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H&r block coupons 2012 printable Business or income-producing property, Business or income-producing property. H&r block coupons 2012 printable Business purposes, property used partly for, Property used partly for business and partly for personal purposes. H&r block coupons 2012 printable C Cars Accidents, Deductible losses. H&r block coupons 2012 printable Fair market value of, Car value. H&r block coupons 2012 printable Cash gifts, Cash gifts. H&r block coupons 2012 printable Casualty losses, Table 3. H&r block coupons 2012 printable When To Deduct a Casualty or Theft Loss Deductible losses, Deductible losses. H&r block coupons 2012 printable Definition, Casualty Deposits, loss on, Casualty loss or ordinary loss. H&r block coupons 2012 printable Nondeductible losses, Nondeductible losses. H&r block coupons 2012 printable Progressive deterioration, Progressive deterioration. H&r block coupons 2012 printable Proof of, Casualty loss proof. 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H&r block coupons 2012 printable Measuring decrease in, Decrease in Fair Market Value Items not to consider, Figuring Decrease in FMV — Items Not To Consider Items to consider, Figuring Decrease in FMV — Items To Consider Federal disaster relief grants, Federal disaster relief grants. H&r block coupons 2012 printable Federal Emergency Management Agency (FEMA), contacting, Contacting the Federal Emergency Management Agency (FEMA) Federally declared disasters, Business or income-producing property located in a federally declared disaster area. H&r block coupons 2012 printable , Disaster Area Losses Figuring gain, Property used partly for business and partly for personal purposes. H&r block coupons 2012 printable Figuring loss, Theft loss proof. H&r block coupons 2012 printable , Figuring the Deduction Adjusted basis, Adjusted Basis Disaster area losses, Figuring the loss deduction. 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H&r block coupons 2012 printable Timber loss, Timber loss. H&r block coupons 2012 printable W Workbooks for property lost due to casualties and thefts, Workbooks for casualties and thefts. H&r block coupons 2012 printable Prev  Up     Home   More Online Publications
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H&r block coupons 2012 printable 4. H&r block coupons 2012 printable   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. H&r block coupons 2012 printable Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. H&r block coupons 2012 printable Net unrelated income. H&r block coupons 2012 printable Net unrelated loss. H&r block coupons 2012 printable Control. H&r block coupons 2012 printable Income from property financed with qualified 501(c)(3) bonds. H&r block coupons 2012 printable Disposition of property received from taxable subsidiary and used in unrelated business. H&r block coupons 2012 printable Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. H&r block coupons 2012 printable If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. H&r block coupons 2012 printable In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. 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H&r block coupons 2012 printable Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. H&r block coupons 2012 printable They cannot be directly connected with excluded income. H&r block coupons 2012 printable For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. H&r block coupons 2012 printable Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. H&r block coupons 2012 printable For an exception, see Expenses attributable to exploitation of exempt activities, later. H&r block coupons 2012 printable Expenses attributable solely to unrelated business. H&r block coupons 2012 printable   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. H&r block coupons 2012 printable   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. H&r block coupons 2012 printable Expenses attributable to dual use of facilities or personnel. H&r block coupons 2012 printable   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. H&r block coupons 2012 printable The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. H&r block coupons 2012 printable Example 1. H&r block coupons 2012 printable A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. H&r block coupons 2012 printable The school provides the tennis courts, housing, and dining facilities. H&r block coupons 2012 printable The contracted individual hires the instructors, recruits campers, and provides supervision. H&r block coupons 2012 printable The income the school receives from this activity is from a dual use of the facilities and personnel. H&r block coupons 2012 printable The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. H&r block coupons 2012 printable Example 2. H&r block coupons 2012 printable An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. H&r block coupons 2012 printable The president devotes approximately 10% of his time to the unrelated business. H&r block coupons 2012 printable To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. H&r block coupons 2012 printable Expenses attributable to exploitation of exempt activities. H&r block coupons 2012 printable   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. H&r block coupons 2012 printable (See Exploitation of exempt functions under Not substantially related in chapter 3. H&r block coupons 2012 printable ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. H&r block coupons 2012 printable Exception. H&r block coupons 2012 printable   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. H&r block coupons 2012 printable The unrelated business exploits the exempt activity. H&r block coupons 2012 printable The unrelated business is a type normally conducted for profit by taxable organizations. H&r block coupons 2012 printable The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. H&r block coupons 2012 printable The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. H&r block coupons 2012 printable   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. H&r block coupons 2012 printable Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. H&r block coupons 2012 printable Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. H&r block coupons 2012 printable (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. H&r block coupons 2012 printable ) Figuring unrelated business taxable income (UBTI). H&r block coupons 2012 printable   The UBTI of an advertising activity is the amount shown in the following chart. H&r block coupons 