Merry Christmas

Revoking A Church’s Tax-Exempt Status

 

I do not recall an audit of a church during my career.

I have however practiced at the other end: helping religious organizations obtain tax-exempt status.

Terms are important here. Let us look at two: churches and religious organizations.

A church is the immediate mental image: a congregation; an established place to meet; a code of doctrine; procedures for ordaining ministers, and so forth. A more intuitive term would be “a house of worship,” and worship would include Christianity and other religions.

A religious association is a religiously-oriented entity other than a church.

The terminology is important be cause churches do not need to apply for and obtain tax-exempt status. As long as they meet basic Section 501(c) requirements, they are deemed to be tax-exempt – the term is “per se” – just by being a church. That said, it is not unusual for a church to formally apply for tax-exempt status. Why? To tie to bow, so to speak. Chances are the church will regularly and routinely seek tax-deductible donations. It might be helpful to assure donors that the IRS recognizes the church as qualifying to receive such donations.

Since a church does not need to request and obtain 501(c) status, it is also not required to file annual Forms 990. It can, of course, the same as it can also formally apply for exempt status. The church can decide.

A religious organization – not being a church – must apply for exempt status, file annual Forms 990, and all the paperwork we routinely associate with being tax-exempt.

Let’s return to the requirements, and then we will discuss a church that crossed the line.

There are five basic requirements under Section 501(c):

·      The entity must be a corporation.

·      The entity must be organized and operated exclusively for religious, educational, scientific, and other charitable purposes.

·      Net earnings may not inure to the benefit of any private individual or shareholder.

·      No substantial part of the organization’s activity may be attempting to influence legislation.

·      The organization may not intervene in political campaigns.

These are the minimum hurdles. In practice there is some latitude (must be a corporation, for example, but the definition of corporation for this purpose is generous), but one must still keep the tires on the pavement.

The Community Worship Fellowship (CWF) was founded in 1998 by Lester Goddard and his family. The organizing documents with Oregon had all the magic words (“organized exclusively for …”), and it obtained tax-exempt status from the IRS. It was governed by an uncompensated council of elders.

There are two broad requirements in this area: what the paperwork says and what you actually do. So far, the paperwork seems normal.

However, it turned out that your name had to be “Goddard” (or related to) to be on the council of elders – the governing body of the church.

Bad start. They might want to address this as soon as possible.

After a decade the IRS began asking questions. There were reports that CWF assets were being used for personal benefit. The church blew off the initial inquiry. The IRS responded by auditing years 2013 through 2016.

COMMENT: Brilliant.

The IRS discovered the following:

·      Lester Goddard determined his own salary and bonus.

·      His salary and bonus were approved by the members, but most of the members were related to Lester.

·      CWF credit cards showed purchases of Prada handbags, jewelry, perfume, and furs.

·      CWF paid personal boat payments and private travel, including Disneyland and Hawaii.

·      CWF paid for improvements (think a pool) at Lester’s home.

·      CWF lent money to Lester and family. Let’s say CWF was … not rigorous … about the money being repaid.

In tax lingo, this money shuffle is called “private inurement.” In common conversation, we call it something else.

Meanwhile CWF moved its incorporation from Oregon to Hawaii. Why? I am not sure. The IRS – to the best of my knowledge – still reaches Hawaii.

In December 2018 the IRS revoked CWF’s exemption.

Problem: the IRS did not publicly disclose the revocation. How were donors to know?

In March 2019 CWF filed suit.

In October 2025 the Federal Court of Claims finally decided.

The reason for a six-year delay? There were 18 stays for additional discovery.

This is not a pretty story, and church exemptions is not an area the IRS likes to tread. Tax and constitutional law weave together closely, and even an IRS win might be construed as pyrrhic. There are more than 350,000 religious tax-exempt organizations, for example, but less than five lost their exemption in 2023. None of those five were churches.

Our case this time was Community Worship Fellowship v United States, No 19-352 (Fed Cl October 23, 2025).

Will I Qualify For The Tips Deduction?

 

Can I take advantage of the new tips deduction?

I will be slowing down in 2026: fewer hours, fewer clients, unlikely to accept new clients. It was inevitable, but the events of the last year-plus have accelerated my decision. I was witness to friends and the consequences from their sale of a firm. I do not care to see that again.

Can I do anything in 2026 to catch a tax break?

We are talking about the “No Tax On Tips” provision of the One Big Beautiful Bill signed by the President on July 4, 2025. The break will last four years – beginning in 2025 – and allow a tipped worker to exclude up to $25,000 of “qualified” tips from income taxes.

COMMENT” Yes, the break is retroactive to January 1, 2025 even though the OBBB was not signed until July 4.

