Tax Court Says Omission of Cost of Donated Property Justifies Full Disallowance of Deduction

In RERI Holdings I, LLC v. Commissioner, (US TC, July 3, 2017), the United States Tax Court held that a charitable deduction for property should be disallowed in full because the taxpayer failed to include the property's cost basis on IRS Form 8283, the form for reporting Non-Cash Charitable Contributions.  The taxpayer did include the fair market value of the property, which it listed as $33 million.  The Tax Court concluded that the actual fair market value was $3.46 million. Reporting on the case, BNA Daily Report for Executives [subscription required] says that the case has caused a stir among tax lawyers because cost basis is rarely relevant and failure to include it is generally seen merely as a technical violation.  The Tax Court, however, said that listing of cost basis assists the IRS in determining whether the fair market value is overstated.

New Study Analyzes Impact of Tax Reform Proposals On Giving To Religious Organizations

The Indiana University Lily Family School of Philanthropy yesterday released a report titled Tax Policy and Charitable Giving Results (full text).  The report attempts to estimate the impact on charitable giving of the proposed 2014 Tax Reform Act.  That bill is similar to the current tax reform proposals by the White House and House of Representatives. The report examines various combinations of 3 proposals-- increase in the standard deduction, decrease in the top marginal tax rate, and universal charitable deduction.  It analyzes the impact of combinations of these on giving to religious congregations and giving to other charities. Religion News Service reports on the data.

Supreme Court Hears Oral Arguments In ERISA "Church Plan" Cases

The U.S. Supreme Court today heard consolidated oral arguments in three cases raising the question of when pension plans of religiously affiliated health care systems qualify for the "church plan" exemption under ERISA.  The three cases are Advocate Health Care v. Stapleton, St. Peter's Health Care v. Kaplan and Dignity Health v. Rollins. The full transcript of the oral arguments are available from the Supreme court's website.  A fuller explanation of the issues involved is set out in this prior posting.  AP reports on the arguments. Huge dollar amounts of potential underfunding are at stake nationwide.

Bob Jones University To Regain Tax Exempt Status

The State reported last week that Bob Jones University, will regain its tax exempt status on March 1, nearly 34 years after the U.S. Supreme Court decision that upheld stripping it of the exempt status.  The revocation stemmed from the University's policy, which at the time it claimed was Biblically-based, to deny admission to applicants engaged in an interracial marriage or known to advocate interracial marriage or dating.  The conservative Christian university dropped its interracial dating policy in 2000, but did not take steps to begin to regain full tax exempt status until 2014. It had previously created certain non-profit arms, such as its scholarship fund.  But now a reorganization will place most of the university's facilities under the umbrella of its existing BJU, Inc. (formerly Bob Jones elementary School, Inc.).  Some assets however will remain in a for-profit entity.  This reorganization did not require formal IRS approval, but the University has had formal correspondence and conversations with IRS about the reorganization.  One of the benefits of the reorganization will be that the University will move from a for-profit to a non-profit college as the Department of Education is giving added oversight to for-profit institutions. [Thanks to Scott Mange for the lead.]

Trump At National Prayer Breakfast Again Promises Johnson Amendment Repeal

President Donald Trump spoke yesterday at the National Prayer Breakfast. (Full text of remarks.)  In a wide-ranging speech, he reiterated his campaign promise to repeal the Johnson Amendment that restricts non-profits from participating in partisan election campaigns, saying in part:

It was the great Thomas Jefferson who said, “The God who gave us life, gave us liberty.”  Jefferson asked, “Can the liberties of a nation be secure when we have removed a conviction that these liberties are the gift of God?”

Among those freedoms is the right to worship according to our own beliefs.  That is why I will get rid of, and totally destroy, the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution.  I will do that -- remember.

Not all religious groups favor repeal of the tax code ban on electioneering.  Responding to Trump's remarks, the Baptist Joint Committee issued a press release, saying in part:

Politicizing churches does them no favors. The promised repeal is an attack on the integrity of both our charitable organizations and campaign finance system.

Inviting churches to intervene in campaigns with tax-deductible offerings would fundamentally change our houses of worship. It would usher our partisan divisions into the pews and harm the church’s ability to provide refuge.

