IRS New Form For Small Non-Profit Applications Has Eliminated Backlog

BNA Daily Report for Executives [subscription required] reported on Feb. 27 that an IRS official recently told a conference that the IRS new streamlined Form 1023-EZ for small entities has been successful in getting rid of the backlog of 75,000 applications for tax exempt status under Section 501(c)(3). The IRS has approved 18,169 of the 20,123 applications for tax exempt status it has received in the last six months. (Churches and other houses of worship, and church associations, do not need to file in order to obtain exemptions.)

IRS Updates Instructions For Small Charities Seeking Exempt Status

In Internal Revenue Bulletin 2015-1 (Jan. 2, 2015), the IRS has published Rev. Proc. 2015–5 (scroll to pg. 186) .  The Revenue Procedure updates the instructions for small organizatons seeking a ruling on their tax-exempt status under Sec. 501(c)(3) using Form 1023-EZ.

President Signs Bill Extending Until 12/31 Tax-Free Charitable IRA Distributions

On Friday, President Obama signed H.R. 5771, the Tax Increase Prevention Act of 2014. Section 108 of the Act extends until Dec. 31, 2014 the provision allowing tax-free distributions from IRA's for charitable purposes. The benefit applies to IRA holders who are at least 70 1/2 years old.  The Wall Street Journal reports in more detail on the provision.

FFRF Lacks Standing To Challenge Church Filing Exemptions

In Freedom From Religion Foundation v. Koskinen, (WD WI, Dec. 17, 2014), a Wisconsin federal district court held that Freedom From Religion Foundation and its local affiliate lack standing to challenge the Internal Revenue Service's  exemption of religious organizations from filing Form 990 annual reports, while requiring most other non-profit organizations to file. FFRF had never sought a similar exemption and disavowed any intent to do so. In reaching its conclusion, the court reversed its own holding to the contrary a year ago because of the intervening 7th Circuit decision in Freedom From Religion Foundation, Inc. v Lew. (See prior posting).

GAO Releases Report On IRS Oversight of Tax Exempt Organizations

Yesterday, the U.S. Government Accountability Office released a 66-page report (full text) on IRS oversight of tax-exempt organizations.  The report recommended that the IRS develop better measures of enforcement performance; communicate more clearly with state charity regulators on allowed use of IRS information; and expand electronic tax-return filing for charities.

IRS Shifts Offices Responsible For Legal Rulings On Tax Exempt Organization Issues

In Announcement 2014-34, issued last Wednesday, the Internal Revenue Service announced that beginning Jan. 2, it is shifting responsibility for making various legal rulings regarding tax-exempt organizations from the much-criticized Tax Exempt and Government Entities Division based in Cincinnati to the office of Associate Chief Counsel (Tax Exempt and Government Entities) based in Washington. Shifting to Washington is "the authority to prepare revenue rulings, revenue procedures, announcements, and notices, and to issue technical advice (including technical advice memoranda (TAMs)), certain letter rulings, and certain information letters" on tax-exempt organization issues.  The Cincinnati office will retain authority to issue determination letters on the exempt status of organizations under §§ 501(c) and 521.  Law 360 reports on the IRS action.

Conservative Group Seeks IRS Communications With Freedom From Religion Foundation

As previously reported, in July the Freedom From Religion Foundation reached a settlement agreement with the Internal Revenue Service in a suit challenging the IRS's alleged non-enforcement against churches and religious organizations of the Section 501(c)(3) ban on political activity by non-profits. In announcing the settlement, FFRF said that the IRS has now adopted procedures for reviewing, evaluating and determining whether to initiate church investigations.

Now the conservative organization, Judicial Watch is attempting to discover more about these new procedures.  It announced today that earlier this month it filed a Freedom of Information Act lawsuit seeking all records of communications between the IRS and FFRF on the promotion of political issues, legislation and candidates by churches and religious organizations.  It is also seeking all records relating to IRS monitoring of churches and religious organizations that took place to ensure they are not engaging in political activity.  The complaint (full text) in  Judicial Watch, Inc. v. Internal Revenue Service, (D DC, filed 11/6/2014), says that so far the IRS has failed to comply with Judicial Watch's request for these records.

Commenting on the filing of the lawsuit, Judicial Watch president Tom Fitton said:

As expressed by the First Amendment, Americans have the God-given right to both express their religious views and to engage in the political process. It is troubling that the IRS seems set to rely on a group of atheists to point them toward churches that might have criticized politicians.  And it is even more disturbing that the IRS would violate federal law, The Freedom of Information Act, in order to keep secret its monitoring of Americans praying together in church.  To be clear, the very IRS that abused Tea Partiers for Obama’s election now purports to be able to ‘audit’ houses of worship in order to protect politicians from criticism. I am sure the Obama administration is more than happy to use the excuse of a lawsuit by a leftist group to use the IRS to punish churches that oppose Obama’s war on religious freedom

