10-04-10 Recent Developments - Christian Banking | ECCU · World Vision states, “Our Christian...

Recent Tax, Finance, and Legal

Developments

Impacting Ministers, Missionaries, Churches,

and Other Nonprofit Organizations

Evangelical Council for Financial Accountability

440 West Jubal Early Drive, Suite 130 • Winchester, VA 22601 540-535-0103 • 800-323-9473 • Fax 540-535-0533

www.ECFA.org

Updated as of October 9, 2010

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This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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Recent Developments

1. Cell phone fix approved by Congress. Congress has finally taken action to remove cell phones from listed property. The House voted 237 to 187 to pass H.R. 5297, the Small Business Lending Funding Act, as approved by the Senate. The President signed the bill into law on September 27.

For tax years beginning after Dec. 31, 2009, cell phones (and similar telecommunications equipment) are removed from the definition of listed property under Code Sec. 280F(Code Sec. 280F(d)(4)(A)). As a result, the stringent recordkeeping requirements that have applied for decades will no longer apply to cell phones or similar devices. We expect that the practical impact of the legislation will be that employers will be able to provide employees with cell phones primarily for business use on a tax-free basis, with little requirement to document the actual business vs. personal use. Stated differently, we expect the law to result in cell phones being treated like any other pieces of equipment, such as regular telephones, for which detailed usage records are not required. While the legislative change applies to all U.S. employers and employees, the impact on nonprofit organizations is especially important because violations of the recordkeeping requirements for "listed property" by nonprofits can result in "automatic excess benefit transaction" penalties on the individuals involved.

The IRS is expected to issue guidance soon on the practical impact of the legislation, which may affect the specific manner in which employer-provided cell phones are treated for tax purposes.

2. ECFA and over 100 organizations ask Congress to protect religious organizations’ rights. ECFA joined more than 100 religious leaders who have signed a letter distributed to members of the House of Representatives and Senate urging respect for religious hiring rights.

Legislation pending on Capitol Hill would deny faith-based charities that receive federal grants the right to hire employees who hold the same faith, the letter states.

“The right that a religious organization possesses to hire those of like faith is fundamental to First Amendment guarantees of free religious exercise,” said Dan Busby, ECFA president. “This has astounding implications for major international charities that help tens of millions of people, as well as smaller ministries and churches.”

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The letter comes on the heels of an Aug. 23 ruling by the U.S. Court of Appeals for the Ninth Circuit that upheld the legally protected practice of hiring workers of like faith. The case involved three employees of the international Christian charity World Vision which, upon their hiring, signed a statement of faith, but later disagreed with the statement. For more information on this case: http://www.ecfa.org/Content/World-Vision-is-victorious-in-defending-their-religious-hiring-rights.aspx

The letter further states that faith-based groups should have equal footing with secular groups when competing for federal funding, and that any changes to laws governing religious hiring must be done only following “full, substantive, and open debate.”

“We respectfully urge you to oppose any effort to amend the Religious Freedom Restoration Act (“RFRA”), to amend Title VII of the 1964 Civil Rights Act, or otherwise to dilute the right of faith-based social service organizations to stay faith-based through their hiring, including when awarded a federal grant,” the letter stated.

The implications of such challenges though could reach beyond those religious organizations that seek federal funding. This is demonstrated by some of the signors on this letter do not even seek federal funding, but yet are concerned about the impact that this legislation could have on their religious organization’s hiring rights.

The letter is posted at http://www.ecfa.org/Files/RHR_Sign-on_Letter_082510.pdf. A document by University of Michigan law professor Douglas Laycock referenced in the letter is posted at http://www.ecfa.org/Files/LaycockHolderReRFRA.pdf.

3. World Vision is victorious in defending their religious hiring rights. The hiring rights of World Vision, the international Christian humanitarian organization, were upheld August 23rd by the U.S. Court of Appeals for the Ninth Circuit. In a 2-1 ruling, the court affirmed that World Vision is a "religious association" and, therefore, comes under the nearly 50-year-old exemption under the 1964 Civil Rights Act allowing it to hire people of like-minded faith.

World Vision states, “Our Christian faith has been the foundation of our work since the organization was established in 1950, and our hiring policy is vital to the integrity of our mission to serve the poor as followers of Jesus Christ.” World Vision will continue to vigorously defend our organization's freedom to hire employees who share their faith, as do other religious organizations, regardless of which religion.

The case, Spencer, et al v. World Vision, involves three employees who were terminated in 2006 because they no longer believed in the Trinity and, therefore, could not comply with World Vision’s statement of faith. Their attorney argued that most of World Vision’s work is humanitarian in nature, and, therefore, could not qualify for the legal protections. Prior to the ruling on the August 23, a U.S. District Court judge in Seattle summarily dismissed the former employees’ claim as being clearly contrary to the law.

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The ruling affects only the U.S. offices of World Vision. The organization, established in 1950, is a federation of affiliate offices in nearly 100 countries whose employees are governed by their nation's laws. Through those affiliates, World Vision serves the poor and victims or injustice, regardless of religion, gender, or race.

4. SAMHSA reauthorization and the elimination of RFRA. H.R. 5466, a bill recently introduced by Rep. Patrick Kennedy (D-RI) and Rep. Gene Green (D-TX), is set to reauthorize federal drug treatment programs administered by SAMHSA and includes language to ban from participation faith-based providers that consider religion when hiring.

Specifically, the bill proposes to add to the Public Health Service Act, Title V, the requirement that every grantee and contractor must agree to “refrain from considering religion or any profession of faith when making any employment decision” about anyone who will be involved in providing the federally funded services.

This ban on religious hiring would apply “notwithstanding any other provision of Federal law, including any exemption otherwise applicable” to a religious organization. This language contradicts SAMHSA Charitable Choice language President Clinton signed into law in 2000, and could undermine the Religious Freedom Restoration Act (RFRA).

5. Employment Non-Discrimination Act (ENDA). Both the House (H.R. 3017) and Senate (S. 1584) are considering ENDA that would outlaw employment discrimination based on sexual orientation and gender identity (transgendered persons). The House passed a similar bill in 2007 but the Senate did not act then. The two current bills include the good religious exemption from 2007 providing that religious organizations free under the Title VII exemption (1964 Civil Rights Act) to hire according to religion are not subject to ENDA.

Inclusion of gender identity is creating resistance from many members of the House who might otherwise support the bill. Speaker Nancy Pelosi has suggested no action will be taken on ENDA until the “Don’t Ask, Don’t Tell”: Military Eligibility Law on Service by Homosexuals is finished. See Tom Messner’s paper documenting how ENDA would operate as a slippery slope to same-sex marriage at http://www.heritage.org/Research/Reports/2009/09/ENDA-and-the-Path-to-Same-Sex-Marriage.

6. Supreme Court decides against Christian Legal Society in First Amendment case. In the Christian Legal Society v. Martinez, the U.S. Supreme Court handed down a ruling in favor of University of California-Hastings College of the Law. The case involved UC-Hastings denying a student chapter of the Christian Legal Society (CLS) official status as a student organization, a status necessary for student groups to have access to school funds. The school’s policy denies official recognition to groups like CLS, which through its statement of faith prevent practicing homosexuals or non-Christians from becoming members and running for leadership positions.

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It should be noted that this is not the end of this case as the Supreme Court returned the case to the Ninth Circuit for some further determination about whether the school case as the Supreme Court returned the case to the Ninth Circuit for some further determination about whether the school had applied its policy in a discriminatory manner. According to CLS counsel, Michael McConnel, UC-Hastings singled out the Christian student group. Writing the dissenting opinion, Justice Samuel Alito warned that “today’s decision is a serious setback for freedom of expression in this country.” He observed that the decision allows public universities to suppress speech of groups that espouse unwanted beliefs.

7. Minister’s housing allowance challenge moves forward. The Freedom From Religion Foundation filed a complaint in a U.S. district court on October 14, 2009 seeking a declaration that sections 107 and 265(a)(6) violate the Establishment Clause and First Amendment of the Constitution by providing preferential tax benefits to ministers of the gospel and has asked the court to enjoin the IRS from allowing such benefits.[1] On May 21, 2010, the court ruled that the case will be allowed to go to trial, likely in the fall of 2011. If the court rules that the housing allowance is unconstitutional, the matter would likely end up before the U.S. Supreme Court.

