Tuesday, October 2, 2012
Sandy Deja, a former IRS Exempt Organizations Specialist and author of books and websites on obtaining tax-exempt status, has posted a report, including charts and graphs, on organizations whose tax-exempt status was automatically revoked and then reinstated. The report is available at: http://501cfreebook.com/The_Comeback_Kids.php.
Tuesday, September 25, 2012
Last week Senator Carl Levin (D-MI) released an exchange of correspondence with the IRS in which he called for the IRS to enforce the limitations on political activity by section 501(c)(4) social welfare organizations. In that exchange, the IRS revealed that it currently "has more than 70 ongoing examinations of section 501(c)(4) organizations," although not all of those exams necessarily relate to possible excessive political activity. It also stated that "[t]here are currently more than 1,600 organizations in the determination process seeking recognition as a section 501(c)(4) organization," including some for which their level of political activity is an issue. More Coverage: Bloomberg BNA ("IRS to Look at Political Activity of Section 501(c)(4) Organizations").
The Congressional Research Service has also been busy, releasing reports on "501(c)(4)s and the Gift Tax: Legal Analysis" (Hat tip: Election Law Blog) and "Political Ads: Issue Advocacy or Campaign Activity Under the Tax Code". In the first report CRS states that "it appears the stronger argument is that contributions to 501(c)(4) groups are statutorily subject to the gift tax" but then concludes that in light of a history of IRS non-enforcement and the 2011 IRS decision to close all examinations on this issue, "it appears that, for now at least, the gift tax will not be enforced on donations to 501(c)(4) groups." In the second report CRS reviews the existing guidance on political ads with respect to tax-exempt organizations, concluding (as those who have studied this area have long known) that "the line between issue advocacy and campaign activity can be difficult to discern."
Finally, the political spending by 501(c)(4)s, as well as by 501(c)(5) labor organizations and 501(c)(6) business organizations continues apace. According to the Center for Responsive Politics, based on only on express advocacy and electioneering communications such groups have already reported spending spent close to $100 million with six weeks still to go until the election. These figures do not include spending that does not fall within these election-law based categories but still could be viewed for federal tax purposes as political activity. While spending by candidates and superPACs dwarf this amount, it remains to be seen whether 501(c) political spending could be the difference in close races this fall.
Monday, September 24, 2012
The Treasury Department recently issued proposed regulations that expand who is able to make a determination that a foreign organization is the equivalent of a charitable organization (other than a private nonoperating foundation) under U.S. federal tax law. These "equivalency determinations" are important for private foundations seeking to make grants to such organizations because they permit foundations both to avoid the need to exercise expenditure responsibility over these grants (under Code section 4945) and to count such grants toward their minimum required distribution (under Code section 4942). Current regulations require that foundations rely on either an affidavit of the foreign organization or an opinion of counsel (for the foundation or for the grantee). The proposed regulations would expand who can provide such an opinion to any "qualified tax practitioner," which includes not only attorneys but also certified public accountants and enrolled agents, as defined in Treasury Department Circular No. 230. The expansion would not reach foreign counsel, however, unless they are otherwise a qualified tax practitioner. Treasury also stated it is considering whether to place a time limit on how long a foundation may rely on such an opinion, whether the ability to rely on affidavits should be modified, restricted, or eliminated, and whether any further modifications to Revenue Procedure 92-94 are need to take into account changes to the public support test (for avoiding private foundation classification). Until the final regulations are issued, they may be relied upon as of the scheduled date for publication in the Federal Register (today).