7th Circuit: Challenge To Parsonage Allowance Dismissed For Lack of Standing

In Freedom From Religion Foundation v. Lew, (7th Cir., Nov. 13, 2014), the U.S. 7th Circuit Court of Appeals dismissed for lack of standing an Establishment Clause challenge to the constitutionality of the federal tax code's parsonage allowance for clergy.  The co-presidents of FFRF, and organization of atheists and agnostics, received part of their salaries as a housing allowance, but they never sought to exclude the income on their federal income tax returns and did not file a claim for a tax refund. Therefore the IRS and the Tax Court never had a chance to interpret the scope of the exemption. According to the court:

A person suffers no judicially cognizable injury merely because others receive a tax benefit that is conditioned on allegedly unconstitutional criteria, even if that person is otherwise “similarly situated” to those who do receive the benefit. Only a person that has been denied such a benefit can be deemed to have suffered a cognizable injury.

Courthouse News Service reports on the decision. [Thanks to Steveh H. Sholk and To Rutledge for the lead.]

IRS Approves Leave-Based Programs That Contribute To Non-Profits Fighting Ebola

On Wednesday, the Internal Revenue Service announced the release of Notice 2014-68 that encourages contributions to non-profits, including religious non-profits, that are engaged in fighting the Ebola outbreak in Guinea, Liberia, and Sierra Leone.  Under the ruling, employers may set up leave-based programs under which the employer will make a contribution to fight Ebola when an employee forgoes vacation, sick leave or personal leave.  Contributions made by the employer will not be considered gross income or wages of the employee. Concomitantly, the employee may not claim a charitable deduction for the payments.

New CRS Report On Expired Charitable Tax Provisions

On Oct. 17, the Congressional Research Service released a Report titled Recently Expired Charitable Tax Provisions (“Tax Extenders”): In Brief. The report discusses (1) the enhanced charitable deduction for contributions of food inventory; (2) tax-free distributions from IRA's for charitable purposes; (3) basis adjustment to stock of S corporations making charitable property contributions; and (4) special rules for contributions of capital gain real property for conservation purposes.  It also projects the cost of extending the expired provisions.

October 5 Is 7th Annual Pulpit Freedom Sunday

This Sunday is Alliance Defending Freedom's 7th Annual Pulpit Freedom Sunday (Press release.). Pastors are encouraged to preach sermons that day "presenting biblical perspectives on the positions of electoral candidates" as a protest against federal tax code limitations on non-profits becoming involved in partisan political campaigns. ADF says that nearly 1500 pastors will participate this year.

7th Circuit Hears Oral Arguments In Parsonage Allowance Challenge

The U.S. 7th Circuit Court of Appeals yesterday heard oral arguments (audio of full arguments) in Freedom From Religion Foundation v. Lew. In the case, a Wisconsin federal district court held that the tax code provision that excludes a minister's parsonage allowance from gross income violates the Establishment Clause. Courthouse News Service reports on the oral arguments which focused both on standing and Establishment Clause issues.

Tax Court Rejects Minister's Attempt To Shield Income From Taxes

In Cortes v. Commissioner, (T.C., Sept. 3, 2014), the United States Tax Court rejected a claim by a minister of the Seventh Day Sabbath Church that an arrangement invovling setting up a ministry, creation of a corporation sole and taking a vow of poverty excused him from paying income tax on amounts paid to his ministry but used for his family's personal expenses. The minister's tax avoidance scheme, promoted by Frederic and Elizabeth Gardner, has been the subject of litigation in prior cases. [Thanks to Steven H. Sholk for the lead.]

Documents Reveal Current IRS Procedures On Church Tax Inquiries

In 2012, the Internal Revenue Service temporarily suspended tax audits of churches accused of violating Section 501(c)(3)'s ban on political participation, pending final adoption of IRS rule changes to clarify which high level Treasury official has authority to make a determination under IRC Sec. 7611 that there are reasonable grounds to begin a church tax inquiry. (See prior posting.) The proposed rules have never been adopted in final form, but as was reported last month, in settling a lawsuit challenging the suspension of church tax inquiries, the IRS assured the Freedom From Religion Foundation that it has adopted procedures for reviewing, evaluating and determining whether to initiate church investigations.

As pointed out yesterday by The Blaze, from a letter attached to the FFRF's Memorandum In Support of Motion To Dismiss, a good deal can be learned of the practices which the IRS now uses. A decision to begin a church tax inquiry is "made by the Commissioner, TEGE, either directly or as concurrence to the determination made by the Director, Exempt Organizations." Complaints about violations of the political intervention ban are evaluated by the Review of Operations unit, and then by the Political Activities Referral Committee.  That process has led to the conclusion that 99 churches merit a high priority examination for activities since 2010.

