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2006 Tax Filing

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2006 Tax Filing

2006 tax filing Publication 557 - Introductory Material Table of Contents What's New Reminders Introduction What's New Proposed regulations on “good faith determinations”. 2006 tax filing  Proposed regulations modify standards for making a good faith determination that a foreign organization is a charitable organization, grants to which may be qualifying distributions and not taxable expenditures. 2006 tax filing The proposed regulations identify a broader class of tax practitioners upon whose written advice a private foundation may base a “good faith determination. 2006 tax filing ” See, Proposed Regulations: Reliance Standards for Making Good Faith Determinations, REG-134974-12, 2012-47 I. 2006 tax filing R. 2006 tax filing B. 2006 tax filing 553. 2006 tax filing Prop. 2006 tax filing Regs. 2006 tax filing on Good Faith Determinations. 2006 tax filing New Requirements for section 501(c)(3) Hospitals Under the Affordable Care Act. 2006 tax filing  The Affordable Care Act (ACA), enacted March 23, 2010, added new requirements that hospital organizations must satisfy in order to be described in section 501(c)(3), as well as new reporting requirements and excise taxes. 2006 tax filing On June 22, 2012, the Service issued a notice of proposed rulemaking that addresses the new requirements enacted by the ACA applicable to section 501(c)(3) hospital organizations. 2006 tax filing See, Proposed Regulations: Additional Requirements for Charitable Hospitals, REG-13026-11, 77 Fed. 2006 tax filing Reg. 2006 tax filing 38148. 2006 tax filing On April 3, 2013, the Service issued proposed regulations on the ACA's community health needs assessment (CHNA) requirements. 2006 tax filing The proposed regulations also discuss the related reporting and excise tax requirements for charitable hospitals and the consequences for failure to satisfy the section 501(r) requirements. 2006 tax filing See, Proposed Regulations: Community Health Needs Assessments for Charitable Hospitals, REG-106499-12, 78 Fed. 2006 tax filing Reg. 2006 tax filing 20,523. 2006 tax filing Timing of when an Organization is exempt for Federal Tax Purposes. 2006 tax filing  As noted in section 2. 2006 tax filing 03(4) of Revenue Procedure 2013-9, 2013-2 I. 2006 tax filing R. 2006 tax filing B. 2006 tax filing 267, the provisions in section 11. 2006 tax filing 01 regarding the effect of determination letters or rulings recognizing exempt status of organizations described in section 501(c), other than sections 501(c)(3), (9), (17), and (29), have been revised. 2006 tax filing Prior to this year, and back to 1962, when such organizations applied for recognition, the IRS would usually recognize the organizations as tax exempt from the date of formation, no matter how long the interval between the date of formation and the date of application. 2006 tax filing In addition to the practical difficulties of ascertaining an organization's purposes and activities for this period, such recognition is now potentially inconsistent with the provisions of section 6033(j), which automatically revokes the exempt status of an organization that fails to file required Form 990 series returns or notices for three consecutive years. 2006 tax filing The new procedure adopts a practice similar to the rule for section 501(c)(3) organizations for these organizations, generally permitting recognition from the date of formation if the organization has: always met the requirements for exemption, has applied within 27 months from the end of the month in which it was organized, and has not failed to file required Form 990 series returns or notices for three consecutive years. 2006 tax filing Section 11. 2006 tax filing 01(3) notes: an organization that otherwise meets the requirements for tax-exempt status and the issuance of a determination letter or ruling that does not meet the requirements for recognition from date of formation will generally be recognized from the postmark date of its application. 2006 tax filing Exempt Organizations Select Check. 2006 tax filing  The IRS has developed an on-line search tool, Exempt Organizations Select Check, that allows users to select an exempt organization and check certain information about its federal tax status and filings. 2006 tax filing It consolidates three former search sites into one, providing expanded search capability and a more efficient way to search for organizations that: Are eligible to receive tax-deductible charitable contributions (Publication 78 data). 2006 tax filing Users may rely on this list in determining deductibility of contributions, just as they did when Publication 78 was a separate electronic publication rather than part of Select Check. 2006 tax filing Have had their tax-exempt status automatically revoked under the law because they have not filed Form 990 series returns or notices annually as required for three consecutive years (Auto-Revocation List). 2006 tax filing Have filed a Form 990-N (e-Postcard) annual electronic notice. 2006 tax filing  In addition to searching for a particular organization, users may download a complete list of each of the three types of organizations through Exempt Organizations Select Check. 2006 tax filing See also Revenue Procedure 2011-33, 2011-25 I. 2006 tax filing R. 2006 tax filing B. 2006 tax filing 887. 2006 tax filing Future developments. 2006 tax filing . 2006 tax filing  The IRS has created a page on IRS. 2006 tax filing gov for information about Publication 557, at www. 2006 tax filing irs. 2006 tax filing gov/pub557. 2006 tax filing Information about any future developments affecting Publication 557 (such as legislation enacted after we release it) will be posted on that page. 2006 tax filing Reminders The Patient Protection and Affordable Care Act (ACA). 2006 tax filing   The ACA added several new laws. 2006 tax filing This includes a new excise tax on indoor tanning services, a small business health care tax credit, additional requirements for tax-exempt hospitals, and the section 501(c)(29) CO-OP program. 2006 tax filing For more information, go to IRS. 2006 tax filing gov and select Affordable Care Act Tax Provisions. 2006 tax filing Electronic filing requirement for large organizations. 2006 tax filing  For tax years ending on or after December 31, 2006, only organizations that file 250 returns during the calendar year and that have total assets of $10 million or more are required to file Form 990 electronically. 2006 tax filing For more information, go to e-file for Charities and Non-Profits. 