2012 printable IF gross advertising income is . H&r block coupons 2012 printable . H&r block coupons 2012 printable . H&r block coupons 2012 printable THEN UBTI is . H&r block coupons 2012 printable . H&r block coupons 2012 printable . H&r block coupons 2012 printable More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. H&r block coupons 2012 printable Equal to or less than direct advertising costs Zero. H&r block coupons 2012 printable   • Circulation income and readership costs are not taken into account. H&r block coupons 2012 printable   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. H&r block coupons 2012 printable   The terms used in the chart are explained in the following discussions. H&r block coupons 2012 printable Periodical Income Gross advertising income. H&r block coupons 2012 printable   This is all the income from the unrelated advertising activities of an exempt organization periodical. H&r block coupons 2012 printable Circulation income. H&r block coupons 2012 printable   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). H&r block coupons 2012 printable It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. H&r block coupons 2012 printable It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. H&r block coupons 2012 printable Allocable membership receipts. H&r block coupons 2012 printable   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. H&r block coupons 2012 printable   The amount used to allocate membership receipts is the amount shown in the following chart. H&r block coupons 2012 printable   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. H&r block coupons 2012 printable The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. H&r block coupons 2012 printable IF . H&r block coupons 2012 printable . H&r block coupons 2012 printable . H&r block coupons 2012 printable THEN the amount used to allocate membership receipts is . H&r block coupons 2012 printable . H&r block coupons 2012 printable . H&r block coupons 2012 printable 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. H&r block coupons 2012 printable The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. H&r block coupons 2012 printable Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. H&r block coupons 2012 printable U is an exempt scientific organization with 10,000 members who pay annual dues of $15. H&r block coupons 2012 printable One of U's activities is publishing a monthly periodical distributed to all of its members. H&r block coupons 2012 printable U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. H&r block coupons 2012 printable Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. H&r block coupons 2012 printable Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). H&r block coupons 2012 printable Example 2. H&r block coupons 2012 printable Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. H&r block coupons 2012 printable Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. H&r block coupons 2012 printable U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. H&r block coupons 2012 printable Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. H&r block coupons 2012 printable Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. H&r block coupons 2012 printable Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). H&r block coupons 2012 printable U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). H&r block coupons 2012 printable Periodical Costs Direct advertising costs. H&r block coupons 2012 printable   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. H&r block coupons 2012 printable   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. H&r block coupons 2012 printable Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. H&r block coupons 2012 printable   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. H&r block coupons 2012 printable For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. H&r block coupons 2012 printable Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. H&r block coupons 2012 printable   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. H&r block coupons 2012 printable Readership costs. H&r block coupons 2012 printable   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. H&r block coupons 2012 printable Costs partly attributable to other activities. H&r block coupons 2012 printable   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. H&r block coupons 2012 printable When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. H&r block coupons 2012 printable The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. H&r block coupons 2012 printable Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. H&r block coupons 2012 printable Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. H&r block coupons 2012 printable It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. H&r block coupons 2012 printable Consolidated treatment, once adopted, must be followed consistently and is binding. H&r block coupons 2012 printable This treatment can be changed only with the consent of the Internal Revenue Service. H&r block coupons 2012 printable An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. H&r block coupons 2012 printable Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. H&r block coupons 2012 printable The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. H&r block coupons 2012 printable For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. H&r block coupons 2012 printable The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. H&r block coupons 2012 printable Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. H&r block coupons 2012 printable Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. H&r block coupons 2012 printable The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. H&r block coupons 2012 printable The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. H&r block coupons 2012 printable It is not engaged in for profit. H&r block coupons 2012 printable Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. H&r block coupons 2012 printable It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. H&r block coupons 2012 printable Modifications Net operating loss deduction. H&r block coupons 2012 printable   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. H&r block coupons 2012 printable However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. H&r block coupons 2012 printable For example, a loss from an unrelated trade or business is not diminished because dividend income was received. H&r block coupons 2012 printable   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. H&r