The plaintiffs are represented by Michael Newdow, a well-known atheist, who also brought an unsuccessful challenge to the constitutionality of the phrase “under God” in the Pledge of Allegiance. Each individual plaintiff claims to be a federal and California taxpayer opposed to government endorsement of religion.

The outcome of this case is uncertain. Former Chief Justice Burger discussed the balance between religious liberties of the Free Exercise Clause and the prohibition under the Establishment clause in Walz v. Tax Commissioner, 397 W.S. 664, 668-70 (1970):

The (U.S. Supreme) Court has struggled to find a neutral course between the two Religion Clauses, both of which are cast in absolute terms….

The general principle deducible from the First Amendment and all that has been said by the Court is this: that we will not tolerate either governmentally established religion or governmental interference with religion. Short of those expressly prescribed governmental acts there is room for play in the joints productive of a benevolent neutrality which will permit religious exercise to exist without sponsorship and without interference.

The IRS, who is currently tasked with defending these provisions will likely need to demonstrate that these provisions are in this mid-ground and therefore constitutional. There is a group of pastors who have sought to intervene in this case, but the court has so far rejected their attempts to intervene.

Other categories of taxpayers are also entitled to housing allowance exclusions and benefits under section 265, e.g., member of the military. In addition, certain

[1] Freedom from Religion Foundation, Inc. v. Geithner, Case No. 2:2009cv02894 (E.D.C.A. filed October 16, 2009

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employees are entitled to exclude the value of housing and meals provided for the convenience of the employer under section 119.

Should this lawsuit be successful, it would result in significant adverse financial impact on ministers and churches. In addition, success here could encourage challenges to other benefits and exemptions provided to churches and religious organizations in the Code, although establishing taxpayer standing remains a significant obstacle. Were the section 107 housing allowance exclusion to be found unconstitutional, certain ministers of the gospel who are required to live in employer provided housing, e.g., parsonages, could continue to exclude the value of housing under the generic provisions of section 119. However, retired ministers receiving benefits from a denominational pension plan would generally lose the housing allowance benefits because they are based on section 107.

8. Impact of health care reform on churches and charities. Health care reform destined to affect nearly all church and charity employees and most organizations. On March 23, 2010, the President signed into law the “Patient Protection and Affordable Care Act.” And, on March 30, 2010, the “Health Care and Education Reconciliation Act of 2010,” was signed into law, making a number of changes to the Patient Protection and Affordable Care Act. Here are the main issues to consider in relation to these laws:

The importance of keeping the same coverage. Organizations will be able to avoid some of the law’s requirements by keeping their coverage the same after the law’s effective date (March 23, 2010). Changes that must be made to all plans include:

o waiting periods for coverage must be less than 90 days;

o no lifetime benefit maximum limits;

o dependent coverage for adult children up to age 26; and

o no annual limits on certain types of benefits (unless permitted by later-issued regulation).

When the organization changes coverage. If an organization does not keep its coverage the same, plan changes must be made such as:

o extending 100 percent coverage for preventive care;

o removing any prior authorization requirement or increased cost-sharing for emergency services (regardless of whether the services are provided in or out of network);

o no pre-existing limitation for children under age 19; and

o coverage of routine patient costs in clinical trials for life-threatening diseases.

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Flexible spending account (FSA), health reimbursement account (HRA) and Health Savings Account (HSA) changes. The law also will require the following changes to these types of accounts:

1. In 2011, employees will no longer be able to receive pre-tax reimbursements from their FSA, HRA or HSA for non-prescribed over-the-counter medications. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) cannot be reimbursed on a tax-free basis through an HSA or Archer MSA.

2. In 2011, the excise tax for nonqualified HSA withdrawals will increase from 10 percent to 20 percent.

3. In 2013, employee contributions to FSAs will be capped at $2,500 annually, with the cap adjusted annually to the Consumer Price Index.

Planning opportunity: Most organizations do not have a properly established plan to reimburse out-of-pocket medical expenses. Even though FSAs will be capped at $2,500 annually in 2013, the benefit of offering an FSA to all staff members on a salary reduction basis is significant. For example, a staff member with margin state and federal taxes, including social security, of 40% could save $1,000 if they have $2,500 of out-of-pocket medical expenses that are covered by an FSA.

Employee notification of value of coverage and exchange information. Effective in 2011, organizations will need to start reporting the value of the employer-sponsored coverage to employees on their W-2s. (Note: There is significant confusion concerning this reporting. Rumor after rumor has been spread indicating that employer-sponsored health insurance becomes taxable in 2011. This is simply not true—the reporting on Form W-2 has not impact on the taxability of this benefit for income or social security tax purposes.) And in March 2013, employers will need to begin notifying employees about state exchanges and the availability of premium subsidies and free choice vouchers, all of which will be available beginning in 2014.

Issue 1099s for corporate service providers. One important change made by the new law unrelated to health benefits requires organizations beginning in 2012 to provide a Form 1099-MISC to all corporate service providers receiving more than $600 per year for services or property. Currently, 1099s need only be generated for non-corporate service providers and only on services. This change will increase the paperwork burden on organizations that routinely make payments each year totaling $600 or more per corporation. Payments to nonprofit organizations and for credit and debit card purchases are exempting from the Form 1099-MISC filing requirements.

Potential penalties on large organizations. Only an "applicable” large organization, defined as one who employed an average of at least 50 full-time employees during the preceding calendar year, is subject to the requirement to

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offer coverage. Most small organizations, since they have fewer than 50 employees, are thus exempt from the employer requirement.

Health insurance mandate. Individuals who do not maintain minimum essential health care coverage will result in a penalty of the greater of $95 or one percent of income in 2014, $325 or two percent of income in 2015 and $695 or 2.5 percent of income in 2016, up to certain caps.

Individuals who are members of certain groups are exempt from the health care mandate, which begins in 2014, that every citizen maintains “minimum essential health care coverage”:

o Members or adherents of certain religious sects. Qualifying religious sects must be opposed to the acceptance of “the benefits of any private or public insurance which makes payments in the event of death, disability, old-age, or retirement, or makes payments toward the cost of, or provides services, for medical care (including the benefits of any insurance system established by the Social Security Act)” on the basis of its established tenets or teachings, in addition to other qualifications. Examples of religious sects that qualifying under this exception includes the Amish and Old Order Mennonites.

o Members of a health care sharing ministry. The definition of an acceptable health care sharing ministry, among other qualifications, is one that has been in existence at all times since December 31, 1999.

Small organization health insurance credit. Starting this year, a tax credit is provided for eligible small organizations for payments to purchase health insurance for its employees. To qualify, a church must have:

o no more than 25 full-time employees employed during its tax year

o an average payroll of no more than $50,000.

The full credit is only available for organizations with 10 or fewer employees with an average wage of less than $25,000. The health insurance credit is available to offset tax liability on the organization’s tax return.

The IRS has released a draft version of the form (Form 8941) that small organizations will use to calculate the small business health care tax credit when they file income tax returns next year. The final version of Form 8941 and its instructions will be available later this year.

Nonprofits will use the form to calculate the credit and claim the credit on a revised Form 990-T. The Form 990-T is currently used by tax-exempt organiza-tions to report and pay the tax on unrelated business income. Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations––even those that owe no tax on unrelated business income––also to claim the small business health care tax credit.

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For tax years 2010 to 2013, the maximum credit for nonprofits is 25 percent of premiums paid by eligible employers that are tax-exempt organizations. Beginning in 2014, the maximum tax credit will go up to 35 percent of premiums paid by eligible tax-exempt organizations for two years.