While private foundations likely will appreciate the expanded and likely usually lower-cost options for obtaining equivalency determinations, which is one of the reasons Treasury gave for the change, the proposed regulations do not address another frequently raised issue in this area. That issue is the creation of repositories for equivalency determinations so that all private foundations, and indeed all charities, could access and rely on them rather than each grantmaking organization having to obtain its own determination. Most prominently, the Advisory Committee on Tax Exempt and Government Entities ("ACT") recommended that the IRS facilitate the formation of such repositors in its 2009 report. The proposed regulations do not acknowledge this proposal, however, suggesting that at least for the time being it is not an option that Treasury and the IRS are interested in formally facilitating
Friday, September 21, 2012
Congress has folded its tent until after the election and, by most peoples' lights, has accomplished extraordinarily little, leaving untouched a profusion of urgent matters. One unresolved issue is the looming "fiscal cliff": massive automatic budget cuts that will take place if Congress and the president cannot agree on an alternative plan for reducing the budget deficit. Last week, the White House issued a report on how it will execute the massive cuts if no agreement is reached. According to a recent analysis published in The Nonprofit Quarterly, the picture is grim for the nonprofit sector. There will be crippling cuts in support for programs that 1) provide housing for the elderly and disabled, 2) focus on juvenile justice, 3) combat violence against women, 4) spur community economic development. And so on.
Tuesday, September 11, 2012
On Sunday, September 2, the Church of St. Catherine of Siena, in NYC, published and circulated to parishioners a church bulletin containing a column by the Rev. John Farren, a member of the congregation’s pastoral staff. The column, which is ostensibly about religious freedom, reproduced in full a letter from several former U.S. ambassadors to the Vatican criticizing the Obama administration and concluding, “We urge our fellow Catholics, and indeed all people of good will, to join with us in this full-hearted effort to elect Governor Mitt Romney as the next President of the United States.” (Note that this is a quote from the ambassadors' letter, reproduced in full in Fr. Farren's column, not a quote from Fr. Farren himself). The reproduced letter, in fact, mentions Romney specifically a half-dozen times, and in each paragraph other than the very first.
Father Farren perhaps thought he had protected himself from violating the political campaign prohibition rules by framing his column as one about religious freedom, and including the following sentence: "I am aware that I and no church authority may endorse candidates for political office, but because that letter focuses on the centrality of religious freedom, I believe it is worth reproducing here." Or perhaps he thought that reproducing someone else's endorsement of Romney in an official church publication was OK as long as the endorsement words didn't come out of his mouth. Either way, he was dead wrong.
Aside from the fact that Father Farren's statement is pretty transparently a ploy to signal his approval of Governor Romney (he could easily have made his arguments regarding religious freedom without reproducing a letter that is essentially a campaign ad for Romney), the statement in the church bulletin quite clearly violates the rules the IRS laid out in Rev. Rul. 2007-41. I cited these rules in my previous post about Bishop Jenky of Peoria, but here they are again. In assessing whether a communication that is ostensibly about an "issue" rather than a political endorsement, the IRS considers the following factors:
- Whether the statement identifies one or more candidates for a given public office;
Whether the statement expresses approval or disapproval for one or more candidates’ positions and/or actions;
Whether the statement is delivered close in time to the election;
Whether the statement makes reference to voting or an election;
Whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office;
Whether the communication is part of an ongoing series of communications by the organization on the same issue that are made independent of the timing of any election; and
Whether the timing of the communication and identification of the candidate are related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder who also happens to be a candidate for public office.
My analysis is that Fr. Farren's column in the church bulletin managed to violate all seven of these criteria; a perfect (negative) score. To analogize to speeding, this isn't going 75 mph in a 65 zone; this is going 120. The fact that the rules were (mostly) broken in the context of reproducing a letter from outsiders is irrelevant; this is similar to a web link that would take you to a web page with the original endorsement. The Revenue Ruling is quite clear that one is responsible for the content behind such links in this context - in other words, you can't escape the rules by re-publishing someone else's endorsement. Link to it, or re-publish it approvingly, and it becomes your own.
As I indicated in my prior post about Bishop Jenky, it's high time the IRS made a stand on the political activity rules. Either enforce your ruling, or withdraw it and give up.
Thursday, August 30, 2012
As we previously reported here, the IRS issued proposed regulations on program-related investments (PRIs) under Code Section 4944. These proposed regulations took the form of nine additional examples to be added to the existing PRI regulations that cover a variety of fact patterns, including equity investing, international activities, and credit enhancement.
