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tax problems - questin and answer,.,. ch 23.....

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Question;31. LO.2, 3 Wellness, Inc., a ? 501(c)(3) organization, makes lobbying expenditures of $340,000 during 2013. Exempt purpose expenditures were $600,000 for the first six months of the year and $950,000 for the last six months of the year. Determine theFederal income tax consequences to Wellness if:a. It does not make the ? 501(h) lobbying election.b. It does make the ? 501(h) lobbying election.32. LO.3, 6, 8 Roadrunner, Inc., is an exempt medical organization. Quail, Inc., a sporting goods retailer, is a wholly owned subsidiary of Roadrunner. Roadrunner inherited the Quail stock last year from a major benefactor of the medical organization. Quail?s taxable income is $550,000. Quail will remit all of its earnings, net of any taxes, to Roadrunner to support the exempt purpose of the parent.a. Is Quail subject to Federal income tax? If so, calculate the liability.b. Arthur Morgan, the treasurer of Roadrunner, has contacted you regarding minimizing or eliminating Quail?s tax liability. He would like to know if the tax consequences would be better if Quail were liquidated into Roadrunner. Write a letter to Morgan that contains your advice. Roadrunner?s address is 500 Rouse Tower, Rochester, NY 14627.c. Would your answer in (a) change if Roadrunner had acquired the Quail stock by purchase or gift rather than by bequest? Discuss.d. How would the tax consequences change if Quail?s taxable income was only $100,000 and it remitted only 75% of its earnings, net of taxes, to Roadrunner?33. LO.3 Initiate, Inc., a ? 501(c)(3) organization, receives the following revenues and incurs the following expenses.Grant from Gates Foundation $ 70,000Charitable contributions received 625,000Expenses in carrying out its exempt mission 500,000Net income before taxes of Landscaping, Inc., a wholly owned for-profit subsidiary 400,000Landscaping, Inc., remits all of its after-tax profits each year to Initiate. Calculate the amount of the Federal income tax, if any, for Initiate and for Landscaping.34. LO.4 Pigeon, Inc., a ? 501(c)(3) organization, received support from the following sources.Governmental unit A for services rendered $ 6,300Governmental unit B for services rendered 4,500Fees from the general public for services rendered (each payment was $100) 75,000Gross investment income 39,000Contributions from disqualified persons 26,000Contributions from other than disqualified persons (each gift was $50) 160,000Total support $310,800a. Does Pigeon satisfy the test for receiving broad public support? Why or why not?b. Is Pigeon a private foundation? Be specific in your answer.c. Arnold Horn, Pigeon?s treasurer, has asked you to advise him on whether Pigeon is a private foundation. Write a letter to him in which you address the issue. His address is 250 Bristol Road, Charlottesville, VA 22903.35. LO.5 Gray, Inc., a private foundation, reports the following items of income and deductions.Interest income $ 29,000Rent income 61,000Dividend income 15,000Royalty income 22,000Unrelated business income 80,000Rent expenses (26,000)Unrelated business expenses (12,000)Gray is not an exempt operating foundation, and it is not eligible for the 1% tax rate.a. Calculate the net investment income.b. Calculate the tax on net investment income.c. What is the purpose of the tax on net investment income?36. LO.5 Salmon, Inc., a private foundation, has existed for 8 years. During this period,Salmon has been unable to satisfy the requirements for classification as a private operating foundation. At the end of 2012, it had undistributed income of $350,000. Of this amount, $185,000 was distributed in 2013, and $165,000 was distributed during the first quarter of 2014. The IRS deficiency notice was mailed on August 1, 2015.a. Calculate the initial tax for 2012, 2013, and 2014.b. Calculate the additional tax for 2015.37. LO.5, 8 Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation?s investment portfolio in derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 7% per annum. If the derivatives investment works as Otis?s investment adviser claims, the annual earnings could be as high as 20%.a. Determine whether Rectify is subject to any of the taxes imposed on private foundations.b. If so, calculate the amount of the initial tax.c. If so, calculate the amount of the additional tax if the act causing the imposition of the tax is not addressed within the correction period.d. Are Otis and the foundation better off financially if the prohibited transaction, if any, is addressed within the correction period? Explain.38. LO.5 The board of directors of White Pearl, Inc., a private foundation, consists ofCharlyne, Beth, and Carlos. They vote unanimously to provide a $325,000 grant to Marcus, their business associate. The grant is to be used for travel and education and does not qualify as a permitted grant to individuals (i.e., it is a taxable expenditure under ? 4945). Each director knows that Marcus was selected for the grant because he is a friend of the organization and that the grant is a taxable expenditure.a. Calculate the initial tax imposed on White Pearl.b. Calculate the initial tax imposed on the foundation manager (i.e., board of directors).39. LO.6 The Open Museum is an exempt organization that operates a gift shop. The museum?s annual operations budget is $3.2 million. Gift shop sales generate a profit of $900,000. Another $600,000 of investment income is generated by the museum?s endowment fund.Both the income from the gift shop and the endowment income are used to support the exempt purpose of the museum. The balance of $1.7 million required for annual operations is provided through admission fees.Wayne Davis, a new board member, does not understand why the museum is subject to tax at all, particularly because all of the entity?s profits are used in carrying out the mission of the museum. The museum?s address is 250 Oak Avenue, Peoria, IL 61625.a. Calculate the amount of unrelated business income.b. Assume instead that the endowment income is reinvested in the endowment fund, rather than being used to support annual operations. Calculate the amount of unrelated business income.c. As the museum treasurer, write a letter to Wayne explaining the reason for the tax consequences. Mr. Davis?s address is 45 Pine Avenue, Peoria, IL 61625.40. LO.6 Upward and Onward, Inc., a ? 501(c)(3) organization that provides training programs for welfare recipients, reports the following income and expenses from the sale of products associated with the training program.Gross income from sales $425,000Cost of goods sold 106,000Advertising and selling expenses 26,000Administrative expenses 112,500Calculate Upward and Onward?s UBIT:a. Assume that the sale of the training program products is substantially related toUpward and Onward?s exempt purpose.b. Assume that the sale of the training program products is not substantially related toUpward and Onward?s exempt purpose.

 

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