9. IRS seeks comments on new disclosure requirement. The health care reform law enacted earlier this year requires nonprofits and businesses, starting in 2012, to report aggregate payments to vendors in excess of $600 for goods and other property. The requirement applies for payments to all vendors, not just those related to health care. Currently, nonprofits and others are required to file Form 1099s for payment of services by independent contractors, but not for goods from vendors. The IRS is seeking public comment on how to most effectively carry out the law change, with the stated goal of minimizing burdens and avoiding duplicate reporting. The deadline for comments is Sept. 29, 2010.1

10. Charities may need to gear up quickly to report health benefits on W-2s. Starting with W-2s for 2011, employers are required to report the value of employer-provided health coverage. The amount listed is not taxed as income to the employee, but the figure still must be shown separately on the form. However, charities shouldn’t think they have until 2012 to prepare for this requirement. Departing workers can ask for a W-2 within 30 days of the final paycheck or the date the request is made, whichever is later. Even though few people do this, charities will need to be ready in early 2011. The calculation of the health plan’s value is the same as the value used to figure the allowable premium for COBRA coverage.

11. Flexible spending accounts can cover some herbal remedies. The IRS has privately ruled that flexible spending accounts (FSAs) can cover the cost of some herbal remedies.

Taxpayers must show that the herb was bought on a doctor’s recommendation to treat a medical condition and that the taxpayer wouldn’t have otherwise purchased it. If taxpayers meet this test, the cost is a medical expense and can be covered by FSAs. The same benefit is not available for herbal remedies used for general health or self-diagnosed illnesses.2

12. Tax legislation remains stalled in Congress. As we go to press, a number of pieces of tax legislation are stalled in Congress:

Tax deductions and write-offs. The deductions for college tuition, teachers’ supplies and the write-off of state sales taxes in lieu of income taxes all lapsed for 2010, plus the extra standard deduction for realty taxes.

Estate tax. Since the estate tax expired at the end of 2009, there is no estate tax for 2010 unless Congress acts before the end of the year. There is a carryover

1 http://www.irs.gov/pub/irs-drop/n-10-51.pdf 2 IRS INFO 2010-0080, released June 25, 2010

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basis system with a $1.3 million exemption. Without new legislation, here is where we are for 2011 and beyond, since the 2011 estate tax law returns:

o Top estate tax rate would be 55%

o Exempt amount would be $1 million

o Carryover basis ends

o And, we would once again have the credit for state death taxes (maximum credit of 16% produces a top net estate tax rate of 39%)

IRA payouts. Until December 31, 2009, taxpayers age 70½ or older could make tax-free distributions directly to a church or charity from traditional IRAs or a Roth IRA up to $100,000 (IRA rollovers to donor advised funds, supporting organizations, private foundations or charitable remainder trusts did not qualify.) Under the former rules, taxpayers could transfer IRA funds directly to your church or charity without incurring income tax on the transfer. The donor could claim a charitable deduction only to the extent that the IRA was funded with after-tax dollars. Unless Congress retroactively reinstates this key provision, donors will no long have this option available.

13. Financial regulatory reform is signed into law. In 2009, Congress introduced legislation that would create a new government agency called the Bureau of Consumer Financial Protection (formerly known as the CFPA). This was undoubtedly in response to the economic decline of 2008 and 2009. A final bill was signed into has been ECFA’s cornerstone for over 30 years. However, the bill poses some unintended consequences for churches and ministries across the country.

These consequences come through the oversight of churches and ministries that perform consumer financial related exempt purposes, such as basic financial literacy education or benevolence assistance counseling.

As the bill was originally drafted it also included the broader implications of oversight and regulation of donor communications by charities, such as information on planned giving instruments. However, through the following work ECFA has expressed concerns on this matter and Congress has included the exemption discussed below.

In November of 2009, ECFA sent Representative Barney Frank a letter regarding specific concerns about the proposed bill’s expansive breadth. Specifically, the definitions of financial activity and financial advisor were drafted so broadly that they could include most churches and ministries.

In February of 2010, a number of nonprofit groups including ECFA sent Senator Christopher Dodd a letter echoing many of the same concerns.

As mentioned above, through the work of ECFA and other organizations, the law does include a section titled “Exclusion for Activities Relating to Charitable Contri-butions” on pages 627-28, which excludes donor communications by those tax

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exempt organizations that have been recognized by the IRS. This leaves in question the implications for churches that have not been required to be officially recognized by the IRS through the submission of a Form 1023. This exemption does not apply to organizations offering any consumer financial product or service to non-donors.

As regulations are still to be seen the exact scope and ramifications of this bill are uncertain. ECFA will post further information as it becomes available on this matter.

14. Worker classification reporting proposal meets resistance. The Employee Misclassification Prevention Act of 2010 (S. 3254) would require churches and other nonprofit employers (and businesses) to record and report the classification status of each worker as well as the wages and hours of nonemployees. The Act would make worker misclassification a violation of the Fair Labor Standards Act; impose civil monetary penalties for record-keeping violations; and create a legal presumption that if the employer has not created a record, the worker is considered an employee. It would also establish an information sharing agreement between the IRS and the Labor Department for misclassification cases.

Senator Michael B. Enzi, R-WY, said “As this bill stands before us today … it will penalize the organizations that are doing the right thing, and the ones doing the wrong thing won’t be caught.”

S. 3254, introduced by Health, Education, Labor, and Pension (HELP) committee member Sherrod Brown, D-OH, is one of two pieces of legislation the White House supports to address worker misclassification, a significant contribution to the tax gap. The second piece, the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408), would no longer allow employers to treat service providers as independent contractors for federal employment purposes by showing that the treatment is consistent with recognized industry practice. It would allow the IRS to begin issuing guidance on worker misclassification and increase the IRS penalties for misclassification from $100 to $500.

Worker misclassification, both accidental and intentional, accounts for more than $1.6 billion of the $345 billion annual tax gap, but the IRS lacks a strategy for confronting the problem, according to a Treasury Inspector General for Tax Administration report.

The Government Accountability Office (GAO) and Congressional Research Service (CRS) have released reports and recommendations on the issue, IRS reportedly is embarking on an employment tax audit of selected employers nationwide, and a recently introduced bill would revamp so-called “Section 530” relief.

In August, the GAO issued a report that includes several recommendations for reducing the number of workers that are incorrectly classified as independent contractors. The report notes that IRS enforces worker classification compliance primarily through examinations of employers, but it also offers settlements through which eligible employers under examination can reduce taxes they might owe if they maintain proper classification of their workers in the future. The report concludes that IRS faces challenges with its compliance efforts because (a) of resource constraints

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and limits that the tax law places on its classification enforcement and education activities; (b) IRS and the Department of Labor (DOL) typically do not exchange the information they collect on misclassification, in part because of certain restrictions in the Code that limit IRS's ability to share tax information with federal agencies; and (c) DOL agencies do not share information internally on misclassification. The report notes, however, that IRS and 34 states share information on misclassification-related audits.

In September 2009, the CRS summarized the employee versus independent contractor issue and reported that the last IRS estimate was that 15% of employers misclassified 3.4 million workers as independent contractors rather than as employees causing an estimated total loss of $1.6 billion in taxes. The report noted however, that this estimate dated to 1984, and urged for more updated information before deciding the policy question of whether the benefits of curtailing misclassification of workers outweighs the costs.3

The IRS is about to embark on an employment tax National Research Program (NRP) that will involve a significant number of randomly selected employers in the next few years. The program was suggested in the 2008 report of the Internal Revenue Service Advisory Council (IRSAC), which urged IRS to embark on a NRP because “historical data seems to be out of date with the current Internet economy,” and because such a study would help IRS focus limited resources within “employment tax challenged industries.”

Rep. James McDermott (D-WA) has once again introduced legislation that would make it more difficult for employers to receive protection from a potentially large employment tax assessment after incorrectly classifying a worker as an independent contractor. The legislation, which is called the “Taxpayer Responsibility, Accountability, and Consistency Act of 2009,” would also increase information reporting penalties. The legislation primarily focuses on Section 530 of the Revenue Act of 1978. Under Section 530, employers that meet the following three requirements are protected from poten-tially large employment tax assessments, even though they incorrectly categorized a worker as an independent contractor: (1) reasonable basis, (2) substantive consis-tency, and (3) reporting consistency. An employer can meet the “reasonable basis” requirement if judicial precedent, IRS rulings, a past IRS audit, or industry practice supports the classification of a worker as an independent contractor. An employer meets the substantive consistency requirement if it (and any predecessor business) consistently treated the workers in question as independent contractors. The reporting consistency requirement is met if the employer has not classified the workers as employees on any required federal tax returns, including information returns.

