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1040 x 3. 1040 x   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. 1040 x Dual use of assets or facilities. 1040 x Exploitation of exempt functions. 1040 x ExamplesExceptions. 1040 x Excluded Trade or Business ActivitiesQualified sponsorship payment. 1040 x Advertising. 1040 x Exception for contingent payments. 1040 x Exception for periodicals. 1040 x Exception for conventions and trade shows. 1040 x Legal definition. 1040 x Legal where played. 1040 x No for-profit games where played. 1040 x Unrelated business income. 1040 x   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. 1040 x   Certain trade or business activities are not treated as an unrelated trade or business. 1040 x See Excluded Trade or Business Activities, later. 1040 x Trade or business. 1040 x   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. 1040 x An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. 1040 x   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. 1040 x Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. 1040 x Regularly conducted. 1040 x   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. 1040 x   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. 1040 x The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. 1040 x However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. 1040 x Not substantially related. 1040 x    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). 1040 x Whether an activity contributes importantly depends in each case on the facts involved. 1040 x   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. 1040 x For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. 1040 x The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. 1040 x   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. 1040 x Selling of products of exempt functions. 1040 x   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. 1040 x Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. 1040 x   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. 1040 x For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. 1040 x But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. 1040 x , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. 1040 x Dual use of assets or facilities. 1040 x   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. 1040 x The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. 1040 x   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. 1040 x The theater is a principal feature of the museum and operates continuously while the museum is open to the public. 1040 x If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. 1040 x   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. 1040 x Exploitation of exempt functions. 1040 x   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. 1040 x When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. 1040 x Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. 1040 x   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. 1040 x Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. 1040 x Sales commissions. 1040 x   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. 1040 x Artists' facilities. 1040 x   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. 1040 x These two activities do not contribute importantly to accomplishing the organization's exempt purpose. 1040 x Therefore, they are unrelated trades or businesses. 1040 x Membership list sales. 1040 x   An exempt educational organization regularly sells membership mailing lists to business firms. 1040 x This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. 1040 x Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. 1040 x Hospital facilities. 1040 x   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. 1040 x The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. 1040 x The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. 1040 x   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. 1040 x These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. 1040 x Book publishing. 1040 x   An exempt organization engages primarily in activities that further its exempt purposes. 1040 x It also owns the publication rights to a book that does not relate to any of its exempt purposes. 1040 x The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. 1040 x These activities constitute a trade or business regularly conducted. 1040 x Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. 1040 x   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. 1040 x See Royalties under Exclusions in chapter 4. 1040 x School handicraft shop. 1040 x   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. 1040 x The students are paid a percentage of the sales price. 1040 x In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. 1040 x The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. 1040 x Although many local participants are former students of the school, any qualified person may participate in the program. 1040 x The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. 1040 x School facilities. 1040 x   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. 1040 x During the summer, the school operates a tennis club open to the general public. 1040 x Employees of the school run the club, including collecting membership fees and scheduling court time. 1040 x   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. 1040 x The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. 1040 x   In both situations, the exempt purpose is the advancement of education. 1040 x Furnishing tennis facilities in the manner described does not further that exempt purpose. 1040 x These activities are unrelated trades or businesses. 1040 x However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. 1040 x See Rents under Exclusions in chapter 4. 1040 x Services provided with lease. 1040 x   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. 1040 x Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. 1040 x It also provides dressing room, linen, and stadium security services for the professional team. 1040 x   Leasing of the stadium is an unrelated trade or business. 1040 x In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. 1040 x Therefore, the income from this lease is rent from real property and unrelated business taxable income. 1040 x Broadcasting rights. 1040 x   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. 1040 x Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. 1040 x An athletic program is considered an integral part of the educational process of a university. 1040 x   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. 1040 x Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. 1040 x Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. 1040 x   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. 1040 x The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. 1040 x   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. 1040 x The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. 1040 x Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. 1040 x Yearbook advertising. 1040 x   An exempt organization receives income from the sale of advertising in its annual yearbook. 1040 x The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. 1040 x This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. 1040 x This advertising activity is an unrelated trade or business. 1040 x Pet boarding and grooming services. 1040 x   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. 1040 x These activities do not contribute importantly to its purpose of preventing cruelty to animals. 1040 x Museum eating facilities. 1040 x   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. 1040 x Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. 1040 x The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. 1040 x Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. 1040 x Halfway house workshop. 1040 x   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. 1040 x The profits are applied to the operating costs of the halfway house. 