IRS Rejects A Religious Organization’s Tax-Exempt Application

 

We have a nonprofit application for exempt status that has gone off the rails.  

The reviewing (IRS) officer wanted them, for example, to recharter under a different category of nonprofit status.

I considered it arbitrary, but if it made him happy….

He called this week threatening to terminate his review altogether. I called him back immediately.

What happened, I asked

You have not forwarded all the information I asked for, he explained.

I faxed you several documents in early June. I said. I am unaware of having omitted anything.

I need state certification of the amendment to the charter, he replied.

Which he had not requested previously.

Fine. I called the secretary of state’s office, explaining my situation. They were very helpful and by the end of the day I received a verification that I could forward to the IRS.

The nonprofit, by the way, is a high school booster club. The IRS is treating them like they were Amazon. Folks, these are parents selling pop and snacks at high school games. All they are trying to do is buy bleachers and build restrooms nearer the athletic fields. The IRS overkill here is ridiculous.

My previous exempt application, on the other hand, went smoothly. I had one conversation with the reviewing officer and that was it.

Yes, one’s experience with the IRS can vary greatly depending on whom one is working with.

I am looking at IRS response to an application by an organization called Christians Engaged. It caught my attention for two reasons: first, the response came out of Cincinnati; second, the organization got turned down. I get curious when an application is rejected. I remember, for example, an application rejected for being little more than a masquerade for sending family members to college on a tax-deductible basis.

Let’s set this up:

(1)  The organization was organized in Texas in 2019.

(2)  The founder and president is a former Republican Congressional candidate and a preacher.

(3)  The vice president is a former Promise Keepers prayer coordinator and a homeschool mom.

(4)  The secretary is a millennial managing Republican field teams in Collins county, Texas.

Sounds 2021-ish.

The organization’s mission statement includes the following:

a.    Regular prayer for the nation

b.    Impact culture by voting every election

c.    Encourage political education and activism

d.    Educate Christians on the importance of prayer, voting and nonpartisan political engagement

Got it. There is noticeable call-to-action here.

So what are the activities of Christians Engaged?

(1)  Hold weekly prayer meetings for state and federal leaders, including distribution of program outlines to participating churches.

(2)  Maintain a website and social media providing educational materials and connections for Christians to become politically active.

(3)  Educate believers on issues central to biblical faith, such as the sanctity of life, the meaning of marriage, private versus governmental ethics, religious liberty, and so on.

(4)  Conduct educational activities, including a course in political activism, with a basis in Biblical and Christian value systems.

(5)  Educate on how to select between imperfect candidates as well as political party impact on elected officials.

Tax-exempts have to be careful when they approach political activities.  The type of exempt we are discussing here is the (c)(3) - the most favorable tax status, as contributions to a (c)(3) are tax-deductible.

As a generalization, a tax-exempt is permitted to advocate on issues affecting them, the community, society and the nation. Think environmental protection or domestic abuse, for example, and you will get a feel for it.

What it cannot do is lobby (at least, not to any significant extent).

What is lobbying?

An obvious example is direct lobbying: contacting an elected or government official with the intent of influencing new or existing legislation.

Less obvious is indirect lobbying, sometimes referred to as grassroots lobbying. Rather than contacting an elected or government official directly, the goal is to influence and motivate the public to do so.

To me this definition is soapy water. A tax exempt is allowed to advocate, and obviously it will advocate on behalf of its mission statement. An early education (c)(3) will, for example, advocate with the goal of getting someone to leave the couch and take action on early education matters.  

We have to tighten-up the definition of grassroots lobbying to make it workable.

How about this:

Attempt to influence the general public through communications that:

·      Refer to specific legislation

·      Reflect a point of view on said legislation, and

·      Include a call to action

Better. It seems that a general education or exhortation mission – and leaving specific legislation or candidates alone - will fit into this definition.

What did the IRS reviewing officer see in the Christians Engaged application?

(1)  The activities approach that of an action organization, involving itself with political campaigns and candidates.

How, me asks?

