EO - Basic Income Tax Considerations

Apply IRC 7701. Identify the entity’s legal status as a corporation, association, trust, cooperative or partnership. This determines what type of return needs to be filed. Unincorporated associations are generally treated as corporations liable for Form 1120 returns.

Don’t make income tax elections on behalf of taxpayers.

All income is taxable and included in gross income unless excluded by statute IRC 61.

Regarding certain dues collected for others, escrow funds, similar trust funds, and amounts received on behalf of others, such amounts are not included in the organization’s gross income until the organization asserts dominion over it as its own. See guidance on an income determination with respect to deposits in Commissioner v. Indianapolis Power & Light Co., 110 S. Ct. 589; See Rev. Rul. 71-189, 1971-1 C.B. 32 (inactive deposits are not income until bank asserts dominion over the accounts). See also Fidelity-Philadelphia Trust Co. v. Commissioner, 23 T. C. 527 (1954).

Contributions and donations received may or may not be taxable. See IRC 102.

Determine whether a contribution received constitutes a “gift”.

Gifts are excluded from gross income by IRC 102.

“Intent” is a critical consideration in determining whether a transaction is a gift. Commissioner v. Duberstein, 363 U.S. 278 (1960).

However, if the gift is acquired by misrepresentation or fraud it is included in gross income of the recipient. Synanon Church v. Commissioner, T.C. Memo. 1989-270.

Government grants are not automatically presumed to be gifts. In some cases, a governmental entity can expect an economic benefit from programs that relieve business or individual hardships. For guidance, refer to Kroon v. United States, Civil No. A-90-71 (D. Alaska 1974); Rev. Rul. 77-280, 1977-2 C.B. 14; Rev. Rul. 68-97, 1968-1 C.B. 34; and United States v. Chicago, B. & Q. R. Co., 412 U.S. 401 (1973), 1973-2 C.B. 428.

Quid pro quo contributions are gifts only to the extent the total amount received exceeds the fair market value of the consideration provided to the donor. IRC 6115(b).

Deductibility of Expenses.

Apply the rules of IRC 162. Expenses are deductible only to the extent they are ordinary and necessary in carrying on a trade or business.

The income-offset rule allows full deduction for exempt function expenses but only to the extent of income derived from the exempt function. See Adirondack League Club, 55 T.C. at 806; Five Lakes Outing Club v. U.S., 468 F. 2d 443, 446 (8th Cir. 1972); Synanon, 57 T.C.M. at 631.

Similarly, charitable distributions are deductible in full only to the extent of the charitable gifts received. For corporations, charitable distributions from other income are deductible only to the extent of 10% of taxable income after certain adjustments. See limitations at IRC 170(b)(2).