2006 tax filing Section 501(c)(15) gross receipts. 2006 tax filing   The definition of gross receipts for purposes of determining whether small insurance companies qualify as tax-exempt under section 501(c)(15) has changed. 2006 tax filing See Notice 2006-42, 2006-19 I. 2006 tax filing R. 2006 tax filing B. 2006 tax filing 878, Notice 2006-42. 2006 tax filing Prohibited tax shelter transactions. 2006 tax filing  New excise taxes are imposed under section 4965 on certain tax-exempt organizations entering into prohibited tax shelter transactions. 2006 tax filing See T. 2006 tax filing D. 2006 tax filing 9492, Excise Taxes on Prohibited Tax Shelter Transactions and Related Disclosure Requirements, 2010-33 I. 2006 tax filing R. 2006 tax filing B. 2006 tax filing 242. 2006 tax filing See IRS Issues Final Regulations Regarding Excise Taxes on Prohibited Tax Shelter Transactions and Related Disclosure Requirement. 2006 tax filing Pension Protection Act of 2006 tax changes. 2006 tax filing  The Pension Protection Act of 2006 made numerous changes to the tax law provisions affecting tax-exempt organizations. 2006 tax filing Unless otherwise noted, most of the changes became effective on August 17, 2006. 2006 tax filing For key provisions, go to The Pension Protection Act of 2006. 2006 tax filing Section 501(c)(3) organizations must make their Form 990-T, Exempt Organization Business Tax Return (and proxy tax under section 6033(e)), open for public inspection for a period of 3 years from the date the Form 990-T is required to be filed (determined with regard to any extension of time for filing) or is actually filed, whichever is later. 2006 tax filing There is an increase in excise taxes relating to public charities, social welfare organizations, and private foundations. 2006 tax filing There are additional standards for credit counseling organizations. 2006 tax filing The definition of convention or association of churches has been modified. 2006 tax filing Entities that are not required to file Form 990 or 990-EZ must file new Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ. 2006 tax filing The requirements of disclosure to state officials relating to exempt organizations has been modified. 2006 tax filing There are excise taxes imposed on excess benefit transactions involving donor advised funds and sponsoring organizations. 2006 tax filing There are new excise taxes on prohibited tax shelter transactions. 2006 tax filing There is a modification of recordkeeping requirements for certain charitable contributions. 2006 tax filing Introduction This publication discusses the rules and procedures for organizations that seek recognition of exemption from federal income tax under section 501(a) of the Internal Revenue Code (the Code). 2006 tax filing It explains the procedures you must follow to obtain an appropriate ruling or determination letter recognizing your organization's exemption, as well as certain other information that applies generally to all exempt organizations. 2006 tax filing To qualify for exemption under the Code, your organization must be organized for one or more of the purposes specifically designated in the Code. 2006 tax filing Organizations that are exempt under section 501(a) include those organizations described in section 501(c). 2006 tax filing Section 501(c) organizations are covered in this publication. 2006 tax filing Chapter 1, Application, Approval, and Appeal Procedures, provides general information about the procedures for obtaining recognition of tax-exempt status. 2006 tax filing Chapter 2, Filing Requirements and Required Disclosures, contains information about annual filing requirements and other matters that may affect your organization's tax-exempt status. 2006 tax filing Chapter 3, Section 501(c)(3) Organizations, contains detailed information on various matters affecting section 501(c)(3) organizations, including a section on the determination of private foundation status. 2006 tax filing Chapter 4, Other Section 501(c) Organizations, includes separate sections for specific types of organizations described in section 501(c). 2006 tax filing Chapter 5, Excise Taxes, provides information on when excise taxes may be imposed. 2006 tax filing Organizations not discussed in this publication. 2006 tax filing   Certain organizations that may qualify for exemption are not discussed in this publication, although they are included in the Organization Reference Chart. 2006 tax filing These organizations (and the Code sections that apply to them) are as follows. 2006 tax filing Corporations organized under Acts of Congress 501(c)(1) Teachers' retirement fund associations 501(c)(11) Mutual insurance companies 501(c)(15) Corporations organized to finance crop operations 501(c)(16) Employee funded pension trusts (created before June 25, 1959) 501(c)(18) Withdrawal liability payment fund 501(c)(22) Veterans' organizations (created before 1880) 501(c)(23) National Railroad Retirement Investment Trust 501(c)(28) Religious and apostolic associations 501(d) Cooperative hospital service organizations 501(e) Cooperative service organizations of operating educational organizations 501(f)   Section 501(c)(24) organizations (section 4049 ERISA trusts) are neither discussed in the text nor listed in the Organization Reference Chart. 2006 tax filing   Similarly, farmers' cooperative associations that qualify for exemption under section 521, qualified state tuition programs described in section 529, and pension, profit-sharing, and stock bonus plans described in section 401(a) are not discussed in this publication. 2006 tax filing If you think your organization falls within one of these categories, contact the IRS for any additional information you need. 2006 tax filing For telephone assistance, call 1-877-829-5500. 2006 tax filing   Check the Table of Contents at the beginning of this publication to determine whether your organization is described in this publication. 2006 tax filing If it is, read the chapter (or section) that applies to your type of organization for the specific information you must give when applying for recognition of exemption. 2006 tax filing Organization Reference Chart. 2006 tax filing   The Organization Reference Chart enables you to locate at a glance the section of the Code under which your organization might qualify for exemption. 2006 tax filing It also shows the required application form and, if your organization meets the exemption requirements, the annual return to be filed (if any), and whether or not a contribution to your organization will be deductible by a donor. 