15. Nonprofit Sector and Community Solutions Act introduced. The Nonprofit Sector and Community Solutions Act (H.R. 5533) has been introduced by Betty McCollum (D-MN). This bill would create a bipartisan “United States Council on Nonprofit Organizations and Community Solutions,” comprised of leaders from nonprofits,

3 Tax Gap: Misclassification of Employees as Independent Contractors, Congressional Research Service, September 14, 2009 and Employee Misclassification, Government Accountability Office, August 2009

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foundations, businesses, and all levels of government to identify high-priority issues and make formal recommendations to Congress and the Administration. It would assign the Department of Commerce the task of compiling data on nonprofits and develop metrics for performance, establish reporting requirements, and expand information so Congress can make well-informed policy decisions on nonprofit legislation.

16. House member calls on Congress to end ban on campaign intervention by charities and churches. Congress should repeal the section 501(c)(3) prohibition against campaign intervention and “give churches back their First Amendment rights to free speech,” Rep. Michele Bachmann, R-Minn., said recently.

Churches are “afraid to be involved” in political campaigns, Bachmann said March 8 on the Hot Tea Radio show. She said churches can be political from the pulpit and may discuss political issues, but they cannot endorse a candidate from the pulpit. People of faith “are not second-class citizens, but these radical leftist organizations have been intimidating Christians for so long” that pastors do not realize they have the right to speak out from the pulpit, she said. (An archived recording of the show is available on Hot Tea Radio's website.)

Sandhya Bathija, a communications associate for Americans United for Separation of Church and State, said in a March 10 blog post that her organization “couldn't disagree more” with Bachmann's comments because mixing politics with religion serves only to exploit houses of worship. Churches have the right to examine social and moral issues, but they can't have it both ways by endorsing candidates while retaining their tax-exempt status, she said.

This is not the first time Bachmann has tangled with the campaign intervention prohibition. In 2006, Citizens for Responsibility and Ethics in Washington (CREW) filed a complaint with the IRS alleging that the Living Word Christian Center (LWCC) in Brooklyn Park, Minn., endorsed Bachmann in her campaign for the House of Representatives.

According to a CREW release, in October 2006 Bachmann delivered a campaign stump speech from the LWCC's pulpit, and the church's pastor, the Rev. Mac Hammond, openly endorsed her candidacy. Hammond's comments and Bachmann's speech were made during the LWCC's weekend services, which were before a congregation and broadcast via the Internet.

The IRS later initiated a church tax inquiry of the LWCC but lost a court case regarding the procedure with which church tax inquiries are initiated. In United States v. Living Word Christian Center, Civil. No. 08-mc-37 (D. Minn. Jan. 30, 2009), the U.S. District Court for the District of Minnesota ruled that the IRS director of exempt organizations examinations is not an appropriate high-level Treasury official for signing off on church tax inquiries because that official lacks the responsibility of a

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regional commissioner, the individual authorized to approve church tax inquiries before the IRS was reorganized in 1998.4

As is true with most election years, the controversy about the section 501(c)(3) ban on partisan political campaign activity by charities and churches became heated in 2008. An interesting twist in 2008 was the decision by a number of pastors to openly defy the IRS and endorse candidates.

The aggressive approach began in January when a Wisconsin pastor placed a full-page ad in The Wall Street Journal that challenged the IRS to investigate a supposedly political sermon he delivered in 2006. Several months later, on Pulpit Freedom Sunday, pastors at more than 30 churches across the country spoke out about candidates’ positions in the hopes of provoking the IRS to act and thereby setting up a court challenge to the campaign intervention prohibition. Attorneys knowledgeable about the issue were doubtful that the protest, which was organized by the Alliance Defense Fund, would work.

A number of pastors from different denominations condemned the protest, and almost 100 churches took part in a counter initiative in which pastors spoke in favor of separation of church and state.5

Lois Lerner, IRS Exempt Organizations Division Director, said the IRS will prepare a report on its political activities compliance initiative for 2008. She said the IRS received a significantly higher number of referrals of possible campaign intervention by charities and churches relating to the 2008 election cycle than in the previous election but that ultimately the number of referrals selected for examination was about the same.6

The IRS formed the Political Activity Compliance Initiative (PACI) in relation to the 2004 election cycle and continued it for 2006 and 2008. In the 2004 election cycle the IRS opened examinations of 110 charities and churches in a review of the organizations’ activities during the 2004 election cycle. The IRS has revoked the tax exemptions of six of the organizations because the groups engaged in prohibited political activities.7 For the 2006 cycle, PACI received 237 referrals alleging violations split almost evenly between churches and other nonprofits.

Pulpit Freedom Sunday will continue every year until the constitutional right of pastors to preach freely from their pulpits is recognized by the IRS, the courts, or Congress, an attorney for the Alliance Defense Fund (ADF) told Tax Analysts.

A pastor has the right to apply scripture to all areas of life including candidates and elections, Erik Stanley, ADF senior legal counsel, said.

4 Tax Analysts, March 11, 2010 5 “Year in Review: Exempt Organizations Faced Challenges, Opportunities in 2008,” Fred Stokeld, The Exempt Organization Tax Review, January 2009 6 “IRS Ready to Post Official New EO Return,” Fred Stokeld, The Exempt Organization Tax Review, January 2009 7 The publication is available at www.treas.gov/tigta/auditreports/2009reports/200910080fr.pdf

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The ADF has announced that for the third year it will organize Pulpit Freedom Sunday, an event that calls on clergy to speak on candidates' positions as part of a challenge to the section 501(c)(3) prohibition on campaign intervention by charities and houses of worship. The ADF has said it hopes the IRS will revoke the exemption of the participating churches, which the ADF would use to challenge the constitutionality of the campaign intervention ban.

According to the ADF's website, the 2010 Pulpit Freedom Sunday will preach a sermon discussing the intersection of a political realm with Scriptural truth.

This year, Pulpit Freedom Sunday is scheduled for a September Sunday, just before mid-term elections. Those interested in learning more about this program can visit www.speakupmovement.org.

The IRS has yet to act against ADF or the churches that participated in Pulpit Freedom Sunday in 2008 and 2009. Stanley said he hopes the IRS eventually will acknowledge the need for clarity regarding campaign intervention by organizations operating under section 501(c)(3), either through a federal lawsuit or a clarification of the law.

In April, Marcus S. Owens, a former director of the IRS Exempt Organizations Division who is now a partner at Caplin & Drysdale LLP, Washington, said the IRS may take action against the ADF before it takes action against the participants of Pulpit Freedom Sunday. Speaking in Washington at an event sponsored by the Georgetown University Law Center's Continuing Legal Education program, Owens said the ADF violated Circular 230, which precludes anyone from assisting taxpayers in violating the tax laws.

Owens also said the IRS might be delaying any action because of a recent decision by the U.S. District Court for the District of Minnesota, in which the court concluded that the IRS hadn't followed the proper procedure for commencing a church tax inquiry. The IRS had asked the court to enforce a summons against the Living Word Christian Center, which the court denied, saying the IRS failed to have a high-level Treasury official make a reasonable belief determination that the center might not qualify for exempt status.

Even if the IRS does not act, no congregation could “reasonably rely on the IRS's inaction” to justify future violations of the rule prohibiting campaign intervention, Robert W. Tuttle, a law professor at George Washington University, said July 15. Tuttle, who also serves as counsel to the Metropolitan Washington, D.C. Synod, a branch of the Evangelical Lutheran Church in America, said congregations would be no more permitted to engage in electioneering if the IRS does not act than they were before the ADF started this campaign. He added, however, that he is not convinced that the IRS “book is closed” regarding the 2008 election season, noting the slowness with which the IRS sometimes proceeds.

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The Political Activity Compliance Initiative (PACI) report for the 2008 election season was due to be released on March 31, 2009. As of the date of this document, the PACI 2008 report had not yet been released.

