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2012 Tax Returns

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2012 Tax Returns

2012 tax returns 8. 2012 tax returns   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. 2012 tax returns Reporting tax withheld. 2012 tax returns Nominees. 2012 tax returns Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. 2012 tax returns Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. 2012 tax returns Alternative minimum tax treatment. 2012 tax returns How To Report Dividend IncomeInvestment interest deducted. 2012 tax returns Reminder Foreign-source income. 2012 tax returns  If you are a U. 2012 tax returns S. 2012 tax returns citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. 2012 tax returns S. 2012 tax returns law. 2012 tax returns This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. 2012 tax returns Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. 2012 tax returns This chapter also explains how to report dividend income on your tax return. 2012 tax returns Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. 2012 tax returns You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. 2012 tax returns However, some amounts you receive that are called dividends are actually interest income. 2012 tax returns (See Dividends that are actually interest under Taxable Interest in chapter 7. 2012 tax returns ) Most distributions are paid in cash (or check). 2012 tax returns However, distributions can consist of more stock, stock rights, other property, or services. 2012 tax returns Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. 2012 tax returns Tax on unearned income of certain children. 2012 tax returns   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. 2012 tax returns If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. 2012 tax returns If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. 2012 tax returns    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. 2012 tax returns Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. 2012 tax returns   For more information about the tax on unearned income of children and the parents' election, see chapter 31. 2012 tax returns Beneficiary of an estate or trust. 2012 tax returns    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. 2012 tax returns You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 2012 tax returns , from the fiduciary. 2012 tax returns Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. 2012 tax returns Social security number (SSN) or individual taxpayer identification number (ITIN). 2012 tax returns    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. 2012 tax returns This includes payers of dividends. 2012 tax returns If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. 2012 tax returns For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. 2012 tax returns Backup withholding. 2012 tax returns   Your dividend income is generally not subject to regular withholding. 2012 tax returns However, it may be subject to backup withholding to ensure that income tax is collected on the income. 2012 tax returns Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. 2012 tax returns   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. 2012 tax returns For more information, see Backup Withholding in chapter 4. 2012 tax returns Stock certificate in two or more names. 2012 tax returns   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. 2012 tax returns Form 1099-DIV. 2012 tax returns   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. 2012 tax returns Keep this form with your records. 2012 tax returns You do not have to attach it to your tax return. 2012 tax returns Dividends not reported on Form 1099-DIV. 2012 tax returns   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. 2012 tax returns For example, you may receive distributive shares of dividends from partnerships or S corporations. 2012 tax returns These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 2012 tax returns , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. 2012 tax returns Reporting tax withheld. 2012 tax returns   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. 2012 tax returns Nominees. 2012 tax returns   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. 2012 tax returns Form 1099-MISC. 2012 tax returns   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. 2012 tax returns See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. 2012 tax returns Incorrect amount shown on a Form 1099. 2012 tax returns   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. 2012 tax returns The new Form 1099 you receive will be marked “Corrected. 2012 tax returns ” Dividends on stock sold. 2012 tax returns   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. 2012 tax returns Dividends received in January. 2012 tax returns   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. 2012 tax returns You report the dividend in the year it was declared. 2012 tax returns Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. 2012 tax returns They are paid out of earnings and profits and are ordinary income to you. 2012 tax returns This means they are not capital gains. 2012 tax returns You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. 2012 tax returns Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. 2012 tax returns Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. 2012 tax returns They should be shown in box 1b of the Form 1099-DIV you receive. 2012 tax returns The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. 2012 tax returns 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. 2012 tax returns 6%. 2012 tax returns 20% on any amount that otherwise would be taxed at a 39. 2012 tax returns 6% rate. 2012 tax returns To qualify for the maximum rate, all of the following requirements must be met. 2012 tax returns The dividends must have been paid by a U. 2012 tax returns S. 2012 tax returns corporation or a qualified foreign corporation. 