2015 Tax & Legal Update

for Nonprofit Organizations

Presented by:

Elaine Sommerville, CPA

Sommerville & Associates, P.C.

(817) 795-5046 – telephone

(817) 795-5516 – facsimile

Elainesommerville.blogspot.com

and

Frank Sommerville, JD, CPA

Weycer, Kaplan, Pulaski & Zuber, P.C.

(817) 795-5046 – telephone

(800) 556-1869 – facsimile

nonprofitattorney.blogspot.com

Tax & Legal Update for Nonprofit Organizations

Page 1

2015 Tax & Legal Update

for Nonprofit Organizations

IRS Planned Activities

  1. The Federal General Accountability Office reported to Congress that the IRS EO audit selection process was severely flawed and resulting in targeting EOs for audit based on the political or religious points of view. July 23, 2015.
  2. Z Street v. Koskinen, 791 F.3d 24 (D.D.C. 2015). Z Street can sue IRS for damages arising from delayed processing due to targeting due to political positions by the IRS.

Tax Exemption Issues

  1. PLR 201541013 – Inurement/Private Benefit - Exemption revoked where the Foundation paid for the expenses of the founder’s telemarketing company and entered into an exclusive contract with founder’s telemarketing company for fundraising services. Additionally, the Foundation failed to conduct any exempt activities since its only activities were raising funds that were paid to the telemarketing company engaged.
  2. PLR 201538026 – Inurement/Private Benefit - Exemption revoked for organization that was formed to provide “health, education and treatment, including a specific therapy, to the general public. Insider used funds from checking account for general purposes.
  3. PLR 201534014 – Inurement - Use of funds to pay personal expenses of the organization’s president and comingled payment of expenses with another organization with the same president was inurement of benefit and the exemption was revoked.
  4. PLR 201523022 - Inurement/Private Benefit - Organization formed for religious activities of a minister, including preaching engagements, revivals, Bible studies and worship services, not exempt because the true purpose was to support the minister's candidacy for office of bishop.
  5. PLR 201516066 -- Inurement/Private Benefit - Art gallery not exempt because it promoted the sale of works by a local artists.
  6. PLR 201505039 -- Inurement/Private Benefit - Organization did not qualify for tax exemption under IRC § 501(c)(3) because it was formed and operated to raise funds for the benefit of a designated individual. Private benefit ruling. See PLR 201519035 with same result, though the child benefitting from the organization was handicapped and needed substantial assistance that the family could not afford.
  7. PLR 201522006 – Exempt Activities - Inactive organization not exempt though it had a written business plan to conduct exempt activities.
  8. PLR 201503016 – Fundraising/Exempt Activities - Organization formed to enable online fundraising by charities is not exempt. No exempt purpose.
  9. Zagfly v. Commissioner, 2015 U.S. App. LEXIS 10326 (9th Cir. 2015). – Fundraising/Exempt Activities - The donation of business profits is not an exempt purpose. Internet florist sought tax exempt status because it promised to donate profits from sales to charities selected by customers.
  10. PLR 201539032 – Expenditure Responsibility - Exemption revoked for being a conduit for funds to go to foreign organizations. Service also deems unreported compensation payments a “nonexempt” activity. Funds transferred to foreign organization for tuition and for grants without expenditure responsibility.
  11. PLR 201523021 – Political - Organization's mission to educate the public about political candidates not exempt because all its speakers for the "Meet the Candidate" forum came from the same political party.
  12. PLR 201505042 – Political - Because the organization was formed to show how electronic communication enhanced good governance but its ideas and suggestions could become effective only by the enactment of legislation, the organization was an "action" organization under Treas. Reg. § 1.501(c)(3)-1(c)(3)(iv).
  13. PLR 201503018 – Commercial Activities - Creation of taxable subsidiary does not jeopardize tax exemption.
  14. PLR 201540019 – Commercial Activities - Exemption denied where the organization was formed to take over the operations of the founder’s sole proprietorship that had been operating at a loss. Activities held to inure to her benefit and were conducted in a commercial manner.
  15. PLR 201535019 – Commercial Activities - Organization organized to provide various services to the elderly and veterans. Predominately these activities are the provision of consulting services to assist veterans’ hospitals. Exemption denied since a substantial part of the activities was operated in a commercial manner. The IRS also deemed a compensation system that included performance bonuses and revenue based payments to be private benefit.

