Chapter 22: Tax-Exempt Entities and Trusts

This chapter covers two specialized but testable areas: tax-exempt organizations and trusts. The material is less about broad memorization than about knowing the qualifying framework, the compliance risks, and how income is allocated or taxed within fiduciary structures.

In This Chapter

• Qualifying as a Tax-Exempt Organization (501(c)(3)) explains the basic eligibility framework for exemption.
• Loss of Tax-Exempt Status and Ongoing Compliance covers the operational failures that jeopardize exempt treatment.
• Unrelated Business Taxable Income (UBTI): Key Determinations, Exceptions, and Netting Rules explains when exempt entities still owe tax.
• Types of Trusts (Simple, Complex, Grantor) and Their Taxation compares the major trust classifications.
• Allocation of Income and Corpus; Distributable Net Income (DNI) explains the allocation system that drives trust and beneficiary taxation.

How to Use This Chapter

• Read this chapter when trust and exempt-entity questions feel like isolated memorization topics.
• Focus on classification first, then on the rule that changes whether income is taxed or passed through.
• Return here when a REG question asks you to distinguish exempt-status compliance from actual taxable activity.

In this section

• Qualifying as a Tax-Exempt Organization (501(c)(3))
  Explore how to form and maintain a 501(c)(3) tax-exempt organization, including the required organizing documents, filing obligations, and the operational tests imposed by the IRS.
• Loss of Tax-Exempt Status and Ongoing Compliance
  Explore how tax-exempt organizations risk losing their status through noncompliant activities, such as excessive political involvement, lobbying, or private inurement, and discover strategies for maintaining ongoing compliance and safeguarding their exempt classification.
• Unrelated Business Taxable Income (UBTI): Key Determinations, Exceptions, and Netting Rules
  A comprehensive guide to UBTI, covering its core definition, major exceptions, netting rules, and best practices for tax-exempt entities.
• Types of Trusts (Simple, Complex, Grantor) and Their Taxation
  Discover the fundamentals of simple, complex, and grantor trusts, covering distributions, DNI, and key differences from estates.
• Allocation of Income and Corpus; Distributable Net Income (DNI)
  Discover how fiduciary accounting income interacts with trust tax rules and beneficiary distributions, including classification of trust income vs. corpus and the pivotal concept of Distributable Net Income (DNI).