2012 tax returns (See Qualified foreign corporation , later. 2012 tax returns ) The dividends are not of the type listed later under Dividends that are not qualified dividends . 2012 tax returns You meet the holding period (discussed next). 2012 tax returns Holding period. 2012 tax returns   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. 2012 tax returns The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. 2012 tax returns Instead, the seller will get the dividend. 2012 tax returns   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. 2012 tax returns See the examples later. 2012 tax returns Exception for preferred stock. 2012 tax returns   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. 2012 tax returns If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. 2012 tax returns Example 1. 2012 tax returns You bought 5,000 shares of XYZ Corp. 2012 tax returns common stock on July 9, 2013. 2012 tax returns XYZ Corp. 2012 tax returns paid a cash dividend of 10 cents per share. 2012 tax returns The ex-dividend date was July 16, 2013. 2012 tax returns Your Form 1099-DIV from XYZ Corp. 2012 tax returns shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). 2012 tax returns However, you sold the 5,000 shares on August 12, 2013. 2012 tax returns You held your shares of XYZ Corp. 2012 tax returns for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). 2012 tax returns The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. 2012 tax returns You have no qualified dividends from XYZ Corp. 2012 tax returns because you held the XYZ stock for less than 61 days. 2012 tax returns Example 2. 2012 tax returns Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. 2012 tax returns You held the stock for 63 days (from July 16, 2013, through September 16, 2013). 2012 tax returns The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). 2012 tax returns Example 3. 2012 tax returns You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. 2012 tax returns ABC Mutual Fund paid a cash dividend of 10 cents a share. 2012 tax returns The ex-dividend date was July 16, 2013. 2012 tax returns The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. 2012 tax returns Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. 2012 tax returns However, you sold the 10,000 shares on August 12, 2013. 2012 tax returns You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. 2012 tax returns Holding period reduced where risk of loss is diminished. 2012 tax returns   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. 2012 tax returns You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. 2012 tax returns You were grantor (writer) of an option to buy substantially identical stock or securities. 2012 tax returns Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. 2012 tax returns   For information about how to apply condition (3), see Regulations section 1. 2012 tax returns 246-5. 2012 tax returns Qualified foreign corporation. 2012 tax returns   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. 2012 tax returns The corporation is incorporated in a U. 2012 tax returns S. 2012 tax returns possession. 2012 tax returns The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. 2012 tax returns For a list of those treaties, see Table 8-1. 2012 tax returns The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. 2012 tax returns See Readily tradable stock , later. 2012 tax returns Exception. 2012 tax returns   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. 2012 tax returns Readily tradable stock. 2012 tax returns   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. 2012 tax returns For a list of the exchanges that meet these requirements, see www. 2012 tax returns sec. 2012 tax returns gov/divisions/marketreg/mrexchanges. 2012 tax returns shtml. 2012 tax returns Dividends that are not qualified dividends. 2012 tax returns   The following dividends are not qualified dividends. 2012 tax returns They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. 2012 tax returns Capital gain distributions. 2012 tax returns Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. 2012 tax returns S. 2012 tax returns building and loan associations, U. 2012 tax returns S. 2012 tax returns savings and loan associations, federal savings and loan associations, and similar financial institutions. 2012 tax returns (Report these amounts as interest income. 2012 tax returns ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. 2012 tax returns Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. 2012 tax returns Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. 2012 tax returns Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. 2012 tax returns Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. 2012 tax returns Table 8-1. 2012 tax returns Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. 2012 tax returns Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. 2012 tax returns This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. 2012 tax returns Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. 2012 tax returns If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. 2012 tax returns If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. 2012 tax returns You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. 2012 tax returns But you may be able to deduct the service charge. 2012 tax returns See chapter 28 for more information about deducting expenses of producing income. 2012 tax returns In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. 2012 tax returns If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. 2012 tax returns When figuring this amount, use the fair market value of the stock on the dividend payment date. 2012 tax returns Money Market Funds Report amounts you receive from money market funds as dividend income. 2012 tax returns Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. 