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CHAPTER 23 EXEMPT ENTITIES LECTURE NOTES OVERVIEW 1. Exempt. An exempt organization generally is not subject to Federal income taxation. a. Chief justification for such exemption is the social consideration objective of the Federal tax law. b. Organizations qualify for exempt status only if they fit into one of the categories provided in the Code. See Exhibit 23-1 in the text. ADDITIONAL LECTURE RESOURCE Satisfying Statutory Intent. Code contains the following language for § 501(c)(7) organizations. Clubs organized for pleasure, recreation, and other nonprofit purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder. Illustrative of social clubs which can qualify for exemption are country clubs, amateur sports clubs, and dinner clubs. But what is a “club?” The position of the IRS is that “club” implies personal contact and fellow-ship. Actual commingling of members is required (Rev. Rul. 70-32, 1970-1 CB 132). Thus, an aviation club which did not provide any organized social or recreational activities for its members was deemed to be “not a club.” c. Organizations that otherwise are exempt from Federal income taxation may be subject to the following forms of taxation. (1) Tax on excess lobbying expenditures. 23-1
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23-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes (2) Tax on feeder organizations. (3) Excise taxes on private foundations. (4) Tax on unrelated business income. TYPES OF EXEMPT ORGANIZATIONS 2. An organization qualifies for exempt status only if it fits into one of the categories provided in the Code. ADDITIONAL LECTURE RESOURCE IRS scrutiny of exempt organizations has intensified since the mid-1980s. Most of the action began in response to the scandals faced by various religious evangelists, as the vast extent of the business operations of such religious organizations became apparent. In response to public calls to “clean up” such organizations, the IRS began to examine the application of the unrelated business income tax on the evangelists’ arrangements. Revenue pressure from ever-increasing budget deficits also forced an increase in the frequency of close reviews of the business operations of hospitals, churches, museums, and other exempt entities, due to (a) the opportunity for the Treasury to increase tax collections, and (b) the likelihood that such entities had been tempted to increase tainted business activities as a means to replace government funding that did not survive the budget-cutting process. The taxation of exempt organizations now is a regular feature of the tax section of the CPA examination, with three to five questions appearing on nearly every exam. REQUIREMENTS FOR EXEMPT STATUS
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This note was uploaded on 03/17/2009 for the course ACC 483 taught by Professor Susankuniyoshi during the Spring '08 term at University of Phoenix.

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