Marcus Owens, a former exempt organization director in the IRS Tax-Exempt/Government Entities Division, said one element contributing to the absence of any political activity enforcement talk by IRS officials may be the inability of the agency to conduct any church tax inquiries or examinations.8 The IRS has suspended all church tax inquiries following a loss in the Living Word case.

17. Congress passes HIRE Act. The HIRE act, which has been signed into law:

Exempts employers from paying the employer share of Social Security employ-ment taxes on wages paid in 2010 to newly hired qualified unemployed workers—a so-called “tax holiday.” These are workers who: (1) begin employment with the employer after February 3, 2010 and before January 1, 2011, (2) were previously unemployed and (3) do not replace other employees of the employer. The payroll tax relief applies only for wages paid with respect to employment beginning on the day after the enactment date (the date the HIRE Act is signed into law by the President) and before 2011.

Provides employers with an up-to-$1,000 tax credit for retaining qualified unemployed workers. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

18. Credit card rebates paid to charity yield charitable deductions for cardholders. The IRS has privately ruled that an individual will not realize income from, and will qualify for charitable deductions for, rebates he designates to be paid to charities under a credit card program when he makes purchases by credit card. However, IRS concluded that a sample written acknowledgment provided by the taxpayer would not satisfy the Code Sec. 170(f)(17) record keeping requirements.

Facts. Taxpayers, whom we'll call Mr. and Mrs. Smith, will acquire credit cards issued by a bank through an arrangement promoted by Company. They will make credit card purchases that will entitle them to receive rebates. The rebates are based on a percentage of the credit card purchases (usually 1%) and reduced by fees charged by Company (e.g., administrative and marketing). The Smiths will have the option of receiving the rebates in cash or of allowing Company to pay the rebates to charity that they choose from a list of participating Code Sec. 170(c) charities. The choice is made at the time the Smiths open the credit card account but they may change it at any time by contacting Company.

The Smiths included the following sample written acknowledgment, which presumably was supplied by Company, with their ruling request:

8 Tax Notes, August 30, 2010

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Dear Contributor:

This letter is to acknowledge your contribution made to the __________, an organization described in section 501(c)(3) of the Internal Revenue Code and qualified to receive contributions deductible for federal income tax purposes, provided the contribution is made exclusively for charitable purposes. We appreciate your contribution of $_______ made in calendar year ____ and wish to confirm for you that no goods or services were provided to you in consideration, in whole or in part, for your contribution.9

19. Two charities refuse to return gifts from donor convicted of fraud. Two high-profile New York nonprofit institutions are resisting the federal government’s call to return donations from Hassan Nemazee, a business executive who has been convicted of fraud, The New York Times writes.

The Asia Society has held onto the more than $270,000 it received from Mr. Nemazee, a once-powerful businessman and Democratic Party donor who pleaded guilty in March to operating a $292-million Ponzi scheme. The private Spence School has refused to return $15,415 in gifts.

In letters to the government, the institutions argued that they should not have to return donations that they did not know were the product of criminal activity and that the money has long since been spent.

Federal officials contend that the society, which listed $8-million in cash, according to its 2009 annual report, and the school, with an $85-million endowment, have ample resources to repay the gifts.

Several other Nemazee beneficiaries, including Harvard and Brown University and the Council on Foreign Relations, have forfeited the donated funds.10

20. Bishop Jinwright and his wife await sentencing. A lawyer for Bishop Anthony Jinwright filed papers in federal court this month denying that his client is a flight risk or a “threat to anyone’s economic safety.”

Responding to documents filed June 8 by federal prosecutors, attorney Ed Hinson said Jinwright has “spiritual, emotional and familial” ties to the Charlotte region and therefore is unlikely to flee if released from jail on bond.

Jinwright, senior pastor of Greater Salem City of God, has been detained in the Mecklenburg jail since the night of May 3, immediately after a jury convicted him on six counts of tax evasion, six counts of filing a false tax return and one count of conspiracy to defraud the IRS. Federal prosecutors have opposed his request to be released on bond pending sentencing, which is expected later this year.

9 RIA, July 15, 2010, PLR 201027015 10 The Chronicle of Philanthropy, July 15, 2010

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In his decision to jail the 56-year-old preacher, Whitney did not classify Jinwright as a flight risk but ruled that he did pose an economic threat to the community – in other words, that he might continue to draw undue compensation from Greater Salem.

In his petition for release, Jinwright said that, among other thing, efforts to sell his funeral home businesses to pay federal taxes are being hampered by his early incarceration. “From all we read about deficits,” Hinson wrote, “the government could use the money.”

An IRS agent estimated during Jinwright’s trial that he and his wife Harriet, who also was convicted on tax-related charges, may owe the federal government more than $600,000 in back taxes based on their failure to report $2.3 million of taxable income.

In a separate filing, D. Brooks Cowles, a broker specializing in the sale of funeral homes, signed an affidavit stating that his efforts to sell Jinwright’s two funeral home businesses have been “very difficult…without direct communication with the managing owners.” Cowles said he was retained in February to find a buyer for A.L. Jinwright Funeral Service Inc. and A.L. Jinwright Funeral Services II Inc.

“As we go forward,” Cowles said, “it will be very difficult to engage in detailed discussions with potential buyers without being able to directly engage Bishop Anthony Jinwright in the discussions and negotiations….I believe that direct access for me and potential buyers to Bishop Anthony Jinwright is necessary to achieve maximum sale value for these firms.”

Jinwright’s lawyer said the preacher’s release on bond also would allow him to continue his ministry – assuming Greater Salem wants his continued services. “As was obvious from numerous witnesses at trial, he has been and can be of enormous spiritual benefit to others,” Hinson wrote.

In addressing prosecutors’ concerns that Jinwright might flee, Hinson said his client has surrendered his passport and has no substantial assets. “The government says he has received money – yet it knows he spent this money and has acquired no substantial savings or assets,” Hinson wrote. “The only assets of any potential significant value are the funeral homes, and he needs to be out in order to manage and market those assets or they will be worthless.” Hinson said Jinwright’s incarceration also “obviously affects Jinwright’s and the church’s exercise of their First Amendment rights.”11

21. IRS releases Interim Report on College and University Compliance Project. In October 2008, the Exempt Organization Division of the IRS sent surveys to 400 public and private four year colleges and universities as part of the Colleges and Universities Compliance Project. The survey requested information regarding the entities’ operations, endowments, international activities, compensation, unrelated business income, and governance.

11 The Charlotte Observer, June 28, 2010

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The IRS has released an interim report summarizing responses to compliance questionnaires sent to 400 public and private colleges and universities in October 2008. Colleges and universities make up one of the largest nonprofit segments in terms of revenue and assets.

The interim report contains preliminary information on the respondents’ organiza-tional structures, demographics, exempt and unrelated business activities, endow-ments, executive compensation as well as governance practices. Respondents are divided into three groups based on size of student population.

“This compliance project, like our previous one on nonprofit hospitals, gives us a lot of valuable information on activities conducted by those organizations that will help us in our enforcement and services efforts,” said Lois Lerner, Director of the IRS Exempt Organizations. “Our findings will be reported in a final report after we have completed our analysis of all of the data.”

The IRS has opened examinations of more than 30 organizations that were selected based on responses to the questionnaire.

22. Tax Court rules on deductibility of gift to missionaries. A taxpayer was able to deduct donations made to support church missionaries who were working with domestic churches, but was denied deductions for donations made directly to a church missionary working with a foreign church and donations made directly to independently-identified needy individuals. Donations to support domestic missionaries were deductible because the donee was a domestic organization and the donation was for the use of the donee. Donations to the missionary doing work abroad were not deductible because the associated church was not domestically organized. In addition, donations made to certain needy individuals were not deductible, even though the individuals were categorized by the taxpayer’s religious doctrine as worthy beneficiaries, because a deductible donation must be to an organization.12

23. The administration continues to push itemized deduction cap. Currently the value of an itemized deduction is equal to the deductible amount multiplied by one's top income tax rate, which can range well above 28%. The administration proposed the 28% itemized deduction cap as a way to partially fund health care reform. The plan was rejected by Congress. However, the administration has included the cap in their 2011 budget proposal.

