MODULE 40 TAXES: GIFT AND ESTATE
income tax rates if the organization is a corporation. An
exempt organization must be a trust in order for its unrelated
business income to be taxed at the rates applicable to trusts.
60. (b) The requirement is to determine the correct
statement regarding an exempt organization's income of
$15,000 derived from conducting bingo games. If an ex-
empt organization derives income from conducting bingo
games, in a locality where such activity is legal, and in a .
state that confines such activity to nonprofit organizations,
then such income is exempt from the tax on unrelated busi-
ness income. Answer (d) is incorrect because unrelated
business income will not cause the revocation or forfeiture
of an organization's exempt status.
61. (c) The requirement is to determine the correct
statement regarding the unrelated business income of ex-
empt organizations. A tax-exempt organization may be
subject to tax on its unrelated business income if the organi- '
zation conducts a trade or business that is not substantially
related to the exempt purpose of the organization, and the
trade or business is regularly carried on by the organization.
For an exempt organization, an unrelated business does not
include any activity where all the work is performed for the
organization by unpaid volunteers. Answer (a) is incorrect
because although unrelated business income may result in a
tax, it will not result in the loss of the organization's exempt
status. Answer (b) is incorrect because the term "business"
is broadly defined to include any activity conducted for the
production of income through the sale of merchandise or the
performance of services. Answer (d) is incorrect because
using a trade or business to provide financial support for the
organization's exempt purpose will not prevent an activity
from being classified as an unrelated trade or business and
being subject to the tax on unrelated business income.
62. (b) The requirement is to determine the correct
statement regarding an exempt organization's payment of
estimated taxes on its unrelated business income. An ex-
empt organization subject to tax on its unrelated business
income must comply with the Code provisions regarding
installment payments of estimated income tax by corpora-
tions. This means that an exempt organization must make
quarterly estimated tax payments if it expects its estimated
tax on its unrelated business income to be $500 or more.
Answers (c) and (d) are incorrect because any tax on unre-
lated business income must be paid in full by the due date of
the exempt organization's return.
63. (d) The requirement is to determine the correct
statement regarding the taxability of unrelated business in-
come (UBI) to an exempt organization that is a charitable
trust. Answer (c) is incorrect because an exempt organiza-
tion that is a charitable trust is subject to tax on its UBI only
to the extent that its UBI exceeds $1,000. Answers (a)
and (b) are incorrect because an exempt organization with
UBI in excess of $1,000 is subject to tax at rates applicable
to trusts if it is organized as a charitable trust.
64. (c) Unrelated business income (UBI) is gross in-
come derived from any trade or business the conduct of .
which is not substantially related to the exercise or perfor-
mance of an organization's exempt purpose. Although divi-
dends and interest are generally excluded from UBI, they
will be included if they result from debt-financed invest-
ments. Answer (d) is incorrect because it states that divi-
691
dends and interest are always excluded from UBI. An-
swer (a) is incorrect because the Code only imposes a tax on
UBI, it does not revoke, an organization's exempt status.
Answer (b) is incorrect because a net operating loss is al-
lowed in computing unrelated business taxable income.
Answer (c) is correct because Code Sec. 513(f) specifically
excludes from UBI an exempt organization's conducting
bingo games where such activity is legal.
IV. Tax Return Preparers
65. (b) The requirement is to determine which acts con-
stitute(s) grounds for a tax preparer penalty. A return pre-
parer will be subject to penalty if the preparer knowingly or
recklessly discloses information furnished in connection
with the preparation of a tax return, unless such information
is furnished for quality or peer review, under an administra-
tive order by a regulatory agency, or pursuant to an order of
a court. Additionally, a return preparer will be subject to
penalty if any part of an understatement of liability with
respect to a return or refund claim is due to the preparer's
willful attempt to understate tax liability, or to any reckless
or intentional disregard of rules and regulations.
66. (d) The requirement is to determine Water's re-
sponsibility regarding Vee's unfiled 2004 income tax return.
A CPA should promptly inform the client upon becoming
aware of the client's failure to file a required return for a
prior year. However, the CPA is not obligated to inform the
IRS and the CP A may not do so without the client's permis-
sion, except where required by law. If the CP A is requested
to prepare the current year's return (2009) and the client has
not taken action to file the return for the earlier year (2004),
the CPA should consider whether to withdraw from prepar-
ing the current year's return and whether to continue a pro-
fessional relationship with the client. Also, note that the
normal statue of limitations for the assessment of a tax defi-
ciency is three years after the due date of the return or three
years after the return is filed, whichever is later. Thus, the
statute of limitations is still open with regard to 2004 since
there is no time limit for the assessment of tax if no tax re-
turn was filed.
67. (c) The requirement is to determine which action a
tax return preparer must take to avoid tax preparer penalties
for a return's understated tax liability due to a taxpayer's
intentional disregard of regulations. A return preparer may,
in good faith, rely without verification upon information
furnished by the client or by third parties, and is not required
to audit, examine, or review books, records, or documents in
order to independently verify the taxpayer's information.
However, the preparer should not ignore the implications of
information furnished and should make reasonable inquiries
if the furnished information appears incorrect, incomplete,
or inconsistent.
68. (d) According to the Statements on Standards for
Tax Services, in preparing a tax return a CP A may in good
faith rely upon information furnished by the client or third
parties without further verification.
69. (d) The requirement is to determine the correct
statement regarding the imposition of a preparer penalty for
understated corporate tax liability. A return preparer may in
good faith rely without verification upon information fur-
nished, and is not required to audit, examine, or review
books, records, or documents in order to independently ver-