Accy 407 - Chapter 15

Front 1

"The first step in the establishment of a charitable, not-for-profit organization (NPO) is to:

A) Apply to the IRS for exemption from federal income taxes.
B) Establish a legal identity for the NPO separate from the individuals who joined together with a charitable purpose.
C) Prepare by-laws that show how the business of the organization will be conducted.
D) Elect officers of the not-for-profit organization."

Back 1

B) Establish a legal identity for the NPO separate from the individuals who joined together with a charitable purpose. Choice A and B should follow after the state has sanctioned that the organization has a legal identity. The election of officers will be dictated by the rules in the by-laws, so Choice D is not the answer.

Front 2

"
A state might regulate a nonprofit corporation that operates in its state by all of the following methods except:

A) License to conduct charitable gaming.
B) Registration of political lobbyists.
C) Exemption from sales and property taxes.
D) Approval of all disbursements."

Back 2

D) Approval of all disbursements. it would be impractical to approve disbursements of the large number of charities in a state even if it was considered a prudent thing to do. Choices A, B, and C are typical regulations that govern NPOs in a state. See Illustration 15-1 for a more complete list.

Front 3

"Which of the following interactions with the Internal Revenue Service (IRS) are most likely for a not-for-profit organization during the first stage in its life cycle?

A) Filing unrelated business income tax Form 990-T.
B) Reporting the dissolution of the tax-exempt organization.
C) Applying for exempt status on Form 1023 or 1024.
D) Filing information return Form 990."

Back 3

C) Applying for exempt status on Form 1023 or 1024 - the not-for-profit organization first applies to the IRS for tax-exempt status on a Form 1023 or 1024. During its lifetime, it will file annual compliance Forms 990 (Choice D), or 990-T (Choice A) if the organization is subject to UBIT. If it is determined that the organization will dissolve, it must report that to the IRS (Choice B)

Front 4

"Which of the following terms applies to a tax-exempt organization that is supported primarily by donations from a small set of individuals and exists to make grants to other tax-exempt organizations?

A) Public charity.
B) Private foundation.
C) Charitable organization.
D) Not-for-profit organization."

Back 4

Choice B is correct because it describes a private foundation, often funded by a large gift from a family. Choice A refers to a tax-exempt organization that is funded, operated, and monitored by the public at large. All tax-exempt organizations are categorized as either a public charity or private foundation, Choices C and D are more generic terms.

Front 5

"
Incorporating documents that contain language helpful in ascertaining the charitable or tax-exempt purpose of the organization include all of the following except:

A) By-laws.
B) Articles of incorporation.
C) Application to the IRS for tax-exempt status.
D) All of the above."

Back 5

Choice A is correct because the by-laws are designed to have an internal focus and describe the functional rules of the organization. Both Choice B and C will include such language about the organization's tax-exempt purpose, so D is not a correct choice.

Front 6

"The largest number of tax-exempt entities are granted exemption under which section of the following Internal Revenue Codes (IRC)?

A) IRC Sec. 501(c)3 charitable, religious, scientific, literary, educational, and testing for public safety.
B) IRC Sec. 501(c)4 civic leagues, social welfare organizations, local employee associations, community organizations.
C) IRC Sec. 501(c)6 business leagues, trade associations, chambers of commerce, real estate boards.
D) IRC Sec. 501(c)7 social and recreational clubs, hobby clubs, country clubs."

Back 6

A. IRC Sec. 501(c)3 organizations number more than any other type of exempt organization so Choice A is correct. The term "independent sector" is sometimes used to describe IRC Sec. 501(c)3 and (c)4 organizations. See Illustration 15-3 for a list of various subsections of the IRC that are available to not-for-profit organizations for exempt status.

Front 7

"
A reason why the Form 990 was revised for tax years 2008 and beyond is to:

A) Enhance transparency about the organization.
B) Allow the IRS to efficiently assess noncompliance with regulations.
C) Minimize the burden of filing on tax-exempt organizations.
D) All of the above."

