2021 Session Dividers

General Session

Tax & Legal Update for Religious Organizations Elaine Sommerville, CPA, Shareholder

Sommerville & Associates, P.C. &

Frank Sommerville, JD, CPA, Shareholder Weycer, Kaplan, Pulaski, & Zuber

2021 Tax Update for Religious Organizations

Presented by:

ElaineSommerville,CPASommerville&Associates,P.C.

[email protected] Elainesommerville.blogspot.com

FrankSommerville,JD,CPAWeycer,Kaplan,Pulaski&Zuber,P.C.

[email protected] [email protected]

Page | 1 © Frank and Elaine Sommerville 2021

2021 Tax & Legal Update for Religious Organizations

COVID‐19

a. Notice 2021‐42 – Leave Sharing Programs – Employers may continue to operate leave sharing programs through 2021 for employees who want to donate the value of paid time off to an exempt organization working to relieve the effects of the pandemic.

b. Employer‐Provided Dependent Care Assistance – For 2021, the American Rescue Plan increases employer‐provided dependent care assistance to $10,500. This benefit may include amounts provided through a cafeteria plan if the plan is amended by the last day of the plan year.

c. Employee Retention Credit – Expanded for all of 2021 and available if 1) a full or partial suspension of the business has occurred including due to restrictions on meeting size or 2) a reduction in gross receipts of at least 21% has occurred compared to the same quarter in 2019 (for 2020 a 50% reduction was required.) However, wages paid to a minister do not qualify for the credit. An employer may benefit from the credit and a PPP loan if the same wages are not used to justify both benefits. Also, for the last portion of 2021, the nonrefundable portion of the credit is claimed against the employer portion of Medicare taxes, but excess credit is fully refundable. The IRS has declared that PPP loan proceeds or forgiveness is not a part of “gross receipts” in determining eligibility for the program. As of May 6, 2021, there were 1.9 million unprocessed Forms 941 in the system. A Form 941‐X may not be processed for the employer until the original Form 941 is processed. Due to this snag in the system, there were 100,000 unprocessed Forms 941‐X in the system on May 6, 2021. See Notice 2021‐23, 2021‐20. (Warning: the new infrastructure bill may remove the credit for most employers for the last quarter of 2021.)

d. PPP Loan Forgiveness – Churches can apply for a PPP loan forgiveness after 24 weeks have passed since receiving the loan. The church will have up to 5 years to repay the 1% interest loan, or the loan may be forgiven if the church incurs qualifying expenses within 24 weeks (or eight weeks for earlier loans, if elected) of receiving the loan. Qualifying expenses include payroll costs, rent of real or personal property, interest on certain loans, and utilities. The sick and emergency leave wages or wages used for the employee retention credit cannot be used in the PPP loan forgiveness calculation. Churches that qualify for the employee retention credit should carefully coordinate payroll costs used to justify forgiveness of PPP loans with the payroll costs eligible for the employee retention credit. Loans of less than $150,000 may be forgiven with the 3508S or a new SBA portal has been opened for use by these borrowers.


e. Cafeteria Plans – Several provisions have been enacted to allow for carryovers of unused amounts, changes in elections, and other benefits that generally are prohibited for such plans. Churches with these plans may seek to explore options that would allow employees to use still funds that would usually be lost if not used.

f. Reopening Issues – Risk management is imperative. Constantly monitor federal, state, and local health authorities. Follow all suggestions. Sanitize frequently. Consider requesting people wear masks if not fully vaccinated. Reduce touch points by eliminating bulletins, hymnals, offering plates, and pew Bibles. Plan your response for when a member or staff catches COVID‐19. Remember privacy issues when communicating about individuals infected by COVID‐19.

IRS Activity

a. IRS TE/GE Fiscal Year 2022 Program – The IRS issued is program letter for exempt organizations citing a much anticipated increase in its workforce and a greater focus on compliance issues with exempt organizations. The IRS provided the following site as the place to monitor compliance strategies https://www.irs.gov/government‐entities/tax‐exempt‐government‐entities‐compliance‐program‐and‐priorities. Topping the list is worker classification including organizations that file both a Form W‐2 and a Form 1099 for the same person. Also included on the list of compliance initiatives is examinations on organizations filing Form 990‐N and the compliance with the excise tax on excess compensation.

b. Americans for Prosperity Foundation v Bonta, S Ct, 127 AFTR2d 2021‐813 – Supreme Court rules that the California charity registration requirement requiring full disclosure of donor information was unconstitutional.

c. IRS Dirty Dozen – News Release 2021‐137 – Phishing scams using phone calls or e‐mails top the dirty dozen list along with fake charities. The IRS does not contact you via e‐mail, and they don’t leave messages that say they are calling the cops. Additionally, donors should always be careful to make sure organizations soliciting contributions are valid organizations.

d. IRS restarts collection activity – If notices are received, double‐check the date and be prepared to receive notices with out‐of‐date information.

e. Notice 2020‐36 – IRS proposes revamping the group exemption rules. While portions of the newly proposed regulations would be effective in one year, other portions are effective immediately. The new rules become effective one year after publication. While final action is currently still under consideration, the proposed regulations are not dead. Each subordinate organization to be included in the group exemption letter must be affiliated with the central organization and subject to its general supervision or control and be exempt under the same Internal Revenue Code section of Section 501(c) and must be a public charity under Section 509. Supporting organizations do not qualify for the group. (The IRS


is considering also requiring the same classification for Section 170.) Subordinate organizations included in a group exemption letter must have the same or similar purposes and be classified under the same National Taxonomy of Exempt Entities (NTEE) Code. The subordinate organization must use governing documents promulgated by the supervising organization.

i. General supervision — A subordinate organization is subject to the central organization’s general supervision if the central organization—

1. annually obtains, reviews, and retains information on the subordinate organization’s finances, activities, and compliance with annual filing requirements (see section 7 of this revenue procedure), and

2. transmits written information to (or otherwise educates) the subordinate organization about the requirements to maintain tax‐exempt status under the appropriate paragraph of § 501(c), including annual filing requirements (see section 7 of this revenue procedure).

ii. Control — A subordinate organization is subject to the central organization’s control if—

1. The central organization appoints a majority of the subordinate organization’s officers, directors, or trustees; or

2. A majority of the subordinate organization’s officers, directors, or trustees are officers, directors, or trustees of the central organization.