The organization involves itself on issues prominent in political campaigns, instructing what the Bible says about the issue and how the public should vote.

(2)  The issues discussed are more commonly affiliated with certain candidates of one political party rather than candidates of another party, meaning the organization’s activities are not neutral.

(3)  The organization itself is not neutral, as it instructs people on using and voting the Bible. 

(4)  The organization serves the interest of the Republican party more than incidentally, meaning it serves a substantial nonexempt purpose.

 Huh?

Let’s just quote the IRS: 

Specifically, you educate Christians on what the Bible says in areas where they can be instrumental including the areas of sanctity of life, the definition of marriage, biblical justice, freedom of speech, defense, and borders and immigration, U.S. and Israel relations. The bible teachings are typically affiliated with the [Republican] party and candidates.”

That took a turn I did not expect.

I expected an analysis of applying soapy-water standards of grassroots lobbying to societal reality in the 21^st century.  

We got something … else.

The matter is being appealed, of course.

1000% Political Sales Tax

Let’s return to the topic of state tax lunacy.

Our destination? California, a frequent contestant (if not winner) of the popular gameshow “Five Short of a Nickel.”

A citizen initiative posted on the California Attorney General’s website provides the following:

This initiative amends the California Constitution, Article 13, Section 35,(b).

It adds a section 3 as follows:

"For the privilege of influencing public elections and political issues, a sales tax of 1,000% (one thousand percent) is hereby imposed upon Political Advertisements. The proceeds of which shall solely benefit California public education. There shall be no further exemptions to this tax except as federally required or as passed by a California ballot initiative.

Political Advertisements shall mean any political advertising delivered within the state of California. This is applicable to both cash and barter transactions. This includes but is not limited to all media spending by political parties, political action committees or candidates.

This sales tax will not apply to the first $1,000,000 (one million dollars) of spending within a calendar year by any tax entity. However, if a group of tax entities are controlled or coordinated then this first one million dollar of sales tax relief shall only apply to the group of entities and not to the individual entities.

If a Federal District Court or Supreme Court of the United States find this tax to be too high, then this law shall immediately ratchet down to the highest acceptable level and remain in place.”

Well then.

And it perfectly typifies much of what has contaminated tax law in recent years:

(1) The insistence on wielding tax law to accomplish a social program, whether by granting a boon (such as the new markets tax credit) or striking a blow (such as the ACA penalty). 

(2) The delegation of actual tax writing to a non-electable bureaucracy. For example, what in the world does “Political Advertisements” mean? He or she who gets to define this term will rank among the most powerful of California politicos.

(3)  An ignorance if not contempt for tax doctrines, precedent or potential litigation. To begin with, the California Franchise Tax Board would have to defend a 1000% tax against a free speech challenge under the First Amendment. One also wonders whether the "takings" clause of the Constitution could be invoked. Is this really a tax issue or just the overheated opinion of a grievance dispenser?

Citizen initiatives are peculiar to California politics. They began as a way to limit the outsized influence of special interests but have devolved into a means to sidestep Sacramento, assuming one can recruit a deep-heeled supporter willing to fund the initiative. I trust there is little chance that this one will pass.

Nonetheless, let’s give a round of applause as we present the award to this week’s winner.

IRS Ends Gift Tax Probes of Non-Profit Groups

On  July 7  the IRS said that it would stop its examinations of tax-exempt 501(c)(4) organizations. The IRS had quite recently been reviewing donors to these organizations for compliance with gift tax return requirements.

There is some uncertainty in the tax literature whether contributions to these organizations would be considered “gifts.” If so, and depending on the amount, there could be a gift tax return requirement. Now, when I say uncertainty, I mean that there is a classroom argument to be made. The IRS has not pursued this matter for nigh near 30 years, so it is not something that has concerned many practitioners.

The classic charity is a 501(c)(3). We are talking about (c)(4)’s, which are “social welfare” organizations. The idea is that the organization promotes the common good, although that common good can be targeted to a certain slice of the population. The AARP, for example, is a 501(c)(4), and that slice is people over age 50. A (c)(4) can even lobby, as long as it is not the primary thing the (c)(4) does. A (c)(3)  cannot go as far with lobbying as a (c)(4) can.