Back 7

D. All of the above - see p. 637

Front 8

"
For which of the following types of abuse would the IRS most likely impose ""intermediate sanctions"" on a tax-exempt entity?

A) Failure to file a Form 990 tax return on time.
B) Refusal to provide a copy of the Form 990 to an individual who requested it.
C) Excessive compensation paid to the executive director.
D) Imprudent investments that resulted in a loss for the entity."

Back 8

Choice C is an example of an excess benefit transaction between a person with substantial influence over the organization and the NPO. Intermediate sanction legislation was designed to curtail such abuse. There are other penalties that can be assessed for the activities described in Choices A and B. Stakeholders of not-for-profit organizations may have legal sanctions against managers who make imprudent investment decisions (Choice D), but that is not within the purview of the IRS.

Front 9

"
Direct lobbying by a not-for-profit organization which includes testifying at legislative hearings, corresponding or conferring with legislators or their staffs, and publishing documents advocating specific legislative action is:

A) Permitted but subject to some constraints.
B) Never allowed.
C) Always allowed.
D) Not recommended."

Back 9

Choice A is the best answer. At the federal level, IRC Sec. 501(h) does allow direct lobbying; however, a ceiling is calculated to allow for grass-roots lobbying not exceeding $1 million in any one year so Choices B and C are not correct. IRS Form 990, the annual reporting form, requires much information to determine whether a tax-exempt entity is operating within the guidelines on direct lobbying. Choice D is incorrect because there will be many times when it is appropriate for an organization to take a position on legislative issues and spend money in doing so

Front 10

"
A measure of performance of a not-for-profit organization that captures how many months of operating expenses can be covered by unrestricted net assets is:

A) Program expenses divided by total expenses.
B) Public support divided by fund-raising expenses.
C) Unrestricted net assets divided by operating expenses.
D) Revenues divided by expenses."

Back 10

Choice C is the only one that compares unrestricted net assets to operating expenses to get a number that represents how many months (measured as a proportion of a year) can be covered through net assets that have accumulated over time and are not restricted for other purposes. Choices A, B, and D relate statement of activities accounts only to each other.

Front 11

"A best practice from the Sarbanes-Oxley (SOX) Act of 2002 legislation that many not-for-profit organizations have adopted is:

A) Investing in a balanced portfolio of stocks and bonds.
B) Hiring an executive director with business experience.
C) Writing down management policies and procedures.
D) Establishing an audit committee."

Back 11

Choice D is considered a best practice; that is, to establish a sub-committee of the board of directors and finance committee that can work with the auditors through the engagement as discussed on p. 644. Choices A and B are perhaps good practices, but they are not in or within the scope of the SOX legislation. Many not-for-profit organizations will document policies and procedures in light of some questions on the revised Form 990; however, that is not a specific call of the SOX legislation, so Choice C is not correct.

Front 12

"The group with direct responsibility for oversight of managers of nongovernmental not-for-profit organizations is:

A) The public at large who grants a subsidy to tax-exempt entities.
B) Individual donors and funding sources of the organization.
C) Board of directors.
D) Consumers of the services provided by the not-for-profit entity."

Back 12

State not-for-profit corporation laws make it clear that the board of directors has distinct responsibilities for overseeing how managers operate not-for-profit organizations, so Choice C is correct. Choices A, B, and D identify other stakeholders who have interest in effective management of the NPO but are not in the best position to monitor the actions of management.

Front 13

"An example of a tax-exempt entity that may be subject to unrelated business income tax is a:

A) College bookstore that sells clothing.
B) Credit union that operates a travel agency.
C) Theater that rents out its facility to businesses for conventions.
D) All of the above."

Back 13

Choice D is correct because Choices A, B, and C might all be considered unrelated business income to the tax-exempt entity offering the service. More information would be helpful to determine if the activity is outside the scope of the tax-exempt mission of the organization.

Front 14

"States regulate charitable solicitation primarily to:

A) Limit the free speech of not-for-profit organizations.
B) Protect citizens from fraud and competitive fund-raising requests.
C) Limit the number of professional fund-raisers.
D) Tax professional fund-raisers to raise fee revenue."