COMMENT: The $25 grand is per return. If you file single, the limit is $25 grand. If you file jointly, the limit is again $25 grand. Another important point is that we are talking about federal income taxes only. Those tips are still going to be subject to social security taxes, just like before.

There is an income limit, of course: $150 grand for singles and $300 grand for marrieds.

The break is available whether you are a tipped employee or tipped self-employed. The reporting to you, however, will be different.

If you are an employee, you will receive a 2025 Form W-2 from your employer.

I want you to notice Box 7: Social Security Tips.

The tips deduction uses the term “qualified” tips.

Mind you, it is possible that Box 7 is also the amount for qualified tips, but it does not have to be. The tax Code does this sleight-of-hand repetitively by sliding the word “qualified” before otherwise innocuous nouns. How can a tip be “nonqualified?” Easy: it is nonvoluntary. How does that happen? Again - easy. Say that you have a party of eight or more and the restaurant applies an automatic gratuity of 18%. That fact that the gratuity/tip is now automatically included means that it is nonvoluntary, which means it is not “qualified,” which means it does not qualify for the tips deduction.

So ... how is one to know how much of box 7 is qualified?

Fortunately – and given that the law was passed halfway into the year – the IRS realized that employers and payroll companies could not make these changes retroactively. In Notice 2025-62, the IRS stated that - for 2025 only - an employee can assume that Box 7 is the same amount as qualified tips. Employers can also get this information to employees via other means, such as an online portal.

A new W-2 will be in place for 2026.

What about tipped self-employeds?

Now we are circling back to my situation and the tips deduction.

Scratch that Form W-2, as I will not be an employee. I may get some flavor of Form 1099, though.

Form 1099-K         used for credit and debit cards

Form 1099-NEC    used for independent contractor

Form 1099-MISC  used for other reportable payments

I took a look: nope, not seeing any 2025 reporting for tips. I see something on Form 1099-MISC Box 10 for payments to an attorney, but I am not an attorney. The IRS has said, however, that they are revising the 2026 forms to include tips information. That's OK, I will adjust my 2026 invoices as necessary - if I can otherwise qualify for the deduction.

I gotta ask: how will the IRS know if I am self-employed and have 2025 income representing qualified tips?

I see the following IRS guidance: “you can rely on your own tip records.”

Not the hardest tax planning I have seen.

The IRS buttressed this with proposed Regulations on September 22, 2025.

I see four requirements in the Regulations for a qualified tip:

·      Is paid voluntarily

·      Is not received in a specified trade or business

·      Satisfies other requirements established by the Secretary

·      Received in an occupation that customarily and regularly received tips on or before December 31, 2024

Let’s see:

·      I can meet this: you can pay me voluntarily or involuntarily, but you will pay me.

·      This is a problem. I am not going to labor you with the provenance and metaphysics of “specified trades or businesses,” other than to say that common examples include physicians, attorneys, and accountants.

o   But there is transitional relief until January 1 “of the first calendar year following the issuance of final regulations ….”

§  I may still be in the running.

·      I will worry about other requirements when they happen.

·      We hit a hard stop with “customarily and regularly received tips.”

o   The IRS published a list of qualifying occupations.

o   I see the expected: bartenders, wait staff, hair stylists, and so forth.

o   I see a few unexpected: home landscapers, electricians, and plumbers.

o   I see nothing for accountants and tax preparers.

o   I do see something for “#209 Digital Content Creators.”

§  I suppose I could put these blogs on YouTube and be a “content creator.”

I am not seeing a (reasonable) way to meet that fourth requirement and get my 2026 fees to qualify for the tips deduction, unfortunately. I suppose an occasional client might mark my fee as a “tip” – thereby hoping to help me out – but I am not seeing a way to sidestep (at least legitimately) the “customarily and regularly” hurdle.

I won’t, but you know somebody will.

The tax literature is littered with cases like these.

Trump Savings Accounts

 

I was reading someone somewhere complaining about Michael and Susan Dell’s recent donation of $6.25 billion. 

The bitter are always with us, unfortunately. 

But it gives us a chance to talk about the new Trump savings accounts. I see that we even have a new tax form to (possibly) bulk-up our 2025 Form 1040 return.

What are they?

The Trump accounts are a twist on an IRA.

What is the twist?

One does not need earned income to contribute to a Trump account.

Anything else?

Trump accounts cease to be Trump accounts when the beneficiary turns age 18. These things are intentionally designed for infants, children and young adults who (likely) have not started working.

How are infants and children going to know how to open this account?

They do not need to. Their parent (more precisely, the person who can claim them on a tax return) will do so for them.