2006 tax filing It also describes each type of qualifying organization and the general nature of its activities. 2006 tax filing   You may use the Organization Reference Chart to determine the Code section that you think applies to your organization. 2006 tax filing Any correspondence with the IRS (in requesting forms or otherwise) will be expedited if you indicate in your correspondence the appropriate Code section. 2006 tax filing Check the IRS website, IRS. 2006 tax filing gov, for the latest updates, Tax Information for Charities & Other Non-Profits, www. 2006 tax filing irs. 2006 tax filing gov/charities/index. 2006 tax filing html. 2006 tax filing Comments and suggestions. 2006 tax filing   We welcome your comments about this publication and your suggestions for future editions. 2006 tax filing   You can e-mail us while visiting our website at IRS. 2006 tax filing gov. 2006 tax filing   You can send your comments to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 2006 tax filing NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 2006 tax filing Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2006 tax filing   If you wish telephone assistance, please call 1-877-829-5500. 2006 tax filing This toll-free telephone service is available Monday through Friday. 2006 tax filing Prev  Up  Next   Home   More Online Publications
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The 2006 Tax Filing

2006 tax filing 4. 2006 tax filing   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. 2006 tax filing Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. 2006 tax filing Net unrelated income. 2006 tax filing Net unrelated loss. 2006 tax filing Control. 2006 tax filing Income from property financed with qualified 501(c)(3) bonds. 2006 tax filing Disposition of property received from taxable subsidiary and used in unrelated business. 2006 tax filing Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. 2006 tax filing If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. 2006 tax filing In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. 2006 tax filing Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. 2006 tax filing For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. 2006 tax filing Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. 2006 tax filing Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. 2006 tax filing Dividends, interest, annuities and other investment income. 2006 tax filing   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. 2006 tax filing Exception for insurance activity income of a controlled foreign corporation. 2006 tax filing   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. 2006 tax filing The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. 2006 tax filing Certain exceptions to this rule apply. 2006 tax filing For more information, see section 512(b)(17). 2006 tax filing Other exceptions. 2006 tax filing   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). 2006 tax filing Income from lending securities. 2006 tax filing   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. 2006 tax filing   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. 2006 tax filing The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. 2006 tax filing Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. 2006 tax filing Royalties. 2006 tax filing   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. 2006 tax filing   To be considered a royalty, a payment must relate to the use of a valuable right. 2006 tax filing Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. 2006 tax filing Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. 2006 tax filing However, royalties do not include payments for personal services. 2006 tax filing Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. 2006 tax filing   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. 2006 tax filing   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. 2006 tax filing However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. 2006 tax filing To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. 2006 tax filing To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. 2006 tax filing Exceptions. 2006 tax filing   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). 2006 tax filing Rents. 2006 tax filing   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. 2006 tax filing Rents from personal property are not excluded. 2006 tax filing However, special rules apply to “mixed leases” of both real and personal property. 2006 tax filing Mixed leases. 2006 tax filing   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. 2006 tax filing If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. 2006 tax filing If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. 2006 tax filing   Property is placed in service when the lessee first may use it under the terms of a lease. 2006 tax filing For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. 2006 tax filing   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. 2006 tax filing   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). 2006 tax filing Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. 2006 tax filing Exception for rents based on net profit. 2006 tax filing   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. 2006 tax filing Exception for income from personal services. 2006 tax filing   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. 2006 tax filing Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. 2006 tax filing Other exceptions. 2006 tax filing   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. 2006 tax filing ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). 2006 tax filing See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. 2006 tax filing Income from research. 2006 tax filing   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. 2006 tax filing However, the extent of the exclusion depends on the nature of the organization and the type of research. 2006 tax filing   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. 2006 tax filing   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. 2006 tax filing   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. 2006 tax filing   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. 2006 tax filing In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. 2006 tax filing Gains and losses from disposition of property. 2006 tax filing   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. 2006 tax filing   It should be noted that the last exception relates only to cut timber. 2006 tax filing The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. 