5th Circuit Rejects Religion-Related Income Tax Gimmick

In Gunkle v. Commissioner, (5th Cir., May 20, 2014), the U.S. 5th Circuit Court of Appeals affirmed a Tax Court decision that rejected husband and wife taxpayers' attempted use of a "religion-related tax gimmick" to avoid income taxes. Initially the Gunkle's had created a 501(c)(3) non-profit, City of Refuge Christian Fellowship, Inc. They however heard a speaker at a church conference who claimed they could instead create a non-501(c)(3) "corporation sole," assign their income to it, deduct this as a charitable contribution without qualifying as a non-profit, and thus make their income non-taxable. They did this, and then signed a vow of poverty, assigned their residence to the corporation sole, and had the corporation sole agree to provide “all their needs as Apostles and as pastors of this church ministry." The 5th Circuit agreed with the Tax Court that payments of living expenses of the Gunkle's from the corporation sole's Pastoral Account were taxable income to the Gunckle's, and their assignment of income to the corporation sole did not qualify for a charitable deduction.

Suit Challenging Denial of IRS Non-Profit Exemption Dismissed On Numerous Grounds

In Lock v. United States, (D OR, April 29, 2014), an Oregon federal district court allowed a pro se plaintiff to proceed in forma pauperis, but dismissed, with leave to amend, his suit complaining that the Internal Revenue Service had denied Section 501(c)(3) status for a small church he had founded.  The court held that the claim would need to be brought by the church itself, not by its founder, and also that only the Tax Court, Court of Claims or D.C. District Court would have jurisdiction over such a claim.  Finally it held that plaintiff had not alleged facts to show that the exemption denial was discriminatory.

IRS Guidance On Qualified Retirement Plans and Same-Sex Spouses

On April 4, the Internal Revenue Service announced two releases that give guidance on how qualified retirement plans should treat marriages of same-sex couples following the Supreme Court’s decision in United States v. Windsor. Notice 2014-19 gives important guidance as to retroactivity:

Qualified retirement plan operations must reflect the outcome of Windsor as of June 26, 2013. A retirement plan will not be treated as failing to meet the requirements of section 401(a) merely because it did not recognize the same-sex spouse of a participant as a spouse before June 26, 2013.... [A] retirement plan will not be treated as failing to meet the requirements of section 401(a) merely because the plan, prior to September 16, 2013, recognized the same-sex spouse of a participant only if the participant was domiciled in a state that recognized same-sex marriages. 

Further guidance is given in IRS, Answers to Frequently Asked Questions Regarding the Application of the Windsor Decision and Post-Windsor Published Guidance to Qualified Retirement Plans (April 4, 2014). (See prior related posting.)

Investigative Report Criticizes IRS Classifying Televangelists as Churches

NPR yesterday published a lengthy investigative report on the lack of financial transparency of television evangelists because the Internal Revenue Service is willing to categorize many of them as churches rather than non-profit religious organizations.  Churches are not required to file Form 990 that provides annual disclosure of finances. The report focuses particularly on Daystar Television, one of the three largest religious television networks. Illustrating financial concerns that might be revealed if televangelists had to file Form 990, the report said in part:

Daystar's primary revenue comes from selling airtime to other religious programmers. Its secondary income is donations.... [B]etween 2005 and 2011, Daystar took in $208 million in tax-deductable contributions from viewers through on-air pitches. Daystar has built a public image as a generous giver to charitable causes. Indeed, the network has contributed millions of dollars to a trauma center and a home for Holocaust survivors in Israel, a hospital in Calcutta, and to ministries that support women in Moldova and children in Uganda....

NPR analyzed six years of Daystar balance sheets. They show the network gave away $9.7 million dollars in direct grants to outside recipients. Not $30 million [which its founder has claimed]. That works out to charitable giving of about 5 percent of donor revenue.

New IRS Exempt Organization Head Speaks On Priorities

BNA Daily Report for Executives (subscription required) reports on the first public comments by Tamera Ripperda, the Internal Revenue Service's new director of Exempt Organizations.  Speaking yesterday at the Washington Non-Profit Legal and Tax Conference, she said that a key focus for IRS this fiscal year is to reduce the backlog of applications for tax exemptions.  Her goal is to close the oldest cases-- mostly applications under Section 501(c)(3)-- by the end of June. Examination of non-profits will focus on protection of charitable assets, activities that jeopardize exempt status, and international issues, and will involve an expanded use of data analytics.

IRS Says 2 Religious Organizations Do Not Qualify As Non-Profits

Last week, the Internal Revenue Service made public (with identifying information redacted) two Written Determinations handed down in December finding that two different religious organizations do not qualify for Section 501(c)(3) non profit status.

In Release No. 201411037, the IRS concluded that a church's earnings inure to the benefit of its president from whom the church leases an unusable warehouse building.  Over 80% of the church's revenues are used to pay rent, insurance and utilities on the building.

In Release No. 201411038, the IRS concluded that an organization formed to help small struggling synagogues throughout the United States develop strategic management plans is not operated exclusively for charitable, educational or religious purposes. A substantial part of the organization's operations involves offering in a commercial manner consulting and Jewish heritage travel tours. The revenues from these benefit the two founders of the organization.

House Passes Religious Exemption To Required Health Insurance For Those Who Are Opposed To All Medical Treatment

With bipartisan support, the House of Representatives yesterday passed by voice vote and sent to the Senate H.R. 1814-- the Equitable Access to Care and Health (EACH) Act. The Hill reports on the House vote which extends an exemption (26 USC 5000A(d)(2)) currently in the Affordable Care Act that exempts members of a "recognized religious sect" whose tenets oppose accepting benefits of medical insurance. The bill passed by the House provides an exemption to individuals whose "sincerely held religious beliefs would cause the individual to object to medical health care that would be covered under such coverage." The bill is apparently intended to cover only those who hold sincere religious beliefs object to all health care supervised by physicians.  It does not require the objector to be a member of a religious group with such tenets. To obtain the exemption, an individual would be required to file a sworn statement with his or her tax return.  The exemption is lost if the individual during the year receives medical health care.

