On May 17, 2010, the IRS began revoking the tax-exempt statuses of nonprofits that failed to file three consecutive annual returns (Form 990-N, 990-EZ, or 990-PF).  As a result, as many as 300,000 nonprofits may lose their tax-exempt status, effectively shrinking the nonprofit sector by 25%.

On July 26, 2010, the IRS released a guidance on filing relief for Form 990-N and 990-EZ filers in danger of losing their tax exemptions.  However, this one-time relief is ONLY available to small organizations whose filing deadlines fall on or after May 17, 2010, and before October 15, 2010.  (All returns filed under this program are due no later than October 15, 2010.) 

These events beg the question:  Why is it important to preserve an organization’s tax-exempt status? 

A nonprofit organization has numerous benefits that will help it to survive economically.  There are also benefits to the contributors, which make a donation to the organization more attractive.  Some of the benefits of being a nonprofit organization include:

• Exemption from paying federal income tax.
• May receive tax-deductible gifts.
• May receive tax-deductible contributions.
• Eligibility to receive grants from foundations.
• Contributions to a nonprofit are tax deductible for donors to the organization.

Protecting the organization’s tax-exempt status is vitally important to a nonprofit organization.  But, what happens to a nonprofit that loses its exemption?  What happens if a donor gives to a charity that has lost its exemption?

Contact the Church Law Group at 972-444-8777 to find out the answers to these questions and more!

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Entitlement to a clergy housing allowance is not as straightforward as is often imagined.  Right now, religious nonprofit organizations are under heavy assault by the IRS, so a conservative approach is warranted.

The Internal Revenue Code allows a tax-free housing benefit for a “minister of the gospel” in two situations.  First, the employer can allow the minister to live rent-free in a home (parsonage) owned by the church.  The minister can exclude this benefit from gross income up to the home’s fair rental value.  The value of the parsonage must be clearly distinguished from other compensation, and includes items such as furniture, insurance, utilities, and taxes.  Second, if a parsonage is not provided to the minister, a nontaxable housing allowance can be provided so that the minister can rent or buy a home.  This is the option used most frequently.  It provides ministers with the freedom to choose their preferred type of housing.  The allowance covers items such as mortgage payments (principal and interest), insurance, repairs, utilities, and other expenses to keep the home in working order.

Although the term “minister” is not defined in the Internal Revenue Code, the IRS and courts have specified five factors that should be used to identify a minister.  The factors include:

• Performing sacerdotal functions (i.e. weddings and funerals, etc.);
• Conducting worship services;
• Controlling or maintaining the organization;
• Considered a spirtual leader; and
• Ordained, licensed, or commissioned.

Only the last factor is required in all cases: the individual must be ordained, licensed, or commissioned.  Although it is clear from existing caselaw that the remaining four factors need not all be present for a person to be considered a minister for tax reporting, it is unclear how many of the remaining four factors must be met.

It is not uncommon for an employee’s job duties to include both ministerial and nonministerial functions.  However, if more than 50% of an employee’s time is devoted to nonministry (i.e. secular) duties, the church will be put in a tenuous position if it grants a housing allowance to the employee.  Many churches think it seems unfair to exclude employees from the benefits of a housing allowance if part of their job involves performing the typical duties of a minister.  However, the church cannot ignore the fact that if most of the employee’s duties are secular, in the eyes of a court they will fail to meet the definition of a minister. 

The Church Law Group has released a Guide to Executive Compensation (with forms) that is now available for purchase. Email churchlawgroup@amlawteam.com or call 972-444-8777 if you have any questions about clergy housing allowances or are interested in the Church Law Group Guide to Executive Compensation.

You can also visit us on You Tube to hear David Middlebrook speak about some important  information on housing allowances!!!

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There is considerable disagreement on how boards of directors should function.  For a religious nonprofit organization, the board of directors is (or should be) the critical body that determines the entity’s programs and investments and provides management guidance.  The role of the officers and employees is important, but the board of directors has the responsibility to frame the organization’s overall policy directions and objectives.  The governing board has the ultimate responsibility for the organization’s activities—and can be a prime target when matters of liability arise.

