Very large capital gain by a 501(c)(3) exempt organization - Form 990 and Sch A reporting questions

[joshuabarksatlcs]

Client: 501(c)(3) organization that regularly checks Box 10 on Schedule A (> 33-1/3% public support and < 33-1/3% from investment and UBI).

In 2020, it sold a large position in its mutual funds and had over $500K of capital gains.

Its program income was $450K.

Question 1: Form 990, Page 9, Part VIII, Statement of Revenue.  My understand is to classify the capital gains under Col (D) Revenue excluded from Tax under Sections 512-514, Exception 18 (Gain from the sale of investments).  Is this a correct understanding?  Comments?

Question 2: Schedule A, Page 3, Part III Section B, Total Support.  Line 10a is for Gross income from "interest, dividends, payments received on securities loans, rents royalties and income from similar sources".  My understanding is NOT to include the capital gains on Line 10a.  Instead, disclose the gains with a narrative under Part VI on Page 8.  Is this a correct understanding?

If the gains were to be included in Line 10a, the investment income percentage for 2020 would still be under 33-1/3% for 2020, but not for 2021 (similar gains were recognized in 2021 also) .  In any case, just wanted to make sure the gains are NOT includable in Line 10a.  Any comments would be appreciated.  

Question 3:  If my understanding is correct for Question 2, the total support Line 13 for the year would be different from its total revenue.  Comments?  Any problem?

(Note, the instructions specifically state NOT to include gain or loss from the sale of capital assets on Line 12, Section B.  However, it does not spell out NOT to include the gains on Line 10a.  I don't think "and income from similar sources" for Line 10a meant gains on sale of investments.  However, would like to make sure.)

Thanks.

[qbteachmt]

Are you asking about this: https://www.irs.gov/instructions/i990#idm139918046018032

"Lines 7a through 7d.

Enter on lines 7a through 7c all sales of securities in column (i). Use column (ii) to report sales of all other types of investments (such as real estate, royalty interests, or partnership interests) and all other non-inventory assets (such as program-related investments and fixed assets used by the organization in its related and unrelated activities).

On line 7a, for each column, enter the total gross sales price of all such assets. Total the cost or other basis (less depreciation) and selling expenses and enter the result on line 7b. On line 7c, enter the net gain or loss. Show any loss in parentheses.

On lines 7a and 7c, also report capital gains dividends, the organization's share of capital gains and losses from a joint venture, and capital gains distributions from trusts.

Combine the gain or loss figures reported on line 7c, columns (i) and (ii), and report that total on line 7d. Show any loss in parentheses. Don't include any unrealized gains or losses on securities carried at fair market value in the books of account."

[joshuabarksatlcs]

@qbteachmt  Yes, My Question 1 was about Line 7 a thru d, but it was more about confirming the total gain belongs to Column (D) - the instructions for the four columns are in the beginning for Part VIII, same instructions cited by you. 

Part VIII. Statement of Revenue

Check the box in the heading of Part VIII if Schedule O (Form 990 or 990-EZ) contains any information pertaining to this part.

Column (A).  All organizations must complete column (A), reporting their gross receipts for all sources of revenue..... 

Column (B).  In column (B), report all revenue from activities substantially related to the organization's exempt purposes.... 

Column (C).  In column (C), report any unrelated business revenue received by the organization during the tax year from an unrelated trade or business, unless.... 

Column (D).  In column (D), report any revenue excludable from unrelated business income by section 512, 513, or 514. Examples of such revenue include receipts from the sale of donated merchandise, interest (unless debt-financed), and receipts from bingo games.

My understanding is based on: 

Section 512(b)(1) exempts dividends, interest... etc; (Exclusion Code 14 on Lacerte input screen); and 

Section 512(b)(5) exempts gain on sales of investments (Exclusion Code 18 on Lacerte input screen) . 

My Question 2 and Question 3 were about Schedule A, Support Test.

I have not dealt with capital gains to this magnitude, and would like to confirm my understanding.  Thanks.

[qbteachmt]

I wouldn't treat something differently based on its magnitude. But you should be able to differentiate if an asset sold was already related to UBIT. For instance, a private school or NFP day care facility whose extra property is used as a storage yard. They make money from storage and could conceivably sell that lot. If the investments were part of a donation or endowment, then that made them part of support. Is that what you are asking about?