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REG, Regulation

Sources for Tax-Exempt Organizations: 501(c)(3), UBIT, and Form 990

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The standards and authorities behind PocketCPA's REG lessons on Tax-Exempt Organizations: 501(c)(3), UBIT, and Form 990. The topic rests on IRC Subchapter F.

About this topic

Exemption is not a blanket shield. An organization must qualify, stay within strict limits, pay tax on any unrelated business, and file annually or lose its status.

Nearly every question in this area is really a question about which of those four bodies is being invoked. Read the stem for the organization's classification before reading it for the arithmetic.

Key points

What the lessons cover

  1. Qualifying under Sec. 501(c)(3)
  2. Unrelated business income tax
  3. Unrelated business income: the three prongs and the Sec. 513(a) exceptions
  4. Unrelated business income: bingo, sponsorship, low cost articles and donor lists
  5. Unrelated business income: the Sec. 512(b) modifications
  6. Unrelated business income: one silo per business (Sec. 512(a)(6))
  7. Public charities versus private foundations
  8. Annual filing on Form 990
  9. Private foundation excise taxes: self-dealing under Sec. 4941
  10. Lobbying, campaigning, and the Sec. 501(h) election
  11. Debt-financed income under Sec. 514

Authoritative references

Exemption and qualification. Sec. 501(c)(3), the operative description; Sec. 501(a), the exemption itself; Sec. 501(h)(1) through (h)(7), the expenditure-test election, its eligible categories, its disqualified organizations and its non-effect on the substantiality standard. Treas. Reg. 1.501(c)(3)-1(a)(1), (b)(1)(i), (b)(4), (c)(2), (c)(3) and (d)(1)(ii) for the organizational and operational tests, inurement, action organizations and private benefit.

Notice and classification. Sec. 508(a), the recognition notice and its retroactive gap; Sec. 508(b), the private foundation presumption; Sec. 508(c)(1) mandatory exceptions and Sec. 508(c)(2) regulatory exceptions; Sec. 508(d)(2)(B), donor deduction disallowance. Sec. 509(a)(1) through (a)(4); Sec. 509(d) support and Sec. 509(e) gross investment income; Sec. 509(f)(1) Type III requirements. Sec. 170(b)(1)(A) clauses (i) through (ix) for the public charity categories. Treas. Reg. 1.170A-9(f)(2), (f)(3)(i) and (f)(6)(i) for the 33-1/3 percent mechanical test, the 10 percent facts-and-circumstances floor and the governmental-unit exception to the 2 percent ceiling.

Unrelated business income. Sec. 511(a)(1) and Sec. 11(b) for the 21 percent corporate rate; Sec. 511(b)(1) and Sec. 1(e) for trusts. Sec. 512(a)(1) definition; Sec. 512(a)(6)(A) through (C) siloing; Sec. 512(b)(1), (2), (3), (4), (5), (6), (12) and (13) modifications. Sec. 513(a) and its (a)(1) volunteer, (a)(2) convenience and (a)(3) donated-merchandise exceptions; Sec. 513(b) trusts; Sec. 513(c) trade or business. Sec. 513(f)(1) and (f)(2) cover bingo, Sec. 513(h) covers low-cost articles and mailing lists, and Sec. 513(i)(1) through (i)(3) covers qualified sponsorship payments.

Debt-financed income. Sec. 514(a)(1) inclusion percentage, Sec. 514(a)(2) deduction percentage, Sec. 514(a)(3) deduction sum and straight-line override; Sec. 514(b)(1) debt-financed property. Sec. 514(c)(1) defines acquisition indebtedness, Sec. 514(c)(2)(A) and (c)(2)(B) cover mortgaged property acquired by bequest or gift, and Sec. 514(c)(7) covers average and highest acquisition indebtedness.

Chapter 42 excise taxes. Sec. 4940(a) and (b) net investment income; Sec. 4941(a) through (e) self-dealing, including the Sec. 4941(c)(2) manager cap, the Sec. 4941(d)(2) exceptions and the Sec. 4941(e)(2) amount involved. Sec. 4942 covers minimum distribution (section level only), Sec. 4946(a)(1), (b), (c) and (d) cover disqualified persons, foundation managers, government officials and family, and Sec. 507(d)(2)(A) through (C) covers substantial contributor. Sec. 4911(a) through (c)(4) covers excess lobbying expenditures, Sec. 4955(a) through (d) political expenditures, and Sec. 4958(a) through (f)(2) excess benefit transactions.

Reporting and penalties. Sec. 6033(a)(1) annual return, Sec. 6033(a)(3)(A) mandatory exceptions and (a)(3)(B) discretionary relief, Sec. 6033(a)(3)(C) the organizations to which the small-organization exception can apply. Sec. 6033(i) covers electronic notice and Sec. 6033(j)(1) through (j)(3) automatic revocation and reinstatement. Sec. 6652(c)(1)(A) is the failure-to-file penalty, Sec. 6652(c)(5) reasonable cause, and Sec. 6652(c)(7) inflation adjustment. Forms 1023, 990, 990-EZ, 990-N, 990-PF and 990-T are IRS administrative instruments; their thresholds come from the instructions for the year rather than from the Code.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.

See also