24. TIGTA finds taxpayers still failing to substantiate motor vehicle contributions. The American Jobs Creation Act of 2004 enacted section 170(f)(12) of the Code, which imposed new substantiation and reporting requirements for individuals claiming charitable tax deductions under section 170 for donations of motor vehicles, boats, and planes. These provisions were a reaction to Congressional concerns about widespread abuse in the valuation of such donations. Charitable deductions for contributions for vehicle donations generally are limited to $500, with certain

12 Jeffrey N. and Patricia A. Wilkes v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2010-53

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exceptions, e.g., vehicles retained for use by the charitable donee or provided by the donee to disadvantaged individuals for transportation needs. Charitable donees are required to file Form 1098-C with IRS for any vehicle donation with a claimed value more than $500. Taxpayers are required to submit Form 1098-C, in addition to Form 8283, for any vehicle donation with a value more than $500.

An audit by the treasury inspector General for Tax Administration (TIGTA) for the year 2007 revealed that over 92,000 taxpayers had claimed unsubstantiated vehicle donations totaling $204 million. TIGTA also found that charities did not properly report vehicle donations, and that IRS did not match the Form 1098-C information filed by charities regarding vehicle contributions with information on taxpayer returns. TIGTA stated that IRS’ plan to take action only if a deduction exceeded the high threshold established for other noncash donations and when Form 8283 is missing (rather than incomplete) had resulted in virtually no enforcement by IRS.13

25. IRS approves charitable deduction in scrip rebate program with purchaser option. Scrip is a common fundraising activity for charitable organizations, particularly schools. In traditional scrip programs, the school purchases scrip (a form of gift certificate or gift card) from a local vendor at a percentage discount from its face value. The school sells the scrip at face value and retains the percentage differential (the rebate) to support its programs. In PLR 9704012 (October 25, 1996 – released January 24, 1997), IRS concluded that the regular sale of scrip by an exempt organization is an unrelated activity. Unless substantially all (85%) of the scrip operation is conducted by uncompensated volunteers, income from the program is subject to unrelated business income tax (UBIT). IRS further indicated that no part of the scrip purchase price is a charitable contribution.

Late last year, IRS released a private letter ruling discussing income tax and deductibility issues with respect to a modified scrip program. In the PLR, the charity purchased scrip at a discount but sold it at face value. However, unlike the traditional scrip program described in PLR 9704012, here the purchaser had the right to retain a portion of the percentage differential scrip rebate. At the time of purchase, the purchaser could elect to receive this portion of scrip rebate in cash or permit the charity to retain it. IRS made two rulings with respect to this modified scrip program. First, the portion of the scrip rebate that the purchaser could either receive back in cash or allow the charity to retain was not income to the purchaser under section 61. Second, the portion of the scrip rebate that the purchaser could receive back in cash but instead allowed the charity to retain constituted a charitable contribution at the time the purchaser could have received the amount in cash. Charitable contributions covered by this PLR must meet all applicable requirements of section 170, including the substantiation requirements of section 170(f)(8) [relating to the contributions of $250 or more] and 179(f)(17) [relating to cash contributions].14

26. IRS continues its focus on board governance. The IRS has released a check sheet that will be used by agents during examinations of exempt organizations to

13 Procedures to Address Noncompliance with the Reporting Requirements for Contributions Continue to be Inadequate, TIGTA Report 2009-30-116 (September 11, 2009) 14 PLR 200945022 (July 29, 2009—released November 6, 2009)

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gather information on the governance practices and internal controls of organizations. According to the IRS, the check sheet will be used to collect data for its continuing efforts to understand the intersection between governance practices and tax compliance. The check sheet reports on organizations’ governance structure including bylaws provisions, board meetings, and relationships between directors; board practices for compensation decisions; adoption of written conflict of interest and document retention policies; and financial oversight practices.

Interestingly, although all exempt organizations are required to answer governance questions as part of the redesigned Form 990, the checklist contains a notation that it is to be used by revenue agents in examinations of 501(c)(3) public charities. While the IRS would not be precluded from raising governance issues in examinations of other exempt organizations, this notation may suggest that the IRS intends to focus its efforts concerning governance on Section 501(c)(3) organizations.

The check sheet and other materials are available at: http://www.irs.gov/charities/article/0,,id=216068,00.html.

The Internal Revenue Service is not backing away from its controversial efforts to promote good governance by charities, according to its top nonprofit regulator.

The federal tax code does not explicitly set out governance standards for the IRS to enforce, but the tax agency in the past two years has been keeping an eye on charities' governance practices – a move that has drawn criticism from some observers.

Even with state oversight of nonprofit groups and self-regulation by charities, Sarah Hall Ingram, Commissioner, Tax Exempt and Government Entities, IRS, said, "Congress is not going to let the IRS off the hook for its job of regulating the (nonprofit) sector and ensuring that the sector is not only equipped to do the deeds that it sets out to do but also that the federal tax subsidy is used correctly."15 Ms. Ingram said she views good governance practices "as being all about risk management," both for charities and for the IRS. While no one set of governance principles fits all charities, said Ms. Ingram, "I continue to believe strongly that this is one of the key topics that every board, every organization, must keep on its agenda." She added that "building procedures and habits into the fabric of the organization actually makes it less expensive, less alarming, and less disruptive."

The IRS is not auditing charities for their governance practices, Ms. Ingram said, but is using charities' answers to governance questions on the Form 990 to help "target and calibrate our level of attention" to nonprofit groups. "If we look at the 990 and we see no, or very lax, governance practices, procedures, and answers, then we're going to worry more," she said.

15 Remarks made by Sarah Hall Ingram, Commissioner, Tax Exempt and Government Entities, IRS, at the April 22-23-2010 conference, Representing & Managing Tax-Exempt Organizations sponsored by Georgetown Law, Washington, D.C.

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27. IRS discusses tax consequences of a refund to a donor. In a recent letter to Rep. Kay Granger (R-TX), the IRS discusses the tax consequences to a donor who receives a repayment of a charitable gift that he or she made in an earlier taxable year plus interest on the repayment.

The IRS clarifies that the donor does not file an amended return for the year in which the donation was initially made. Instead, the donor must reflect the refund as gross income in the year the gift is returned and the interest as interest income. This presumes the taxpayer received the full tax benefit of the charitable contribution deduction when making a contribution to a qualified charity.16

28. IRS releases new Compliance Guide for 501(c)(3) Charities. The IRS has released Publication 4221-PC in which it addresses activities that could jeopardize a public charity’s tax-exempt status. It identifies general compliance requirements on recordkeeping, reporting, and disclosure for exempt organizations.

29. Potential annual church reporting to IRS. Speaking at the Georgetown University Law Center Continuing Legal Education program, Theresa Pattara, tax counsel for the Finance Committee minority staff said that staffers are considering requiring churches to report income on Form 990 or its variations.” She cautioned that this idea has not yet been approved by her boss, Finance Committee ranking minority member Charles Grassley, R-IA.17

In a letter from Senator Grassley to the author of this book, he stated: “If and when my staff’s proposals regarding tax reform for churches are released publicly, I would expect them to conduct roundtables and otherwise discuss such proposals with as many people as possible. I will work with Chairman Baucus to conduct hearings if necessary. I hope that ECFA will be active participants in any discussions that may take place.”18

30. “Grassley Six” investigation. On March 12, 2009, Sen. Chuck Grassley, ranking member of the Committee on Finance, made the following comment on Joyce Meyer Ministries joining the Evangelical Council for Financial Accountability (ECFA):

“This is a positive development. It’s good to see increased financial accountability, transparency, board governance, and ethical fund-raising taken seriously. These are good goals for every tax-exempt group. Since ministries have independence from the IRS and don’t have to file material with the IRS, like most other tax-exempt groups, ECFA membership is like a Good Housekeeping Seal of Approval. It’s an indepen-dent organization that audits members to maintain accreditation. I hope other ministries, including the ones I’m looking at, will pursue accreditation. I met with ECFA representatives today, while they were in town for their annual meeting, and they told me about Joyce Meyer Ministries and Oral Roberts University joining the ECFA. In addition, we discussed the status of my ministries inquiry. My staff and I

16 Letter from the IRS to Rep. Kay Granger on August 10, 2009, released on September 25, 2009 17 Tax Analysts, April 6, 2009, reported by Chuck O’Toole 18 Letter from Senator Charles E. Grassley to Dan Busby and Michael Batts, June 8, 2009

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continue to review the information we’ve received from the ministries that cooperated, and we continue to weigh our options for the ministries that have not cooperated.”