block coupons 2012 printable This would reduce the loss that could be applied against unrelated business income of prior or future tax years. H&r block coupons 2012 printable Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. H&r block coupons 2012 printable   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. H&r block coupons 2012 printable   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. H&r block coupons 2012 printable   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. H&r block coupons 2012 printable For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. H&r block coupons 2012 printable   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. H&r block coupons 2012 printable Charitable contributions deduction. H&r block coupons 2012 printable   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. H&r block coupons 2012 printable   To be deductible, the contribution must be paid to another qualified organization. H&r block coupons 2012 printable For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. H&r block coupons 2012 printable   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. H&r block coupons 2012 printable Deduction limits. H&r block coupons 2012 printable   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. H&r block coupons 2012 printable See the Instructions for Form 990-T for more information. H&r block coupons 2012 printable    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. H&r block coupons 2012 printable However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. H&r block coupons 2012 printable   Contributions in excess of the limits just described may be carried over to the next 5 tax years. H&r block coupons 2012 printable A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. H&r block coupons 2012 printable Suspension of deduction limits for farmers and ranchers. H&r block coupons 2012 printable   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. H&r block coupons 2012 printable See the Instructions for Form 990-T for details. H&r block coupons 2012 printable Specific deduction. H&r block coupons 2012 printable   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. H&r block coupons 2012 printable However, the specific deduction is not allowed in computing an NOL or the NOL deduction. H&r block coupons 2012 printable   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. H&r block coupons 2012 printable Exception. H&r block coupons 2012 printable   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. H&r block coupons 2012 printable In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. H&r block coupons 2012 printable   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. H&r block coupons 2012 printable The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. H&r block coupons 2012 printable The local units cannot file separate returns. H&r block coupons 2012 printable However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. H&r block coupons 2012 printable See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable X is an association of churches and is divided into local units A, B, C, and D. H&r block coupons 2012 printable Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. H&r block coupons 2012 printable X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. H&r block coupons 2012 printable Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. H&r block coupons 2012 printable If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. H&r block coupons 2012 printable No distinction is made between limited and general partners. H&r block coupons 2012 printable The organization is required to notify the partnership of its tax-exempt status. H&r block coupons 2012 printable Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. H&r block coupons 2012 printable The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. H&r block coupons 2012 printable The partnership is required to provide the organization this information on Schedule K-1. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable An exempt educational organization is a partner in a partnership that operates a factory. H&r block coupons 2012 printable The partnership also holds stock in a corporation. H&r block coupons 2012 printable The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. H&r block coupons 2012 printable Different tax years. H&r block coupons 2012 printable   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. H&r block coupons 2012 printable S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. H&r block coupons 2012 printable For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. H&r block coupons 2012 printable The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. H&r block coupons 2012 printable Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. H&r block coupons 2012 printable To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. H&r block coupons 2012 printable Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). H&r block coupons 2012 printable These organizations must figure unrelated business taxable income under special rules. H&r block coupons 2012 printable Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. H&r block coupons 2012 printable ). H&r block coupons 2012 printable (See Exclusions under Income, earlier. H&r block coupons 2012 printable ) Therefore, they are generally subject to unrelated business income tax on this income. H&r block coupons 2012 printable The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. H&r block coupons 2012 printable The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. H&r block coupons 2012 printable Losses from nonexempt activities. H&r block coupons 2012 printable   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. H&r block coupons 2012 printable The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. H&r block coupons 2012 printable Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. H&r block coupons 2012 printable Modifications. H&r block coupons 2012 printable   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). H&r block coupons 2012 printable Exempt function income. H&r block coupons 2012 printable   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. H&r block coupons 2012 printable Exempt function income also includes income set aside for qualified purposes. H&r block coupons 2012 printable Income that is set aside. H&r block coupons 2012 printable   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. H&r block coupons 2012 printable In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. H&r block coupons 2012 printable   