Parties' Agreement To Dismiss Challenge on IRS Church Audit Rules Trumps Intervenors' Objections

As previously reported, last month the Freedom From Religion Foundation agreed to drop its suit against the Internal Revenue Service after the IRS eliminated its blanket policy of not enforcing Section 501(c)(3) restrictions on political activity against churches. Now the court has granted the parties' joint motion to dismiss the case, over objections of a pastor who had intervened in the case.  In Freedom from Religion Foundation v. Koskinen, (WD WI, Aug. 1, 2014), Holy Cross Anglican Church and Father Patrick Malone had been permitted to intervene to argue that any IRS policy of non-enforcement against churches was required by the Establishment Clause and RFRA. (Background and documents.) In now dismissing the case without prejudice, the court concluded that the dismissal would not prejudice the intervenors. Meanwhile Alliance Defending Freedom has filed a Freedom of Information Act request (full text) seeking copies of any new IRS policies or procedures on church audits.

FFRF and IRS Settle Suit On Non-Enforcement of 501(c)(3) Against Churches

The Freedom From Religion Foundation announced Thursday that it has reached a settlement agreement with the Internal Revenue Service in Freedom From Religion Foundation v. Koskinen, a suit (links to pleadings) challenging the IRS's alleged non-enforcement against churches and religious organizations of the Section 501(c)(3) ban on political activity by non-profits. (See prior related posting.)  According to FFRF:

A prior lawsuit in 2009 required the IRS to designate an appropriate high-ranking official to initiate church tax examinations, but it had apparently failed to do so. 

The IRS has now resolved the signature authority issue necessary to initiate church examinations. The IRS also has adopted procedures for reviewing, evaluating and determining whether to initiate church investigations. While the IRS retains “prosecutorial” discretion with regard to any individual case, the IRS no longer has a blanket policy or practice of non-enforcement of political activity restrictions as to churches.

Church audits will not begin immediately because the IRS now has a broader moratorium in place on investigation of any tax-exempt organizations because of the Congressional investigation of its alleged targeting of conservative groups for adverse treatment.

A Ruling And Another Suit On Catholic Hospital Pension Plans As "Church Plans"

As reported by BNA Daily Report for Executives [subscription required], another decision has been handed down in a series of cases filed over the last 18 months challenging the assertion by a number of Catholic health care companies that their pension plans qualify as "church plans," and are thus exempt from the funding and other requirements of ERISA.  In Medina v. Catholic Health Initiatives, (D CO, July 9, 2014), a Colorado federal magistrate judge recommended entering a declaratory judgment finding that the plan is not a church plan. Refusing to defer to the position taken by the IRS in a 2002 Private Letter Ruling, the magistrate judge followed the lead of two out of three other courts that have ruled on the issue and held that to qualify as a church plan, the plan must be established by a church or association of churches, and not merely by a church-affiliated organization. (See prior related posting.)

Meanwhile one more similar challenge has been filed, bringing the total number of cases pending or decided to 8.   The complaint (full text) in Lann v. Trinity Health Corp., (D MD, filed 7/11/2014), not only claims that the health care organization's plan does not qualify as a church plan, but argues that if it does, the exemption in ERISA for church plans violates the Establishment Clause.

IRS Adopts New Short Form For Applications By Small Charities

The Internal Revenue Service announced on July 1 that it has adopted a new Form 1023-EZ that will streamline the process of applying for 501(c)(3) status for small non-profit and religious groups. The new form is only 3 pages long, instead of the 26-page long form.  It will be available to most charities with gross receipts of $50,000 or less and assets of $250,000 or less. The new form must be filed electronically. In an interview with Time earlier this week, Internal Revenue Service Commissioner John Koskinen says the change will allow the IRS to clear up the 66,000-application backlog that it faces.

Pro-Marriage Group Entitled To Actual Damages For Erroneous IRS Release of Donor Data

In National Organization for Marriage, Inc. v. United States, (ED VA, June 3, 2014), a non-profit organization whose purpose is "to protect marriage and the faith communities that sustain it" sued the federal government under 26 USC Sec. 7431 for damages growing out of the IRS's unauthorized release in 2011 of Schedule B of the organization's Form 990. Schedule B lists donors of over $5000 to the organization and should have been redacted before releasing the Form 990 in response to a media request.  The Schedule B was ultimately published by the Huffington Post along with an article focusing on the fact that it showed a $10,000 donation by a political action committee associated with Mitt Romney. The court held that plaintiff is entitled to actual damages, but not to punitive damages for willful disclosure or gross negligence.  The court also dismissed plaintiff's unauthorized inspection claim.

Court Rejects Jurisdictional Defenses In IRS 501(c)(3) Policy Challenge

In Z Street, Inc., v. Koskinen, (D DC, May 27, 2014), the D.C. federal district court rejected a number of jurisdictional and procedural defenses raised by the Internal Revenue Service in a viewpoint discrimination suit brought by a conservative pro-Israel group challenging the IRS's "Israel Special Policy."  Plaintiff alleges that the IRS has a policy of sending applications by Israel-related non-profit organizations seeking 501(c)(3) status to a special unit in the D.C. office to determine if the organization's policies differ from those of the Obama administration. Applications by such groups are allegedly subjected to additional review procedures not applied to others. In rejecting the IRS's motion to dismiss, the court said:

Defendant struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action’s advancement. But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff’s Section 501(c)(3) status, is not so easily deterred.

[Thanks to Steven H. Sholk for the lead.]