Leah Pasternak Federal Taxation ACC317 Chapter 23: Exempt Entities Homework Submission

32a. Quail is subject to the Federal income tax on corporations. The income tax on corporate taxable income of $550,000 is $187,000. b. Mr. Arthur Morgan, Treasurer Roadrunner, Inc. 500 Rouse Tower Rochester, NY 14627 Dear Mr. Morgan: I am responding to your inquiry regarding the appropriate actions needed to enable the earnings of Quail, Inc. to become a tax-exempt corporation. Currently, the earnings of Quail, Inc. are subject to the Federal corporate income tax. Based on your projection of annual earnings of approximately $550,000, Quails corporate tax liability would be $187,000. If you liquidated 100% of Quail, Inc. into Roadrunner, Inc. you would bring about the legal dissolution of Quail which would terminate it being taxed as a separate entity. Unfortunately, Quail, Inc. is considered to be in the sporting goods industry and thus would be classified as an unrelated trade or business and subject to the unrelated business income tax. Even though Roadrunner, Inc. is tax-exempt, the earnings of the sporting goods business conducted by it still would be subject to taxation. The corporate tax liability on the $550,000 would remain the same. If there are no other reasons for liquidating Quail, Inc. other than to reduce your income tax liability, I recommend that you continue to operate Quail as a subsidiary. If you would like to discuss this further, please contact me. Sincerely, Leah Pasternak, CPA c. The answer would not change if Roadrunner acquired the Quail stock by either purchase or by gift. d. Quail would still be considered a feeder organization so its tax liability would be $22,250.

34a. In order for an organization to qualify as receiving broad public support, external and internal support tests must be satisfied. The total support received by Pigeon is $310,800. The external support test is satisfied; $244,500 $310,800 = 78.7%. The internal support is also satisfied; $39,000 $310,800 = 12.5%. Pigeon satisfies both tests for receiving broad public support. b. Since Pigeon satisfies both of the required tests for being an organization that is broadly supported by the public, it is not a private foundation.

c. Mr. Arnold Horn, Treasurer Pigeon, Inc. 250 Bristol Road Charlottesville, VA 22903 Dear Mr. Horn: Per you request, I have determined whether Pigeon, Inc., is a private foundation for the prior year. According to my findings, Pigeon would not be considered a private foundation due to the following reasons. For Pigeon not to be classified as a private foundation, it must satisfy both an external support test and an internal support test. The total support received by Pigeon is $310,800. To satisfy the external support test, more than one-third of Pigeons support must normally come from certain external sources. For Pigeon, the external support test is satisfied ($244,500 $310,800 = 78.7%). Pigeon also satisfies the internal support test ($39,000 $310,800 = 12.5%). If I can be of further assistance, please let me know. Sincerely,

Leah Pasternak, CPA 35a.The net investment income is calculated as follows: Gross investment income Interest income $29,000 Rental income 61,000 Dividend income 15,000 Royalty income 22,000 $127,000 Allowable deductions (26,000) Net investment income $101,000 b. Net investment income $101,000 Statutory rate 2% Tax on net investment income $ 2,020 c. The purpose of the tax on the net investment income is to defray the costs incurred by the Federal Government for IRS audits of private foundations. 49a. Yes, Seagull, Inc. is required to file Form 990. b. The due date for filing would be the 15th day of the fifth month after the taxable year ends, so the filing due date would be March 15. 50.a. If Historic Burg is a private operating foundation, the value of the charitable contribution is $100,000. Sallys charitable contribution deduction is $90,000. The $100,000 gift amount exceeds the AGI ceiling on her contribution deduction of $90,000 ($300,000 30%). b. If Historic Burg is a private non-operating foundation, the value of Sallys contribution is $55,000. The AGI limit of $150,000 ($300,000 50%) exceeds $55,000.