1040 x The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. 1040 x Travel tour programs. 1040 x   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. 1040 x Example 1. 1040 x A tax-exempt university alumni association provides a travel tour program for its members and their families. 1040 x The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. 1040 x It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. 1040 x The organization provides an employee for each tour as a tour leader. 1040 x There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. 1040 x By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. 1040 x Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. 1040 x Therefore, the sale of the travel tours is an unrelated trade or business. 1040 x Example 2. 1040 x A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. 1040 x These tours are conducted by teachers and others certified by the state board of education. 1040 x The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. 1040 x A tour's study program consists of instruction on subjects related to the location being visited on the tour. 1040 x Each tour group brings along a library of material related to the subjects being studied on the tour. 1040 x During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. 1040 x Examinations are given at the end of each tour. 1040 x The state board of education awards academic credit for tour participation. 1040 x Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. 1040 x Insurance programs. 1040 x   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. 1040 x Exceptions. 1040 x   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. 1040 x Magazine publishing. 1040 x   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. 1040 x   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. 1040 x This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. 1040 x   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. 1040 x Directory of members. 1040 x   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. 1040 x Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. 1040 x The directory contains no commercial advertisement and is sold only to the organization's members. 1040 x   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. 1040 x Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. 1040 x The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. 1040 x This directory differs from the publication discussed next because of its noncommercial characteristics. 1040 x Sales of advertising space. 1040 x   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. 1040 x The journal is distributed without charge, mainly to the organization's members. 1040 x   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. 1040 x Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. 1040 x A business firm identified in a separate space is further identified in an Index of Advertisers. 1040 x   The organization solicits advertising by personal contacts. 1040 x Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. 1040 x The organization also solicits advertising in form letters appealing for corporate and personal contributions. 1040 x   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. 1040 x Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. 1040 x Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. 1040 x However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. 1040 x In that case, other factors should also be considered in determining whether a commercial benefit can be expected. 1040 x Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. 1040 x   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. 1040 x However, the purchaser of a listing cannot expect more than an inconsequential benefit. 1040 x Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. 1040 x Publishing legal notices. 1040 x   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. 1040 x The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. 1040 x The state designated the bar association's journal as the place to publish the required notices. 1040 x   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. 1040 x Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. 1040 x Therefore, the advertising income is unrelated trade or business income. 1040 x   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. 1040 x This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. 1040 x Therefore, the publishing of legal notices does not constitute an unrelated trade or business. 1040 x Museum greeting card sales. 1040 x    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. 1040 x Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. 1040 x The cards contain appropriate greetings and are personalized on request. 1040 x   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. 1040 x It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. 1040 x As a result, a large number of cards are sold at a significant profit. 1040 x   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. 1040 x The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. 1040 x The cards may encourage more people to visit the museum itself to share in its educational programs. 1040 x The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. 1040 x Therefore, these sales activities are not an unrelated trade or business. 1040 x Museum shop. 1040 x   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. 1040 x   The shop also rents originals or reproductions of paintings contained in its collection. 1040 x All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. 1040 x   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. 1040 x   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. 1040 x The same is true for the sale of literature relating to art. 1040 x Therefore, these sales activities are not an unrelated trade or business. 1040 x   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. 1040 x The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. 1040 x Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. 1040 x Therefore, these sales are an unrelated trade or business. 1040 x Business league's parking and bus services. 1040 x   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. 1040 x It also operates, as an insubstantial part of its activities, a park and shop plan. 1040 x   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. 1040 x The merchants cannot offer free or discount parking or bus fares to their customers. 1040 x   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. 1040 x Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. 1040 x   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. 1040 x That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. 1040 x   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. 1040 x This provides a particular service to individual members of the organization and does not further its exempt purpose. 1040 x Therefore, operating the park and shop plan is an unrelated trade or business. 1040 x Youth residence. 1040 x   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. 1040 x The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. 1040 x The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. 1040 x The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. 1040 x Health club program. 1040 x   An exempt charitable organization's purpose is to provide for the welfare of young people. 1040 x The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. 1040 x Nominal annual dues are charged for membership in the organization and use of the facilities. 1040 x   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. 1040 x The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. 1040 x   The health club program is in addition to the general physical fitness program of the organization. 1040 x Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. 1040 x Miniature golf course. 1040 x   An exempt youth welfare organization operates a miniature golf course that is open to the general public. 