- Which of the following correctly describes the treatment of the store's sales for unrelated business income tax purposes?
Answer: The sales of donated merchandise are not unrelated business taxable income, but the sales of the purchased craft items are unrelated business income.
IRC § 513(a)(1) and (a)(3). A trade or business is not unrelated if substantially all of the work is performed without compensation, and a business consisting of selling merchandise that was substantially all received as gifts or contributions is also excluded. The donated-merchandise sales, run entirely by volunteers, satisfy both exceptions. The craft-item sales fail both exceptions: the merchandise was not donated, and paid employees handle those sales, so the craft sales are an unrelated trade or business. Choice C is correct. Choice A is wrong because the use of the proceeds for exempt purposes does not determine whether an activity is an unrelated trade or business. Choice B is wrong because satisfying the regularly-carried-on element does not override the statutory exceptions. Choice D is wrong because it reverses the treatment of the two sales lines.
- For 2025, which of the following is correct regarding the treatment of royalties and rents under the unrelated business income tax?
Answer: Royalties are generally excluded from unrelated business taxable income, but payments for the use of an organization's name or logo may be treated as unrelated business income if the organization provides significant services in connection with the arrangement.
Under IRC § 512(b)(2) and § 514, Choice A is correct. Royalties are excluded from unrelated business taxable income, but the exclusion does not cover payments that are in substance compensation for services; significant services in a licensing arrangement can cause the payments to be treated as unrelated business income. Choice B is wrong because rents from debt-financed property are generally included under § 514, and rents based on a tenant's net profits are not within the real-property rent exclusion of § 512(b)(3). Choice C is wrong because royalty treatment does not depend on the paragraph of § 501(c) under which the organization is exempt; it depends on the nature of the payment. Choice D is wrong because advertising income from a periodical is not rent from personal property; it is subject to the special periodical-income allocation rules and may be unrelated business income.
- Which of the following is correct regarding the $100,000 excess compensation?
Answer: The excess compensation is subject to an excise tax imposed on the executive director as a disqualified person, and organization managers who knowingly participated may also be subject to an excise tax.
IRC § 4958(a) and (f)(1); Treas. Reg. § 53.4958-3. For a public charity, an excess benefit transaction occurs when a disqualified person receives an economic benefit worth more than the consideration provided. A voting board member and the organization's top executive are each disqualified persons because they are in a position to exercise substantial influence. Being a substantial contributor is only one factor that can show such influence, and it is not required. Because the board did not rely on comparability data, the rebuttable presumption of reasonableness is not available. The excess benefit is $450,000 - $350,000 = $100,000. The § 4958 initial tax of 25% of the excess benefit is imposed on the executive director, and organization managers who knowingly participated are subject to a separate 10% tax. Choice D is correct. Choice A is wrong because the § 4958 taxes fall on the disqualified person and the managers, not on the organization, and exemption is not automatically revoked. Choice B is wrong because the executive director is a disqualified person through the executive director's positions, and board approval without comparability data does not avoid the tax. Choice C is wrong because the excess benefit is only the amount by which compensation exceeded fair market value, not the entire compensation.
- Which of the following is correct regarding the purchase?
Answer: The purchase is an act of self-dealing under IRC § 4941 even though the price equaled fair market value, and the wife is subject to the initial excise tax on the amount involved.
IRC § 4941(d)(1)(A) and § 4946(a)(1)(B). A sale or exchange of property between a private foundation and a disqualified person is an act of self-dealing, and the statute contains no fair-market-value or board-approval defense. The wife is a disqualified person as a foundation manager because she is the foundation's president and a board member. Under § 4941(a)(1), the initial excise tax is imposed on the self-dealer. Choice C is correct. Choice A asserts an arm's-length defense that § 4941 does not recognize. Choice B is wrong because officers and directors of a private foundation are disqualified persons regardless of whether they contributed to the foundation. Choice D is wrong because the statute does not require that the foundation pay more than fair market value; a sale at fair market value is self-dealing as well.
- Which of the following is correct regarding the church's activities?
Answer: The forum is prohibited political campaign intervention, and the church may be subject to excise taxes and may lose its exemption.
IRC § 501(c)(3) forbids an exempt organization from participating in, or intervening in, any political campaign for or against a candidate for public office. The prohibition is absolute; unlike the lobbying rules, there is no insubstantial-part or de minimis exception. Hosting a one-candidate forum and urging members to vote for the incumbent is political campaign intervention. Under § 4955, the church may be subject to excise tax on the political expenditures, and the IRS may revoke its exemption. Choice D is correct. Choice A confuses the substantial-part standard that applies to lobbying with the absolute ban on political campaign activity. Choice B is wrong because spending funds to sponsor the event is itself intervention; a contribution to a candidate or committee is not required. Choice C is wrong because the prohibition applies regardless of the audience reached or the medium used to advertise the event.
- Which of the following is correct regarding the organization's lobbying activities for 2025?
Answer: The organization is subject to the IRC § 4911 excise tax on $2,500, the amount by which its total lobbying expenditures exceed the lobbying nontaxable amount.