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. H&r block coupons 2012 printable Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. H&r block coupons 2012 printable These rules are explained in section 512(a)(3)(E)(ii). H&r block coupons 2012 printable   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. H&r block coupons 2012 printable In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. H&r block coupons 2012 printable   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. H&r block coupons 2012 printable However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. H&r block coupons 2012 printable The income set aside must have been includible in gross income for that earlier year. H&r block coupons 2012 printable Nonrecognition of gain. H&r block coupons 2012 printable   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. H&r block coupons 2012 printable The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. H&r block coupons 2012 printable   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. H&r block coupons 2012 printable Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. H&r block coupons 2012 printable The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. H&r block coupons 2012 printable For details, see section 512(a)(4) and the regulations under that section. H&r block coupons 2012 printable Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. H&r block coupons 2012 printable The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. H&r block coupons 2012 printable All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. H&r block coupons 2012 printable Excess qualifying specified payments. H&r block coupons 2012 printable   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. H&r block coupons 2012 printable Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. H&r block coupons 2012 printable   If a controlled participant is not required to file a U. H&r block coupons 2012 printable S. H&r block coupons 2012 printable income tax return, the participant must ensure that the copy or copies of the Regulations section 1. H&r block coupons 2012 printable 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. H&r block coupons 2012 printable S. H&r block coupons 2012 printable Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. H&r block coupons 2012 printable S. H&r block coupons 2012 printable Corporation or a Foreign Corporation Engaged in a U. H&r block coupons 2012 printable S. H&r block coupons 2012 printable Trade or Business, or any Form 8865, Return of U. H&r block coupons 2012 printable S. H&r block coupons 2012 printable Persons With Respect to Certain Foreign Partnerships, filed for that participant. H&r block coupons 2012 printable Addition to tax for valuation misstatements. H&r block coupons 2012 printable   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. H&r block coupons 2012 printable See section 512(b)(13)(E)(ii) for more information. H&r block coupons 2012 printable Net unrelated income. H&r block coupons 2012 printable   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. H&r block coupons 2012 printable Net unrelated loss. H&r block coupons 2012 printable   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. H&r block coupons 2012 printable Control. H&r block coupons 2012 printable   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. H&r block coupons 2012 printable For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. H&r block coupons 2012 printable   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). H&r block coupons 2012 printable Income from property financed with qualified 501(c)(3) bonds. H&r block coupons 2012 printable If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. H&r block coupons 2012 printable No deduction is allowed for interest on the private activity bond. H&r block coupons 2012 printable See sections 150(b)(3) and (c) for more information. H&r block coupons 2012 printable Disposition of property received from taxable subsidiary and used in unrelated business. H&r block coupons 2012 printable A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). H&r block coupons 2012 printable The assets are treated as if sold at fair market value. H&r block coupons 2012 printable Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. H&r block coupons 2012 printable S. H&r block coupons 2012 printable and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. H&r block coupons 2012 printable A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. H&r block coupons 2012 printable However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. H&r block coupons 2012 printable In such a case the built-in appreciation is preserved in the replacement property received in the transaction. H&r block coupons 2012 printable A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). H&r block coupons 2012 printable This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. H&r block coupons 2012 printable In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. H&r block coupons 2012 printable If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. H&r block coupons 2012 printable If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. H&r block coupons 2012 printable Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. H&r block coupons 2012 printable Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. H&r block coupons 2012 printable Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. H&r block coupons 2012 printable The amount of income included is proportionate to the debt on the property. H&r block coupons 2012 printable Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). H&r block coupons 2012 printable It includes rental real estate, tangible personal property, and corporate stock. H&r block coupons 2012 printable Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. H&r block coupons 2012 printable The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. H&r block coupons 2012 printable That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. H&r block coupons 2012 printable Example 1. H&r block coupons 2012 printable Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. H&r block coupons 2012 printable The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. H&r block coupons 2012 printable Example 2. H&r block coupons 2012 printable X, an exempt organization, forms a partnership with A and B. H&r block coupons 2012 printable The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. H&r block coupons 2012 printable X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. H&r block coupons 2012 printable