Chapter 23 - PROBLEMS 31. a. Absent the 501(h) election to...

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PROBLEMS 31. a. Absent the § 501(h) election to participate in lobbying activities on a limited basis, Research is in violation of the qualification and maintenance requirement which prohibits § 501(c)(3) organizations from attempting to influence legislation (i.e., lobbying activities) or participating in political campaigns. Therefore, the lobbying expenditures can result in Research forfeiting its exempt status. In addition, Research is subject to a tax on the lobbying expenditures of $60,000 ($1.2 million × 5%). If the organization’s management knew that the lobbying expenditures were likely to result in Research no longer being described in § 501(c)(3) and if such activities were willful and not due to reasonable cause, a tax of $60,000 will also be levied on the organization’s management. b. The § 501(h) election permits the medical research organization to participate in lobbying activities on a limited basis. To determine the extent of participation permitted, it is necessary to calculate the lobbying nontaxable amount, which is the lesser of the following. $1,000,000 $1,150,000 [$225,000 + .05($20 million – $1.5 million)] The ceiling on permitted lobbying expenditures then is calculated. Lobbying nontaxable amount $1,000,000 × Statutory rate × 150% = Ceiling on permitted lobbying expenditures $1,500,000 Since Research’s lobbying expenditures of $1,200,000 are below the ceiling of $1,500,000, all of the lobbying expenditures are permitted lobbying expenditures. However, since the lobbying expenditures exceed the lobbying nontaxable amount, Research has excess lobbying expenditures of $200,000 ($1,200,000 – $1,000,000). The tax liability on the excess lobbying expenditures is $50,000 ($200,000 × 25%). c. A 50% increase in lobbying expenditures results in total lobbying expenditures of $1,800,000 ($1,200,000 + $600,000). With the § 501(h) election, the ceiling on permitted lobbying expenditures is $1,500,000. Therefore, the total expenditures exceed the ceiling by $300,000 ($1,800,000 – $1,500,000). The tax to an exempt organization with disqualifying lobbying expenditures is $90,000 ($1,800,000 × 5%). If the organization’s management knew that the lobbying expenses were likely to result in Research no longer being described in § 501(c)(3) and if such activities were willful and not due to reasonable cause, a tax of $90,000 also is levied on the organization’s management. Research should not make such non-permitted lobbying expenditures, since this could result in the loss of exempt status. In addition, since the lobbying expenditures exceed the lobbying nontaxable amount, Research has excess lobbying expenditures of $800,000 ($1,800,000 – $1,000,000). The tax liability on the excess lobbying expenditures is $200,000 ($800,000 × 25%).
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Considering these tax effects Research definitely should not increase its lobbying expenditures to $1,800,000. At most, the expenditures should be increased by $300,000 to $1,500,000. pp. 23-7 to 23-9 and Figure 23.1
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Chapter 23 - PROBLEMS 31. a. Absent the 501(h) election to...

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