Lawsuit Claims Kars4Kids Is Using Shell Synagogue To Hide Financial Dealings

Last week, an Orthodox synagogue, Young Israel of Eltingville, filed suit in a New York state trial court against the charity Kars4Kids alleging that the charity is improperly attempting to take over the synagogue located on Staten Island and use it to avoid filings with the Internal Revenue Service. The Forward, PixII, The Gothamist and an earlier New York Post article all report on the lawsuit and its background. In 2007, a former president of the synagogue-- attempting to save it from financial collapse-- entered an arrangement with Oorah, Inc., an Orthodox Jewish charity affiliated with Kars4Kids.  Oorah's name was placed on the deed to the synagogue in exchange for $250,000 and upgrades to the building. Young Israel says that the arrangement was for it to continue to used the sanctuary for worship, while Oorah would use the rest of the building for a preschool and adult classes.  An earlier dispute over whether Young Israel owes Oorah for some of the renovations is in state court after a religious court awarded Oorah $1 million.

In 2008, Rabbi Eliyahu Mintz, president of Oorah and Kars4Kids, incorporated Congregation Oorah and listed its place of worship as the Young Israel synagogue, even though Congregation Oorah apparently conducts no religious services.  In last week's lawsuit, Young Israel alleges that all of this was undertaken to create an entity that is exempt from filing Form 990 with the Internal Revenue Service. This, it is alleged, would allow Kars4Kids, which has a history of questionable financial dealings, to use Congregation Oorah to hide its activities.

IRS Adopts Final Rules Recognizing Same-Sex Marriages For Tax Purposes

Yesterday the Internal Revenue Service published in the Federal Register a release (full text) adopting final rules recognizing same-sex marriages for federal tax purposes. The new rules provide in part:

[A] marriage of two individuals is recognized for federal tax purposes if the marriage is recognized by the state, possession, or territory of the United States in which the marriage is entered into, regardless of domicile....

Two individuals who enter into a relationship denominated as marriage under the laws of a foreign jurisdiction are recognized as married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the United States....

The terms spouse, husband, and wife do not include individuals who have entered into a registered domestic partnership, civil union, or other similar formal relationship not denominated as a marriage under the law of the state, possession, or territory of the United States where such relationship was entered into....

Trump Again Calls For Repeal of Politicking Limits on Churches-- Some Background

In Donald Trump's acceptance speech at the Republican National Convention last night (full text from Politico), he repeated his previous promise to work for repeal of the Johnson Amendment, saying:

At this moment, I would like to thank the evangelical community who have been so good to me and so supportive. You have so much to contribute to our politics, yet our laws prevent you from speaking your minds from your own pulpits.

An amendment, pushed by Lyndon Johnson, many years ago, threatens religious institutions with a loss of their tax-exempt status if they openly advocate their political views.

I am going to work very hard to repeal that language and protect free speech for all Americans.

The relevant language is found in Section 501(c)(3) of the Internal Revenue Code which, in describing religious and charitable organizations that qualify for tax-exempt status, says that they may "not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."

Here is a history and critique of the Johnson Amendment from the perspective of Alliance Defending Freedom, an organization that seeks its repeal. And here is an issue of Liberty Magazine containing four articles largely supporting the Amendment's underlying policy and constitutionality.

Charitable Contributions In Bitcoin?

Last week, the American Institute of Certified Public Accountants submitted a Comment Letter (full text) to the Internal Revenue Service in response to a two-year old IRS Release seeking input on issues relating to virtual currencies (such as Bitcoin). The AICPA said in part:

The AICPA encourages the IRS to release additional, much needed, guidance on virtual currency. Specifically, we request further guidance on the following items: ***

Provide guidance to explain when a donation of virtual currency, valued above $5,000, does not need a qualified appraisal to substantiate a charitable contribution deduction. Additionally, provide guidance on how to document the virtual donation values.

A charitable contribution of property with a value in excess of $5,000 requires a qualified appraisal from a qualified appraiser. An exception exists for contributions of publicly traded stock. The rationale is that the prices of these publicly traded stocks are available on published exchanges, thus not requiring a qualified appraisal. The same is true for most, if not all, types of virtual currency. That is, an exchange publishes the values of this currency on any given day. Therefore, a similar exception should apply for virtual currency donations in excess of a certain amount.