2006 tax filing Lapse or termination of options. 2006 tax filing   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. 2006 tax filing The exclusion applies only if the option is written in connection with the exempt organization's investment activities. 2006 tax filing Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. 2006 tax filing Exception. 2006 tax filing   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. 2006 tax filing Gain or loss on disposition of certain brownfield property. 2006 tax filing   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. 2006 tax filing See sections 512(b)(19) and 514(b)(1)(E). 2006 tax filing Income from services provided under federal license. 2006 tax filing   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. 2006 tax filing   This exclusion applies only if the following requirements are met. 2006 tax filing The trade or business must have been operated by the order or by the institution before May 27, 1959. 2006 tax filing The trade or business must provide services under a license issued by a federal regulatory agency. 2006 tax filing More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. 2006 tax filing The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. 2006 tax filing Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. 2006 tax filing Exception. 2006 tax filing    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). 2006 tax filing Member income of mutual or cooperative electric companies. 2006 tax filing   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. 2006 tax filing Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. 2006 tax filing For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. 2006 tax filing Exception. 2006 tax filing   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. 2006 tax filing The limit on dues paid by an associate member is $148 for 2011. 2006 tax filing   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. 2006 tax filing Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. 2006 tax filing They cannot be directly connected with excluded income. 2006 tax filing For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. 2006 tax filing Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. 2006 tax filing For an exception, see Expenses attributable to exploitation of exempt activities, later. 2006 tax filing Expenses attributable solely to unrelated business. 2006 tax filing   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. 2006 tax filing   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. 2006 tax filing Expenses attributable to dual use of facilities or personnel. 2006 tax filing   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. 2006 tax filing The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. 2006 tax filing Example 1. 2006 tax filing A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. 2006 tax filing The school provides the tennis courts, housing, and dining facilities. 2006 tax filing The contracted individual hires the instructors, recruits campers, and provides supervision. 2006 tax filing The income the school receives from this activity is from a dual use of the facilities and personnel. 2006 tax filing The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. 2006 tax filing Example 2. 2006 tax filing An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. 2006 tax filing The president devotes approximately 10% of his time to the unrelated business. 2006 tax filing To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. 2006 tax filing Expenses attributable to exploitation of exempt activities. 2006 tax filing   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. 2006 tax filing (See Exploitation of exempt functions under Not substantially related in chapter 3. 2006 tax filing ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. 2006 tax filing Exception. 2006 tax filing   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. 2006 tax filing The unrelated business exploits the exempt activity. 2006 tax filing The unrelated business is a type normally conducted for profit by taxable organizations. 2006 tax filing The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. 2006 tax filing The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. 2006 tax filing   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. 2006 tax filing Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. 2006 tax filing Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. 2006 tax filing (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. 2006 tax filing ) Figuring unrelated business taxable income (UBTI). 2006 tax filing   The UBTI of an advertising activity is the amount shown in the following chart. 2006 tax filing IF gross advertising income is . 2006 tax filing . 2006 tax filing . 2006 tax filing THEN UBTI is . 2006 tax filing . 2006 tax filing . 2006 tax filing More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. 2006 tax filing Equal to or less than direct advertising costs Zero. 2006 tax filing   • Circulation income and readership costs are not taken into account. 2006 tax filing   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. 2006 tax filing   The terms used in the chart are explained in the following discussions. 2006 tax filing Periodical Income Gross advertising income. 2006 tax filing   This is all the income from the unrelated advertising activities of an exempt organization periodical. 2006 tax filing Circulation income. 2006 tax filing   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). 2006 tax filing It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. 2006 tax filing It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. 2006 tax filing Allocable membership receipts. 2006 tax filing   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. 2006 tax filing   The amount used to allocate membership receipts is the amount shown in the following chart. 2006 tax filing   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. 2006 tax filing The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. 2006 tax filing IF . 2006 tax filing . 2006 tax filing . 2006 tax filing THEN the amount used to allocate membership receipts is . 2006 tax filing . 2006 tax filing . 2006 tax filing 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. 2006 tax filing The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. 2006 tax filing Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. 2006 tax filing U is an exempt scientific organization with 10,000 members who pay annual dues of $15. 2006 tax filing One of U's activities is publishing a monthly periodical distributed to all of its members. 