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Free income tax forms Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. Free income tax forms A pension is generally a series of payments made to you after you retire from work. Free income tax forms Pension payments are made regularly and are for past services with an employer. Free income tax forms An annuity is a series of payments under a contract. Free income tax forms You can buy the contract alone or you can buy it with the help of your employer. Free income tax forms Annuity payments are made regularly for more than one full year. Free income tax forms Note. Free income tax forms Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Free income tax forms Types of pensions and annuities. Free income tax forms   Particular types of pensions and annuities include: Fixed period annuities. Free income tax forms You receive definite amounts at regular intervals for a definite length of time. Free income tax forms Annuities for a single life. Free income tax forms You receive definite amounts at regular intervals for life. Free income tax forms The payments end at death. Free income tax forms Joint and survivor annuities. Free income tax forms The first annuitant receives a definite amount at regular intervals for life. Free income tax forms After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Free income tax forms The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Free income tax forms Variable annuities. Free income tax forms You receive payments that may vary in amount for a definite length of time or for life. Free income tax forms The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Free income tax forms Disability pensions. Free income tax forms You are under minimum retirement age and receive payments because you retired on disability. Free income tax forms If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. Free income tax forms If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Free income tax forms A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. Free income tax forms This plan must meet Internal Revenue Code requirements. Free income tax forms It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Free income tax forms However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Free income tax forms A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Free income tax forms A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Free income tax forms   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Free income tax forms A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Free income tax forms It does not qualify for most of the tax benefits of a qualified plan. Free income tax forms Annuity worksheets. Free income tax forms   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. Free income tax forms Request for a ruling. Free income tax forms   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. Free income tax forms This is treated as a request for a ruling. Free income tax forms See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free income tax forms Withholding tax and estimated tax. Free income tax forms   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Free income tax forms If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. Free income tax forms Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. Free income tax forms Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Free income tax forms These payments are also known as amounts received as an annuity. Free income tax forms If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. Free income tax forms In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Free income tax forms The amount of each payment that is more than the part that represents your net cost is taxable. Free income tax forms Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. Free income tax forms These terms are explained in the following discussions. Free income tax forms Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. Free income tax forms First, find your net cost of the contract as of the annuity starting date (defined later). Free income tax forms To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Free income tax forms This includes the amounts your employer contributed if you were required to include these amounts in income. Free income tax forms It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Free income tax forms From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. Free income tax forms Any additional premiums paid for double indemnity or disability benefits. Free income tax forms Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Free income tax forms The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. Free income tax forms Example. Free income tax forms On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. Free income tax forms The annuity starting date is July 1. Free income tax forms This is the date you use in figuring your investment in the contract and your expected return (discussed later). Free income tax forms Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Free income tax forms Foreign employment. Free income tax forms   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Free income tax forms The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. Free income tax forms Foreign employment contributions while a nonresident alien. Free income tax forms   In determining your cost, special rules apply if you are a U. Free income tax forms S. Free income tax forms citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Free income tax forms Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. Free income tax forms Death benefit exclusion. Free income tax forms   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. Free income tax forms The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Free income tax forms How to adjust your total cost. Free income tax forms   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Free income tax forms Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Free income tax forms See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Free income tax forms Net cost. Free income tax forms   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Free income tax forms This is the unrecovered investment in the contract as of the annuity starting date. Free income tax forms If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Free income tax forms Refund feature. Free income tax forms   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Free income tax forms Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. Free income tax forms   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. Free income tax forms Zero value of refund feature. Free income tax forms   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. Free income tax forms   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). Free income tax forms   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Free income tax forms Examples. Free income tax forms The first example shows how to figure the value of the refund feature when there is only one beneficiary. Free income tax forms Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. Free income tax forms In both examples, the taxpayer elects to use Tables V through VIII. Free income tax forms If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. Free income tax forms Example 1. Free income tax forms At age 65, Barbara bought for $21,053 an annuity with a refund feature. Free income tax forms She will get $100 a month for life. Free income tax forms Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. Free income tax forms In this case, the contract cost and the total guaranteed return are the same ($21,053). Free income tax forms Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. Free income tax forms 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. Free income tax forms For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). Free income tax forms In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. Free income tax forms Example 2. Free income tax forms John died while still employed. Free income tax forms His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Free income tax forms John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Free income tax forms John's contributions to the retirement fund totaled $7,559. Free income tax forms 45, with interest on those contributions of $1,602. Free income tax forms 53. Free income tax forms The guarantee or total refund feature of the contract is $9,161. Free income tax forms 98 ($7,559. Free income tax forms 45 plus $1,602. Free income tax forms 53). Free income tax forms The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. Free income tax forms 9 $71,614. Free income tax forms 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. Free income tax forms 0 5,400. Free income tax forms 00   3) Total expected return   $77,014. Free income tax forms 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Free income tax forms 45   2) Guaranteed amount (contributions of $7,559. Free income tax forms 45 plus interest of $1,602. Free income tax forms 53) $9,161. Free income tax forms 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Free income tax forms 00   4) Net guaranteed amount $3,761. Free income tax forms 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Free income tax forms 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. Free income tax forms 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free income tax forms See the discussion of expected return, later in this publication. Free