1040 x The course, which is managed by salaried employees, is substantially similar to commercial courses. 1040 x The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. 1040 x   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. 1040 x Sales of hearing aids. 1040 x   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. 1040 x This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. 1040 x It is not an unrelated trade or business. 1040 x Nonpatient laboratory testing. 1040 x   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. 1040 x However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. 1040 x Selling endorsements. 1040 x   An exempt scientific organization enjoys an excellent reputation in the field of biological research. 1040 x It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. 1040 x Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. 1040 x Accordingly, the sale of endorsements is an unrelated trade or business. 1040 x Sponsoring entertainment events. 1040 x   An exempt university has a regular faculty and a regularly enrolled student body. 1040 x During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. 1040 x Members of the general public also are admitted. 1040 x The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. 1040 x Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. 1040 x Therefore, the activity is not an unrelated trade or business. 1040 x Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. 1040 x Volunteer workforce. 1040 x   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. 1040 x Example 1. 1040 x A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. 1040 x Example 2. 1040 x A volunteer fire company conducts weekly public dances. 1040 x Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. 1040 x However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. 1040 x Convenience of members. 1040 x   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. 1040 x For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. 1040 x Qualified sponsorship activities. 1040 x   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. 1040 x Qualified sponsorship payment. 1040 x   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. 1040 x “Use or acknowledgment” does not include advertising the sponsor's products or services. 1040 x The organization's activities include all its activities, whether or not related to its exempt purposes. 1040 x   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. 1040 x   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. 1040 x Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. 1040 x Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. 1040 x   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. 1040 x   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. 1040 x For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. 1040 x Advertising. 1040 x   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. 1040 x For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. 1040 x   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. 1040 x   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. 1040 x In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. 1040 x Exception for contingent payments. 1040 x   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. 1040 x However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. 1040 x Exception for periodicals. 1040 x   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. 1040 x For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. 1040 x It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). 1040 x   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. 1040 x See Sales of advertising space under Examples, earlier in this chapter. 1040 x Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. 1040 x Exception for conventions and trade shows. 1040 x   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. 1040 x The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. 1040 x Selling donated merchandise. 1040 x   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. 1040 x For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. 1040 x Employee association sales. 1040 x   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. 1040 x This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. 1040 x Bingo games. 1040 x   Certain bingo games are not included in the term “unrelated trade or business. 1040 x ” To qualify for this exclusion, the bingo game must meet the following requirements. 1040 x It meets the legal definition of bingo. 1040 x It is legal where it is played. 1040 x It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. 1040 x Legal definition. 1040 x   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. 1040 x   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. 1040 x For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. 1040 x Legal where played. 1040 x   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. 1040 x The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. 1040 x No for-profit games where played. 1040 x   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. 1040 x Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. 1040 x Example. 1040 x Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. 1040 x In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. 1040 x Several for-profit organizations conduct nightly games. 1040 x Y conducts weekly bingo games in city S, while X conducts weekly games in county R. 1040 x Since state law confines the for-profit organizations to city S, local jurisdiction controls. 1040 x Y's bingo games conducted in city S are an unrelated trade or business. 1040 x However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. 1040 x Gambling activities other than bingo. 1040 x   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. 1040 x Pole rentals. 1040 x   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). 1040 x A qualified pole rental is the rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. 1040 x For this purpose, the term rental includes any sale of the right to use the pole (or other structure). 1040 x Distribution of low cost articles. 1040 x   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. 1040 x This applies to organizations described in section 501 that are eligible to receive charitable contributions. 1040 x   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. 1040 x   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. 1040 x The maximum cost of a low cost article is $9. 1040 x 70 for 2011. 1040 x The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. 1040 x Exchange or rental of member lists. 1040 x   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. 1040 x Hospital services. 1040 x   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. 1040 x This exclusion applies only to services described in section 501(e)(1)(A). 1040 x Public entertainment activity. 1040 x   An unrelated trade or business does not include a qualified public entertainment activity. 1040 x A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. 1040 x   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. 1040 x   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. 1040 x Its conducting qualified public entertainment activities will not affect determination of its exempt status. 1040 x Convention or trade show activity. 1040 x   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. 1040 x   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. 1040 x   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). 1040 x The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. 1040 x   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. 1040 x For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. 1040 x    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. 1040 x The trade show itself must be a qualified convention and trade show activity. 1040 x The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. 1040 x Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. 1040 x Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of Hurricane Sandy in Rhode Island