IRS Advisory Committee On Non-Profits Submits Report

The Advisory Committee on Tax Exempt and Government Entities this week presented its 2016 report (full text) providing recommendations to the Internal Revenue Service.  Its subcommittee on exempt organizations noted that common themes emerged in conversations with regulators and other experts:

a need for coordinated action among regulators; better communication between regulators and those regulated entities; efficient and effective platforms for communication and dissemination of information; the need for transparency, particularly around enforcement; and, above all, the need to be user-focused throughout the regulatory and enforcement cycle.

BNA Daily Report for Executives [subscription required] has more on the recommendations.

Catholic Publisher Must File Reports With AG Under New Hampshire Law

In Attorney General, Director of Charitable Trusts v. Loreto Publications, Inc., (NH Sup. Ct., May 27, 2016), the New Hampshire Supreme Court held that a non-profit publishing house and bookseller of Catholic literature is a "charitable trust" under New Hampshire law and thus is required to register and submit annual reports to the state Attorney General's office. The court interpreted the reporting exclusion in NH RSA 7:19 for "religious organizations" to apply to organizations classified by the Internal Revenue Service as "churches" under the federal tax code.  According to the court, "Loreto conducts no religious services, has no congregation, and provides no religious instruction." While the exemption also applies to integrated auxiliaries of religious organizations, Loreto is not integrated auxiliary of the Catholic Church either.

Suit Challenges Constitutionality of Tax Code Parsonage Allowance

In a lawsuit filed this week, the Freedom From Religion Foundation is again challenging the constitutionality of the Internal Revenue Code's parsonage allowance.  The complaint (full text) in Gaylor v. Lew, (WD WI, filed 4/6/ 2016), contends that Section 107 of the Internal Revenue Code--which allows clergy to exclude from taxable income a housing allowance paid as part of their compensation-- violates the Establishment Clause.  The suit was brought by two FFRF officers who also received housing allowances.  One of the plaintiffs is an ordained minister who in prior years when employed by a church was able to claim the allowance.  In 2014, the 7th Circuit dismissed a similar suit on standing grounds because plaintiffs had not sought to exclude their FFRF allowances on their federal income tax returns or claim a tax refund. (See prior posting.) This time plaintiffs did file amended returns seeking a refund of taxes paid on their housing allowances. FFRF issued a press release announcing the filing of the lawsuit. [Thanks to Steven H. Sholk for the lead.]

6th Circuit: Names of Applicants For Non-Profit Tax Status Are Not Confidential

In a case which is highly charged politically, the U.S. 6th Circuit Court of Appeals this week held that the names, addresses, and taxpayer-identification numbers of applicants for tax-exempt status are not confidential information protected by 26 USC Sec. 6103.  The decision, United States v. NorCal Tea Party Patriots, (6th Cir., March 22, 2016), grew out of discovery requests in a lawsuit alleging that the IRS used political criteria to select applications from so-called tea party groups for special scrutiny. Washington Times reported on the decision.

IRS Releases Financial Data On Charities From 2012 Returns

The Internal Revenue Service in its recently-released Statistics of Income (Winter 2016) discloses extensive financial data regarding Nonprofit Charitable Organizations and Donor-Advised Funds. The data was compiled from Forms 990 and 990-EZ filed for tax year 2012. Non-profit charitable organizations had assets of $3.3 trillion. They received over $1.7 trillion in total revenue (nearly 75% of which came from program services). Charities holding $10 million or more in assets filed only 8% of the tax returns, but accounted for 92% of overall charitable assets.

Trump Pledges To Work To Eliminate Ban on Religious Non-Profits Endorsing Candidates

In a news conference in Ft. Worth, Texas today, Republican candidate Donald Trump-- saying that Christians are afraid to have a lobby because it threatens their tax exempt status-- pledged to work to eliminate the Johnson amendment that prevents non-profits, including religious non-profits, from endorsing or opposing political candidates. (Video of news conference, this portion at 1:44).  This came after evangelical Pastor Robert Jeffress endorsed Trump at the news conference (video at 1:42).