Payroll Issues

  1. Treasury Inspector General Report –TIGTA has determined that 3.8% of tax exempt organization owed approximately $875 million in payroll tax debts as of June 2012. More than 1500 organizations owed more than $100,000 each. The GAO also determined that more than 1200 organizations with unpaid payroll and other taxes received more than $14 billion in direct Federal grants in Fiscal Years 2005 and 2006.
  2. IRS contract labor settlement program still available. See Form 8952.
  3. DOL proposes to raise minimum compensation requirements for exempt employees to $50,440 effective date to still be determined. More than 200,000 comments have been submitted to the DOL.
  4. DOL Technical Release 2013-03 and IRS Notice 2013-54 clearly state that an HRA that is not integrated with other health coverage that meets the unlimited dollar amounts for certain benefits fails to qualify as a qualifying health plan. Therefore, the employer is subject to the $100 per day/per employee penalty. As of July 1, 2014, this effectively ends the practice of reimbursing employees for health insurance that is obtained in the open market as an individual policy.

Charitable Contributions

  1. Issued September 16, 2015, proposed Regulations under Section 170(f)(8)(D) and (E) regarding filing of charitable contribution receipts with the IRS by the charitable recipient (church). The IRC provides that the taxpayer does not need a receipt from the recipient (church) if the recipient files with the IRS a confirmation of the donation. This provision has been on hold because IRS did not provide a way for the recipient organization to confirm with the IRS. The proposed regulation directs the IRS to develop a form (like a Form 1099) that the recipient may file with IRS by February 28 of each year. The form will contain all the information currently required in the charitable contribution receipt. Comments can be received until December 17, 2015.
  2. Wesley v. Commissioner, T.C. Memo 2015-200. Receipts Issues – Taxpayer acknowledged that he has manufactured the receipts in 2014 rather than receive them timely in 2011. Also, one of the donations listed a contribution for an item paid for with a ministry credit card rather than the Taxpayer’s credit card.
  3. Howe v. Commissioner, T.C. Summary Opinion 2015-26. Receipting Issues --Charitable contribution (cash and noncash) deductions denied due to receipts lacking the "no goods or services" statement.
  4. Kunkle v. Commissioner, T.C. Memo 2015-71. Noncash Receipting Issues --Noncash contributions of $37,315 denied because the taxpayer lacked a qualify receipt and no appraisal of items that the exceeded a value of $500.00. They had qualifying noncash contribution receipt from their church for some items, but not others. The church did not report to the donors the disposition of the noncash items.
  5. Smith v. Commissioner, T.C. Memo 2014-203. Noncash Receipting Issues --Court denied deduction for $27k in noncash contributions because the signed, blank receipts provided by AMVETS did not satisfy the receipt requirements of Section 170. Noncash receipts must contain a detailed description of the items being donated. The detailed lists prepared by the taxpayer were not adequate because the recipient organization must have prepared the detailed list for the receipt.
  6. Isaacs v. Commissioner, T.C. Memo 2015-121. Value Issues -- Donation of fossils not deductible because taxpayer did not submit a qualifying appraisal.

Scholarships

  1. PLR 201516077 -- Types of Education -- Scholarships to study horsemanship, including paying expenses to attend horse shows and competitions, approved. Exempt purpose was to support public educational programs about horses.
  2. PLR 201504019 -- Types of Education -- Scholarship program awarding scholarships to students who intend to study agriculture approved.
  3. PLR 201501021 -- Charitable Class Issues -- Foundation formed to award scholarships to members approved. To be eligible, an applicant had to be a church member in good standing who planned to attend, or was attending, a school of divinity or an institution of higher learning.
  4. PLR 201537028 – Charitable Class Issues -- Scholarships to former athletes for grad school is approved and will not constitute taxable expenditures. Tax free to the recipient if used for tuition and related expenses under Section 117.
  5. PLR 201536026 – Charitable Class Issues -- Grants to former unpaid interns allowed as long as the interns worked at organizations that further the foundation’s exempt purposes. Grants will not represent taxable expenditures. The amounts will be taxable to the recipients unless the grant qualifies as a scholarship under Section 117.
  6. Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. v. United States, 2015 U.S. Dist. LEXIS 85477 (D.D.C. 2015). Charitable Class Issues -- Scholarship foundation for family members not tax exempt. The Foundation was funded through one charitable bequest and the donor’s family controlled the operations and was the only recipients of the awards.

