690 MODULE 40 TAXES: GIFT AND ESTATE
/ zations that are listed in Sec. 501 as being exempt from tax.
Answer (d) is incorrect because a social club can be an ex-
empt organization as long as substantially all its activities
are for such purposes and no part of its net earnings inures to
the benefit of any private shareholder. Answer (c) is incor-
rect because most exempt organizations are permitted speci-
fied levels of lobbying expenditures, and can even elect to
be subject to a tax equal to 25% of their excess lobbying
expenditures to prevent loss of exempt status. Answer (b) is
incorrect because foreign corporations can qualify as exempt
organizations.
52. (c) Organizations that can qualify as exempt organi-
zations are listed in Sec. 501 of the Internal Revenue Code.
An exempt organization can take the form of a trust or a
corporation. In order to receive exempt status, the organiza-
tion must file an application with the Internal Revenue Ser-
vice. In no event will exempt status be conferred upon an
organization unless the organization is one of those listed in
the Code. Answer (b) is incorrect because there is no limi-
tation on the amount of salary that can be paid an employee.
IV.A.2. Sec. 501(c)(3) Organizations
53. (b) The requirement is to determine which of the
activities is(are) consistent with Hope's tax-exempt status as
a religious organization. An exempt organization must be
operated exclusively for its exempt purpose, and other ac-
tivities not in furtherance of its exempt purpose must be only
an insubstantial part of its activities. A religious organiza-
tion's providing' traditional burial services that maintain the
religious beliefs of its members would be consistent with its
tax-exempt status as a religious organization. However,
conducting recreational functions such as weekend retreats
conducted for business organizations ordinarily would not
be consistent with the tax-exempt status of a religious or-
ganization unless there were tightly scheduled religious ac-
tivities and only limited free time for incidental recreation
activities.
54. (a) The requirement is to determine which state-
ments are correct in regard to the organizational test to qual-
ify a public service charitable entity as tax-exempt. The
term "articles of organization" includes the trust instrument,
corporate charter, articles of association, or any other written
instruments by which an organization is created. To satisfy
the organizational test, the articles of organization (1) must
limit the organization'S purposes to one or more exempt
purposes described in Sec. 501(c)(3); and, (2) must not ex-
pressly empower the organization to engage in activities that
are not in furtherance of one or more exempt purposes, ex-
cept as an insubstantial part of its activities.
55. (d) The requirement is to determine which of two
activities (if any) will result in unrelated business income.
Unrelated business income (UBI) is income derived from a
trade or business, the conduct of which is not substantially
related to the exercise or performance of an organization's
exempt purpose. For a trade or business to be related, the
conduct of the business activity must have a causal relation-
ship to the achievement of the organization's exempt pur-
pose. Selling articles made by handicapped persons as part
of their rehabilitation would be substantially related to the
exempt purpose of an organization exclusively involved in
their rehabilitation. Similarly, operating a grocery store
almost fully staffed by emotionally handicapped persons as
part of a therapeutic program to allow the persons to become
involved with society, assume responsibility, and to exercise
business judgment, would be substantially related to the
rehabilitation purposes of the exempt organization.
56 .. (c) The operational test requires that an exempt
organization be operated exclusively for an exempt purpose.
An organization will be considered to be operated exclu-
sively for an exempt purpose only if it engages primarily in
activities that accomplish its exempt purpose. An organiza-
tion will not be so regarded if more than an insubstantial part
of its activities is not in furtherance of an exempt purpose.
Thus, an organization that engages in insubstantial nonex-
empt activities will not fail the operational test. In contrast,
an organization that operates for the prevention of cruelty to
animals will fail the operational test if it directly participates
in any political campaign.
IV.C. Unrelated Business Income (UBI)
57. (b) The requirement is to determine the correct
statement with regard to the unrelated business income of an
exempt organization. An exempt organization is not taxed
on unrelated business income of less than $1,000. Answer
(a) is incorrect because the amount of unrelated business
income will not cause the loss of exempt status. Answer (c)
is incorrect because the tax will not apply to a business ac-
tivity that is not regularly carried on. Answer (d) is incorrect
because a loss from an unrelated trade or business activity is
allowed in computing unrelated business taxable income.
58. (d) The requirement is to determine which one of
the listed activities will not result in unrelated business in-
come. Unrelated business income (UBI) is income derived
from any trade or business, the conduct of which is not sub-
stantially related to the exercise or performance of an or-
ganization'S exempt purpose. For a trade or business to be
"related," the conduct of the business activity must have a
causal relationship to the achievement of the exempt pur-
pose. A business activity will be "substantially related" only
if the causal relationship is a substantial one. Assuming that
the development and improvement of its members is one of
the purposes for which a trade association is granted an ex-
emption, the sale of publications used as course materials for
the association's seminars for its members would be sub-
stantially related.
Answer (a) is incorrect because even though a special
rule permits an exempt hospital to perform services at cost
for other hospitals with facilities to serve not more than 100
inpatients, the permitted services are limited to data pro-
cessing, purchasing, warehousing, billing and collection,
food, clinical, industrial engineering, laboratory, printing,
communications, record center, and personnel services.
Answer (b) is incorrect because even though an exempt
senior citizen's center may operate a beauty parlor and bar-
ber shop for its members, selling major appliances to its
members has been held to generate unrelated business in-
come. Answer (c) is incorrect because the performance of
accounting and tax services for its members would be unre-
lated to the exempt purpose of a lab or union.
59. (a) The requirement is to determine the correct
statement with regard to an exempt organization's unrelated
business taxable income when the exempt organization is a
corporation. An exempt organization's unrelated business
income in excess of $1,000 is taxed at regular corporate