income tax forms Free IRS help. Free income tax forms   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. Free income tax forms Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free income tax forms The following discussions explain how to figure the expected return with each type of annuity. Free income tax forms A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Free income tax forms Fixed period annuity. Free income tax forms   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. Free income tax forms It is the total amount you will get beginning at the annuity starting date. Free income tax forms You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Free income tax forms To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. Free income tax forms Single life annuity. Free income tax forms   If you are to get annuity payments for the rest of your life, find your expected return as follows. Free income tax forms You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Free income tax forms These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Free income tax forms   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Free income tax forms See Adjustments to Tables I, II, V, VI, and VIA following Table I. Free income tax forms Example. Free income tax forms Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Free income tax forms If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. Free income tax forms 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. Free income tax forms 2 multiple by +. Free income tax forms 1. Free income tax forms His expected return would then be $115,800 ($6,000 × 19. Free income tax forms 3). Free income tax forms Annuity for shorter of life or specified period. Free income tax forms   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. Free income tax forms To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Free income tax forms Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. Free income tax forms Example. Free income tax forms Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Free income tax forms She was age 65 at her birthday nearest the annuity starting date. Free income tax forms She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. Free income tax forms 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Free income tax forms See Special Elections, later. Free income tax forms Joint and survivor annuities. Free income tax forms   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. Free income tax forms To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Free income tax forms If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Free income tax forms See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Free income tax forms Example. Free income tax forms John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. Free income tax forms At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Free income tax forms The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Free income tax forms 0 Expected return $132,000 Different payments to survivor. Free income tax forms   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. Free income tax forms Example 1. Free income tax forms Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. Free income tax forms If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. Free income tax forms 0 Multiple for Gerald, age 70 (from Table V)   16. Free income tax forms 0 Difference: Multiple applicable to Mary   6. Free income tax forms 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Free income tax forms 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Free income tax forms 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Free income tax forms Your husband died while still employed. Free income tax forms Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. Free income tax forms Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Free income tax forms You were 50 years old at the annuity starting date. Free income tax forms Marie was 16 and Jean was 14. Free income tax forms Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. Free income tax forms 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Free income tax forms 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Free income tax forms 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. Free income tax forms Computation Under the General Rule Note. Free income tax forms Variable annuities use a different computation for determining the exclusion amounts. Free income tax forms See Variable annuities later. Free income tax forms Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Free income tax forms   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Free income tax forms See Death benefit exclusion , earlier. Free income tax forms Step 2. Free income tax forms   Figure your expected return. Free income tax forms Step 3. Free income tax forms   Divide Step 1 by Step 2 and round to three decimal places. Free income tax forms This will give you the exclusion percentage. Free income tax forms Step 4. Free income tax forms   Multiply the exclusion percentage by the first regular periodic payment. Free income tax forms The result is the tax-free part of each pension or annuity payment. Free income tax forms   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. Free income tax forms However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. Free income tax forms   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Free income tax forms Step 5. Free income tax forms   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Free income tax forms This will give you the tax-free part of the total payment for the year. Free income tax forms    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. Free income tax forms This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Free income tax forms Step 6. Free income tax forms   Subtract the tax-free part from the total payment you received. Free income tax forms The rest is the taxable part of your pension or annuity. Free income tax forms Example 1. Free income tax forms You purchased an annuity with an investment in the contract of $10,800. Free income tax forms Under its terms, the annuity will pay you $100 a month for life. Free income tax forms The multiple for your age (age 65) is 20. Free income tax forms 0 as shown in Table V. Free income tax forms Your expected return is $24,000 (20 × 12 × $100). Free income tax forms Your cost of $10,800, divided by your expected return of $24,000, equals 45. Free income tax forms 0%. Free income tax forms This is the percentage you will not have to include in income. Free income tax forms Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. Free income tax forms If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Free income tax forms Example 2. Free income tax forms Gerald bought a joint and survivor annuity. Free income tax forms Gerald's investment in the contract is $62,712 and the expected return is $121,200. Free income tax forms The exclusion percentage is 51. Free income tax forms 7% ($62,712 ÷ $121,200). Free income tax forms Gerald will receive $500 a month ($6,000 a year). Free income tax forms Each year, until his net cost is recovered, $3,102 (51. Free income tax forms 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. Free income tax forms If Gerald dies, his wife will receive $350 a month ($4,200 a year). Free income tax forms If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Free income tax forms 7%). Free income tax forms Each year, until the entire net cost is recovered, his wife will receive $2,171. Free income tax forms 40 (51. Free income tax forms 7% of her payments received of $4,200) tax free. Free income tax forms She will include $2,028. Free income tax forms 60 ($4,200 − $2,171. Free income tax forms 40) in her income tax return. Free income tax forms Example 3. Free income tax forms Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. Free income tax forms Your two daughters each receive annual annuities of $1,800 until they reach age 18. Free income tax forms Your husband contributed $25,576 to the plan. Free income tax forms You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Free income tax forms Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. Free income tax forms The exclusion percentage of 18. Free income tax forms 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Free income tax forms Each full year $864 (18. Free income tax forms 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Free income tax forms Each year, until age 18, $324 (18. Free income tax forms 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. Free income tax forms Part-year payments. Free income tax forms   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. Free income tax forms   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. Free income tax forms For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. Free income tax forms   If you received a fractional payment, follow Step 5, discussed earlier. Free income tax forms This gives you the tax-free part of your total payment. Free income tax forms Example. Free income tax forms On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Free income tax forms The applicable multiple from Table V is 23. Free income tax forms 3 (age 61). Free income tax forms Her expected return is $34,950 ($125 × 12 × 23. Free income tax forms 3). Free income tax forms Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Free income tax forms 1%. Free income tax forms Each payment received will consist of 63. Free income tax forms 1% return of cost and 36. Free income tax