One of the main responsibilities of board members is to maintain financial accountability and effective oversight of the organization they serve.  Board members act as trustees of the organization’s assets and must exercise due diligence to see that the organization is well managed and that its financial situation remains sound.  Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient.  Board members, as stewards of public trust, must always act for the good of the organization, rather than for their personal benefit.  They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.

It is important to remember, however, that individual board members have responsibilities but not personal authority over the organization.  Since members have no individual authority to make organizational decisions, the board collectively is responsible for:

1) Developing and maintaining the organization’s mission;

2) Maintaining the organization’s tax-exempt status and (if applicable) its ability to attract charitable contributions;

3) Protecting the organization’s resources and approving the budget;

4) Hiring and evaluating the chief executive, and generally overseeing the organization’s management; and

5) Supporting any fundraising that the organization undertakes.

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One factor which can contribute to the long-term success of a nonprofit organization is the presence of an able board of directors who can complement the vision and resources of the organization.  However, unlike large for-profit corporations who elect their directors based on the individual’s business and legal savvy, most nonprofit organizations elect their board of directors based upon the individual’s loyalty and dedication to the organization.  As a result, many persons serving on their nonprofit organization’s board may not have a clear understanding of their rights, responsibilities and, most importantly, their potential personal liability.  In an effort to fill this gap, the Church Law Group is focusing this month on training for board members.  Our goal is to to set-out the basic rules which all directors should follow and to discuss a few ways in which nonprofit organizations can limit the potential exposure faced by its board members. 

Let’s start with the traditional duties of individual board members:

The duties of the board of directors of a nonprofit organization can be encapsulated in the three D’s: duty of care, duty of loyalty, and duty of obedience.  Defined by case law, these are legal standards against which all actions taken by directors are held.  They are collective duties adhering to the entire board and require the active participation of all board members.  Accountability can be demonstrated by showing the effective discharge of these duties.

1. Duty of Care.  The duty of care requires that directors of a nonprofit organization be reasonably informed about the organization’s activities, participate in decisions, and do so in good faith and with the care of an ordinarily prudent person in similar circumstances.  The duty of care could be carried out by attendance at meetings of the board and appropriate committees, advance preparation for board meetings, obtaining information before voting to make good decisions, use of independent judgment, periodic examination of the credentials and performance of those who serve the organization, and frequent review of the organization’s finances and financial policies.

2. Duty of Loyalty.  The duty of loyalty requires board members to exercise their power in the interest of the organization and not in their own interest or the interest of another entity, particularly one in which they have a formal relationship.  When acting on behalf of the organization, board members must put the interests of the organization before their personal and professional interests.  In practice, the duty of loyalty is carried out by disclosure of any conflicts of interest, adherence to the organization’s conflict-of-interest policy, avoidance of the use of corporate opportunities for the individual’s personal gain or benefit, and nondisclosure of confidential information about the organization

3. Duty of Obedience.  The duty of obedience requires that directors of a nonprofit organization comply with applicable federal, state, and local laws, adhere to the organization’s bylaws and existing policies, and remain the guardians of the mission.

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Not all nonprofit organizations are tax exempt.  However, the IRS, due to constitutional constraints, gives churches and some religious organizations special exemptions.  These include not being required to file either an application for exemption (Form 1023) or an annual report (Form 990).  Unfortunately, in our current day and age, many financial planners, accountants, and attorneys will not allow their clients to give money to an organization which has not received IRS recognition.  So, while there is no requirement that a church apply for tax exemption, it is highly recommended. 

An organization seeking recognition of exemption as a charitable organization should file Form 1023.  The Form 1023 application includes a description of the purposes and activities of the organization, its fundraising plans, the composition of its board of directors, its compensation practices, and financial information.  The organization’s articles of organization and bylaws and perhaps other documents must be attached.  This application is a significant legal document for an exempt organization, and it should be prepared and retained accordingly.  Every statement made in the application should be carefully considered.

If the IRS agrees that the organization is tax exempt, it will issue a determination letter. This determination letter can serve as proof to a potential donor that a contemplated donation is tax-deductible.  In addition, the letter may serve as proof to state sales tax authorities that the church is tax-exempt and not subject to sales tax.  It may also help a minister who wishes to elect out of the Social Security system as the determination letter provides proof that the organization that ordained him or her is recognized as a church by the IRS.

Has your church obtained tax-exempt status from the IRS?

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