IRS Issues Sample Questions That May Be Asked Of Non-Profits In Making Rulings

In EO [Exempt Organizations] Update March 4, 2014, the Internal Revenue Service  released a list of Sample Questions that may be asked of organizations applying for a determination that they are tax exempt. Among the sample questions are ones that might be asked of a Church Affiliate (Integrated Auxiliary); and of a Mission Society. IRS also released questions that might be asked in making a determination on whether Bingo and Other Gaming will jeopardize the tax status of, or lead to added taxes for, a non-profit (Background).

Church Permitted To Intervene In Suit Against Internal Revenue Service Over Political Activity By 501(c)(3)'s

In Freedom From Religion Foundation, Inc. v. Koskinen, (WD WI, Feb. 3, 2014), a Wisconsin federal district court permitted  Father Patrick Malone and the Holy Cross Anglican Church  to intervene as defendants in a lawsuit in which the Freedom From Religion Foundation is suing the Internal Revenue Service to challenge its alleged policy of not  enforcing against churches and religious organizations the Section 501(c)(3) ban on political activity by non-profits. According to the court:

Father Malone, the vicar of the church, regularly makes statements during worship services and church gatherings in which he urges members of the congregation to vote for or against certain candidates for public office..... So far, however, the IRS has not taken any action in response to the church’s activities..... But the church and Father Malone are concerned that if the Foundation obtains the relief it seeks in this lawsuit, then the IRS will be required to “punish” them for having engaged in political activity.

U.S. Appeals To 7th Circuit On Tax Code's Parsonage Allowance

According to ABP, the Justice Department last week filed a notice of appeal with the U.S. 7th Circuit Court of Appeals in Freedom From Religion Foundation v. Lew. In the case, a federal district court held unconstitutional the provision in the Internal Revenue Code that for tax purposes excludes from income a minister's parsonage allowance. (See prior posting.) [Thanks to Steven H. Sholk for the lead.]

IRS Issues New Procedures To Reinstate Lost Tax-Exempt Status

KPMG Tax News Flash reports that yesterday the Internal Revenue Service issued an advance copy of Rev. Proc. 2014-11 which provides procedures for reinstating the tax-exempt status of non-profit organizations that have had their tax-exempt status automatically revoked for failure to file required Annual Returns or notices for three consecutive years. The new Revenue Procedure modifies and supersedes Notice 2011-44.

Suit By Anti-Catholic Group Challenges IRS Revocation of Its Non-Profit Status

The Dr. R. C. Samanta Roy Institute of Science and Technology, Inc. (SIST) has received some public notice in recent months as the attorney for its affiliates in bankruptcy proceedings was disciplined by the Minnesota Supreme Court for making repeated anti-Catholic slurs aimed at a federal bankruptcy judge and several bankruptcy trustees. (See prior posting.) Last year, the Southern Poverty Law Center profiled SIST, calling the Wisconsin-based organization "a mysterious, Catholic-bashing group" that plans to use profits from an amusement park to build a school in Wisconsin and fund another school in India. In Internal Revenue Bulletin 2013-49, (Dec. 2, 2013), the Internal Revenue Service recently announced that SIST has filed a declaratory judgment action challenging the revocation of its non-profit status under the Internal Revenue Code. The filing of the action allows individual contributors to continue to make tax-deductible contributions in limited amounts while the litigation is pending.

Court Holds That Tax Code's Parsonage Allowance Violates Establishment Clause

In Freedom From Religion Foundation, Inc. v. Lew, (WD WI, Nov. 22, 2013), a Wisconsin federal district court held unconstitutional Internal Revenue Code Sec. 107(2) that excludes from gross income a minister's parsonage allowance. The court held that the exclusion "violates the establishment clause under the [U.S. Supreme Court's] holding in Texas Monthly, Inc. v. Bullock... because the exemption provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise."

An important issue in the case was plaintiffs' standing to bring the challenge.  FFRF co-presidents who were plaintiffs ultimately were found to have standing because of the non-excludable housing allowance they received as part of their compensation from FFRF. The court rejected the argument that plaintiffs should be seen as being entitled to claim the parsonage allowance as atheist ministers. The complaint in the case originally also challenged Sec. 107(1) that allows ministers who are furnished a home instead of a housing allowance to exclude the rental value of the home from income. Plaintiffs essentially conceded they lacked standing to pursue that challenge, and the court dismissed that aspect of their complaint. [Thanks to several readers who alerted me to the decision.]

Panelists Lament Loss of Experience At IRS Exempt Organizations Unit

Yesterday's BNA Daily Report for Executives [subscription required] reports on a Nov. 15 conference on tax exempt organizations sponsored by the American Law Institute and American Bar Association at which speakers lamented the current situation in the Internal Revenue Service's Exempt Organizations unit. Here are some excerpts from the BNA report:

Most of the senior IRS officials who worked in the unit have either retired or been pushed out as a result of the May Tea Party scandal, said Marc Owens, a partner with Caplin & Drysdale.... “Everyone from the commissioner down to the director of rulings and agreements in the exempt organizations function were replaced by people with essentially no tax administration experience,” he said. “No experience interpreting the Internal Revenue Code, no experience dealing with taxpayers that apply the code, no experience in doing what the exempt organizations function has done and is in charge of doing.”... One of the impacts of less-experienced employees in recent years has been a dwindling number of technical advice memorandums, the panelists said. TAMs move audit cases to the IRS's national office....