2006 tax filing U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. 2006 tax filing Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. 2006 tax filing Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). 2006 tax filing Example 2. 2006 tax filing Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. 2006 tax filing Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. 2006 tax filing U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. 2006 tax filing Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. 2006 tax filing Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. 2006 tax filing Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). 2006 tax filing U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). 2006 tax filing Periodical Costs Direct advertising costs. 2006 tax filing   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. 2006 tax filing   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. 2006 tax filing Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. 2006 tax filing   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. 2006 tax filing For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. 2006 tax filing Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. 2006 tax filing   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. 2006 tax filing Readership costs. 2006 tax filing   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. 2006 tax filing Costs partly attributable to other activities. 2006 tax filing   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. 2006 tax filing When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. 2006 tax filing The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. 2006 tax filing Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. 2006 tax filing Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. 2006 tax filing It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. 2006 tax filing Consolidated treatment, once adopted, must be followed consistently and is binding. 2006 tax filing This treatment can be changed only with the consent of the Internal Revenue Service. 2006 tax filing An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. 2006 tax filing Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. 2006 tax filing The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. 2006 tax filing For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. 2006 tax filing The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. 2006 tax filing Example. 2006 tax filing Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. 2006 tax filing Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. 2006 tax filing Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. 2006 tax filing The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. 2006 tax filing The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. 2006 tax filing It is not engaged in for profit. 2006 tax filing Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. 2006 tax filing It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. 2006 tax filing Modifications Net operating loss deduction. 2006 tax filing   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. 2006 tax filing However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. 2006 tax filing For example, a loss from an unrelated trade or business is not diminished because dividend income was received. 2006 tax filing   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. 2006 tax filing This would reduce the loss that could be applied against unrelated business income of prior or future tax years. 2006 tax filing Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. 2006 tax filing   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. 2006 tax filing   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. 2006 tax filing   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. 2006 tax filing For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. 2006 tax filing   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 2006 tax filing Charitable contributions deduction. 2006 tax filing   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. 2006 tax filing   To be deductible, the contribution must be paid to another qualified organization. 2006 tax filing For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. 2006 tax filing   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. 2006 tax filing Deduction limits. 2006 tax filing   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. 2006 tax filing See the Instructions for Form 990-T for more information. 2006 tax filing    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. 2006 tax filing However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. 2006 tax filing   Contributions in excess of the limits just described may be carried over to the next 5 tax years. 2006 tax filing A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. 2006 tax filing Suspension of deduction limits for farmers and ranchers. 2006 tax filing   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. 2006 tax filing See the Instructions for Form 990-T for details. 2006 tax filing Specific deduction. 2006 tax filing   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. 2006 tax filing However, the specific deduction is not allowed in computing an NOL or the NOL deduction. 2006 tax filing   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. 2006 tax filing Exception. 2006 tax filing   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. 2006 tax filing In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. 2006 tax filing   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. 2006 tax filing The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. 2006 tax filing The local units cannot file separate returns. 2006 tax filing However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. 2006 tax filing See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. 2006 tax filing Example. 2006 tax filing X is an association of churches and is divided into local units A, B, C, and D. 2006 tax filing Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. 2006 tax filing X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. 2006 tax filing Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. 2006 tax filing If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. 2006 tax filing No distinction is made between limited and general partners. 2006 tax filing The organization is required to notify the partnership of its tax-exempt status. 2006 tax filing Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. 