IRC § 4911(a), (b) and (c); IRC § 501(h). For an organization that has elected the § 501(h) expenditure test, the lobbying nontaxable amount is 20% of the first $500,000 of exempt purpose expenditures plus 15% of the next $500,000: $100,000 + (15% x $150,000) = $122,500. The grassroots nontaxable amount is 25% of that, or $30,625. Total lobbying expenditures (direct plus grassroots) are $95,000 + $30,000 = $125,000, which exceeds the lobbying nontaxable amount by $2,500; the $30,000 of grassroots expenditures does not exceed the grassroots nontaxable amount. The § 4911 tax is 25% of the greater of the two excesses, so the tax is 25% x $2,500 = $625. Choice B is correct. Choice A looks only at the grassroots limit and ignores total lobbying. Choice C is wrong because the tax applies to the excess, not to all lobbying expenditures. Choice D is wrong because loss of exemption under § 501(h) requires lobbying expenditures that normally exceed 150% of the nontaxable amount (the lobbying ceiling amount, $183,750 here), measured over a four-year averaging period; a single-year excess of $2,500 triggers only the excise tax.
- For 2025, which of the following is correct regarding the limits on political and legislative activities of a § 501(c)(3) public charity?
Answer: It is absolutely prohibited from participating in any political campaign for or against a candidate for public office, and it may engage in legislative lobbying only to an insubstantial extent unless it elects the expenditure test under § 501(h).
Under IRC § 501(c)(3) and § 501(h), Choice C is correct. The campaign-intervention ban is absolute, and lobbying is permitted only if it is not a substantial part of the organization's activities unless the organization elects the § 501(h) expenditure limits. Choice B is wrong because nonpartisan voter education, including a neutral guide presenting all candidates' positions, is not campaign intervention. Choice A is wrong because the campaign ban is absolute, and a § 501(c)(3) may not use a separate segregated fund to engage in activity it cannot conduct directly. Choice D is wrong because a § 501(c)(3) public charity is not entitled to unlimited lobbying, and campaign participation is prohibited even if it is not the organization's primary activity.
- What amount of unrelated business taxable income (before the $1,000 specific deduction) must the museum report on Form 990-T for 2025?
Answer: $20,000
IRC § 512(b)(4) and § 514(a). Rents from real property are generally excluded from unrelated business taxable income under § 512(b)(3), but the exclusion is overridden for debt-financed property: the property's net income is included in the ratio that the average acquisition indebtedness bears to the average adjusted basis. Here, the net rental income is $120,000 - $70,000 = $50,000, and the debt/basis fraction is $400,000 / $1,000,000 = 40%, so the pre-deduction unrelated business taxable income is $50,000 × 40% = $20,000. Choice A is correct. Choice B ignores the debt/basis fraction and treats all net rental income as taxable. Choice C uses the equity percentage (60%) instead of the debt percentage, reversing the statutory fraction. Choice D reflects the general exclusion for real property rents but ignores the debt-financed property rules, which override that exclusion.
- Which of the following is correct regarding the church's Form 990 filing obligation for 2025?
Answer: The church is not required to file any Form 990-series information return for 2025 because churches are excepted from the annual return requirement.
IRC § 6033(a)(3)(A)(i) excepts churches, their integrated auxiliaries, and conventions or associations of churches from the annual information-return requirement (the Form 990 series). Because the church has no unrelated business income, it is not required to file Form 990-T either. Choice D is correct. Choice A applies the general rule that an organization with year-end total assets over $500,000 must file the full Form 990, but the statutory church exception overrides the general rule. Choice B applies the Form 990-EZ gross-receipts threshold without recognizing that churches are excepted from the Form 990 series entirely. Choice C is wrong because Form 990-N (e-Postcard) is limited to organizations whose gross receipts are normally $50,000 or less, and the church has no filing obligation in any event.
- For 2025, which of the following is correct regarding the excise taxes imposed on private foundations under Chapter 42?
Answer: An act of self-dealing between a private foundation and a disqualified person gives rise to an excise tax imposed on the disqualified person, and a foundation manager may be separately taxed for knowing participation in the act.
Under IRC § 4941(a), Choice B is correct. The self-dealing tax is payable by the disqualified person who engages in the act, and a foundation manager who knowingly participates may be subject to a separate tax. Choice A misstates § 4945: the taxable-expenditure tax is imposed on the private foundation, with a separate limited tax on foundation managers; the foundation's liability does not depend on a manager's refusal to correct. Choice C is wrong because a § 509(a)(3) supporting organization is not a private foundation, but it is not exempt from every Chapter 42 provision; for example, the excess benefit transaction tax under § 4958 can apply to applicable tax-exempt organizations. Choice D misstates § 4943: the excess business holdings tax is imposed on the private foundation, not on the disqualified persons holding the excess holdings.
- For 2025, which of the following is correct regarding the definition of an unrelated trade or business under IRC § 513?