RI-2012-30, Nov. 15, 2012

BOSTON — Victims of Hurricane Sandy that began on Oct. 26, 2012 in parts of Rhode Island may qualify for tax relief from the Internal Revenue Service.

The President has declared Newport and Washington counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Oct. 26, and on or before Feb. 1, have been postponed to Feb. 1, 2013.  

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Oct. 26, and on or before Nov. 26, as long as the deposits are made by Nov. 26, 2012.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area need to call the IRS disaster hotline at 866-562-5227 to request this tax relief.

For a full description of the relief being provided by the IRS to the victims of Hurricane Sandy, visit IRS.gov.

Covered Disaster Area

The counties above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Feb. 1 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Oct. 26 and on or before Feb. 1.

The IRS also gives affected taxpayers until Feb. 1 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Oct. 26 and on or before Feb. 1.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after Oct. 26 and on or before Nov. 26 provided the taxpayer makes these deposits by Nov. 26.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Rhode Island/Hurricane Sandy” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 800-TAX-FORM (800-829-3676). The IRS toll-free number for general tax questions is 800-829-1040.

Related Information

Disaster Assistance and Emergency Relief for Individuals and Businesses

Recent IRS Disaster Relief Announcements

 

Page Last Reviewed or Updated: 05-Nov-2013

The 1040 X

1040 x Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. 1040 x A pension is generally a series of payments made to you after you retire from work. 1040 x Pension payments are made regularly and are for past services with an employer. 1040 x An annuity is a series of payments under a contract. 1040 x You can buy the contract alone or you can buy it with the help of your employer. 1040 x Annuity payments are made regularly for more than one full year. 1040 x Note. 1040 x Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. 1040 x Types of pensions and annuities. 1040 x   Particular types of pensions and annuities include: Fixed period annuities. 1040 x You receive definite amounts at regular intervals for a definite length of time. 1040 x Annuities for a single life. 1040 x You receive definite amounts at regular intervals for life. 1040 x The payments end at death. 1040 x Joint and survivor annuities. 1040 x The first annuitant receives a definite amount at regular intervals for life. 1040 x After he or she dies, a second annuitant receives a definite amount at regular intervals for life. 1040 x The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. 1040 x Variable annuities. 1040 x You receive payments that may vary in amount for a definite length of time or for life. 1040 x The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. 1040 x Disability pensions. 1040 x You are under minimum retirement age and receive payments because you retired on disability. 1040 x If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. 1040 x If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. 1040 x A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. 1040 x This plan must meet Internal Revenue Code requirements. 1040 x It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. 1040 x However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. 1040 x A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. 1040 x A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. 1040 x   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. 1040 x A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. 1040 x It does not qualify for most of the tax benefits of a qualified plan. 1040 x Annuity worksheets. 1040 x   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. 1040 x Request for a ruling. 1040 x   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. 1040 x This is treated as a request for a ruling. 1040 x See Requesting a Ruling on Taxation of Annuity near the end of this publication. 1040 x Withholding tax and estimated tax. 1040 x   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. 1040 x If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. 1040 x Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. 1040 x Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). 1040 x These payments are also known as amounts received as an annuity. 1040 x If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. 1040 x In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. 1040 x The amount of each payment that is more than the part that represents your net cost is taxable. 1040 x Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. 1040 x These terms are explained in the following discussions. 1040 x Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. 1040 x First, find your net cost of the contract as of the annuity starting date (defined later). 1040 x To find this amount, you must first figure the total premiums, contributions, or other amounts paid. 1040 x This includes the amounts your employer contributed if you were required to include these amounts in income. 1040 x It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). 1040 x From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. 1040 x Any additional premiums paid for double indemnity or disability benefits. 1040 x Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). 1040 x The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. 1040 x Example. 1040 x On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. 1040 x The annuity starting date is July 1. 1040 x This is the date you use in figuring your investment in the contract and your expected return (discussed later). 1040 x Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. 1040 x Foreign employment. 1040 x   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. 1040 x The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. 1040 x Foreign employment contributions while a nonresident alien. 1040 x   In determining your cost, special rules apply if you are a U. 1040 x S. 1040 x citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. 1040 x Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. 1040 x Death benefit exclusion. 1040 x   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. 1040 x The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. 1040 x How to adjust your total cost. 1040 x   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. 1040 x Add it to the cost or unrecovered cost of the annuity at the annuity starting date. 1040 x See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. 1040 x Net cost. 1040 x   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. 1040 x This is the unrecovered investment in the contract as of the annuity starting date. 1040 x If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. 1040 x Refund feature. 1040 x   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. 1040 x Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. 