forms 9% taxable income, until her net cost of the contract is fully recovered. Free income tax forms During the first year, Mary received three payments of $125, or $375, of which $236. Free income tax forms 63 (63. Free income tax forms 1% × $375) is a return of cost. Free income tax forms The remaining $138. Free income tax forms 37 is included in income. Free income tax forms Increase in annuity payments. Free income tax forms   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Free income tax forms All increases in the installment payments are fully taxable. Free income tax forms   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. Free income tax forms 72-5(a)(5) of the regulations. Free income tax forms Example. Free income tax forms Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Free income tax forms In figuring the taxable part, Joe elects to use Tables V through VIII. Free income tax forms The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Free income tax forms His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Free income tax forms 0 × $1,764 annual payment). Free income tax forms The exclusion percentage is $7,938 ÷ $35,280, or 22. Free income tax forms 5%. Free income tax forms During the year he received 11 monthly payments of $147, or $1,617. Free income tax forms Of this amount, 22. Free income tax forms 5% × $147 × 11 ($363. Free income tax forms 83) is tax free as a return of cost and the balance of $1,253. Free income tax forms 17 is taxable. Free income tax forms Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Free income tax forms The tax-free part is still only 22. Free income tax forms 5% of the annuity payments as of the annuity starting date (22. Free income tax forms 5% × $147 × 12 = $396. Free income tax forms 90 for a full year). Free income tax forms The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Free income tax forms Variable annuities. Free income tax forms   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. Free income tax forms   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. Free income tax forms If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Free income tax forms Example. Free income tax forms Frank purchased a variable annuity at age 65. Free income tax forms The total cost of the contract was $12,000. Free income tax forms The annuity starting date is January 1 of the year of purchase. Free income tax forms His annuity will be paid, starting July 1, in variable annual installments for his life. Free income tax forms The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. Free income tax forms   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. Free income tax forms Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. Free income tax forms The result is added to the previously figured periodic tax-free part. Free income tax forms The sum is the amount of each future payment that will be tax free. Free income tax forms Example. Free income tax forms Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. Free income tax forms Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Free income tax forms Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. Free income tax forms 00 Amount received in second year 500. Free income tax forms 00 Difference $100. Free income tax forms 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Free income tax forms 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Free income tax forms 4) $5. Free income tax forms 43 Revised annual tax-free part for third and later years ($600 + $5. Free income tax forms 43) $605. Free income tax forms 43 Amount taxable in third year ($1,200 − $605. Free income tax forms 43) $594. Free income tax forms 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. Free income tax forms 72–4(d)(3) of the Income Tax Regulations. Free income tax forms The statement must also show the following information: The annuity starting date and your age on that date. Free income tax forms The first day of the first period for which you received an annuity payment in the current year. Free income tax forms Your investment in the contract as originally figured. Free income tax forms The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. Free income tax forms Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Free income tax forms Exclusion limited to net cost. Free income tax forms   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). Free income tax forms This is the unrecovered investment in the contract as of the annuity starting date. Free income tax forms   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Free income tax forms This deduction is not subject to the 2%-of-adjusted-gross-income limit. Free income tax forms Example 1. Free income tax forms Your annuity starting date is after 1986. Free income tax forms Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Free income tax forms There is no refund feature. Free income tax forms Your monthly annuity payment is $833. Free income tax forms 33. Free income tax forms Your exclusion ratio is 12% and you exclude $100 a month. Free income tax forms Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Free income tax forms Thereafter, your annuity payments are fully taxable. Free income tax forms Example 2. Free income tax forms The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. Free income tax forms The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Free income tax forms The exclusion ratio is 10. Free income tax forms 8%, and your monthly exclusion is $90. Free income tax forms After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Free income tax forms An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. Free income tax forms Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Free income tax forms Exclusion not limited to net cost. Free income tax forms   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Free income tax forms If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Free income tax forms The total exclusion may be more than your investment in the contract. Free income tax forms How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. Free income tax forms Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. Free income tax forms These tables correspond to the old Tables I through IV. Free income tax forms In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Free income tax forms If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Free income tax forms However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). Free income tax forms Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. Free income tax forms Contributions made both before July 1986 and after June 1986. Free income tax forms   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. Free income tax forms (See the examples below. Free income tax forms )    Making the election. Free income tax forms Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. Free income tax forms 72–6 of the Income Tax Regulations. Free income tax forms ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Free income tax forms   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. Free income tax forms You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. Free income tax forms    Advantages of election. Free income tax forms In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. Free income tax forms    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Free income tax forms If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. Free income tax forms   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. Free income tax forms Example 1. Free income tax forms Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Free income tax forms Payment of the $42,000 contribution is guaranteed under a refund feature. Free income tax forms Bill is 55 years old as of the annuity starting date. Free income tax forms For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. Free income tax forms       Pre- July 1986   Post- June 1986 A. Free income tax forms Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. Free income tax forms of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. Free income tax forms Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. Free income tax forms Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Free income tax forms 7   28. Free income tax forms 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Free income tax forms Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Free income tax forms 079   . Free income tax forms 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). Free income tax forms The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Free income tax forms If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). Free income tax forms Example 2. Free income tax forms Al is age 62 at his nearest birthday to the annuity starting date. Free income tax forms Al's wife is age 60 at her nearest birthday to the annuity starting date. Free income tax forms The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. Free income tax forms The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Free income tax forms Al makes the election described in Example 1 . Free income tax forms For purposes of this example, assume the refund feature adjustment is zero. Free income tax forms If an adjustment is required, IRS will figure the amount. Free income tax forms See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free income tax forms       Pre-  July 1986   Post-  June 1986 A. Free income tax forms Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. Free income tax