On August 8, 2012, the ABA Section of Taxation submitted comments to the IRS regarding the proposed regulations. I know that many members of the Exempt Organizations Group of the Tax Section (specifically including David Chertoff, formerly of the MacArthur Foundation and Rob Wexler from Adler & Colvin in San Fransico) had worked tirelessly with the IRS for years to obtain an update from the IRS on the PRI regulations. The comments themselves are summarized as follows:
The Tax Section requested that the preamble to the Proposed Regulations, which summarizes the types of transactions that the new PRI examples cover, be included in the Regulations themselves.
The comments further request that the IRS issue additional examples in certain subtantive areas, such as mixed-income housing and nonprofit newspapers. In its prior submissions to the IRS, the Tax Section proposed such examples. I understand that one of the objections that the IRS raised was that it wanted the examples to describe activities that were clearly already charitable under existing law. Examples in some of these new areas might have raised issues under Section 501(c)(3)/Section 170, and not just under Section 4944.
Finally, the Tax Section raised specific comments on some of the examples (example 11, regarding the for-profit subsidiary that developed vaccines; example 15, regarding international disaster relief, and example 16, regarding LLC investments.)
Congratulations to everyone at the ABA Tax Section - Exempt Orgs group for their success so far in getting *actual* proposed regulations on the books! We look forward to seeing how those final regs turn out.
Monday, August 27, 2012
For a while now, many of us have thought that a donor should get a charitable deduction for a gift made directly to a single member LLC (SMLLC) that is wholly owned by an organization eligible to receive deductible contributions. After all, the tax law treats the SMLLC as a disregarded entity and attributes its tax attributes up to the single member. Why shouldn't the contribution be deemed made to the parent?
While this is the logical result, the IRS has heretofore been hesistant to confirm it in writing. This has been a source of some consternation for charities, especially those faced with the prospect of high value commercial real estate gifts. Those charities certainly would love to take those gifts directly into a SMLLC and stay out of the chain of title, but donors are understandibly hesitant when their tax advisors say, "Well, you ought to get a deduction... but we can't be sure."
Happily, we now have IRS Notice 2012-52 (July 31, 2012), which states that a gift to a domestic SMLLC will be treated as "a charitable contribution to a branch or division of the U.S. charity." In an extra present, the IRS indicates that the Notice is effective for "charitable contributions made on or after July 31, 2012. However, taxpayers may rely on this notice prior to its effective date for taxable years for which the period of limitation on refund or credit under § 6511 has not expired."
One note of interest in the Notice is the discussion of substantiation. The charity/member is treated as the donee organization for purposes of the substantiation rules under Section 170(f), including the written acknowledgement rules. This means that the charity/member is supposed to send the "you've received no goods or services" letter to the donor. The IRS goes on to state: "[t]o avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity." This got me to thinking - part of the reason for using the SMLLC in the first place is to get the charity itself out of the chain of title for liability protection purposes. Would the IRS accept the following acknowledgement on the letterhead of the SMLLC?
Thank you for your donation of expensive commercial real estate that formerly held a dry cleaner and a gas station. You've received no goods and services in return for your donation. Please note that for federal income tax purposes, your donation is treated as having been made directly to Charity. LLC is a a single member limited liability company that is wholly owned by Charity and is treated as a disregarded entity for federal tax purposes. Consult your tax advisor for further details.
Charity, in its capacity as the sole member of LLC
From the language of the Notice, I'm not sure that would acceptable - would it need to be on the Charity's letterhead? Signed by Charity in its individual capacity? I'd be curious to know how others would handle this.
Thursday, August 9, 2012
Earlier this year, the IRS issued denial letter 201224036 rejecting an application filed by a medical marijuana dispensary for exemption under section 501(c)(3). The interesting but ultimately not surprising aspect of the denial letter is that the IRS flatly held federal not state law controlled in determining the legality of the organization's activities for purposes of section 501(c)(3): "The fact that State legalized distribution of cannabis to a limited extent is not determinative because under federal law, distribution of cannabis is illegal." The IRS therefore concluded the organization furthered a substantial nonexempt purpose (the IRS also found prohibited private benefit because the group was organized as a cooperative with only members having access to the medical marijuana). This IRS position, combined with the fact that the IRS and, more recently, the Tax Court deny business expense deductions for taxable medical marijuana organizations under Internal Revenue Code section 280E, may spell the tax death of medical marijuana dispensaries.