Grassley wrote to six ministries; Sen. Max Baucus, committee chairman, joined him in a follow-up request. Joyce Meyer Ministries and Benny Hinn of World Healing Center Church provided extensive answers to all questions in a series of submissions. Randy and Paula White of Without Walls International Church, Eddie Long of New Birth Missionary Baptist Church/Eddie L. Long Ministries, and Kenneth and Gloria Copeland of Kenneth Copeland Ministries have submitted incomplete responses. Creflo and Taffi Dollar of World Changers Church International/Creflo Dollar Ministries declined to provide any of the requested information.

31. Definition of a church. The IRS does not define a church in Regulations. However, to receive the IRS determination of what qualifies as a church, an organization must meet at least several of 14 criteria:

1. a distinct legal existence;

2. a recognized creed and form of worship;

3. a definite and distinct ecclesiastical government;

4. a formal code of doctrine and discipline;

5. a distinct religious history;

6. a membership not associated with any other church or denomination;

7. an organization of ordained ministers;

8. ordained ministers selected after completing prescribed studies;

9. a literature of its own;

10. established places of worship;

11. regular congregations;

12. regular religious services;

13. Sunday schools for religious instruction of the young; and

14. schools for the preparation of its ministers.

Because few, if any, new organizations can satisfy all 14 criteria, the IRS does not give controlling weight to any one of them. These criteria are often considered to be an outgrowth of a 1959 IRS ruling that determined The Salvation Army to be a church.

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There are indications that Congress may consider, for the first time, defining a church in the Code.19

Nonprofit Attorney Bruce Hopkins observes that “the traditional position of the IRS of reliance on its 14-point criteria in determining what is a church continues to crumble. Today, the agency pays nominal homage to the criteria, then wings it, making up new tests to fit whatever fact situation it happens to be facing. The courts are ruling that advertising in the yellow pages is evidence of commerciality and, thus, ineligibility for exemption as a public charity. The IRS is of the view that an entity can’t be an exempt church unless it advertises in the yellow pages!”20

32. IRS fails to comply with church audit procedures. Section 7611 of the Internal Revenue Code requires written approval by an “appropriate high-level Treasury official” before the IRS may commence a church tax inquiry. Under section 7611(h)(1), the term “appropriate high-level Treasury official” is defined as “the Secretary of the Treasury or any delegate of the Secretary whose rank is no lower than that of a principal Internal Revenue officer for an internal revenue region.”

The IRS was restructured by Congress in 1998. Under the restructuring, many IRS positions were eliminated, including Regional Commissioners and the Assistant Commissioner. The restructuring law kept in effect regulations that made reference to IRS positions that no longer existed. This has set the stage for several challenges by churches concerning whether an appropriate high-level Treasury official appropriately authorized particular church tax inquiries.

A Judge in the District Court, District of Minnesota, on November 18, 2008, found the IRS failed to comply with the church audit procedures under Internal Revenue Code Section 7611.

The IRS began investigating the Living Word Christian Center (LWCC) in Brooklyn Park, MN in April 2007, when the IRS received reports that the church may have engaged in political conduct jeopardizing its tax-exempt status.

The investigation was also based on information the IRS received suggesting that LWCC may have improperly conferred economic benefits on its senior pastor Reverend James M. Hammond (according to LWCC response to the IRS, LWCC leased planes owned by Hammond, Hammond borrowed money from LWCC, and LWCC forgave a portion of Hammond’s debt).

LWCC asserted that the notice of church tax inquiry was defective because it was not authorized by the appropriate IRS official because the Internal Revenue Code requires “an appropriate high-level Treasury official” to form a reasonable belief that the church’s tax-exempt status is in jeopardy.” At issue was whether the Director of Exempt Organizations, Examinations met the definition of an “appropriate high-level Treasury official.”

19 Revenue Ruling 59-129, 1959-1 C.B. 58 and GCM 37116 (1977) 20 Nonprofit Counsel, October 2008

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As a result of LWCC’s refusal to comply with a summons seeking LWCC records, the IRS filed a Petition to Enforce Internal Revenue Summons. The Judge denied the Internal Revenue summons and dismissed the action.

33. GAO studies annual reporting of all cash charitable contributions to the IRS. The IRS most recently estimated that the gross tax gap reached $290 billion for tax year 2001.21 The IRS estimates that taxpayers misreported $13.6 billion in deductions for charitable cash contributions.

The tax gap arises when taxpayers fail to comply with their individual income, corporate income, employment, estate, or excise tax obligations through (1) underreporting of tax liabilities on tax returns; (2) underpayment of taxes due from filed returns; or (3) non-filing, which refers to the failure to file a required tax return altogether or on time.

The Government Accountability Office (GAO) studied, at the direction of the Senate Finance Committee, the possibility of a change in federal law which would require all congregations and other charities to file an annual report with the federal government detailing contributions on a per donor basis. The study included requiring charities to obtain the social security number or employer identification number of each donor as a basis for filing an annual Form 1098-type document for each donor.

The GAO interviewed ECFA’s president, Dan Busby, as part of this study. ECFA raised significant concerns regarding requiring churches and other nonprofits to file annual reports with the IRS reflecting donations based on the donors social security numbers/taxpayer identification numbers.

The GAO study concluded that requiring information reporting for charitable cash contributions may not be an effective way to improve compliance. Charities could incur substantial costs and burdens if they were required to file information returns with IRS and taxpayers on the cash contributions they receive. Exempting some cash contributions, such as those below a certain dollar amount or those made to small or religious charities, from information reporting could reduce the burden on some charities. However, exempting some cash contributions from information reporting would reduce the effect that the reporting would have on improving compliance, in part because IRS may not be able to match information returns against tax returns without complete information reporting. Also, the extent to which information reporting would improve voluntary compliance is unclear.

The Pension Protection Act of 2006 included more stringent requirements for the documentation taxpayers must keep to substantiate their cash contributions, starting in tax year 2007. It is not yet known whether the enhanced substantiation require-ments have improved taxpayer recordkeeping and reporting compliance, although an updated National Research Program study of individual taxpayers could show whether compliance improved following the passage of the act. Finally, requiring information reporting could result in reduced charitable cash contributions from

21 IRS estimated that it would eventually collect about $55 billion of the gross tax gap through late payments and IRS enforcement actions, leaving a net tax gap of around $290 billion.

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taxpayers, for example, because taxpayers may not want the federal government to know to which charities they donate, particularly for donations to religious organizations.22

34. Some members of Congress views tax breaks for nonprofits as subsidies. There are indications of 2009 Congressional hearings which will focus on the charitable tax deduction which costs the federal treasury an estimated $46 billion in 2008, and the exemption of earnings on assets from the income tax creates a benefit of another $50 billion a year.23

Like many members of Congress, Rep. Xavier Becerra — a Democrat who represents a largely Latino district of Los Angeles — is worried about the federal deficit and how to find money for social programs like providing health care to millions of uninsured children.

But Mr. Becerra, a member of the Ways and Means Committee, which oversees tax issues, regularly zeroes in on a government expense that has huge implications for nonprofit groups — the charitable tax deduction. "I'm wondering how many of those charitable contributions end up helping people who are poor, helping people who have no health care," he told a House Budget Committee hearing last September. In an interview with The Chronicle, Mr. Becerra called the charitable deduction one of "the least accountable tax breaks," complaining that it is hard to get information about who gives money to whom and how the money is spent.