1040 x   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. 1040 x Zero value of refund feature. 1040 x   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. 1040 x   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). 1040 x   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. 1040 x Examples. 1040 x The first example shows how to figure the value of the refund feature when there is only one beneficiary. 1040 x Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. 1040 x In both examples, the taxpayer elects to use Tables V through VIII. 1040 x If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. 1040 x Example 1. 1040 x At age 65, Barbara bought for $21,053 an annuity with a refund feature. 1040 x She will get $100 a month for life. 1040 x Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. 1040 x In this case, the contract cost and the total guaranteed return are the same ($21,053). 1040 x Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. 1040 x 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. 1040 x For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). 1040 x In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. 1040 x Example 2. 1040 x John died while still employed. 1040 x His widow, Eleanor, age 48, receives $171 a month for the rest of her life. 1040 x John's son, Elmer, age 9, receives $50 a month until he reaches age 18. 1040 x John's contributions to the retirement fund totaled $7,559. 1040 x 45, with interest on those contributions of $1,602. 1040 x 53. 1040 x The guarantee or total refund feature of the contract is $9,161. 1040 x 98 ($7,559. 1040 x 45 plus $1,602. 1040 x 53). 1040 x The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. 1040 x 9 $71,614. 1040 x 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. 1040 x 0 5,400. 1040 x 00   3) Total expected return   $77,014. 1040 x 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. 1040 x 45   2) Guaranteed amount (contributions of $7,559. 1040 x 45 plus interest of $1,602. 1040 x 53) $9,161. 1040 x 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. 1040 x 00   4) Net guaranteed amount $3,761. 1040 x 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. 1040 x 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. 1040 x 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. 1040 x See the discussion of expected return, later in this publication. 1040 x Free IRS help. 1040 x   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. 1040 x Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. 1040 x The following discussions explain how to figure the expected return with each type of annuity. 1040 x A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. 1040 x Fixed period annuity. 1040 x   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. 1040 x It is the total amount you will get beginning at the annuity starting date. 1040 x You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). 1040 x To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. 1040 x Single life annuity. 1040 x   If you are to get annuity payments for the rest of your life, find your expected return as follows. 1040 x You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. 1040 x These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). 1040 x   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. 1040 x See Adjustments to Tables I, II, V, VI, and VIA following Table I. 1040 x Example. 1040 x Henry bought an annuity contract that will give him an annuity of $500 a month for his life. 1040 x If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. 1040 x 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. 1040 x 2 multiple by +. 1040 x 1. 1040 x His expected return would then be $115,800 ($6,000 × 19. 1040 x 3). 1040 x Annuity for shorter of life or specified period. 1040 x   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. 1040 x To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. 1040 x Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. 1040 x Example. 1040 x Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. 1040 x She was age 65 at her birthday nearest the annuity starting date. 1040 x She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. 1040 x 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. 1040 x See Special Elections, later. 1040 x Joint and survivor annuities. 1040 x   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. 1040 x To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. 1040 x If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. 1040 x See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. 1040 x Example. 1040 x John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. 1040 x At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. 1040 x The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. 1040 x 0 Expected return $132,000 Different payments to survivor. 1040 x   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. 1040 x Example 1. 1040 x Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. 1040 x If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. 1040 x 0 Multiple for Gerald, age 70 (from Table V)   16. 1040 x 0 Difference: Multiple applicable to Mary   6. 1040 x 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. 1040 x 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. 1040 x 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. 1040 x Your husband died while still employed. 1040 x Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. 1040 x Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. 1040 x You were 50 years old at the annuity starting date. 1040 x Marie was 16 and Jean was 14. 1040 x Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. 1040 x 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. 1040 x 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. 1040 x 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. 1040 x Computation Under the General Rule Note. 1040 x Variable annuities use a different computation for determining the exclusion amounts. 1040 x See Variable annuities later. 1040 x Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. 1040 x   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. 1040 x See Death benefit exclusion , earlier. 1040 x Step 2. 1040 x   Figure your expected return. 1040 x Step 3. 1040 x   Divide Step 1 by Step 2 and round to three decimal places. 1040 x This will give you the exclusion percentage. 1040 x Step 4. 1040 x   Multiply the exclusion percentage by the first regular periodic payment. 1040 x The result is the tax-free part of each pension or annuity payment. 1040 x   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. 1040 x However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. 1040 x   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. 1040 x Step 5. 1040 x   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. 1040 x This will give you the tax-free part of the total payment for the year. 1040 x    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. 1040 x This fractional amount is multiplied by your exclusion percentage to get the tax-free part. 1040 x Step 6. 