According to a document posted by the Medical Cannabis Resource Center in Oregon, it is the subject of this denial letter. The letter suggests the group may try to limit its activities in ways that push right up against the legality envelope but do not cross into (IRS) forbidden territory.
Tuesday, August 7, 2012
Led by Senator Orrin Hatch (R-Utah), ten GOP senators sent a letter to the IRS yesterday urging it not to revisit its regulations governing section 501(c)(4) organizations in response to outside political pressure without careful (and time-consuming) deliberation. More specifically, they stated "public confidence in the non-partisan integrity of the agency demands that you issue no sub-regulatory guidance nor engage in any similar efforts that would effectuate immediate changes without a lengthy period of review, separated in time from the current heated political environment." The Senators were writing in response to a letter the IRS sent last month to two groups supporting campaign finance reform stating:
I am responding to your letter dated March 22, 2012, which supplemented you [sic] letter dated July 27, 2011, urging the IRS to institute a rulemaking proceeding to address the rules related to political activity by organizations exempt under section 501(c)(4) of the Internal Revenue Code.
The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.
This letter underlines the political tightrope that the IRS is walking in this area, especially with countervailing pressure coming from the Democratic side of the congressional aisle. Whether the Service can successfully walk this tightrope - and where it leads - remains to be seen.
Monday, August 6, 2012
For years the IRS has refused to rule on whether contributions to a single-member limited liability company (SMLLC) that is wholly owned and controlled by a U.S. charity and otherwise disregarded for federal income tax purposes are deductible as charitable contributions. The long wait is now over, at least in part. In Notice 2012-52 the Service provides the following:
If all other requirements of § 170 are met, the Internal Revenue Service will treat a contribution to a disregarded SMLLC that was created or organized in or under the law of the United States, a United States possession, a state, or the District of Columbia, and is wholly owned and controlled by a U.S. charity, as a charitable contribution to a branch or division of the U.S. charity.
This is welcome news, as charities often prefer to use SMLLCs for a variety of purposes. For example, if a potential contribution of real property may come with unexpected liabilities, one strategy a charity can use to protect its other assets from that liability is to create a SMLLC solely for the purpose of receiving that contribution and owning that property. Left still uncertain, however, is what happens if the SMLLC is a foreign entity, which could easily be the case for charities that operate internationally. The IRS views regarding that situation are still unknown.
Friday, July 27, 2012
More on Use of 501(c)(4)s in the Political Campaign Context - Disclosure Requirements, Need For Reform
As reported in The New York Times as well as other news sources (including the live blogging herein), the IRS announced in Congressional hearings on Wednesday that 50 political groups have obtained 501(c)(4) exemptions in 2010 and 2011.
In the Forth Worth Star-Telegram, an editorial entitled "IRS needs to strengthen tax code to uncover political nonprofits" criticizes the use of 501(c)(4)s for political campaign purposes, concluding: "Tax-exempt status is intended to promote the public good, not enable wealthy and powerful donors of any political stripe to wield influence without public scrutiny."
In the BNA Daily Tax Report on Wednesday, an article addressed the disclosure requirement with respect to 501(c)(4) donors. Although 501(c)(4)s are required to inform the IRS, but not the public, of the identity of donors, many organizations find ways around these full disclosure rules. The organization can list the donor as "anonymous" if it doesn't know where the money originated from and "can't easily find out," or client trust accounts are used (i.e., donors make contributions through law firms that transmits the money to the organization, with only the law firm's name disclosed). Cashier's checks and bank wire transfers are other means to keep donors anonymous and, thus, out of the IRS's purview. Another potential area for reform?
Wednesday, July 25, 2012
As my fellow blogger Nicholas Mirkay noted earlier in the week, the second House Ways & Means Subcommittee on Oversight hearing on exempt organizations is scheduled for this morning at 9:30 EST. I'll be liveblogging the hearing in the comments to this post (see the fine print just below the post.) I have to manually enable the comments on Typepad, so there may be a little bit of a delay as they go up. I will also be doing this *live* so I'm going to beg your forgiveness for typos and such from the outset.