forms Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. Free income tax forms Expected return         1) Multiple for both annuitants from Tables II and VI 25. Free income tax forms 4   28. Free income tax forms 8   2) Multiple for first annuitant from Tables I and V 16. Free income tax forms 9   22. Free income tax forms 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Free income tax forms 5   6. Free income tax forms 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. Free income tax forms Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Free income tax forms 209   . Free income tax forms 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). Free income tax forms The taxable part of his annuity is $9,216 ($12,000 − $2,784). Free income tax forms The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. Free income tax forms After Al's death, his widow will apply the same exclusion percentages (20. Free income tax forms 9% and 2. Free income tax forms 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Free income tax forms Annuity received after June 30, 1986. Free income tax forms   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. Free income tax forms Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Free income tax forms    Make the election by attaching the following statement to your income tax return. Free income tax forms    “I elect, under section 1. Free income tax forms 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Free income tax forms ”   The statement must also include your name, address, and social security number. Free income tax forms   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. Free income tax forms Disqualifying form of payment or settlement. Free income tax forms   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. Free income tax forms See regulations section 1. Free income tax forms 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Free income tax forms You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Free income tax forms Worksheets for Determining Taxable Annuity Worksheets I and II. Free income tax forms   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Free income tax forms 72–6(d)(6) Election. Free income tax forms Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Free income tax forms 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free income tax forms   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free income tax forms )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free income tax forms If not, the IRS will calculate the refund feature percentage. Free income tax forms             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free income tax forms   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. Free income tax forms   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. Free income tax forms   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free income tax forms     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Free income tax forms 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free income tax forms   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free income tax forms )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free income tax forms If not, the IRS will calculate the refund feature percentage. Free income tax forms             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free income tax forms   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. Free income tax forms   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Free income tax forms Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. Free income tax forms   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free income tax forms   Actuarial Tables Please click here for the text description of the image. Free income tax forms Actuarial Tables Please click here for the text description of the image. Free income tax forms Actuarial Tables Please click here for the text description of the image. Free income tax forms Actuarial tables Please click here for the text description of the image. 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Free income tax forms Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. Free income tax forms If you make this request, you are asking for a ruling. Free income tax forms User fee. Free income tax forms   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Free income tax forms You should call the IRS for the proper fee. Free income tax forms A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Free income tax forms Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Free income tax forms O. Free income tax forms Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. Free income tax forms When to make the request. Free income tax forms   Please note that requests sent between February 1 and April 15 may experience some delay. Free income tax forms We process requests in the order received, and we will reply to your request as soon as we can process it. Free income tax forms If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. Free income tax forms S. Free income tax forms Individual Income Tax Return, to get an extension of time to file. Free income tax forms Information you must furnish. Free income tax forms   You must furnish the information listed below so the IRS can comply with your request. Free income tax forms Failure to furnish the information will result in a delay in processing your request. Free income tax forms Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. Free income tax forms Copies of any documents showing distributions, annuity rates, and annuity options available to you. Free income tax forms A copy of any Form 1099–R you received since your annuity began. Free income tax forms A statement indicating whether you have filed your return for the year for which you are making the request. Free income tax forms If you have requested an extension of time to file that return, please indicate the extension date. Free income tax forms Your daytime phone number. Free income tax forms Your current mailing address. Free income tax forms A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Free income tax forms Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Free income tax forms A completed Tax Information Sheet (or facsimile) shown on the next page. Free income tax forms Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Free income tax forms This statement must be signed by the retiree or the survivor annuitant. Free income tax forms It cannot be signed by a representative. Free income tax forms Tax Information Sheet Please click here for the text description of the image. Free income tax forms Tax Information Sheet Please click here for the text description of the image. Free income tax forms Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Free income tax forms Free help with your tax return. Free income tax forms   You can get free help preparing your return nationwide from IRS-certified volunteers. Free income tax forms The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Free income tax forms The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Free income tax forms Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Free income tax forms In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Free income tax forms To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Free income tax forms gov, download the IRS2Go app, or call 1-800-906-9887. Free income tax forms   As part of the TCE program, AARP offers the Tax-Aide counseling program. Free income tax forms To find the nearest AARP Tax-Aide site, visit AARP's website at www. Free income tax forms aarp. Free income tax forms org/money/taxaide or call 1-888-227-7669. Free income tax forms For more information on these programs, go to IRS. Free income tax forms gov and enter “VITA” in the search box. Free income tax forms Internet. Free income tax forms    IRS. Free income tax forms gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Free income tax forms Download the free IRS2Go app from the iTunes app store or from Google Play. Free income tax forms Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Free income tax forms Check the status of your 2013 refund with the Where's My Refund? application on IRS. Free income tax forms gov or download the IRS2Go app and select the Refund Status option. Free income tax forms The IRS issues more than 9 out of 10 refunds in less than 21 days. Free income tax forms Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Free income tax forms You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Free income tax forms The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Free income tax forms Use the Interactive Tax Assistant (ITA) to research your tax questions. Free income tax forms No need to wait on the phone or stand in line. Free income tax forms The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Free income tax forms When you reach the response screen, you can print the entire interview and the final response for your records. Free income tax forms New subject areas are added on a regular basis. Free income tax forms  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Free income tax forms gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Free income tax forms You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Free income tax forms The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Free income tax forms When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Free income tax forms Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. 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Circular 230 Tax Professionals