The big difference? Donations to a(c)(3) are deductible on your income tax return. Donations to a (c)(4) are not.

Let’s fast forward. What has changed? Well, in the last election cycle the (c)(4)s raised seven times as much money for Republican causes than for Democrat causes.

Then the IRS announced that it wanted to “look into” the (c)(4)s.

Republicans in both the House and Senate immediately questioned why the IRS was going there.

While the IRS statement is welcome, lawmakers want to find out what, if any, political muscle was used. The IRS says there was none. Republicans of course are highly skeptical.

The IRS is Pursuing 501(c)(4)s

The 2011 Workplan of the IRS Exempt Organizations Division states:

"[i]n recent years, our examination program has concentrated on section 501(c)(3) organizations. Beginning in FY 2011, we are increasing our focus on section 501(c)(4), (5) and (6) organizations."

The (c)(3) is the classic charity – Muscular Dystrophy or March of Dimes, for example. The purpose of a (c)(4) is to pursue a near-endless range of public policy goals through action and advocacy. Many of these entities are barred from (c)(3) status because they express their advocacy through political activity. It is quite common to couple a (c)(3) with a (c)(4). You already know some of the big (c)(4) players, organizations such as AARP and the National Rifle Association.

Now let’s carve-out the meaning of “political activities”:

* Promoting legislation germane to the (c)(4)s purpose is considered a permissible social welfare purpose. Therefore an organization can qualify as tax-exempt under( c)(4) even if the organization’s only activity is lobbying, as long as the lobbying is related to its exempt purpose.
* A social welfare purpose does not include participating in an election in order to advance or defeat a given candidate. Candidate-related activity cannot be the (c)(4)s primary activity. The IRS does not tell us what “primary” means, and advisors differ. Some advisors s feel comfortable with electioneering approaching (but always remaining below) 50% of the organization’s total activities. It is unclear how to even measure activities. What is the measure: dollars spent, time spent by staff and volunteers, a percentage of fixed expenses (such as rent)?

So lobbying is acceptable but electioneering is not.

Donations to (c)(4)s are not afforded the same protection as a (c)(3), and the IRS has held its powder for almost 30 years on whether it would consider (c)(4) donations to be subject to the gift tax.

That has changed.

How would the IRS know who donated to a (c)(4)? A (c)(4) has to disclose to the IRS on its 990 filing contributors who donated $5,000 or more. This list however does not have to be publicly disclosed. Therefore, you and I might not know, but the IRS would. It would not be a difficult task for the IRS to identify donors for audit.

And they have. The IRS has recently sent letters that read as follows:

"Your 2008 gift tax return (Form 709) has been assigned to me for examination. The Internal Revenue Service has received information that you donated cash to [REDACTED], an IRC Section 501(c)(4) organization. Donations to 501(c)(4) organizations are taxable gifts and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709)."

The federal gift tax applies to a gratuitous transfer of property by an individual. The gift tax is separate from the individual income tax. Not all gratuitous transfers are subject to the gift tax. Transfers between spouses are not considered gifts, for example. An individual can give away $13,000 per year to anyone for any reason without involving the gift tax. Donations to (c)(3)s are not considered gifts, irrespective of the amount. Donations to a 527 organization (that is, a PAC) are not considered gifts. Donations to a (c)(4) are considered gifts.

At least they are considered gifts by the IRS. The IRS pulled out almost 30 years ago, and the limited guidance and cases in this area leaves doubt that the IRS is correct. If one focuses in on the political nature of the contribution, then one has to consider Stern and Carson, for example. In Stern (CA-5, 1971), the IRS lost its argument that campaign contributions were taxable gifts. In Carson (CA-10, 1981) the Tax Court held that Congress did not intend for gift tax to apply to campaign contributions, and the Tenth Circuit affirmed on this point.

We almost undoubtedly will see this matter litigated.