2006 tax filing The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. 2006 tax filing The partnership is required to provide the organization this information on Schedule K-1. 2006 tax filing Example. 2006 tax filing An exempt educational organization is a partner in a partnership that operates a factory. 2006 tax filing The partnership also holds stock in a corporation. 2006 tax filing The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. 2006 tax filing Different tax years. 2006 tax filing   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. 2006 tax filing S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. 2006 tax filing For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. 2006 tax filing The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. 2006 tax filing Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. 2006 tax filing To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. 2006 tax filing Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). 2006 tax filing These organizations must figure unrelated business taxable income under special rules. 2006 tax filing Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. 2006 tax filing ). 2006 tax filing (See Exclusions under Income, earlier. 2006 tax filing ) Therefore, they are generally subject to unrelated business income tax on this income. 2006 tax filing The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. 2006 tax filing The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. 2006 tax filing Losses from nonexempt activities. 2006 tax filing   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. 2006 tax filing Example. 2006 tax filing A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. 2006 tax filing The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. 2006 tax filing Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. 2006 tax filing Modifications. 2006 tax filing   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). 2006 tax filing Exempt function income. 2006 tax filing   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. 2006 tax filing Exempt function income also includes income set aside for qualified purposes. 2006 tax filing Income that is set aside. 2006 tax filing   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. 2006 tax filing In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. 2006 tax filing   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. 2006 tax filing Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. 2006 tax filing These rules are explained in section 512(a)(3)(E)(ii). 2006 tax filing   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. 2006 tax filing In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. 2006 tax filing   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. 2006 tax filing However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. 2006 tax filing The income set aside must have been includible in gross income for that earlier year. 2006 tax filing Nonrecognition of gain. 2006 tax filing   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. 2006 tax filing The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. 2006 tax filing   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. 2006 tax filing Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. 2006 tax filing The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. 2006 tax filing For details, see section 512(a)(4) and the regulations under that section. 2006 tax filing Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. 2006 tax filing The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. 2006 tax filing All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. 2006 tax filing Excess qualifying specified payments. 2006 tax filing   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. 2006 tax filing Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. 2006 tax filing   If a controlled participant is not required to file a U. 2006 tax filing S. 2006 tax filing income tax return, the participant must ensure that the copy or copies of the Regulations section 1. 2006 tax filing 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. 2006 tax filing S. 2006 tax filing Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. 2006 tax filing S. 2006 tax filing Corporation or a Foreign Corporation Engaged in a U. 2006 tax filing S. 2006 tax filing Trade or Business, or any Form 8865, Return of U. 2006 tax filing S. 2006 tax filing Persons With Respect to Certain Foreign Partnerships, filed for that participant. 2006 tax filing Addition to tax for valuation misstatements. 2006 tax filing   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. 2006 tax filing See section 512(b)(13)(E)(ii) for more information. 2006 tax filing Net unrelated income. 2006 tax filing   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. 2006 tax filing Net unrelated loss. 2006 tax filing   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. 2006 tax filing Control. 2006 tax filing   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. 2006 tax filing For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. 2006 tax filing   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). 2006 tax filing Income from property financed with qualified 501(c)(3) bonds. 2006 tax filing If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. 2006 tax filing No deduction is allowed for interest on the private activity bond. 2006 tax filing See sections 150(b)(3) and (c) for more information. 2006 tax filing Disposition of property received from taxable subsidiary and used in unrelated business. 2006 tax filing A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). 2006 tax filing The assets are treated as if sold at fair market value. 2006 tax filing Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. 2006 tax filing S. 2006 tax filing and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. 2006 tax filing A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. 2006 tax filing However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. 2006 tax filing In such a case the built-in appreciation is preserved in the replacement property received in the transaction. 2006 tax filing A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). 2006 tax filing This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. 2006 tax filing In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. 2006 tax filing If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. 2006 tax filing If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. 2006 tax filing Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. 2006 tax filing Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. 