Trump Speculates Audit of His Tax Returns Stems From Religious Discrimination

As reported by Politico, during last night's contentious CNN Republican presidential debate Donald Trump said that he has not released his tax returns because they are the subject of a routine IRS audit. Then in an interview with CNN's Chris Cuomo immediately following the debate, Trump said:

But the one problem I have is that I’m always audited by the IRS, which I think is very unfair. I don’t know, maybe because of religion, maybe because I’m doing something else, maybe because I’m doing this, although this is just recently.

Cuomo followed up asking Trump what he meant by religion, and Trump responded:

Well maybe because of the fact that I’m a strong Christian, and I feel strongly about it. And maybe there’s a bias.  You see what’s happened. I mean, you have many religious groups have been complaining about that. They’ve been complaining about it for a long time.

IRS Announces Changed Procedures For Tax Issues Involving Churches

BNA Daily Report for Executives [subscription required] reported last week on two recent Internal Revenue Service memos of interest to churches. A Dec. 17, 2015 memo (full text) announces that from now on, any investigation involving Employment Tax examinations of churches will be subject to the same special procedures under IRC Sec. 7611 as other church tax inquiries.  A Dec. 30, 2015 Memo (full text) announces that the Exempt Organizations Division will create a three-person team, rotated on an annual basis, to deal with "high profile" referrals.  These include "evidence or allegations involving a church."

IRS Withdraws Proposal For Donee Reporting By Charities Over Privacy Concerns

The Internal Revenue Service announced in the Jan. 8 Federal Register that it is withdrawing a controversial proposal that would have allowed charitable organizations to report individual donations to the IRS as an alternative to taxpayers obtaining a contemporaneous written acknowledgement of the contribution.  Many of the public comments on the proposal expressed privacy concerns since charitable organizations would have needed to collect and maintain social security numbers of donees.

9th Circuit Upholds California AG's Collection of Donors' Names Against "As Applied" Challenge

As previously reported, in June the U.S. 9th Circuit Court of Appeals upheld against a facial challenge California's administrative rule requiring non-profit organizations that wish to solicit tax deductible contributions in the state to file an annual report that includes an unredacted IRS Form 990 Schedule B, the names and contributions of significant donors. The filings are not made public by the state. Now in Americans For Prosperity Foundation v. Harris, (9th Cir., Dec. 29, 2015), the 9th Circuit also rejected an "as-applied" challenge to the California law. This challenge was brought by Americans for Prosperity (a libertarian advocacy group funded in large part by the Koch brothers) and by the Thomas More Law Center  (which describes itself as an advocacy group which "defends and promotes America’s Judeo-Christian heritage and moral values"). According to the court:

First, the plaintiffs have not shown the demand for nonpublic disclosure of their Schedule B forms to the Attorney General has actually chilled protected conduct or would be likely to do so.... Second, the plaintiffs have not shown a “reasonable probability” of harassment at the hands of the state if the Attorney General is permitted to collect their Schedule B forms for nonpublic use.

The 9th Circuit, however, upheld the district court's preliminary injunction barring the California Attorney General from making the Schedule B's public, saying in part:

Because the Attorney General agrees with the plaintiffs that Schedule B information should not be publicly disclosed, and because she is in the process of promulgating a regulation prohibiting such public disclosure, a preliminary injunction prohibiting public disclosure of donor information promotes, rather than undermines, the state’s policy. 

New Appropriations Bill Includes Extensions of Charitable Contribution Tax Incentives

Yesterday President Obama signed into law the 887-page Consolidated Appropriations Act 2016.  Division Q of the bill is the "Protecting Americans From Tax Hikes Act" which made permanent a number of tax provisions that create incentives for charitable giving [scroll to pg. 805 of the bill]:

Sec. 111. Extension and modification of special rule for contributions of capital gain real property made for conservation purposes.

Sec. 112. Extension of tax-free distributions from individual retirement plans for charitable purposes.

Sec. 113. Extension and modification of charitable deduction for contributions of food inventory.

Sec. 114. Extension of modification of tax treatment of certain payments to controlling exempt organizations.

Sec. 115. Extension of basis adjustment to stock of S corporations making charitable contributions of property.