• Nonprofit unincorporated association– Typically a default
• Nonprofit Corporation– Most common
• Charitable Trust (covered in T&E)– Oldest form (Statute of Uses – 1601)
§ 501(c)(3) Elements
1. Proper organizational structure
2. Organized exclusively for charitable purposes
3. Operated exclusively for charitable purposes
4. No part of net earnings inures to benefit of private individual
5. Not an action organization
6. <<case law>> - not violative of public policy
Public Charity
• Traditional charities (hospitals, churches, etc.)
• Publicly supported (aka gross receipts) charities (receive substantial amount of support from public or governmental agencies)
• Supporting Organizations (take status from supported organization)
Obtaining Tax-Exempt Status
• Recognition of tax-exempt status occurs when IRS agrees with the organization that it is eligible for tax-exempt status
• For charitable organizations, absent an exception, must file Form 1023 to achieve tax-exempt status
• Form 1023 also notifies the IRS if the organization is to be classified as a public charity or private foundation
• Exceptions to filing Form 1023: churches, associations of churches, integrated auxiliaries of churches, organizations (other than PFs) normally having annual gross receipts of not more than $5000
• Non-501(c)(3)’s apply with a different form and recognition of exempt status is not mandatory
What is a Church?
• Term is found but not defined in IRC• “The term “church” includes a religious
order or a religious organization if such order or organization (a) is an integral part of a church, or (b) is engaged in carrying out the functions of a church . . . .” Treas. Reg. 1.511(a)(3)(ii) – “ministration of sacerdotal functions and the
conduct of religious worship” [also not defined]!!!
IRS View of “Church”• Foundation for Human Understanding v. Commissioner
1. Distinct legal existence2. Recognized creed and form of worship3. Definite and distinct ecclesiastical government4. Formal code of doctrine and discipline5. Distinct religious history6. Membership not associated with another church7. Organization of ordained ministers8. Ordination after prescribed studies9. Literature of its own10. Established place or worship11. Regular congregations12. Regular worship services13. Sunday schools for religious instruction of the young14. Schools for the preparation of ministers
What is an Integrated Auxiliary?
• Term found but not defined in IRC• Refers to a class of organizations related to a
church or association but not themselves a church or association
1. Fit definition of public charity2. Affiliated with a church or association3. Receive financial support primarily from internal
church sources as opposed to governmental sources
4. Exclusively religious purpose??? (Lutheran Social Services v. United States)
What is a Convention or Association of Churches?
• Term found but not defined in IRC
• Added to statute at urging of Baptist leaders (congregational autonomous churches having loose associations)
• Term used as a way to refer to the organizational structure of some congregational churches
Nonprofit Unincorporated Associations
Unincorporated association, other than one created by a trust, consisting of three or more members joined by mutual consent for a common, nonprofit purpose
Governed by the Texas Uniform Unincorporated Nonprofit Association Act (since 1995) (1396-70.01)
Separate legal entity
Formation not governed by statute (usually have Constitution, Articles of Association, or Bylaws)
Powers: Promote aims and purposes and advance members’ interests by all legitimate and legal means (not necessarily charitable, e.g. trade association, unions)
Nonprofit Unincorporated Associations
Rights
• Sue or be sued
• Sue or be sued by a member
• Acquire, hold, encumber, transfer real or personal property without the need for trustees
• Be a beneficiary of a trust, contract, will, life insurance
CON’s Cost to set up & run Rules to follow Giving up religious Giving up religious
freedom???freedom??? Even where funded
entirely by a single individual, must have at least three directors (IRS will request non-related)
Subject to Texas franchise tax unless granted exemption
Judicial Intervention into Private Association Affairs
• Traditionally not disposed to interfere with internal management of voluntary association
• Private association has the right to make and enforce its own rules (generally)
• Rationale: by becoming a member, you have subjected yourself to the organization’s power
• Constitutional Issues
Judicial Intervention into Church Disputes
• Constitutional implications of religious freedom restrict intervention even more severely than other voluntary associations
• Civil courts lack jurisdiction to resolve any dispute where resolution would necessitate inquiry into ecclesiastical doctrine or polity
• Marginal civil review available in certain circumstances
Federal Cases on Judicial Intervention
• Watson v. Jones (1871)
• Presbyterian Church of America v. Hull Presbyterian Church (1969)
• Milivojevich (1976)
• Jones v. Wolf (1979)
State Cases on Judicial Intervention
• Dean v. Alford (FW 1999)
• Patterson v. SWBTS (FW 1993)
• Hill v. Sargent (Dallas 1981)
• Masjid Al-Ihsaan, Inc. v. Ouda (Ga. Ct. App.)