2006 tax filing Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. 2006 tax filing The amount of income included is proportionate to the debt on the property. 2006 tax filing Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). 2006 tax filing It includes rental real estate, tangible personal property, and corporate stock. 2006 tax filing Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. 2006 tax filing The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. 2006 tax filing That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. 2006 tax filing Example 1. 2006 tax filing Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. 2006 tax filing The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. 2006 tax filing Example 2. 2006 tax filing X, an exempt organization, forms a partnership with A and B. 2006 tax filing The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. 2006 tax filing X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. 2006 tax filing The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. 2006 tax filing The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. 2006 tax filing The loan is secured by a mortgage on the entire office building. 2006 tax filing By agreement with Y bank, X is not personally liable for payment of the mortgage. 2006 tax filing X has acquisition indebtedness of $7 million. 2006 tax filing This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). 2006 tax filing Example 3. 2006 tax filing A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. 2006 tax filing The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. 2006 tax filing Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. 2006 tax filing The union has no outstanding debt on the property. 2006 tax filing The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. 2006 tax filing The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. 2006 tax filing Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. 2006 tax filing In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. 2006 tax filing Accordingly, the debt is not acquisition indebtedness. 2006 tax filing Change in use of property. 2006 tax filing   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. 2006 tax filing Example. 2006 tax filing Four years ago a university borrowed funds to acquire an apartment building as housing for married students. 2006 tax filing Last year, the university rented the apartment building to the public for nonexempt purposes. 2006 tax filing The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. 2006 tax filing Continued debt. 2006 tax filing   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. 2006 tax filing This is true even if the original property was not debt-financed property. 2006 tax filing Example. 2006 tax filing To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. 2006 tax filing The office building was not debt-financed property. 2006 tax filing The organization later sold the building for $1 million without repaying the $400,000 loan. 2006 tax filing It used the sale proceeds to buy an apartment building it rents to the general public. 2006 tax filing The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. 2006 tax filing Property acquired subject to mortgage or lien. 2006 tax filing   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. 2006 tax filing Example. 2006 tax filing An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. 2006 tax filing The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. 2006 tax filing Liens similar to a mortgage. 2006 tax filing   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. 2006 tax filing A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. 2006 tax filing However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. 2006 tax filing Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). 2006 tax filing Exception for property acquired by gift, bequest, or devise. 2006 tax filing   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. 2006 tax filing However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. 2006 tax filing   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). 2006 tax filing   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. 2006 tax filing Modifying existing debt. 2006 tax filing   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. 2006 tax filing When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. 2006 tax filing Extension or renewal. 2006 tax filing   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. 2006 tax filing   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. 2006 tax filing Debt increase. 2006 tax filing   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. 2006 tax filing Example. 2006 tax filing An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. 2006 tax filing The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. 2006 tax filing A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. 2006 tax filing Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. 2006 tax filing These include the following. 2006 tax filing Debts incurred in performing an exempt purpose. 2006 tax filing Annuity obligations. 2006 tax filing Securities loans. 2006 tax filing Real property debts of qualified organizations. 2006 tax filing Certain Federal financing. 2006 tax filing Debt incurred in performing exempt purpose. 2006 tax filing   A debt incurred in performing an exempt purpose is not acquisition indebtedness. 2006 tax filing For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. 2006 tax filing Annuity obligation. 2006 tax filing   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. 2006 tax filing It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. 2006 tax filing Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. 2006 tax filing It must be payable over the lives of either one or two individuals living when issued. 2006 tax filing It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. 2006 tax filing Example. 2006 tax filing X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. 2006 tax filing In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. 2006 tax filing The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. 2006 tax filing The present value of this annuity is $81,156, determined from IRS valuation tables. 2006 tax filing Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. 2006 tax filing Securities loans. 2006 tax filing   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). 2006 tax filing This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. 2006 tax filing   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from