It is a fantastic line up this morning. Sometimes, it is easy to get cynical about who ends up on these panels but not today - the Subcommittee did its homework and got some great people, including Prof. John Colombo (who posts here, not that we are biased!), Prof. Donald Tobin (well known to all of us who teach tax), Thomas Hyatt of SNR Denton, and Eve Borenstein, Queen of the Form 990. I really think it will be an informative hearing. Here's a link to the official announcement.
If you are so inclined, you can watch this streaming here. As statements and such become public, I'll update this post to include links to them. So warm up your coffee and off we go... To the comments!
UPDATE: Hopefully, all of those comments came through for you all. Feel free to contact me if there were any issues. Here are some of the posted materials for the day:
By the way, in my comments I sometimes refer to the Comn'r as short hand - I mean Steve Miller, who is actually Deputy Commissioner for Sevices and Enforcment and used to be the head of TEO for the IRS.
SECOND UPDATE: Some of the later comments are not showing up when I hit comments on the front page (after the post where I indicate I have technical issues). They are, however, showing up in the dashboard for bloggers, so I will try to figure that all out. Please drop a comment if the last one you see from me is that I'm having technical issues, or if they go all the way to the end of the hearing.
Tuesday, July 24, 2012
As reported in today's Daily Tax Report, IRS EO Director, Lois Lerner, stated in a July 17th letter to an organization raising concerns about the political campaign activities of 501(c)(4) organizations:
The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.
Wednesday, July 18, 2012
In the red corner - The US Treasury
In the blue corner - The Congressional Research Service
The bout - mandatory payouts from donor advised funds
In December, 2011, Treasury issued the long awaited "Report to Congress on Supporting Organizations and Donor Advised Funds," which was mandated by the Pension Protection Act (PPA). In general, the Treasury report took the position that many of the reforms implemented as part of the PPA were sufficient to address the abuses seen in the area. With specific regard to DAF distributions, Treasury noted favorably that the average payout rates for donor advised funds exceeded the private foundation 5% requirement, although Treasury did indicate that it was premature to make any recommendation based on the paucity of available data (DAF information was added to the Form 990 in 2008)(Treasury Report pp. 81-82).
Fast forward six months. On July 11, the Congressional Research Service issued, "An Analysis of Chariable Giving and Donor Advised Funds," using many of the statistics regarding donor advised funds cited in the Treasury report. Unlike the more cautious but generally favorable Treasury report, the CRS report concluded that donor advised funds should have a mandatory distribution requirement - and further, that it should be applied on a per fund basis. The CRS report focuses on the fact that although average distribution rates among donor advised funds are quite high, there are many DAFs that make little or no distributions at all. Janne Gallagher at the Council on Foundations (CoF posted the CRS report linked above, which is not generally available online) wrote a critique of the CRS report, posted at the CoF site here.
Interestingly, the Summary section of the CRS report notes that "The Treasury study was released in 2011. Senator Chuck Grassley, Senate Finance commitee chairman at the time of the 2006 legislation, has criticized the study as being 'disappointing and nonresponsive.'"
Despite all the statistics and analysis, however, it seems to me that the case has not been made from a policy perspective as to why we should (or should not) require a payout from DAFs. I find myself saying, "well, so there are a few DAFs not making annual distributions - so what?" To some degree, the CRS report comes the closest to reciting a reason - that DAFs are in fact under the functional control of their donors and therefore, they should be regulated similarly to private foundations. Treasury appears not to assume donor control; CRS assumes donor control because the DAF sponsoring organizations generally follow donor suggestions. Clearly, the parties disagree on factual nature this issue - I guess we will see more in Round 2.
Hat tip to my friend Chris Hoyt at the University of Missouri (KC) Law School (you know him... really, really terrible jokes!) for pointing me to the CoF materials.