Back 14

Choice B is the only correct answer. The discussion on pp. 631-634 in the text indicates that Choice A, C, and D may be the perception of some about charitable solicitation regulations but are not the primary intent of such regulation.

Front 15

"The IRS annual reporting form, Form 990, is required to be completed by:

A) All not-for profit organizations, including churches and their affiliates.
B) Federal agencies and not-for-profit organizations.
C) All organizations exempt from federal income taxes under IRC Sec. 501(a).
D) None of the above statements are true."

Back 15

Choice C is correct. Choice A is incorrect because the separation of church and state precludes the IRS from directly regulating churches. Choice B is not correct because federal agencies are not subject to annual compliance requirements by the IRS. The revised Form 990 for tax year 2008 and beyond requires even small tax-exempt organizations to file a Form 990-N (postcard).

Front 16

"Which of the following performance measures would provide the best information to assess whether a not-for-profit organization is viable for the long-term?

A) Unrestricted net assets divided by operating expenses.
B) Current assets divided by current liabilities.
C) Public support divided by fund-raising expenses.
D) Program expenses divided by total expenses."

Back 16

Choice A is one of two ratios presented in Illustration 15-6 designed to measure whether an organization is a "going concern." Choice B is an indicator of liquidity. Choice C best measures fund-raising efficiency, and Choice D is an indicator of program effectiveness, so those choices are not correct.

Front 17

"Benchmarking the performance of a not-for-profit organization against its peers or competitors is:

A) Difficult due to the lack of a federal agency, such as the Securities and Exchange Commission, that requires annual informational reporting from not-for-profit organizations.
B) Relatively easy due to the databases of the BBB Wise Giving Alliance and Guidestar.
C) In the early stages of development for the not-for-profit sector.
D) Difficult due to the lack of any standardized tax reporting form to the federal government."

Back 17

Choice C is the best answer. Although the Form 990 is a required annual information return prepared by the largest segment of the not-for-profit sector, it is not yet in searchable form for comparative purposes.

Front 18

"Which of the following not-for-profit entities makes Form 990s for tax-exempt organizations available on a public Web site?

A) BBB Wise Giving Alliance.
B) Guidestar.
C) American Institute of Philanthropy.
D) Internal Revenue Service."

Back 18

Choice B is correct because Guidestar, through its relationship with the National Center for Charitable Statistics and the Internal Revenue Service, has been designated as a depository for easy retrieval of exempt organization's Form 990s. Choice A and C represent not-for-profit organizations that serve as "watchdogs" over other NPOs in the sector. Choice D may seem logical, but the IRS works through Guidestar in making Form 990 data accessible.

Front 19

"Political action committees (PACs), political parties, and campaign committees for candidates for government offices are subject to special reporting and disclosure requirements under:

A) IRC Sec. 527.
B) IRC Sec. 501(c)4.
C) IRC Sec. 501(h).
D) IRC Sec. 501(c)3."

Back 19

Choice A is the correct answer as discussed on p. 641. Choice B which relates to a civic or community organization is not related to political expenditures. Choice C relates to an election made on Form 5786 by IRC Sec. 501(c)3 organizations to make limited expenditures to influence legislation. Choice D is not correct.

Front 20

"Which of the following represents a collaborative effort by state attorneys general and others to provide stricter guidelines regarding endowment fund expenditures in times of fluctuating endowment values?

A) Uniform Trust Code of 2005.
B) Uniform Prudent Management of Investment Funds Act (UPMIFA) of 2006.
C) Revised Model Nonprofit Corporation Act of 1987.
D) Uniform Prudent Investors Act of 1994."

Back 20

Choice B is a revision of the Uniform Management of Institutional Funds Act (UMIFA) designed to provide guidance to states that oversee not-for-profit organizations. Choice C is incorrect as it relates only to establishing a not-for-profit corporation rather than its ongoing investment decisions. Choice D was the basis for the UMIFA which was updated in 2006 with UPMIFA, so D is not correct. UPMIFA adopted the approach in the Uniform Trust Code (Choice A).