How will the parent/person do this?

Two ways:

·      There is a new tax form (Form 4547 - get it?)

·      There will be a new tax portal (trumpaccounts.gov) 

 

Will this account be with the government itself?

The Treasury will create the account with a “designated financial agent.” No, I do not know what that means. I do see where one can thereafter move the account - say to Fidelity, Schwab or Vanguard (as examples) - should one wish.

How do you know one can move the account?

Because I was looking at an ad from one of the investment companies.

What about free money?

Children born between January 1, 2025, and December 31, 2028 will be eligible for a $1,000 seed contribution from the Treasury. There are requirements, such as a social security number, of course.

This period (2025 to 2028) BTW is called the “pilot program.”

What if the family makes too much money?

The “too much money” thing does not apply to the $1,000.

What is the July 4, 2026 date I have read about?

None of the government’ $1,000 seeding will occur before July 4, 2026.

What if you were born before 2025?

You still qualify to establish a Trump account, as long as you are under the age of 18 at the end of the year. You won’t get that $1,000, though.

Big deal. Why all this hullabaloo for $1,000?

One can put more than a $1,000 into the account.

The annual limit is $5 grand, and the $1 grand seed money does not count toward the $5 grand.

An employer can also put in $2.5 grand annually, but that $2.5 counts toward the overall $5 grand.

Who can contribute?

Parents of course, but also grandparents, other family members, and friends.

And Michael and Susan Dell.

Who qualifies for the Michael and Susan Dell Donation?

The $250 Dell donation reaches children age 10 and under but not eligible for the $1,000 Treasury seed contribution.

There is also an income test, although the test is by zip code and not household. The test is $150,000 or less of median income. Note that a child may qualify even if living in a wealthy household, if the median (not average) income for the zip code is $150,000 or less. The reverse is also true, of course.

What if I cannot put in $5 grand every year?

Put in what you can. Skip a year. Do not make the perfect the enemy of the possible.

Is there a tax deduction for this?

In general: no. Think of it as a Roth contribution.

I am uncertain about the employer ($2.5 grand) contribution, though. Generally, such expenses are deductible by an employer. I however expect that it will also be taxable to the employee, meaning that someone somewhere is paying tax.

Is there another way to get money into the account?

Yes. There is the usual stuff, such as rolling an account from one investment company to another.

The one that intrigues me is a contribution from a 501(c)(3) tax exempt. There is no explicit limit on these contributions, other than the overall (c)(3) requirement to benefit broad categories of beneficiaries and not just the select fortunates.

This, BTW, was the Dell contribution we referred to above: a $6.25 billion donation to contribute $250 each to 25 million children age 10 and under.

What if my parent/person fails to open an account?

Supposedly, the Treasury will open one if the child otherwise qualifies.

You think so?

Consider me cynical at the moment.

How is this thing taxed?

It is not: think IRA.

When can the child get to the money?

Figure that the child cannot until he/she turns age 18. If he/she can, something terrible has happened.

What about after age 17?

Then the Trump account gets wonky.

Supposedly this thing becomes a “regular” IRA account.

OK, but it would be a “regular” IRA account with nondeductible contributions in it. In tax lingo, we call this a “nondeductible” IRA, which has greatly lost favor since people have had access to Roth IRAs. Distributions from a Roth are (generally) tax-free. Distributions from a nondeductible are partially tax-free. There is even a tax form (Form 8606) for nondeductibles to track the numbers between taxable and nontaxable.

Inside wonk: you would not believe how difficult it can be to get (some) tax preparation software to run an IRA distribution through Form 8606 to calculate the taxable portion. I have seen more than one staff accountant give up in frustration.

I suppose Congress may further clarify/change the rules for this age-18 flip. I would like to see the flip go to full-Roth and not to this nondeductible-IRA yahtzee, but we will see.

A positive, though: since it flips to a “regular” IRA, you can make annual IRA contributions to it, if you wish. You will need earned income, of course.

Are there penalties for distributions?

You are not supposed to access IRA monies before age 59 ½. If you do, the distributions (adjusting for that wonky nondeductible IRA arithmetic) will be taxable.

In addition to income tax and unless for several permitted purposes (first house, higher education, adoption expenses and so on), there will also be a 10% penalty.

What does CTG think?

You can tell Trump accounts took water during passage of the One Big Beautiful Bill. There is stuff to both like and dislike.

Me? In general, I like.

Let’s say that you can put away $1,000 per year for 18 years. Add the government’s $1,000 seed. Assume market rate of returns, low investment fees and the money remaining untouched (remember: it is not taxed while within the IRA) for 40 to 50 years.

What an incredible gift and legacy to a grandchild.