2012 tax returns Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). 2012 tax returns They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. 2012 tax returns Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. 2012 tax returns Undistributed capital gains of mutual funds and REITs. 2012 tax returns    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. 2012 tax returns You must treat your share of these gains as distributions, even though you did not actually receive them. 2012 tax returns However, they are not included on Form 1099-DIV. 2012 tax returns Instead, they are reported to you in box 1a of Form 2439. 2012 tax returns   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. 2012 tax returns   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. 2012 tax returns You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. 2012 tax returns Attach Copy B of Form 2439 to your return, and keep Copy C for your records. 2012 tax returns Basis adjustment. 2012 tax returns   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. 2012 tax returns Additional information. 2012 tax returns   For more information on the treatment of distributions from mutual funds, see Publication 550. 2012 tax returns Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. 2012 tax returns You should receive a Form 1099-DIV or other statement showing the nondividend distribution. 2012 tax returns On Form 1099-DIV, a nondividend distribution will be shown in box 3. 2012 tax returns If you do not receive such a statement, you report the distribution as an ordinary dividend. 2012 tax returns Basis adjustment. 2012 tax returns   A nondividend distribution reduces the basis of your stock. 2012 tax returns It is not taxed until your basis in the stock is fully recovered. 2012 tax returns This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. 2012 tax returns If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. 2012 tax returns   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. 2012 tax returns Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. 2012 tax returns See Holding Period in chapter 14. 2012 tax returns Example. 2012 tax returns You bought stock in 2000 for $100. 2012 tax returns In 2003, you received a nondividend distribution of $80. 2012 tax returns You did not include this amount in your income, but you reduced the basis of your stock to $20. 2012 tax returns You received a nondividend distribution of $30 in 2013. 2012 tax returns The first $20 of this amount reduced your basis to zero. 2012 tax returns You report the other $10 as a long-term capital gain for 2013. 2012 tax returns You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. 2012 tax returns Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. 2012 tax returns These distributions are, at least in part, one form of a return of capital. 2012 tax returns They may be paid in one or more installments. 2012 tax returns You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. 2012 tax returns For more information on liquidating distributions, see chapter 1 of Publication 550. 2012 tax returns Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. 2012 tax returns Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. 2012 tax returns Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. 2012 tax returns Taxable stock dividends and stock rights. 2012 tax returns   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. 2012 tax returns You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. 2012 tax returns The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. 2012 tax returns The distribution is in convertible preferred stock and has the same result as in (2). 2012 tax returns The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. 2012 tax returns The distribution is on preferred stock. 2012 tax returns (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. 2012 tax returns )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. 2012 tax returns If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. 2012 tax returns Preferred stock redeemable at a premium. 2012 tax returns   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. 2012 tax returns For more information, see chapter 1 of Publication 550. 2012 tax returns Basis. 2012 tax returns   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. 2012 tax returns If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. 2012 tax returns Fractional shares. 2012 tax returns    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. 2012 tax returns However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. 2012 tax returns Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. 2012 tax returns Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. 2012 tax returns Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. 2012 tax returns    Report these transactions on Form 8949 with the correct box checked. 2012 tax returns   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. 2012 tax returns Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). 2012 tax returns Example. 2012 tax returns You own one share of common stock that you bought on January 3, 2004, for $100. 2012 tax returns The corporation declared a common stock dividend of 5% on June 29, 2013. 2012 tax returns The fair market value of the stock at the time the stock dividend was declared was $200. 2012 tax returns You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. 2012 tax returns You figure your gain or loss as follows: Fair market value of old stock $200. 2012 tax returns 00 Fair market value of stock dividend (cash received) +10. 2012 tax returns 00 Fair market value of old stock and stock dividend $210. 2012 tax returns 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. 2012 tax returns 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. 2012 tax returns 76 Total $100. 2012 tax returns 00 Cash received $10. 2012 tax returns 00 Basis (cost) of stock dividend − 4. 