Circular No. 230 (Rev. 8-2011)
Rules Governing Practice Before the Internal Revenue Service

The Office of Professional Responsibility (OPR) At-A-Glance
Understand the Office of Professional Responsibility's mission and operations as it pertains to the standards of practice for tax professionals.

Frequently Asked Questions (FAQ's)
The Office of Professional Responsibility: Frequently Asked Questions.

OPR's Disciplinary Stats
Information regarding OPR's calendar year(s) disciplinary stats

Office of Professional Responsibility Webinars
Learn more about Practice by viewing IRS/OPR webinars from the OPR's Director.

Latest News from Office of Professional Responsibility (OPR)
The latest news from OPR.

Rights and responsibilities of practitioners in Circular 230 disciplinary cases
Rules and procedures for practitioners who fail to comply with Circular 230.

Restrictions on Practitioners Disciplined by OPR
What tax practice activities are prohibited while under suspension/disbarment.

Circular 230 Disciplinary Proceedings
An Overview.

Announcements of Disciplinary Sanctions
Office of Professional Responsibility's Final Agency Decisions in disciplinary cases, and the Internal Revenue Bulletins List of Announcements for Disbarments, Suspensions, Resignations, and Censures Since 1998 taken Against Tax Professionals.

Information for Tax Professionals
Office of Professional Responsibility/Circular 230 - related issues.

Contingent Fees Under Circular 230
Contingent Fees Under Circular 230 - Notice 2008–43.

OPR 9/11/09 Discipline Policy on FBAR Violations by Practitioners
Statement from 9/11/09 re: Discipline Policy on FBAR Violations by Practitioners

Make a Complaint About a Tax Return Preparer
Taxpayers can use this site to find out how to file a complaint about a tax preparer.

Enrolled Agent Program
Special competencies are required to represent your client for audits and related tax matters before the IRS. Find out about the Special Enrollment Examination and how to become an enrolled agent.

Joint Board for the Enrollment of Actuaries
Information for Enrolled Actuaries, or for individuals who wish to become Enrolled Actuaries.

Enrolled Retirement Plan Agent Program
Information for enrolled retirement plan agents and individuals who wish to become enrolled retirement plan agents.