Wednesday, July 11, 2012
A recent report by the IRS Inspector General found that while the IRS is doing a better job of acknowledging receipt of complaints about EO violations, there are issues with internal controls and tracking of such complaints. For example, the report found that the IRS couldn't find records of about a quarter of the complaints (31 of 120 cases surveyed from October 1, 2009 through June 17, 2011) and wasn't keeping information updated in its tracking database in a number of other cases. The report recommended improving internal tracking and review procedures for complaints.
I hope the IRS updates its procedures soon - presidential election years are always high-volume complaint times, and in the wake of Citizens United, this one promises to be a doozy, with (c)(4)'s outspending PACs in the political arena, and some church officials trampling the rules regarding political campaign intervention (e.g., Bishop Jenky of Peoria).
Monday, July 9, 2012
Part of the health care overhaul passed by Congress included a new subsection of Section 501, 501(r), that added new requirements for tax-exemption of nonprofit hospitals. These new requirements are mostly what I would call procedural in nature: requiring a health needs assessment and written charity care policies, as well as regulating the billing of indigent patients and debt collection actions. The legislation left most of the implementing details to the IRS. In July, 2011, the IRS issued Notice 2011-52, providing guidance with respect to the health needs assessment requirement. The IRS now has released proposed regulations addressing the remaining three areas (written charity care policies, billing, and debt collection). The agency is seeking public comment on the proposed regulations by September 24, 2012.
Thursday, June 14, 2012
The IRS has provided new information for federal and state credit unions that have had either their own tax-exempt status revoked automatically for failure to file annual returns for three years or have received a notification that their parent organization has been subject to such revocation. The new information addresses three common situations:
- When a federal credit union has had its tax-exempt status revoked even though it is not required to file an annual return (letter to IRS asserting federal credit union status required).
- When a state credit union, which is required to file an annual return, has had its tax-exempt status revoked (application for reinstatement of tax-exempt status required if the credit union was required but failed to file annual returns for three consecutive years).
- When a credit union has been notified that its parent organization has lost its tax-exempt status (noting a situation that has arisen because some state agencies that had previously filed group information returns on behalf of all exempt state-chartered credit unions under their control and supervision have ceased to do so).
Tuesday, June 12, 2012
The Advisory Committee on Tax Exempt and Government Entities (ACT) released its eleventh report last week. The Exempt Organizations portion of the report focused on IRS Form 1023 - the Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Here are their specific recommendations for improving the process by which more than 55,000 organizations per year seek section 501(c)(3) tax-exempt status from the IRS:
- the IRS should expedite the internal processes and commit the necessary resources (human, financial, and technical) to transform Form 1023 to an interactive Web-based Form e-1023 that can be filed electronically and stored, transmitted, and disseminated in an electronic database format. This information will serve as the electronic gateway for IRS knowledge about tax-exempt organizations;
- the IRS should redesign Form 1023 with four primary objectives: to make the form (i) effective at identifying whether organizations meet the requirements for recognition of exemption; (ii) consistent with the structures and definitions of Form 990; (iii) simple by using a short core form with supplemental schedules that will ease the filing burden on small and/or less complex organizations; and (iv) educational by organizing questions based on substantive exemption requirements and including explanatory information;
- the IRS should develop more educational tools about Form 1023 including tips for filing Form 1023, and more information about the substantive requirements for recognition of exemption. The development of these tools, coupled with the redesign of Form 1023, should obviate the need for a separate “Form 1023-EZ” for small organizations. The ACT does not recommend the development of such a form;
- the IRS should coordinate with the Department of the Treasury and the Office of Chief Counsel on the issuance of precedential guidance about tax-compliant alternatives to the creation of new Section 501(c)(3) organizations, such as fiscal sponsorships and donor-advised funds;
- the IRS should carefully examine recurrent complaints about the Form 1023 filing and review process and take appropriate and expeditious steps to improve the effectiveness, efficiency, and timeliness of that process; and
- the IRS should expand its use of the Review of Operations (ROO) program (to follow up on Section 501(c)(3) organizations whose 1023 forms indicate potential future compliance issues), and should consult with state charity regulators regarding indicia that may warrant such follow-up.