2012 tax returns 76 Gain $5. 2012 tax returns 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. 2012 tax returns Scrip dividends. 2012 tax returns   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. 2012 tax returns The certificate is generally nontaxable when you receive it. 2012 tax returns If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. 2012 tax returns   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. 2012 tax returns You must include its fair market value in income on the date you receive it. 2012 tax returns Other Distributions You may receive any of the following distributions during the year. 2012 tax returns Exempt-interest dividends. 2012 tax returns   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. 2012 tax returns Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. 2012 tax returns Information reporting requirement. 2012 tax returns   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. 2012 tax returns This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. 2012 tax returns Alternative minimum tax treatment. 2012 tax returns   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. 2012 tax returns See Alternative Minimum Tax (AMT) in chapter 30 for more information. 2012 tax returns Dividends on insurance policies. 2012 tax returns    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. 2012 tax returns However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. 2012 tax returns    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. 2012 tax returns Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. 2012 tax returns Report any taxable distributions on insurance policies on Form 1040, line 21. 2012 tax returns Dividends on veterans' insurance. 2012 tax returns   Dividends you receive on veterans' insurance policies are not taxable. 2012 tax returns In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. 2012 tax returns Patronage dividends. 2012 tax returns   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. 2012 tax returns   Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use in your business. 2012 tax returns But you must reduce the basis (cost) of the items bought. 2012 tax returns If the dividend is more than the adjusted basis of the assets, you must report the excess as income. 2012 tax returns   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. 2012 tax returns Alaska Permanent Fund dividends. 2012 tax returns    Do not report these amounts as dividends. 2012 tax returns Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. 2012 tax returns How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. 2012 tax returns Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. 2012 tax returns Report qualified dividends on line 9b of Form 1040 or Form 1040A. 2012 tax returns If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. 2012 tax returns See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. 2012 tax returns If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. 2012 tax returns You cannot use Form 1040EZ if you receive any dividend income. 2012 tax returns Form 1099-DIV. 2012 tax returns   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. 2012 tax returns Even if you do not receive Form 1099-DIV, you must report all your dividend income. 2012 tax returns   See Form 1099-DIV for more information on how to report dividend income. 2012 tax returns Form 1040A or 1040. 2012 tax returns    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. 2012 tax returns If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. 2012 tax returns   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. 2012 tax returns If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. 2012 tax returns If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. 2012 tax returns   Enter on line 6 the total of the amounts listed on line 5. 2012 tax returns Also enter this total on line 9a of Form 1040A or 1040. 2012 tax returns Qualified dividends. 2012 tax returns   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. 2012 tax returns The amount in box 1b is already included in box 1a. 2012 tax returns Do not add the amount in box 1b to, or substract it from, the amount in box 1a. 2012 tax returns   Do not include any of the following on line 9b. 2012 tax returns Qualified dividends you received as a nominee. 2012 tax returns See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. 2012 tax returns Dividends on stock for which you did not meet the holding period. 2012 tax returns See Holding period , earlier under Qualified Dividends. 2012 tax returns Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. 2012 tax returns Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. 2012 tax returns Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. 2012 tax returns   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. 2012 tax returns Enter qualified dividends on line 2 of the worksheet. 2012 tax returns Investment interest deducted. 2012 tax returns   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. 2012 tax returns Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. 2012 tax returns This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. 2012 tax returns For more information about the limit on investment interest, see Investment expenses in chapter 23. 2012 tax returns Expenses related to dividend income. 2012 tax returns   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). 2012 tax returns See chapter 28 for general information about deducting expenses of producing income. 2012 tax returns More information. 2012 tax returns    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. 2012 tax returns Prev  Up  Next   Home   More Online Publications
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Native American and Tribal Education, Jobs, and Economic Development

Find an A-Z list of resources on education, business, community development, training, and more.