Page Last Reviewed or Updated: 26-Feb-2014

The Free Income Tax Forms

Free income tax forms 4. Free income tax forms   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. Free income tax forms Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Free income tax forms Net unrelated income. Free income tax forms Net unrelated loss. Free income tax forms Control. Free income tax forms Income from property financed with qualified 501(c)(3) bonds. Free income tax forms Disposition of property received from taxable subsidiary and used in unrelated business. Free income tax forms 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. Free income tax forms 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. Free income tax forms In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Free income tax forms Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Free income tax forms For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Free income tax forms Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Free income tax forms Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Free income tax forms Dividends, interest, annuities and other investment income. Free income tax forms   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Free income tax forms Exception for insurance activity income of a controlled foreign corporation. Free income tax forms   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Free income tax forms The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Free income tax forms Certain exceptions to this rule apply. Free income tax forms For more information, see section 512(b)(17). Free income tax forms Other exceptions. Free income tax forms   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Free income tax forms Income from lending securities. Free income tax forms   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Free income tax forms   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Free income tax forms The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Free income tax forms Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Free income tax forms Royalties. Free income tax forms   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Free income tax forms   To be considered a royalty, a payment must relate to the use of a valuable right. Free income tax forms Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Free income tax forms Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Free income tax forms However, royalties do not include payments for personal services. Free income tax forms Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Free income tax forms   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Free income tax forms   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Free income tax forms However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Free income tax forms To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Free income tax forms To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Free income tax forms Exceptions. Free income tax forms   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Free income tax forms Rents. Free income tax forms   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Free income tax forms Rents from personal property are not excluded. Free income tax forms However, special rules apply to “mixed leases” of both real and personal property. Free income tax forms Mixed leases. Free income tax forms   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Free income tax forms If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Free income tax forms If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Free income tax forms   Property is placed in service when the lessee first may use it under the terms of a lease. Free income tax forms For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Free income tax forms   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Free income tax forms   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Free income tax forms Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Free income tax forms Exception for rents based on net profit. Free income tax forms   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Free income tax forms Exception for income from personal services. Free income tax forms   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Free income tax forms Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Free income tax forms Other exceptions. Free income tax forms   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Free income tax forms ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Free income tax forms See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Free income tax forms Income from research. Free income tax forms   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Free income tax forms However, the extent of the exclusion depends on the nature of the organization and the type of research. Free income tax forms   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Free income tax forms   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Free income tax forms   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Free income tax forms   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Free income tax forms In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Free income tax forms Gains and losses from disposition of property. Free income tax forms   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Free income tax forms   It should be noted that the last exception relates only to cut timber. Free income tax forms The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Free income tax forms Lapse or termination of options. Free income tax forms   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Free income tax forms The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Free income tax forms Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Free income tax forms Exception. Free income tax forms   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Free income tax forms Gain or loss on disposition of certain brownfield property. Free income tax forms   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Free income tax forms See sections 512(b)(19) and 514(b)(1)(E). Free income tax forms Income from services provided under federal license. Free income tax forms   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Free income tax forms   This exclusion applies only if the following requirements are met. Free income tax forms The trade or business must have been operated by the order or by the institution before May 27, 1959. Free income tax forms The trade or business must provide services under a license issued by a federal regulatory agency. Free income tax forms More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Free income tax forms The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Free income tax forms Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Free income tax forms Exception. Free income tax forms    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Free income tax forms Member income of mutual or cooperative electric companies. Free income tax forms   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Free income tax forms Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Free income tax forms For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Free income tax forms Exception. Free income tax forms   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Free income tax forms The limit on dues paid by an associate member is $148 for 2011. Free income tax forms   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Free income tax forms 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. Free income tax forms They cannot be directly connected with excluded income. Free income tax forms For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Free income tax forms 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. Free income tax forms For an exception, see Expenses attributable to exploitation of exempt activities, later. Free income tax forms Expenses attributable solely to unrelated business. Free income tax forms   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. Free income tax forms   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. Free income tax forms Expenses attributable to dual use of facilities or personnel. Free income tax forms   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. Free income tax forms 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. Free income tax forms Example 1. Free income tax forms A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Free income tax forms The school provides the tennis courts, housing, and dining facilities. Free income tax forms The contracted individual hires the instructors, recruits campers, and provides supervision. Free income tax forms The income the school receives from this activity is from a dual use of the facilities and personnel. Free income tax forms The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Free income tax forms Example 2. Free income tax forms An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Free income tax forms The president devotes approximately 10% of his time to the unrelated business. Free income tax forms 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. Free income tax forms Expenses attributable to exploitation of exempt activities. Free income tax forms   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. Free income tax forms (See Exploitation of exempt functions under Not substantially related in chapter 3. Free income tax forms ) 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. Free income tax forms Exception. Free income tax forms   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. Free income tax forms The unrelated business exploits the exempt activity. Free income tax forms The unrelated business is a type normally conducted for profit by taxable organizations. Free income tax forms The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Free income tax forms 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. Free income tax forms   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Free income tax forms 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. Free income tax forms 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. Free income tax forms (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Free income tax forms ) Figuring unrelated business taxable income (UBTI). Free income tax forms   The UBTI of an advertising activity is the amount shown in the following chart. Free income tax forms IF gross advertising income is . Free income tax forms . Free income tax forms . Free income tax forms THEN UBTI is . Free income tax