Charitable Solicitation Registration

If communicating with any donor in any state review the rules for registration. There are 40 jurisdictions that require registration. While just an internet presence does not trigger registration in most jurisdictions, direct communications with a donor can.

Employment Cases

  1. Rogers v. The Salvation Army, 2015 U.S. Dist. LEXIS 61112 (E.D. Mich. 2015). Ministerial Exception -- Ministerial exception applies to substance abuse counselor.
  1. Preece v. The Covenant Presbyterian Church, 2015 U.S. Dist. LEXIS 52751 (D. Neb. 2015). Ministerial Exception -- Youth minister not ordained by the church was a minister for the ministerial exception. Youth minister fired because he filed for divorce.
  1. Conlon v. InterVarsity Christian Fellowship, 2015 U.S. App. LEXIS 1871 (6th Cir. 2015). Ministerial Exception -- Ministerial exception prevents court from considering suit when employee fired for seeking a divorce.
  1. Bohnert v. The Roman Catholic Archbishop of San Francisco, 2015 U.S. Dist. LEXIS 130519 (N.D. Ca. 2015). Title VII and Ministerial Exception -- Teacher at all boys Catholic high school could sue the church for the sexual harassment by students who took upskirt pictures and created a website dedicated to her photos. The school failed to address adequately her complaints. No minister exception applied because she did not have spiritual responsibilities
  1. Kane v. Roman Catholic Church of St. Raymond, 2015 U.S. Dist. LEXIS 91398 (S.D. N.Y. 2015) Title VII -- School counselor at church school suit is dismissed because she failed to complain to the school administration about sexual harassment. She also failed to file a timely complaint with the EEOC.
  1. McIver, et al, v. Imani Christian School, 2015 U.S. Dist. LEXIS 128550 (W.D. Pa. 2015). Title VII -- School that separated from its church was no longer eligible for the religious exemption from Title VII.
  1. Belloni v. Archbishop of the Diocese for San Francisco, 2015 U.S. Dist. LEXIS 1653 (N.D. Ca. 2015). Title VII and AGEA -- Parish secretary's suit for Title VII and AGEA (race, gender, age) survives motion for summary judgment. The 30 year tenured secretary was fired because she was telecommuting as approved by previous pastor. New pastor required her to be present in office 5 days a week. No negative performance reviews in 30 years.
  1. Puckette v. The Board of Trustees of the First Baptist Church of Gainesville, GA, 2015 U.S. Dist. LEXIS 19319 (N.D. Ga. 2015). ADA -- Church's motion for summary judgment denied in ADA case brought by janitor who was fired by the church for insubordination. The janitor presented testimony from psychiatrist that he was schizophrenic. Church could be held liable though the diagnosis occurred after termination and had no knowledge of whether he was mentally ill. The church did nothing to determine whether his behavior was caused by mental illness.
  1. Greater Fairview Missionary Baptist Church v. Hollins, 160 So. 3d 223 (Miss. 2015). Ecclesiastical Abstention Doctrine -- Mississippi Supreme dissolved TRO issued by lower court preventing the church from removing its pastor from office. This was internal church dispute and the court had no jurisdiction to issue TRO. The church had voted to dismiss the pastor, but the TRO prevented church from removing him from office.
  1. Hillenbrand v. Christ Lutheran Church of Birch Run, 2015 Mich. App. LEXIS 1744 (Mi. App. 2015). Ecclesiastical Abstention Doctrine -- The court cannot hear pastor's appeal from termination by a church due to the Ecclesiastical Abstention Doctrine. Further, the church's withdrawal from the denomination made the Synod's opinion advisory and not binding on the local church. The local church was not required to pay damages to the former pastor as suggested by the denominational panel.
  1. Walker v. Interfaith Nutritional Network, 2015 U.S. Dist. LEXIS 91418 (E.D. N.Y. 2015). FLSA -- Soup kitchens with homeless shelters in 23 locations in New York were not subject to overtime because the plaintiff did not allege that the kitchens were engaged in either enterprise or individual interstate commerce.