The 2012 Tax Returns

2012 tax returns 3. 2012 tax returns   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. 2012 tax returns Dual use of assets or facilities. 2012 tax returns Exploitation of exempt functions. 2012 tax returns ExamplesExceptions. 2012 tax returns Excluded Trade or Business ActivitiesQualified sponsorship payment. 2012 tax returns Advertising. 2012 tax returns Exception for contingent payments. 2012 tax returns Exception for periodicals. 2012 tax returns Exception for conventions and trade shows. 2012 tax returns Legal definition. 2012 tax returns Legal where played. 2012 tax returns No for-profit games where played. 2012 tax returns Unrelated business income. 2012 tax returns   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. 2012 tax returns   Certain trade or business activities are not treated as an unrelated trade or business. 2012 tax returns See Excluded Trade or Business Activities, later. 2012 tax returns Trade or business. 2012 tax returns   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. 2012 tax returns An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. 2012 tax returns   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. 2012 tax returns Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. 2012 tax returns Regularly conducted. 2012 tax returns   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. 2012 tax returns   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. 2012 tax returns The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. 2012 tax returns However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. 2012 tax returns Not substantially related. 2012 tax returns    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). 2012 tax returns Whether an activity contributes importantly depends in each case on the facts involved. 2012 tax returns   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. 2012 tax returns For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. 2012 tax returns The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. 2012 tax returns   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. 2012 tax returns Selling of products of exempt functions. 2012 tax returns   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. 2012 tax returns Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. 2012 tax returns   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. 2012 tax returns For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. 2012 tax returns But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. 2012 tax returns , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. 2012 tax returns Dual use of assets or facilities. 2012 tax returns   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. 2012 tax returns The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. 2012 tax returns   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. 2012 tax returns The theater is a principal feature of the museum and operates continuously while the museum is open to the public. 2012 tax returns If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. 2012 tax returns   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. 2012 tax returns Exploitation of exempt functions. 2012 tax returns   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. 2012 tax returns When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. 2012 tax returns Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. 2012 tax returns   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. 2012 tax returns Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. 2012 tax returns Sales commissions. 2012 tax returns   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. 2012 tax returns Artists' facilities. 2012 tax returns   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. 2012 tax returns These two activities do not contribute importantly to accomplishing the organization's exempt purpose. 2012 tax returns Therefore, they are unrelated trades or businesses. 2012 tax returns Membership list sales. 2012 tax returns   An exempt educational organization regularly sells membership mailing lists to business firms. 2012 tax returns This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. 2012 tax returns Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. 2012 tax returns Hospital facilities. 2012 tax returns   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. 2012 tax returns The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. 2012 tax returns The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. 2012 tax returns   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. 2012 tax returns These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. 2012 tax returns Book publishing. 2012 tax returns   An exempt organization engages primarily in activities that further its exempt purposes. 2012 tax returns It also owns the publication rights to a book that does not relate to any of its exempt purposes. 2012 tax returns The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. 2012 tax returns These activities constitute a trade or business regularly conducted. 2012 tax returns Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. 2012 tax returns   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. 2012 tax returns See Royalties under Exclusions in chapter 4. 2012 tax returns School handicraft shop. 2012 tax returns   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. 2012 tax returns The students are paid a percentage of the sales price. 2012 tax returns In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. 2012 tax returns The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. 2012 tax returns Although many local participants are former students of the school, any qualified person may participate in the program. 2012 tax returns The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. 2012 tax returns School facilities. 2012 tax returns   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. 2012 tax returns During the summer, the school operates a tennis club open to the general public. 2012 tax returns Employees of the school run the club, including collecting membership fees and scheduling court time. 2012 tax returns   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. 2012 tax returns The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. 2012 tax returns   In both situations, the exempt purpose is the advancement of education. 2012 tax returns Furnishing tennis facilities in the manner described does not further that exempt purpose. 2012 tax returns These activities are unrelated trades or businesses. 2012 tax returns However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. 2012 tax returns See Rents under Exclusions in chapter 4. 2012 tax returns Services provided with lease. 2012 tax returns   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. 2012 tax returns Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. 