forms . Free income tax forms . Free income tax forms 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. Free income tax forms Equal to or less than direct advertising costs Zero. Free income tax forms   • Circulation income and readership costs are not taken into account. Free income tax forms   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Free income tax forms   The terms used in the chart are explained in the following discussions. Free income tax forms Periodical Income Gross advertising income. Free income tax forms   This is all the income from the unrelated advertising activities of an exempt organization periodical. Free income tax forms Circulation income. Free income tax forms   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Free income tax forms It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Free income tax forms It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Free income tax forms Allocable membership receipts. Free income tax forms   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. Free income tax forms   The amount used to allocate membership receipts is the amount shown in the following chart. Free income tax forms   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Free income tax forms 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. Free income tax forms IF . Free income tax forms . Free income tax forms . Free income tax forms THEN the amount used to allocate membership receipts is . Free income tax forms . Free income tax forms . Free income tax forms 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Free income tax forms 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. Free income tax forms 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. Free income tax forms U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Free income tax forms One of U's activities is publishing a monthly periodical distributed to all of its members. Free income tax forms U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Free income tax forms 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. Free income tax forms 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). Free income tax forms Example 2. Free income tax forms Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Free income tax forms U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Free income tax forms Periodical Costs Direct advertising costs. Free income tax forms   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Free income tax forms   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. Free income tax forms 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. Free income tax forms   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Free income tax forms 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. Free income tax forms 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. Free income tax forms   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. Free income tax forms Readership costs. Free income tax forms   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Free income tax forms Costs partly attributable to other activities. Free income tax forms   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Free income tax forms When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Free income tax forms The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Free income tax forms 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. Free income tax forms 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. Free income tax forms It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Free income tax forms Consolidated treatment, once adopted, must be followed consistently and is binding. Free income tax forms This treatment can be changed only with the consent of the Internal Revenue Service. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms Example. Free income tax forms Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Free income tax forms 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. Free income tax forms 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. Free income tax forms The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Free income tax forms 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. Free income tax forms It is not engaged in for profit. Free income tax forms Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Free income tax forms 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. Free income tax forms Modifications Net operating loss deduction. Free income tax forms   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Free income tax forms 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. Free income tax forms For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Free income tax forms   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. Free income tax forms This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Free income tax forms 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. Free income tax forms   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. Free income tax forms   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. Free income tax forms   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. Free income tax forms 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. Free income tax forms   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. Free income tax forms Charitable contributions deduction. Free income tax forms   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. Free income tax forms   To be deductible, the contribution must be paid to another qualified organization. Free income tax forms 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. Free income tax forms   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. Free income tax forms Deduction limits. Free income tax forms   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. Free income tax forms See the Instructions for Form 990-T for more information. Free income tax forms    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. Free income tax forms 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. Free income tax forms   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Free income tax forms A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Free income tax forms Suspension of deduction limits for farmers and ranchers. Free income tax forms   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Free income tax forms See the Instructions for Form 990-T for details. Free income tax forms Specific deduction. Free income tax forms   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Free income tax forms However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Free income tax forms   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Free income tax forms Exception. Free income tax forms   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. Free income tax forms 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. Free income tax forms   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. Free income tax forms 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. Free income tax forms The local units cannot file separate returns. Free income tax forms However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Free income tax forms 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. Free income tax forms Example. Free income tax forms X is an association of churches and is divided into local units A, B, C, and D. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms No distinction is made between limited and general partners. Free income tax forms The organization is required to notify the partnership of its tax-exempt status. Free income tax forms 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. Free income tax forms 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. Free income tax forms The partnership is required to provide the organization this information on Schedule K-1. Free income tax forms Example. Free income tax forms An exempt educational organization is a partner in a partnership that operates a factory. Free income tax forms The partnership also holds stock in a corporation. Free income tax forms 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. Free income tax forms Different tax years. Free income tax forms   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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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. Free income tax forms 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). Free income tax forms These organizations must figure unrelated business taxable income under special rules. Free income tax forms Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Free income tax forms ). Free income tax forms (See Exclusions under Income, earlier. Free income tax forms ) Therefore, they are generally subject to unrelated business income tax on this income. Free income tax forms 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. Free income tax forms 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. Free income tax forms Losses from nonexempt activities. Free income tax forms   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. Free income tax forms Example. Free income tax forms 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. Free income tax forms The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Free income tax forms Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Free income tax forms Modifications. Free income tax forms   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Free income tax forms Exempt function income. Free income tax forms   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. Free income tax forms Exempt function income also includes income set aside for qualified purposes. Free income tax forms Income that is set aside. Free income tax forms   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. Free income tax forms 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. Free income tax forms   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. Free income tax forms Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Free income tax forms These rules are explained in section 512(a)(3)(E)(ii). Free income tax forms   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Free income tax forms In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Free income tax forms   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. Free income tax forms 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. Free income tax forms The income set aside must have been includible in gross income for that earlier year. Free income tax forms Nonrecognition of gain. Free income tax forms   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. Free