Wednesday, May 30, 2012
Over 40 Catholic organizations (including my employer, the University of Notre Dame) have filed coordinated lawsuits against the federal government challenging a regulation that would require the group health insurance sponsored by most employers to cover birth control and other services that are contrary to Catholic teaching. See Notre Dame press release, the Washington Post blog entry. One among the many interesting aspects of this dispute is the definition of a "religious employer," which is critical because group health plans sponsored by religious employers are exempt from the requirement. As noted in the background section of a recently released Proposed Rule that the federal government is hoping will resolve this dispute,
a religious employer is one that (1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization described in section 6033(a)(1) and section 6033(a)(3)(A)(i) or (iii) of the Code.
Since the first three prongs of the definition are relatively vague (for example, what are the thresholds for "primarily employs" and "primarily serves"?), arguably the narrowest part of this definition is the fourth prong that refers to two of the mandatory exceptions from having to file the Form 990 annual return otherwise generally required for organizations exempt from tax under section 501(a). As the background section for the proposed rule elaborates, "[s]ection 6033(a)(3)(A)(i) and (iii) of the Code refers to churches, their integrated auxiliaries, and conventions or associations of churches, as well as to the exclusively religious activities of any religious order."
Churches, and conventions or associations of churches, are of course religious organizations under section 501(c)(3) but many clearly religious organizations do not qualify as churches (or conventions or associations of churches) for federal tax purposes because "church" for these purposes is limited to organizations that generally have in-person worship meetings and other characteristics common to the historical, Western understanding of a "church." See, e.g., the previous blog entry regarding the Foundation of Human Understanding case. The definition of intergrated auxillary is more complicated, but in general an intergregated auxillary must be both affiliated with a church or a convention or association of churches and, most critically, be "internally supported," which is not the case if an organization offers admissions, goods, services or facilities (e.g., educational or health care services) for sale to the general public and recevies more than 50 percent of its support from a combination of governmental sources, public soliciation of contributiosn, and receipts from such sales. See 26 C.F.R. 1.6033-2(h). It is this last point that places the University of Notre Dame and presumably the other plaintiffs in these lawsuits outside of this exception.
This dispute therefore highlights an increasingly important issue: assuming that for constitutional or policy reasons it is required or desirable to generally grant "religious" organizations exemptions from laws that would conflict with their religious beliefs, how broad should the definition of a "religious" organization be? Here the federal government has chosen a relatively narrow definition that was created for a different purpose (Form 990 filing exemptions), and at the end of the day it is the narrowness of this tax-based definition that has led to these lawsuits.
Tuesday, May 29, 2012
In a series of almost identical determination letters, the IRS revoked the section 501(c)(4) tax-exempt status of five organizations with the stated purpose of identifying of women interested in potential leadership roles with a particular political party and the development of a political leadership training program for such women. The IRS noted that each of the organizations is the affiliate of a national organization that shares the same purpose. The IRS had previously recognized their exemptions but upon further study of their applications has now determined that these previous recognitions were in error because the groups primarily benefit private interests, specifically the interests of a particular political party and its candidates. The IRS explicitly relied on American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), noting that while that case involved section 501(c)(3) "the standard for determining what constitutes private benefit described in American Campaign Academy applies to both [section 501(c)(3) and section 501(c)(4)]". The rulings are 201221025, 201221026, 201221027, 201221028, and 201221029.
While the affected groups are, of course, not identified in the redacted rulings, the denial by the IRS last year of exemption for several similar training groups (see previous blog post) suggests these organizations may be related entities. The NY Times identified those groups as state affiliates of Emerge America, which identifies, trains, and encourages (Democratic) women to run for office. Interestingly, however, the more recent letters are much less redacted than the ones issued last year.
If these five organizations are in fact additional state affiliates of Emerge America, that would probably explain why the IRS choose to take a closer look at their applications even after the IRS had approved those applications. Then again, this activity may simply reflect the decision by the IRS to look more closely at section 501(c)(4) organizations more generally (see previous coverage of the IRS v. Tea Party dispute).