2012 tax returns It also provides dressing room, linen, and stadium security services for the professional team. 2012 tax returns   Leasing of the stadium is an unrelated trade or business. 2012 tax returns In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. 2012 tax returns Therefore, the income from this lease is rent from real property and unrelated business taxable income. 2012 tax returns Broadcasting rights. 2012 tax returns   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. 2012 tax returns Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. 2012 tax returns An athletic program is considered an integral part of the educational process of a university. 2012 tax returns   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. 2012 tax returns Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. 2012 tax returns Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. 2012 tax returns   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. 2012 tax returns The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. 2012 tax returns   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. 2012 tax returns The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. 2012 tax returns Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. 2012 tax returns Yearbook advertising. 2012 tax returns   An exempt organization receives income from the sale of advertising in its annual yearbook. 2012 tax returns The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. 2012 tax returns This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. 2012 tax returns This advertising activity is an unrelated trade or business. 2012 tax returns Pet boarding and grooming services. 2012 tax returns   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. 2012 tax returns These activities do not contribute importantly to its purpose of preventing cruelty to animals. 2012 tax returns Museum eating facilities. 2012 tax returns   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. 2012 tax returns Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. 2012 tax returns The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. 2012 tax returns Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. 2012 tax returns Halfway house workshop. 2012 tax returns   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. 2012 tax returns The profits are applied to the operating costs of the halfway house. 2012 tax returns The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. 2012 tax returns Travel tour programs. 2012 tax returns   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. 2012 tax returns Example 1. 2012 tax returns A tax-exempt university alumni association provides a travel tour program for its members and their families. 2012 tax returns The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. 2012 tax returns It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. 2012 tax returns The organization provides an employee for each tour as a tour leader. 2012 tax returns There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. 2012 tax returns By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. 2012 tax returns Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. 2012 tax returns Therefore, the sale of the travel tours is an unrelated trade or business. 2012 tax returns Example 2. 2012 tax returns A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. 2012 tax returns These tours are conducted by teachers and others certified by the state board of education. 2012 tax returns The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. 2012 tax returns A tour's study program consists of instruction on subjects related to the location being visited on the tour. 2012 tax returns Each tour group brings along a library of material related to the subjects being studied on the tour. 2012 tax returns During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. 2012 tax returns Examinations are given at the end of each tour. 2012 tax returns The state board of education awards academic credit for tour participation. 2012 tax returns Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. 2012 tax returns Insurance programs. 2012 tax returns   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. 2012 tax returns Exceptions. 2012 tax returns   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. 2012 tax returns Magazine publishing. 2012 tax returns   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. 2012 tax returns   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. 2012 tax returns This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. 2012 tax returns   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. 2012 tax returns Directory of members. 2012 tax returns   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. 2012 tax returns Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. 2012 tax returns The directory contains no commercial advertisement and is sold only to the organization's members. 2012 tax returns   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. 2012 tax returns Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. 2012 tax returns The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. 2012 tax returns This directory differs from the publication discussed next because of its noncommercial characteristics. 2012 tax returns Sales of advertising space. 2012 tax returns   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. 2012 tax returns The journal is distributed without charge, mainly to the organization's members. 2012 tax returns   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. 2012 tax returns Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. 2012 tax returns A business firm identified in a separate space is further identified in an Index of Advertisers. 2012 tax returns   The organization solicits advertising by personal contacts. 2012 tax returns Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. 2012 tax returns The organization also solicits advertising in form letters appealing for corporate and personal contributions. 2012 tax returns   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. 2012 tax returns Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. 2012 tax returns Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. 2012 tax returns However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. 2012 tax returns In that case, other factors should also be considered in determining whether a commercial benefit can be expected. 2012 tax returns Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. 2012 tax returns   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. 2012 tax returns However, the purchaser of a listing cannot expect more than an inconsequential benefit. 2012 tax returns Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. 2012 tax returns Publishing legal notices. 2012 tax returns   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. 2012 tax returns The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. 