1040 x   Subtract the tax-free part from the total payment you received. 1040 x The rest is the taxable part of your pension or annuity. 1040 x Example 1. 1040 x You purchased an annuity with an investment in the contract of $10,800. 1040 x Under its terms, the annuity will pay you $100 a month for life. 1040 x The multiple for your age (age 65) is 20. 1040 x 0 as shown in Table V. 1040 x Your expected return is $24,000 (20 × 12 × $100). 1040 x Your cost of $10,800, divided by your expected return of $24,000, equals 45. 1040 x 0%. 1040 x This is the percentage you will not have to include in income. 1040 x Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. 1040 x If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). 1040 x Example 2. 1040 x Gerald bought a joint and survivor annuity. 1040 x Gerald's investment in the contract is $62,712 and the expected return is $121,200. 1040 x The exclusion percentage is 51. 1040 x 7% ($62,712 ÷ $121,200). 1040 x Gerald will receive $500 a month ($6,000 a year). 1040 x Each year, until his net cost is recovered, $3,102 (51. 1040 x 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. 1040 x If Gerald dies, his wife will receive $350 a month ($4,200 a year). 1040 x If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. 1040 x 7%). 1040 x Each year, until the entire net cost is recovered, his wife will receive $2,171. 1040 x 40 (51. 1040 x 7% of her payments received of $4,200) tax free. 1040 x She will include $2,028. 1040 x 60 ($4,200 − $2,171. 1040 x 40) in her income tax return. 1040 x Example 3. 1040 x Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. 1040 x Your two daughters each receive annual annuities of $1,800 until they reach age 18. 1040 x Your husband contributed $25,576 to the plan. 1040 x You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. 1040 x Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. 1040 x The exclusion percentage of 18. 1040 x 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. 1040 x Each full year $864 (18. 1040 x 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. 1040 x Each year, until age 18, $324 (18. 1040 x 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. 1040 x Part-year payments. 1040 x   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. 1040 x   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. 1040 x For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. 1040 x   If you received a fractional payment, follow Step 5, discussed earlier. 1040 x This gives you the tax-free part of your total payment. 1040 x Example. 1040 x On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. 1040 x The applicable multiple from Table V is 23. 1040 x 3 (age 61). 1040 x Her expected return is $34,950 ($125 × 12 × 23. 1040 x 3). 1040 x Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. 1040 x 1%. 1040 x Each payment received will consist of 63. 1040 x 1% return of cost and 36. 1040 x 9% taxable income, until her net cost of the contract is fully recovered. 1040 x During the first year, Mary received three payments of $125, or $375, of which $236. 1040 x 63 (63. 1040 x 1% × $375) is a return of cost. 1040 x The remaining $138. 1040 x 37 is included in income. 1040 x Increase in annuity payments. 1040 x   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. 1040 x All increases in the installment payments are fully taxable. 1040 x   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. 1040 x 72-5(a)(5) of the regulations. 1040 x Example. 1040 x Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. 1040 x In figuring the taxable part, Joe elects to use Tables V through VIII. 1040 x The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. 1040 x His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. 1040 x 0 × $1,764 annual payment). 1040 x The exclusion percentage is $7,938 ÷ $35,280, or 22. 1040 x 5%. 1040 x During the year he received 11 monthly payments of $147, or $1,617. 1040 x Of this amount, 22. 1040 x 5% × $147 × 11 ($363. 1040 x 83) is tax free as a return of cost and the balance of $1,253. 1040 x 17 is taxable. 1040 x Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). 1040 x The tax-free part is still only 22. 1040 x 5% of the annuity payments as of the annuity starting date (22. 1040 x 5% × $147 × 12 = $396. 1040 x 90 for a full year). 1040 x The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. 1040 x Variable annuities. 1040 x   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. 1040 x   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. 1040 x If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. 1040 x Example. 1040 x Frank purchased a variable annuity at age 65. 1040 x The total cost of the contract was $12,000. 1040 x The annuity starting date is January 1 of the year of purchase. 1040 x His annuity will be paid, starting July 1, in variable annual installments for his life. 1040 x The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. 1040 x   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. 1040 x Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. 1040 x The result is added to the previously figured periodic tax-free part. 1040 x The sum is the amount of each future payment that will be tax free. 1040 x Example. 1040 x Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. 1040 x Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. 1040 x Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. 1040 x 00 Amount received in second year 500. 1040 x 00 Difference $100. 1040 x 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. 1040 x 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. 1040 x 4) $5. 1040 x 43 Revised annual tax-free part for third and later years ($600 + $5. 1040 x 43) $605. 1040 x 43 Amount taxable in third year ($1,200 − $605. 1040 x 43) $594. 1040 x 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. 1040 x 72–4(d)(3) of the Income Tax Regulations. 1040 x The statement must also show the following information: The annuity starting date and your age on that date. 1040 x The first day of the first period for which you received an annuity payment in the current year. 1040 x Your investment in the contract as originally figured. 1040 x The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. 1040 x Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. 1040 x Exclusion limited to net cost. 1040 x   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). 1040 x This is the unrecovered investment in the contract as of the annuity starting date. 1040 x   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. 1040 x This deduction is not subject to the 2%-of-adjusted-gross-income limit. 1040 x Example 1. 1040 x Your annuity starting date is after 1986. 1040 x Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. 1040 x There is no refund feature. 1040 x Your monthly annuity payment is $833. 1040 x 33. 1040 x Your exclusion ratio is 12% and you exclude $100 a month. 1040 x Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. 1040 x Thereafter, your annuity payments are fully taxable. 1040 x Example 2. 1040 x The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. 