Same Sex Marriage Issues

Obergefell v. Hodges, 115 AFTR 2d 2015-2309 held that the government must recognize same sex marriage as a fundamental right. Besides the employee benefits discussed earlier, this decision impacts the church into areas: employment and facilities use.

a.Employment Law. After this decision, the EEOC announced that it would follow this decision in its enforcement of Title VII. If a church discriminates against an applicant or employee because they are married to someone of the same gender, they have violated Title VII's prohibition against discriminating on the basis of marital status. The church could be liable for damages for unlawful discrimination. No exception exists for churches, though the ministerial exception applies for ministerial positions.

b.Defensive Measures. If a church sincerely believes that employing an individual who is married to someone of the same gender, then it must demonstrate that it's sincerely held religious beliefs overrule the EEOC's interpretation of the statute. The church should adopt a Statement of Faith incorporating its major theological doctrines, including its doctrine on marriage. The church should require that all applicants and employees sign a statement that they agree to conduct themselves within the requirements of the Statement of Faith. Annually, employees should be required to affirm that they have not changed their mind. Ideally, the Statement of Faith should be incorporated into the bylaws of the church and the employee handbook.

c.Facilities Use. After this decision, if a church sincerely believes that it cannot allow its facilities to be used to host a same-sex marriage ceremony or celebration, its facilities use policy must reflect this sincerely held religious belief. Also, many state and local laws prohibit discrimination on the basis of sexual orientation or sexual perception in public accommodations. If the church allows any outside groups to use its facilities, then it may be covered by a public accommodation statute. Substantial fines may be imposed for violating the public accommodation statute, including the loss of property tax exemption.

In some states, the church must prohibit all outside use to avoid adverse consequences due to the public accommodation laws. In other states, the church must prohibit the use by any organization that cannot further the church's exempt purposes. Texas does not include sexual orientation or sexual perception in its public accommodation statute, but city ordinances in Dallas, Fort Worth, Austin and San Antonio include sexual orientation and sexual perception in their public accommodation ordinance. Houston is voting on its public accommodation ordinance in November 2015. All Texas city ordinances exclude churches from their coverage. The Texas Pulpit Protection Act also prohibits any state or local government official from making an adverse decision involving a church prohibiting same-sex marriage.

d.Defensive Measures.If a church sincerely believes that it cannot allow its facilities to be used to host a same-sex marriage ceremony or celebration, it must avoid being classified as subject to the public accommodation statute. Churches should enact a written facilities use policy and written wedding policy. It should require every outside organization using church facilities to recognize the church's Statement of Faith. It should require that those being married agree with the Statement of Faith as well. In Texas, churches may still allow government entities, such as schools, to use its facilities without requiring the government entity to recognize the church's Statement of Faith. Every church should check with its local attorneys to determine its rights under state or local laws.

2015 Tax & Legal Update for Nonprofit OrganizationsPage 1

NEW PROPOSED OVERTIME RULES

By Frank Sommerville, JD, CPA

Since virtually all churches are subject to overtime rules, these proposed regulations will require many organizations to amend their policies and procedures on overtime pay if made effective. If your state’s overtime rules mandate overtime pay, the state rules apply even though a federal exemption may apply.

The 2015 proposed rule changes represent the first attempt to index the minimum salary to inflation. The new proposed rules seek to cause the overtime rules to apply as they were intended when first enacted in 1938. The minimum salary level is set at the proposed level of the 40th percentile of average full-time employee salaries, while the 2004 regulations set it at 20th percentile and was not indexed to inflation.

The Fair Labor Standards Act (the statute that mandates minimum wage and overtime) applies to all enterprises that (1) have employees engaged in commerce or (2) in the production of goods for commerce and (3) have an annual gross volume of sales made, or business done, of at least $500,000; or are engaged in the operation of a hospital, an institution primarily engaged in the care of the sick, the aged, or individuals with intellectual disabilities who reside on the premises; a school for intellectually or physically disabled or gifted children; a preschool, elementary or secondary school, or an institution of higher education (without regard to whether such hospital, institution or school is public or private, or operated for profit or not); or are engaged in an activity of a public agency. There are two ways an employee may be covered by the provisions of the FLSA: (1) enterprise coverage, in which any employee of an enterprise covered by the FLSA is covered, and (2) individual coverage, in which even employees of non-covered enterprises may be covered if they are engaged in interstate commerce or in the production of goods for commerce, or are employed in domestic service.