2012 tax returns The state designated the bar association's journal as the place to publish the required notices. 2012 tax returns   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. 2012 tax returns Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. 2012 tax returns Therefore, the advertising income is unrelated trade or business income. 2012 tax returns   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. 2012 tax returns This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. 2012 tax returns Therefore, the publishing of legal notices does not constitute an unrelated trade or business. 2012 tax returns Museum greeting card sales. 2012 tax returns    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. 2012 tax returns Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. 2012 tax returns The cards contain appropriate greetings and are personalized on request. 2012 tax returns   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. 2012 tax returns It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. 2012 tax returns As a result, a large number of cards are sold at a significant profit. 2012 tax returns   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. 2012 tax returns The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. 2012 tax returns The cards may encourage more people to visit the museum itself to share in its educational programs. 2012 tax returns The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. 2012 tax returns Therefore, these sales activities are not an unrelated trade or business. 2012 tax returns Museum shop. 2012 tax returns   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. 2012 tax returns   The shop also rents originals or reproductions of paintings contained in its collection. 2012 tax returns All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. 2012 tax returns   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. 2012 tax returns   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. 2012 tax returns The same is true for the sale of literature relating to art. 2012 tax returns Therefore, these sales activities are not an unrelated trade or business. 2012 tax returns   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. 2012 tax returns The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. 2012 tax returns Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. 2012 tax returns Therefore, these sales are an unrelated trade or business. 2012 tax returns Business league's parking and bus services. 2012 tax returns   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. 2012 tax returns It also operates, as an insubstantial part of its activities, a park and shop plan. 2012 tax returns   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. 2012 tax returns The merchants cannot offer free or discount parking or bus fares to their customers. 2012 tax returns   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. 2012 tax returns Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. 2012 tax returns   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. 2012 tax returns That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. 2012 tax returns   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. 2012 tax returns This provides a particular service to individual members of the organization and does not further its exempt purpose. 2012 tax returns Therefore, operating the park and shop plan is an unrelated trade or business. 2012 tax returns Youth residence. 2012 tax returns   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. 2012 tax returns The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. 2012 tax returns The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. 2012 tax returns The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. 2012 tax returns Health club program. 2012 tax returns   An exempt charitable organization's purpose is to provide for the welfare of young people. 2012 tax returns The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. 2012 tax returns Nominal annual dues are charged for membership in the organization and use of the facilities. 2012 tax returns   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. 2012 tax returns The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. 2012 tax returns   The health club program is in addition to the general physical fitness program of the organization. 2012 tax returns Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. 2012 tax returns Miniature golf course. 2012 tax returns   An exempt youth welfare organization operates a miniature golf course that is open to the general public. 2012 tax returns The course, which is managed by salaried employees, is substantially similar to commercial courses. 2012 tax returns The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. 2012 tax returns   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. 2012 tax returns Sales of hearing aids. 2012 tax returns   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. 2012 tax returns This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. 2012 tax returns It is not an unrelated trade or business. 2012 tax returns Nonpatient laboratory testing. 2012 tax returns   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. 2012 tax returns However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. 2012 tax returns Selling endorsements. 2012 tax returns   An exempt scientific organization enjoys an excellent reputation in the field of biological research. 2012 tax returns It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. 2012 tax returns Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. 2012 tax returns Accordingly, the sale of endorsements is an unrelated trade or business. 2012 tax returns Sponsoring entertainment events. 2012 tax returns   An exempt university has a regular faculty and a regularly enrolled student body. 2012 tax returns During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. 2012 tax returns Members of the general public also are admitted. 2012 tax returns The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. 2012 tax returns Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. 2012 tax returns Therefore, the activity is not an unrelated trade or business. 2012 tax returns Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. 2012 tax returns Volunteer workforce. 2012 tax returns   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. 2012 tax returns Example 1. 2012 tax returns A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. 2012 tax returns Example 2. 2012 tax returns A volunteer fire company conducts weekly public dances. 2012 tax returns Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. 2012 tax returns However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. 2012 tax returns Convenience of members. 2012 tax returns   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. 2012 tax returns For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. 2012 tax returns Qualified sponsorship activities. 