Answer: A trade or business is not an unrelated trade or business if substantially all of the work in carrying it on is performed for the organization without compensation, even if the business is regularly carried on and produces a profit.
Under IRC § 513(a) and Treas. Reg. § 1.513-1, Choice C is correct. Section 513(a)(1) excludes a business in which substantially all the work is performed for the organization without compensation; regularity and profitability do not make it unrelated. Choice B misstates the convenience exception: § 513(a)(2) also covers students, patients, officers, and employees, not only members. Choice A misstates the donated-goods exception: § 513(a)(3) applies to merchandise substantially all of which was received by gift or contribution, and it is not limited to sales to members or to prices at or below fair market value. Choice D misstates the substantially-related test: the test is whether the activity contributes importantly to the exempt purpose, not whether it is irregular or volunteer-run.
- For 2025, which of the following is correct regarding an organization described in IRC § 509(a)(3) as a supporting organization?
Answer: A Type III supporting organization must be operated in connection with one or more supported organizations, must satisfy both a responsiveness test and an integral-part test, and may not be controlled by disqualified persons other than foundation managers and its supported organizations.
Under IRC § 509(a)(3) and Treas. Reg. § 1.509(a)-4, Choice A is correct. A Type III supporting organization is not a private foundation; it must be operated in connection with one or more supported organizations, satisfy both the responsiveness and integral-part tests, and satisfy the control test of § 509(a)(3)(C). Choice B misstates the categories: a Type II supporting organization is supervised or controlled in connection with one or more supported organizations (common supervision or control), not 'operated in connection with' them, and only Type III organizations must satisfy the integral-part test. Choice C is wrong because control by disqualified persons other than foundation managers and supported organizations disqualifies an organization under § 509(a)(3)(C), and approval by the supported organization does not cure that defect. Choice D is wrong because § 509(a)(3) is not limited to supporting a single church or school; it permits support of one or more organizations described in § 509(a)(1) or (2).
- Which of the following correctly describes the treatment of the two payments for unrelated business income tax purposes?
Answer: The $20,000 advertising payment is included in unrelated business taxable income; the $15,000 sponsorship payment is a qualified sponsorship payment and is not included.
IRC §§ 512(a)(1), 513(c) and 513(i); Treas. Reg. § 1.513-4. Selling advertising in an exempt organization's periodical is an unrelated trade or business even when the periodical itself furthers the exempt purpose, so the $20,000 paid for the half-page advertisement is included in unrelated business taxable income. A qualified sponsorship payment, one for which the payor receives no substantial return benefit other than a use or acknowledgment of its name or logo, is not income from an unrelated trade or business. The law firm's name and logo appear only on gala banners, with no qualitative or comparative language, price information or call to action, so the $15,000 is a qualified sponsorship payment and is excluded. Choice B is correct. Choice A is wrong because the magazine's exempt purpose does not shield advertising income from the tax. Choice C reverses the two: a name-and-logo acknowledgment is not advertising, and periodical advertising is unrelated business income. Choice D is wrong because a mere acknowledgment is not a substantial return benefit.
- Which of the following is correct regarding the foundation's minimum distribution requirement for 2025?
Answer: Its 2025 qualifying distributions are $95,000, so $5,000 of the 2025 distributable amount must still be distributed by December 31, 2026, because the grant to the other foundation does not count as a qualifying distribution.
IRC § 4942(g)(1)(A) and (g)(3). Qualifying distributions include grants to public charities and reasonable administrative expenses paid to accomplish exempt purposes. A grant to a private non-operating foundation counts only if the donee redistributes an equal amount out of corpus by the close of its first tax year after the year of receipt, and this donee will not. The foundation's 2025 qualifying distributions are $85,000 + $10,000 = $95,000, leaving $100,000 - $95,000 = $5,000 of the 2025 distributable amount. That amount must be distributed by December 31, 2026, or it becomes subject to the § 4942(a) tax. Choice A is correct. Choice B counts total cash disbursements rather than qualifying distributions. Choice C is wrong because expenditure responsibility keeps the grant from being a taxable expenditure under § 4945(d)(4) and (h), but it does not satisfy the separate redistribution requirement of § 4942(g)(3). Choice D is wrong because reasonable administrative expenses are qualifying distributions.
- For 2025, which of the following is correct regarding the annual information return requirements for tax-exempt organizations?
Answer: A private foundation is required to file Form 990-PF, and the return is open to public inspection, while a church described in § 501(c)(3) is generally excused from filing Form 990.
Under IRC § 6033(a)(3)(A)(i) and § 6104(d), Choice B is correct. Private foundations file Form 990-PF and their annual returns are open to public inspection, while churches are among the organizations excepted from the Form 990 filing requirement. Choice A misstates the church exception: the exception is not conditioned on having no gross receipts. Choice C misstates the filing mechanics: Form 990-T is a separate return and is not attached to Form 990. Choice D misstates the disclosure rule: Form 990-PF is open to public inspection under § 6104(d), and the presence of manager or contributor information does not eliminate that obligation.