22 Report to the Committee on Finance, U.S. Senate, Requiring Information Reporting for Charitable Cash Contributions May Not Be an Effective Way to Improve Compliance, May 14, 2009, GAO-09-555 23 Congressional Research Service Report on charitable giving and charitable organizations, February 2, 2009

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Key Federal Tax Limits, Rates, and Other Data

2009 2010 2011

Standard deductions, exemptions, and exclusions:

Standard deductions Married-Joint return $11,400

Head of Household $8,350Single $5,700

Married-Separate returns $5,700

Married-Joint return $11,400 Head of Household $8,400

Single $5,700 Married-Separate returns $5,700

Married-Joint return $11,600 Head of Household $8,500

Single $5,800 Married-Separate returns $5,800

Personal & dependent exemption amount $3,650 $3,650 $3,700

Foreign earned income exclusion $91,400 $91,500 $92,900

Social security:

SECA (OASDI & Medicare) rate 15.3% 15.3% 15.3%

FICA (OASDI & Medicare) rate 7.65% 7.65% 7.65%

OASDI maximum compensation base $106,800 $106,800 $106,800 (est.)

Social security cost-of-living benefit increase 5.8% 0% 0% (est.)

Social security Full Retirement Age (FRA) 66 years 66 years 66 years

Medicare Part B premiums – Basic $96.40 $110.50 $120.20

Earnings ceiling for social security (applies to employment before FRA; special formula in FRA year)

Below FRA: $14,160Over FRA: None

Below FRA: $14,160 Over FRA: None

Below FRA: $14,160Over FRA: None

Earnings limit in year FRA attained $36,120 $37,680

Benefits and contributions: Maximum annual contribution to defined contribution plan

$49,000 $49,000

Maximum salary reduction for 401(k)/403(b) $16,500 $16,500 $16,500

401(k) & 403(b) over 50 “catch up” limit $5,500 $5,500

Maximum income exclusion for nonqualified plans in 501(c)(3) organizations (IRC 457)

$16,500 $16,500

IRA contribution limit – age 49 and below – age 50 and above

$5,000 $1,000

$5,000 $1,000

$5,000 $1,000

Highly compensated employee limit $110,000 $110,000

Per diem and mileage rates and other transportation:

Standard per diem: Lowest rates in continental USA

Lodging $70Meals & Incidentals $39

Lodging $70 Meals & Incidentals $46

Lodging $77 Meals & Incidentals $46

Business auto mileage rate: 55 cents per mile 50 cents per mile

Moving & medical auto mileage rate 24 cents per mile 16.5 cents per mile 16.5 cents per mile

Charitable auto mileage rate 14 cents per mile 14 cents per mile

Motorcycle mileage rate (1) 52 cents per mile 47 cents per mile

Airplane mileage rate (1) $1.24 per mile $1.29 per mile

Bicycle commuting rate $20 per month $20 per month

Maximum value of reimbursement of business expenses (other than lodging) without receipt

$75 $75 $75

Luxury automobile value (limit on use of cents-per-mile valuation of company automobile)

$15,000 $15,300

Monthly limit on free parking $230 $230 $230

Transit passes/token – monthly tax-free limit 1/1/09 – 2/28/09 $120

3/1/09 – 12/31/09 $230$230 $120

(1) Privately-owned vehicle mileage rates set by the U.S. General Services Administration

Note: In some instances, the rate for a particular year may apply to a tax return filed in a subsequent year.

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2009 2010 2011

Health savings accounts:

Contribution limit:

Individual $3,000 $3,050 $3,050

Family $5,950 $6,150 $6,150

Maximum annual out of pocket expense:

Individual $5,800 $5,950 $5,950

Family $11,600 $11,900 $11,900

Minimum deductible:

Individual $1,150 $1,200 $1,200

Family $2,300 $2,400 $2,400

Increase in annual contribution limit – 55 and older

$1,000 $1,000 $1,000

Earned income credit:

Taxable and nontaxable earned income of less than (to qualify for the earned income credit):

Single/Married Filing Joint Single/Married Filing Joint

No qualifying child 13,440/18,440 13,460/18,470

One qualifying child 35,463/40,463 35,535/40,545

Two qualifying children 40,295/45,295 40,363/45,373

Three or more qualifying children 43,279/48,279 43,352/48,362

Long-term care insurance:

Premiums deductible as medical expense based on the insured’s age before close of tax year:

40 or less $320 $330 $340

41 to 50 $600 $620 $640

51 to 60 $1,190 $1,230 $1,270

61 to 70 $3,180 $3,290 $3,390

More than 70 $3,980 $4,110 $4,240

Form 990/990-T/990-N and 1099-MISC threshold:

Threshold for required filing Form 990 (if not otherwise exempt)

$25,000 annual gross receipts $25,000 annual gross receipts $25,000 annual gross receipts

Threshold for filing Form 990 electronically $10 million in total assets & 250 information returns

$10 million in total assets & 250 information returns

Threshold for required filing Form 990-N Under $25,000

in annual gross receiptsUnder $25,000

in annual gross receipts Under $25,000

in annual gross receipts

Threshold for required filing Form 990-T $1,000 annual gross UBI $1,000 annual gross UBI $1,000 annual gross UBI

Threshold for required filing of Form 1099-MISC (payment for most personal services)

$600 $600 $600

Quid pro quo:

Minimum contribution and maximum cost of token

Minimum gift: $47.50Maximum cost: $9.50

Minimum gift: $48 Maximum cost: $9.60

Minimum gift: $48.50Maximum cost: $9.70

Maximum value of de minimus benefit 2% of gift, but not more than $95 2% of gift, but not more than $96 2% of gift, but not more than $97

Other:

Federal minimum wage per hour $7.25 effective 7/24/09 $7.25 $7.25

Sec. 179 expensing limit $250,000 $500,000 $500,000

Gift tax annual exclusion $13,000 $13,000 $13,000

Unified estate and gift tax exception $2,000,000 N/A

Hea

lth C

are

Ref

orm

Tim

elin

e 20

10

2011

20

12

2013

20

14

2015

-201

8 H

ealth

Insu

ranc

e po

licie

s th

at p

rovi

de

depe

nden

t cov

erag

e m

ust

mak

e co

vera

ge

avai

labl

e fo

r de

pend

ents

up

to a

ge 2

6

Volu

ntar

y lo

ng-te

rm c

are

insu

ranc

e op

tions

ava

ilabl

e fo

r ad

ults

who

bec

ome

disa

bled

Form

10

99

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C

repo

rtin

g ex

pand

ed

to p

aym

ents

to

corp

orat

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Impr

ovem

ents

on

elec

tron

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exch

ange

of h

ealth

info

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ren

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dis

coun

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al h

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ver

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entiv

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alth

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vice

s

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ease

of t

axes

on

with

-dr

awal

s fr

om H

SA

s (p

rior

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age

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) and

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her

MS

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whi

ch a

re n

ot u

sed

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ified

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ical

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ense

s

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essm

ent

of h

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in

sura

nce

prov

ider

fee

Res

ciss

ions

in a

ll ne

w a

nd e

xist

ing

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ohib

ited

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ost

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lan

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ior

notic

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the

enr

olle

e

Free

ann

ual w

elln

ess

visi

t fo

r M

edic

are

bene

ficia

ries

an

d el

imin

atio

n of

cos

t sh

arin

g

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limits

on

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al d

olla

r va

lue

of b

enef

its fo

r an

y in

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dual

cov

ered

by

grou

p or

in

divi

dual

hea

lth in

sura

nce.

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-insu

red

grou

p he

alth

pla

ns m

ust

satis

fy n

ondi

scri

min

atio

n ru

les

rega

rdin

g pa

rtic

ipat

ion

and

bene

fit e

ligib

ility

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re-e

xist

ing

cond

ition

hea

lth

insu

ranc

e ex

clus

ions

el

imin

ated

for

adul

ts

Empl

oyer

s m

ust

impr

ove

the

appe

als

proc

ess

for

appe

als

of c

over

age

dete

rmin

atio

ns a

nd c

laim

s

Sm

all b

usin

ess

tax

cred

it av

aila

ble

Reb

ates

for

the

Med

icar

e P

art D

“D

onut

H

ole”

sen

t to

elig

ible

enr

olle

es

Sta

tes

may

exp

and

Med

icai

d el

igib

ility

Indo

or t

anni

ng s

ervi

ces

tax

impo

sed

5

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