1040 x The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. 1040 x The exclusion ratio is 10. 1040 x 8%, and your monthly exclusion is $90. 1040 x After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). 1040 x An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. 1040 x Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. 1040 x Exclusion not limited to net cost. 1040 x   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. 1040 x If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. 1040 x The total exclusion may be more than your investment in the contract. 1040 x How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. 1040 x Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. 1040 x These tables correspond to the old Tables I through IV. 1040 x In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. 1040 x If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. 1040 x However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). 1040 x Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. 1040 x Contributions made both before July 1986 and after June 1986. 1040 x   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. 1040 x (See the examples below. 1040 x )    Making the election. 1040 x Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. 1040 x 72–6 of the Income Tax Regulations. 1040 x ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. 1040 x   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. 1040 x You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. 1040 x    Advantages of election. 1040 x In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. 1040 x    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. 1040 x If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. 1040 x   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. 1040 x Example 1. 1040 x Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. 1040 x Payment of the $42,000 contribution is guaranteed under a refund feature. 1040 x Bill is 55 years old as of the annuity starting date. 1040 x For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. 1040 x       Pre- July 1986   Post- June 1986 A. 1040 x Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. 1040 x of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. 1040 x Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. 1040 x Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. 1040 x 7   28. 1040 x 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. 1040 x Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . 1040 x 079   . 1040 x 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). 1040 x The taxable part of his annuity is $22,080 ($24,000 minus $1,920). 1040 x If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). 1040 x Example 2. 1040 x Al is age 62 at his nearest birthday to the annuity starting date. 1040 x Al's wife is age 60 at her nearest birthday to the annuity starting date. 1040 x The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. 1040 x The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. 1040 x Al makes the election described in Example 1 . 1040 x For purposes of this example, assume the refund feature adjustment is zero. 1040 x If an adjustment is required, IRS will figure the amount. 1040 x See Requesting a Ruling on Taxation of Annuity near the end of this publication. 1040 x       Pre-  July 1986   Post-  June 1986 A. 1040 x Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. 1040 x Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. 1040 x Expected return         1) Multiple for both annuitants from Tables II and VI 25. 1040 x 4   28. 1040 x 8   2) Multiple for first annuitant from Tables I and V 16. 1040 x 9   22. 1040 x 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. 1040 x 5   6. 1040 x 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. 1040 x Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . 1040 x 209   . 1040 x 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). 1040 x The taxable part of his annuity is $9,216 ($12,000 − $2,784). 1040 x The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. 1040 x After Al's death, his widow will apply the same exclusion percentages (20. 1040 x 9% and 2. 1040 x 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. 1040 x Annuity received after June 30, 1986. 1040 x   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. 1040 x Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. 1040 x    Make the election by attaching the following statement to your income tax return. 1040 x    “I elect, under section 1. 1040 x 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. 1040 x ”   The statement must also include your name, address, and social security number. 1040 x   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. 1040 x Disqualifying form of payment or settlement. 1040 x   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. 1040 x See regulations section 1. 1040 x 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. 1040 x You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. 1040 x Worksheets for Determining Taxable Annuity Worksheets I and II. 1040 x   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. 1040 x 72–6(d)(6) Election. 1040 x Worksheet I For Determining Taxable Annuity Under Regulations Section 1. 1040 x 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. 1040 x   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. 1040 x )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. 1040 x If not, the IRS will calculate the refund feature percentage. 1040 x             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. 1040 x   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. 1040 x   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. 1040 x   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. 1040 x     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. 1040 x 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. 1040 x   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. 1040 x )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. 1040 x If not, the IRS will calculate the refund feature percentage. 1040 x             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. 1040 x   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. 1040 x   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. 1040 x Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. 1040 x   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. 1040 x   Actuarial Tables Please click here for the text description of the image. 1040 x Actuarial Tables Please click here for the text description of the image. 1040 x Actuarial Tables Please click here for the text description of the image. 1040 x Actuarial tables 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the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Please click here for the text description of the image. 1040 x Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. 1040 x If you make this request, you are asking for a ruling. 1040 x User fee. 1040 x   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. 