2012 tax returns   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. 2012 tax returns Qualified sponsorship payment. 2012 tax returns   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. 2012 tax returns “Use or acknowledgment” does not include advertising the sponsor's products or services. 2012 tax returns The organization's activities include all its activities, whether or not related to its exempt purposes. 2012 tax returns   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. 2012 tax returns   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. 2012 tax returns Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. 2012 tax returns Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. 2012 tax returns   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. 2012 tax returns   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. 2012 tax returns For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. 2012 tax returns Advertising. 2012 tax returns   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. 2012 tax returns For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. 2012 tax returns   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. 2012 tax returns   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. 2012 tax returns In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. 2012 tax returns Exception for contingent payments. 2012 tax returns   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. 2012 tax returns However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. 2012 tax returns Exception for periodicals. 2012 tax returns   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. 2012 tax returns For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. 2012 tax returns It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). 2012 tax returns   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. 2012 tax returns See Sales of advertising space under Examples, earlier in this chapter. 2012 tax returns Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. 2012 tax returns Exception for conventions and trade shows. 2012 tax returns   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. 2012 tax returns The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. 2012 tax returns Selling donated merchandise. 2012 tax returns   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. 2012 tax returns For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. 2012 tax returns Employee association sales. 2012 tax returns   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. 2012 tax returns This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. 2012 tax returns Bingo games. 2012 tax returns   Certain bingo games are not included in the term “unrelated trade or business. 2012 tax returns ” To qualify for this exclusion, the bingo game must meet the following requirements. 2012 tax returns It meets the legal definition of bingo. 2012 tax returns It is legal where it is played. 2012 tax returns It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. 2012 tax returns Legal definition. 2012 tax returns   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. 2012 tax returns   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. 2012 tax returns For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. 2012 tax returns Legal where played. 2012 tax returns   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. 2012 tax returns The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. 2012 tax returns No for-profit games where played. 2012 tax returns   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. 2012 tax returns Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. 2012 tax returns Example. 2012 tax returns Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. 2012 tax returns In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. 2012 tax returns Several for-profit organizations conduct nightly games. 2012 tax returns Y conducts weekly bingo games in city S, while X conducts weekly games in county R. 2012 tax returns Since state law confines the for-profit organizations to city S, local jurisdiction controls. 2012 tax returns Y's bingo games conducted in city S are an unrelated trade or business. 2012 tax returns However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. 2012 tax returns Gambling activities other than bingo. 2012 tax returns   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. 2012 tax returns Pole rentals. 2012 tax returns   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). 2012 tax returns A qualified pole rental is the rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. 2012 tax returns For this purpose, the term rental includes any sale of the right to use the pole (or other structure). 2012 tax returns Distribution of low cost articles. 2012 tax returns   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. 2012 tax returns This applies to organizations described in section 501 that are eligible to receive charitable contributions. 2012 tax returns   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. 2012 tax returns   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. 2012 tax returns The maximum cost of a low cost article is $9. 2012 tax returns 70 for 2011. 2012 tax returns The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. 2012 tax returns Exchange or rental of member lists. 2012 tax returns   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. 2012 tax returns Hospital services. 2012 tax returns   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. 2012 tax returns This exclusion applies only to services described in section 501(e)(1)(A). 2012 tax returns Public entertainment activity. 2012 tax returns   An unrelated trade or business does not include a qualified public entertainment activity. 2012 tax returns A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. 2012 tax returns   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. 2012 tax returns   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. 2012 tax returns Its conducting qualified public entertainment activities will not affect determination of its exempt status. 2012 tax returns Convention or trade show activity. 2012 tax returns   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. 2012 tax returns   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. 2012 tax returns   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). 2012 tax returns The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. 2012 tax returns   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. 2012 tax returns For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. 2012 tax returns    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. 2012 tax returns The trade show itself must be a qualified convention and trade show activity. 2012 tax returns The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. 2012 tax returns Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. 2012 tax returns Prev  Up  Next   Home   More Online Publications