CAP Regulatory Compliance & Law 2 — Questions and Answers
Question 1: Under IRC Section 4941, which of the following is classified as a 'self-dealing' transaction between a private foundation and a disqualified person?
- Sale of property by the foundation to a disqualified person (Correct answer)
- Hiring an outside contractor with no foundation ties
- Granting funds to a public charity
- Investing in publicly traded securities
Correct answer: Sale of property by the foundation to a disqualified person
IRC Section 4941 prohibits self-dealing transactions including sales of property between a private foundation and a disqualified person, regardless of whether the transaction is at fair market value.
Question 2: A donor establishes a charitable remainder unitrust (CRUT). Which IRS form must the trustee file annually to report the trust's activities?
- Form 990-PF
- Form 5227 (Correct answer)
- Form 1041
- Form 990-T
Correct answer: Form 5227
Form 5227 (Split-Interest Trust Information Return) must be filed annually by trustees of charitable remainder trusts, charitable lead trusts, and pooled income funds.
Question 3: Which type of organization is subject to the excise tax on net investment income under IRC Section 4940?
- Donor-advised fund sponsors
- Public charities under Section 501(c)(3)
- Private foundations (Correct answer)
- Social welfare organizations under 501(c)(4)
Correct answer: Private foundations
IRC Section 4940 imposes a 1.39% excise tax on the net investment income of private foundations, not on public charities or other exempt organizations.
Question 4: A private foundation makes a grant to an organization that is NOT a public charity. Under IRS rules, the foundation must exercise what level of oversight?
- No special oversight is required
- Expenditure responsibility (Correct answer)
- Standard fiduciary review
- Absolute donor control
Correct answer: Expenditure responsibility
When a private foundation grants to a non-public charity (including foreign organizations), it must exercise expenditure responsibility, ensuring funds are used for the charitable purpose specified.
Question 5: Under the Pension Protection Act of 2006, what is required for a donor to claim a deduction for a cash charitable contribution of any amount?
- A written acknowledgment from the charity
- A bank record or written communication from the charity showing the date and amount (Correct answer)
- A notarized receipt from the IRS
- An appraisal of the donated funds
Correct answer: A bank record or written communication from the charity showing the date and amount
The Pension Protection Act of 2006 requires that cash donations of any amount be substantiated by a bank record or written communication from the charity showing the date and amount.
Question 6: A charitable lead annuity trust (CLAT) provides income to a charity for a term of years. At the end of the term, the remainder passes to whom?
- The IRS as an estate tax payment
- The donor's heirs or other non-charitable beneficiaries (Correct answer)
- The sponsoring public charity
- A donor-advised fund
Correct answer: The donor's heirs or other non-charitable beneficiaries
In a CLAT, the charity receives annuity payments during the trust term, and at termination the remainder passes to the donor's heirs or other non-charitable beneficiaries.
Question 7: Which of the following best describes the 'quid pro quo' contribution rule under IRC Section 6115?
- Charities must disclose conflicts of interest to the IRS
- When a donor receives goods or services in exchange for a contribution exceeding $75, the charity must provide a written disclosure (Correct answer)
- Donors must file a special form when receiving any benefit from a charity
- All charitable gifts must be matched by the organization
Correct answer: When a donor receives goods or services in exchange for a contribution exceeding $75, the charity must provide a written disclosure
IRC Section 6115 requires charities to provide written disclosure for quid pro quo contributions exceeding $75, stating that only the amount above the fair market value of any benefit received is deductible.
CAP Regulatory Compliance & Law 2
Under IRC Section 4941, which of the following is classified as a 'self-dealing' transaction between a private foundation and a disqualified person?