Tax-exempt organizations

Area 5: Federal Taxation of Entities (23-33%)

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Topics

Section 501(c)(3) requirements
Unrelated business income tax (UBIT)
Private foundation rules

Lessons

Tax-Exempt Organizations

Study Frameworks

Tax-Exempt Organizations — Section 501(c)(3)

501(c)(3) Tax-Exempt Organizations

Qualification

Organizational test (governing documents)

Operational test (primarily exempt activities)

Dissolution clause required

No private inurement

Public Charity vs. Private Foundation

Public charity: broad public support (1/3 test)

Private foundation: presumed unless proved otherwise

Churches, schools, hospitals = automatic public charity

Prohibited Activities

Political campaign activity — absolute prohibition

Lobbying — limited (not substantial part)

Private inurement — no earnings to insiders

Private Foundation Excise Taxes

§4940: 1.39% on net investment income

§4941: Self-dealing (10% on self-dealer)

§4942: Failure to distribute 5% of assets

§4943: Excess business holdings (>20%)

§4944: Jeopardizing investments

§4945: Taxable expenditures

UBIT (Three-Part Test)

Trade or business

Regularly carried on

Not substantially related to exempt purpose

$1,000 specific deduction

UBIT Three-Part Test

Is the activity a trade or business (carried on for the production of income)?

Yes

Is the trade or business regularly carried on (frequency and continuity comparable to commercial activity)?

Yes

Is the trade or business NOT substantially related to the organization's exempt purpose?

Yes

Does a statutory exclusion apply (volunteers, donated goods, passive income, convenience)?

Yes

Excluded from UBIT despite meeting the three-part test

Subject to UBIT — net income taxed at corporate or trust rates

Not subject to UBIT — activity is related to exempt purpose

Not subject to UBIT — activity is not regularly carried on

Not subject to UBIT — not a trade or business

Practice These Topics(77 questions)