The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. H&r block coupons 2012 printable The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. H&r block coupons 2012 printable The loan is secured by a mortgage on the entire office building. H&r block coupons 2012 printable By agreement with Y bank, X is not personally liable for payment of the mortgage. H&r block coupons 2012 printable X has acquisition indebtedness of $7 million. H&r block coupons 2012 printable This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). H&r block coupons 2012 printable Example 3. H&r block coupons 2012 printable A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. H&r block coupons 2012 printable The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. H&r block coupons 2012 printable Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. H&r block coupons 2012 printable The union has no outstanding debt on the property. H&r block coupons 2012 printable The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. H&r block coupons 2012 printable The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. H&r block coupons 2012 printable Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. H&r block coupons 2012 printable In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. H&r block coupons 2012 printable Accordingly, the debt is not acquisition indebtedness. H&r block coupons 2012 printable Change in use of property. H&r block coupons 2012 printable   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable Four years ago a university borrowed funds to acquire an apartment building as housing for married students. H&r block coupons 2012 printable Last year, the university rented the apartment building to the public for nonexempt purposes. H&r block coupons 2012 printable The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. H&r block coupons 2012 printable Continued debt. H&r block coupons 2012 printable   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. H&r block coupons 2012 printable This is true even if the original property was not debt-financed property. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. H&r block coupons 2012 printable The office building was not debt-financed property. H&r block coupons 2012 printable The organization later sold the building for $1 million without repaying the $400,000 loan. H&r block coupons 2012 printable It used the sale proceeds to buy an apartment building it rents to the general public. H&r block coupons 2012 printable The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. H&r block coupons 2012 printable Property acquired subject to mortgage or lien. H&r block coupons 2012 printable   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. H&r block coupons 2012 printable The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. H&r block coupons 2012 printable Liens similar to a mortgage. H&r block coupons 2012 printable   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. H&r block coupons 2012 printable A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. H&r block coupons 2012 printable However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. H&r block coupons 2012 printable Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). H&r block coupons 2012 printable Exception for property acquired by gift, bequest, or devise. H&r block coupons 2012 printable   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. H&r block coupons 2012 printable However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. H&r block coupons 2012 printable   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). H&r block coupons 2012 printable   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. H&r block coupons 2012 printable Modifying existing debt. H&r block coupons 2012 printable   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. H&r block coupons 2012 printable When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. H&r block coupons 2012 printable Extension or renewal. H&r block coupons 2012 printable   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. H&r block coupons 2012 printable   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. H&r block coupons 2012 printable Debt increase. H&r block coupons 2012 printable   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. H&r block coupons 2012 printable The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. H&r block coupons 2012 printable A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. H&r block coupons 2012 printable Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. H&r block coupons 2012 printable These include the following. H&r block coupons 2012 printable Debts incurred in performing an exempt purpose. H&r block coupons 2012 printable Annuity obligations. H&r block coupons 2012 printable Securities loans. H&r block coupons 2012 printable Real property debts of qualified organizations. H&r block coupons 2012 printable Certain Federal financing. H&r block coupons 2012 printable Debt incurred in performing exempt purpose. H&r block coupons 2012 printable   A debt incurred in performing an exempt purpose is not acquisition indebtedness. H&r block coupons 2012 printable For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. H&r block coupons 2012 printable Annuity obligation. H&r block coupons 2012 printable   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. H&r block coupons 2012 printable It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. H&r block coupons 2012 printable Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. H&r block coupons 2012 printable It must be payable over the lives of either one or two individuals living when issued. H&r block coupons 2012 printable It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. H&r block coupons 2012 printable Example. H&r block coupons 2012 printable X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. H&r block coupons 2012 printable In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. H&r block coupons 2012 printable The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. H&r block coupons 2012 printable The present value of this annuity is $81,156, determined from IRS valuation tables. H&r block coupons 2012 printable Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. H&r block coupons 2012 printable Securities loans. H&r block coupons 2012 printable   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). H&r block coupons 2012 printable This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. H&r block coupons 2012 printable   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from