income tax forms 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. Free income tax forms   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. Free income tax forms 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. Free income tax forms 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. Free income tax forms For details, see section 512(a)(4) and the regulations under that section. Free income tax forms 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. Free income tax forms 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. Free income tax forms All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Free income tax forms Excess qualifying specified payments. Free income tax forms   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. Free income tax forms 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. Free income tax forms   If a controlled participant is not required to file a U. Free income tax forms S. Free income tax forms income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Free income tax forms 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Free income tax forms S. Free income tax forms Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Free income tax forms S. Free income tax forms Corporation or a Foreign Corporation Engaged in a U. Free income tax forms S. Free income tax forms Trade or Business, or any Form 8865, Return of U. Free income tax forms S. Free income tax forms Persons With Respect to Certain Foreign Partnerships, filed for that participant. Free income tax forms Addition to tax for valuation misstatements. Free income tax forms   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. Free income tax forms See section 512(b)(13)(E)(ii) for more information. Free income tax forms Net unrelated income. Free income tax forms   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. Free income tax forms Net unrelated loss. Free income tax forms   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. Free income tax forms Control. Free income tax forms   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. Free income tax forms For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Free income tax forms   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). Free income tax forms Income from property financed with qualified 501(c)(3) bonds. Free income tax forms 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. Free income tax forms No deduction is allowed for interest on the private activity bond. Free income tax forms See sections 150(b)(3) and (c) for more information. Free income tax forms Disposition of property received from taxable subsidiary and used in unrelated business. Free income tax forms 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). Free income tax forms The assets are treated as if sold at fair market value. Free income tax forms Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Free income tax forms S. Free income tax forms and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Free income tax forms 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. Free income tax forms 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. Free income tax forms In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Free income tax forms 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). Free income tax forms 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. Free income tax forms In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Free income tax forms 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. Free income tax forms If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Free income tax forms Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Free income tax forms 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. Free income tax forms 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. Free income tax forms The amount of income included is proportionate to the debt on the property. Free income tax forms 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). Free income tax forms It includes rental real estate, tangible personal property, and corporate stock. Free income tax forms 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. Free income tax forms The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Free income tax forms 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. Free income tax forms Example 1. Free income tax forms 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. Free income tax forms 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. Free income tax forms Example 2. Free income tax forms X, an exempt organization, forms a partnership with A and B. Free income tax forms 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. Free income tax forms X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Free income tax forms The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Free income tax forms The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Free income tax forms The loan is secured by a mortgage on the entire office building. Free income tax forms By agreement with Y bank, X is not personally liable for payment of the mortgage. Free income tax forms X has acquisition indebtedness of $7 million. Free income tax forms 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). Free income tax forms Example 3. Free income tax forms A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Free income tax forms 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. Free income tax forms Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Free income tax forms The union has no outstanding debt on the property. Free income tax forms 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. Free income tax forms The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Free income tax forms Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Free income tax forms 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. Free income tax forms Accordingly, the debt is not acquisition indebtedness. Free income tax forms Change in use of property. Free income tax forms   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. Free income tax forms Example. Free income tax forms Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Free income tax forms Last year, the university rented the apartment building to the public for nonexempt purposes. Free income tax forms The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Free income tax forms Continued debt. Free income tax forms   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. Free income tax forms This is true even if the original property was not debt-financed property. Free income tax forms Example. Free income tax forms 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. Free income tax forms The office building was not debt-financed property. Free income tax forms The organization later sold the building for $1 million without repaying the $400,000 loan. Free income tax forms It used the sale proceeds to buy an apartment building it rents to the general public. Free income tax forms The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Free income tax forms Property acquired subject to mortgage or lien. Free income tax forms   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. Free income tax forms Example. Free income tax forms An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Free income tax forms The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Free income tax forms Liens similar to a mortgage. Free income tax forms   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Free income tax forms A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Free income tax forms 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. Free income tax forms 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). Free income tax forms Exception for property acquired by gift, bequest, or devise. Free income tax forms   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. Free income tax forms 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. Free income tax forms   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). Free income tax forms   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. Free income tax forms Modifying existing debt. Free income tax forms   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Free income tax forms 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. Free income tax forms Extension or renewal. Free income tax forms   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. Free income tax forms   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. Free income tax forms Debt increase. Free income tax forms   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. Free income tax forms Example. Free income tax forms An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Free income tax forms 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. Free income tax forms 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. Free income tax forms Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Free income tax forms These include the following. Free income tax forms Debts incurred in performing an exempt purpose. Free income tax forms Annuity obligations. Free income tax forms Securities loans. Free income tax forms Real property debts of qualified organizations. Free income tax forms Certain Federal financing. Free income tax forms Debt incurred in performing exempt purpose. Free income tax forms   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Free income tax forms 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. Free income tax forms Annuity obligation. Free income tax forms   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Free income tax forms 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. Free income tax forms 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. Free income tax forms It must be payable over the lives of either one or two individuals living when issued. Free income tax forms 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. Free income tax forms Example. Free income tax forms X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Free income tax forms 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. Free income tax forms The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Free income tax forms The present value of this annuity is $81,156, determined from IRS valuation tables. Free income tax forms 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. Free income tax forms Securities loans. Free income tax forms   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). Free income tax forms 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. Free income tax forms   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from