Religious Organizations 2019 Tax Update by Elaine Sommerville, CPA & Frank Sommerville, JD, CPA

2019 Tax Update for Religious Organizations Presented by: Elaine Sommerville, CPA Frank Sommerville, JD, CPA

NorCal Tea Party Patriots v. IRS, ETAL., 119 AFTR 2d 2017-1926 & follow up decision in August 2018 - Judge awards $1.75 million in legal fees in addition to the $3.5 million previous awarded to the claimants in the suit for the unlawful targeting of the groups in the processing or lack thereof, of their exemption applications. The government started issuing checks in January of 2019. ACA Compliance - IRS initiates large scale ACA inquiries which start with a notice of penalties due and proceed from that point. IRS Activity News Release 2019-71 After an intensive 2 weeks of employer site visits, the IRS has issued indictments and sentence some to jail time for bad employment practices. Rev. Proc. 2018-15 issues guidance on when you need to file a new exemption application

Rev. Proc. 2019-22 IRS comes into the age of technology and allows private schools to place nondiscrimination policy on their websites in fulfillment of the notice requirements of Rev. Proc. 75-50. The policy may be included on the school s homepage and must be displayed all year in a manner that it is reasonably expected to be noticed by visitors to the homepage. Rowe v. U.S. Court rules that the IRS does not have to follow IRC Section 7611 in requesting records that apply to the exam of a church employee U.S. v Bible Study Time Director of Exempt Organizations is not high ranking Treasury official for Section 7611 exams More IRS (sorta) Activity

PLR 201922038 Exempt Activities/Operational Test Religious organization sponsoring foreign mission projects fails its operational test when: it did not exercise appropriate discretion and control over the projects.; it didn t receive hard documentation that the projects were operated in a manner consistent with the request for the funds; donor advised funds were operated but no pre-grant inquiries were made, and no follow up documentation was received; Providing management and accounting services for the sponsored projects and donors is not an exempt purpose and the fees charged created a substantial nonexempt activity.; the operation of a nonqualified retirement plan for ministers was not an exempt purpose and provided substantial private benefit to the minister participants. Exempt Activities

Exemption Gone! PLR 201909012 organization was inactive, but still had investment income was ruled to fail the operational test. PLRs 201911018 & 201905008 No activity for 2 years and claims they were going to restart didn t have substance constitute failure of operational test (Also see 201834012, 201833017, 201830014 & 201809009) Operational Test

PLR 201908021, 201908022 & 201802015 All filing 1023-EZ indicating everything was fine, but further review shows flaws in documents and purposes Organizational PLR 201909014 Articles of incorporation lack mandatory dissolution clause and purpose clause. The provisions being in the bylaws was not sufficient( see also PLRs 201904015, 201829006, 201832013 & 201831014) Test

PLR 201907014 Organization created to assist special needs children. However, the organization was only assisting the adopted children of the founders through the remodeling of the founder s home and providing for their care after the founders/parents passed away. PLR 201923026 Organization formed to assist 5 orphans not operated for exempt purposes since it was to benefit 5 designated individuals. Grant Programs PLR 201911008 Organization formed to raise funds to support an individual after a debilitating accident does not qualify. Similar result in PLR 201843013 when support went to a founding family member.

Private Benefit/Inurement PLR 201922036 Compensation paid in excess of the approved amount deemed inurement as were unpaid payroll taxes associated the CEO s compensation and mileage reimbursements based on unverified mileage were inurement. PLR 201921014 Inurement where congregational size small and primarily one family and most funds given were distributed back to the donor since they were operating the church. Also, the church failed to designated compensation packages or follow other basic rules. PLR 201902032 - Failure to follow accountable plan resulted in revocation

PLR 201911006 Organization operated more for paying its fundraisers and providing jobs to insiders than to perform charitable purposes PLR 201906013 IRS requests documentation to support expenses on Form 990 and to prove transactions do not constitute inurement, but it isn t provided Inurement and Private Benefit PLR 201906012 Excess benefit transactions for living expenses paid for president, nonaccountable plan payments not included on Form W-2 and loans that weren t really loans. The transactions happened repeatedly and no safeguards were ever instituted to prevent the transactions

PLR 201906012 Excess benefit transactions for living expenses paid for president, nonaccountable plan payments not included on Form W-2 and loans that weren t really loans. The transactions happened repeatedly, and no safeguards were ever instituted to prevent the transactions Inurement/Private Benefit PLR 201902032 Failure to follow an accountable expense reimbursement plan results in revocation

Farr v. Commissioner Founder of Association for Honest Attorneys assessed sanctions for personal expenses paid by the organization. Both 1st and 2nd tier taxes assessed despite claims that the amounts were compensation and repayment of loans to the organization. Documentation wasn t provided to support claims. Intermediate Sanctions

Form 990-T redesigned Notice 2018-99 - Provision of transportation fringe benefits creates UBI to the extent of the costs involved in providing the benefits Assign expenses to reserved spaces Determine if remaining spaces more than 50% used by employees, if yes, then assign expenses to employee used spaces If the amount of the expenses is more than $1,000, file Form 990-T UBI & Tax Reform

UBI/Commerciality Doctrine PLR 201934008 Organization formed to operate a coffee house to provide a platform for building community relationships is denied exempt status since the coffee house is a substantial unrelated business. PLR 201911010 Organization effectively operating a restaurant in an affluent area did not operate a substantial job training program and except for the philosophy to pay what you think it s worth or what you can , it was a commercial venture.

New Minimum Salary. As of January 1, 2020, the minimum salary for an exempt employee is $684 per week. New 1099-NEC Report independent contractor payments paid in on new Form 1099-NEC to replace reporting payments in Box 7 of Form 1099-Misc. Mikel A. Brown, Sr., et ux., TC Memo 2019-69 Parsonage not allowed since it wasn t designated in any way and gifts given from the congregation were taxable due to expectations created by the church, the creation of special giving days and the church s structure of giving. Payroll Wayne R. Felton Pastor who received offerings placed in blue envelopes directly received taxable gifts

Payroll Issues Gaylor, et Al. 7th Circuit rules the housing allowance is constitutional Payroll New HRA Rules Coming!!!! Get ready in 2019! Certain plans may be integrated with individual health insurance

Moving expenses are taxable unless they are for expenses incurred in 2017 Payroll & Tax Reform Notice 2019-9 provides guidance on the excise tax on compensation in excess of $1 million

IRA Contributions Contributions from IRA accounts that are qualified distributions should not be included on a donor s regular contribution statement but do need a qualifying receipt to be legitimate. Robert A. Oliveri v. Commissioner, TC Memo 2019-57 Minister stated he traveled on behalf of his organization and/or the Catholic Church, but activities were not sufficient to be considered as business expenses and he didn t have adequate substantiation to be contributions. Charitable Contributions Archer v. Commissioner No deductions for noncash where receipts are self completed with just number of bags or boxes Grainger Woman who bought a lot of clothing using discounts and loyalty points couldn t turn around an give the items away and claim FMV contribution

Frank Sommerville, JD, CPA fsommerville@wkpz.com THANK YOU!!!!! Elaine Sommerville, CPA elaine@nonprofit-tax.com