1040 x You should call the IRS for the proper fee. 1040 x A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. 1040 x Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. 1040 x O. 1040 x Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. 1040 x When to make the request. 1040 x   Please note that requests sent between February 1 and April 15 may experience some delay. 1040 x We process requests in the order received, and we will reply to your request as soon as we can process it. 1040 x If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. 1040 x S. 1040 x Individual Income Tax Return, to get an extension of time to file. 1040 x Information you must furnish. 1040 x   You must furnish the information listed below so the IRS can comply with your request. 1040 x Failure to furnish the information will result in a delay in processing your request. 1040 x Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. 1040 x Copies of any documents showing distributions, annuity rates, and annuity options available to you. 1040 x A copy of any Form 1099–R you received since your annuity began. 1040 x A statement indicating whether you have filed your return for the year for which you are making the request. 1040 x If you have requested an extension of time to file that return, please indicate the extension date. 1040 x Your daytime phone number. 1040 x Your current mailing address. 1040 x A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. 1040 x Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. 1040 x A completed Tax Information Sheet (or facsimile) shown on the next page. 1040 x Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. 1040 x This statement must be signed by the retiree or the survivor annuitant. 1040 x It cannot be signed by a representative. 1040 x Tax Information Sheet Please click here for the text description of the image. 1040 x Tax Information Sheet Please click here for the text description of the image. 1040 x Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. 1040 x Free help with your tax return. 1040 x   You can get free help preparing your return nationwide from IRS-certified volunteers. 1040 x The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. 1040 x The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. 1040 x Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. 1040 x In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. 1040 x To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. 1040 x gov, download the IRS2Go app, or call 1-800-906-9887. 1040 x   As part of the TCE program, AARP offers the Tax-Aide counseling program. 1040 x To find the nearest AARP Tax-Aide site, visit AARP's website at www. 1040 x aarp. 1040 x org/money/taxaide or call 1-888-227-7669. 1040 x For more information on these programs, go to IRS. 1040 x gov and enter “VITA” in the search box. 1040 x Internet. 1040 x    IRS. 1040 x gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. 1040 x Download the free IRS2Go app from the iTunes app store or from Google Play. 1040 x Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. 1040 x Check the status of your 2013 refund with the Where's My Refund? application on IRS. 1040 x gov or download the IRS2Go app and select the Refund Status option. 1040 x The IRS issues more than 9 out of 10 refunds in less than 21 days. 1040 x Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. 1040 x You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. 1040 x The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. 1040 x Use the Interactive Tax Assistant (ITA) to research your tax questions. 1040 x No need to wait on the phone or stand in line. 1040 x The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. 1040 x When you reach the response screen, you can print the entire interview and the final response for your records. 1040 x New subject areas are added on a regular basis. 1040 x  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. 1040 x gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. 1040 x You can use the IRS Tax Map, to search publications and instructions by topic or keyword. 1040 x The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. 1040 x When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. 1040 x Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. 1040 x You can also ask the IRS to mail a return or an account transcript to you. 1040 x Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. 1040 x gov or by calling 1-800-908-9946. 1040 x Tax return and tax account transcripts are generally available for the current year and the past three years. 1040 x Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. 1040 x Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. 1040 x If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. 1040 x Check the status of your amended return using Where's My Amended Return? Go to IRS. 1040 x gov and enter Where's My Amended Return? in the search box. 1040 x You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. 1040 x It can take up to 3 weeks from the date you mailed it to show up in our system. 1040 x Make a payment using one of several safe and convenient electronic payment options available on IRS. 1040 x gov. 1040 x Select the Payment tab on the front page of IRS. 1040 x gov for more information. 1040 x Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. 1040 x Figure your income tax withholding with the IRS Withholding Calculator on IRS. 1040 x gov. 1040 x Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. 1040 x Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. 1040 x gov. 1040 x Request an Electronic Filing PIN by going to IRS. 1040 x gov and entering Electronic Filing PIN in the search box. 1040 x Download forms, instructions and publications, including accessible versions for people with disabilities. 1040 x Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. 1040 x gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. 1040 x An employee can answer questions about your tax account or help you set up a payment plan. 1040 x Before you visit, check the Office Locator on IRS. 1040 x gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. 1040 x If you have a special need, such as a disability, you can request an appointment. 1040 x Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. 1040 x Apply for an Employer Identification Number (EIN). 1040 x Go to IRS. 1040 x gov and enter Apply for an EIN in the search box. 1040 x Read the Internal Revenue Code, regulations, or other official guidance. 1040 x Read Internal Revenue Bulletins. 1040 x Sign up to receive local and national tax news and more by email. 1040 x Just click on “subscriptions” above the search box on IRS. 1040 x gov and choose from a variety of options. 1040 x    Phone. 1040 x You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. 1040 x Download the free IRS2Go app from the iTunes app store or from Google Play. 1040 x Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. 1040 x gov, or download the IRS2Go app. 1040 x Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. 1040 x The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. 1040 x Mos