• Hines v. Turley (Ill. App. Ct.)
Marginal Civil Court Review
• Civil, contract, property rights involved• Body making decision lacked authority• Church failed to comply with own
practices/governing documents• Fraud/Collusion (for secular purposes)• Interpretation of contested terminology in
governing documents• Compulsory deference (particularly with property
disputes)– Still must decide based only on neutral principles
of law
Diversion from Charitable Purpose
• Holiman v. Dovers (Ark. 1963)
• Q. on page 528
• Can majority take property and devote to a different faith?
Tax Issues Affecting Churches
• Not required to apply for recognition of exemption but may and recognition may be revoked
• Must maintain status as 501(c)(3)
• Special Rules related to employment tax
• Special rules related to audits (applies only to churches . . . Not integrated auxiliaries or associations)
Failing the Operational Test
1. Substantial commercial activities (unless related to exempt purpose – limits?)
2. Private Benefit
3. Private Inurement
4. Action organization
5. Antithetical to public policy
Private Benefit
• Implicit in requirement that the organization must be operated for charitable (public) purposes
• Benefits cannot be limited to a group of persons (results in private rather than public benefit)
• What private interests are of concern?• Are insubstantial (incidental) private benefit
acceptable?• American Campaign Academy v. Comm’r
Private Inurement
• Subset of private benefit – If an organization allows its assets to inure to
an insider, it violates not only the private inurement prohibition but also operates to benefit a private interest
• Private inurement can result in revocation of tax-exempt status – Can also result in intermediate sanctions as
excess benefit transactions
Excess Benefit Transactions
§ 4958(c)(1): Any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any DQP if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.
Excess Benefit Transaction Consequences
• Two tier excise tax on DQP
1. First tier tax of 25% of the excess benefit- can be abated under certain circumstances
2. If not corrected in a timely manner, second-tier tax of 200% of the excess benefit
• Organization manager who knowingly participates pays a tax of 10% of the excess benefit not to exceed $10,000 <can be subject to both if the organization manager receives the excess benefit>
Action Organization
1. No substantial part of the activities may be carrying on propaganda, or otherwise attempting to influence legislation.
2. Organization cannot participate in, or otherwise intervene in any political campaign on behalf of or in opposition to a candidate for public office.
The Church Audit Procedures ActSection 7611 IRC
1. Church tax inquiries- Reasonable belief on basis of written evidence
church is not exempt- IRS sends church written inquiry notice with specific
concerns outlined and general subject matter of inquiry
2. Church tax examinations- Inquiry met- Notice sent at least 15 days after inquiry and at
least 15 days before inspection/examination- Must tell church what documents will be reviewed
and show church what documents have been reviewed
The Church Audit Procedures Act
3. Church Records – may be examined only to the extent necessary to determine liability for and amount of any income, employment or excise tax
4. Religious activities – may be examined only to the extent necessary to determine whether an organization claiming to be a church is in fact a church
5. Deadline for completion – inquiry (90 days unless followed by examination); examinations (two years after examination notice sent – subject to abatements)
Authority of AG as to Charitable Organizations
• Common Law Authority
• Constitutional Authority
• Statutory Authority
Other Tax Issues
• UBTI (Class # 9)• Employment taxes
– Generally churches required to withhold, report and pay over-withheld income and FICA taxes for employees
– Exceptions: (1) wages paid for services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his or her ministry; (2) church is opposed on religious grounds to payment of Social Security and Medicare taxes (must file Form 8274 – specific requirements)
– Churches are not liable for Federal Unemployment Tax (may be liable for state)
– Housing Allowances can be given to ministers (an exclusion of the fair rental value of his or her home) – must be part of compensation plan and designated in advance of the payment
![JOSEPH WENZEL GRAF [COUNT] RADETZKY OF RADETZ.](https://static.documents.pub/doc/80x56/617fffe0af29c01d387833ed/joseph-wenzel-graf-count-radetzky-of-radetz.jpg)