Tax Exemption Issues

Private Benefit/Inurement Cases

a. Onojuju v. Commissioner, T.C. Memo 2021‐94 – Spouse of doctor assessed intermediate sanctions (225%) because she received checks from nonprofit medical clinic without performing any services. She was unaware of the checks until an IRS examination discovered them. Husband who fled to Nigeria when IRS exam began was also assessed intermediate sanction (225%) on his unreported income from the clinic.

b. Vincent J. Fumo v. Commissioner, TC Memo 2021‐61 – State Senator Fumo argued that he was not a disqualified person for IRC Section 4958 and the related excess benefit transaction rules and penalties because he was not an officer or a director. However, the court determined he was a disqualified person because he could exercise substantial influence over the organization.

c. Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021). The court voided the regulation that required an educational organization’s primary purpose to be


education. It must be determined if Mayo Clinic is an educational organization based on the facts and circumstances of the case.

d. PLR 202118022 – An organization formed to provide funds for veterans to receive a specific therapy usually not covered by insurance was denied exempt status. The therapy was only provided by another organization owned by the founder/president of the exempt organization. This program created an inurement of benefit since it only supported the founder’s business.

e. PLR 202052049 – An organization formed to teach and promote girls’ high school hockey was deemed not exempt since it provided a private benefit by operating member‐designated accounts. The fundraising efforts were seen to relieve the burden of the parents, and the parents did not qualify as a charitable class. Members could pay all the associated fees or participate in fundraising, but they had to pay the fees one way or another.

Exempt Activities & Organizational Test Issues

a. Tikar, Inc. v. Commissioner TC Memo 2021‐53 – An organization formed to exhibit and promote African art and artifacts failed to be exempt since it only arranged for limited exhibitions throughout the years, and it appeared its founder actually owned the artifacts, so the activities created private inurement when they did occur.

b. PLR 202138010 – Organization sought exemption and church status, but the religious activities centered on the use of a controlled and illegal substance and would constitute the distribution of the substance. At the time of the request for exemption no waiver of these rules had been granted to the organization under the Religious Freedom Restoration Act. In regards to being a church, the activities did not meet the “regular congregation or regular worship services” requirements.

c. PLR 202140017 – Organization formed to support and promote vintage car racing failed the organizational test since its dissolution clause specifically listed an organization but didn’t say what should be done if the organization wasn’t in existence at the time of dissolution. Also the purposes clause was not restricted to exempt purposes. Also the operational test failed since the planning and hosting of racing events was for the club members and expenses went to support this nonexempt purpose. Events were deemed to be primarily for recreational and entertainment purposes and were more social events than educational events.

d. PLR 202125022 ‐ Documents fail organizational test since the purpose clause is too broad and the operations of a membership club for equine activities is not an exempt purpose.

e. PLR 202105009 – The organization’s governing documents omitted a purpose and dissolution clause, and the activity of operating an adult softball team is not an exempt purpose.


f. PLR 202103018 – The organization operated primarily for social and recreational activities, and these are not exempt purposes. The governing documents also failed to contain the mandatory clauses to meet the organizational tests.

Grant Programs

a. PLR 202127041 – Organization allowed “members” to work at concession stands and earn money allocated to their personal accounts. Since the organization requires applicants to provide services to qualify for a scholarship, the scholarships represent taxable income. Since the organization awards scholarships without complying with Section 117, the organization is not tax exempt.

b. PLR 202113009 – The organization formed to provide for the medical needs of one of its directors was denied exempt status. The insufficient number of potential grantees disqualified the program and also created an inurement of benefit.

c. PLR 202113008 – Organization was formed to provide for medical treatment and other personal circumstances, but it limited it grantee pool to member and members were limited to specific families. (Original exemption only granted since the organization filed Form 1023‐EZ and lied about having a valid purpose clause in its documents.)

d. PLR 202105010 – An organization was formed to assist people in paying off their student loans. However, the organization did not provide relief to the poor and distressed. “Providing benefits to individuals who are not members of a charitable class is not a charitable activity, and you are therefore not operated exclusively for charitable purposes.”

e. PLR 202101006 – Organization formed to raise funds for a specific purpose denied exempt status. Exemption denied even though after the funds were raised initially for the designated beneficiary, others would also be eligible for assistance. Raising funds to assist one person is not an exempt activity.

Unrelated Business Income/Commercial Purposes

a. E‐filing – Forms 990‐T must now be e‐filed with IRS.

b. PLR 202053020 – An organization formed to create and distribute religious movies was not exempt since, for the most part, the entire operation was operated in the same manner as a for‐profit filmmaker would operate.

c. PLR 202015021 – Grocery store not exempt even though operated in a low‐income neighborhood.

d. PLR 202007019/201934008 – Operating a coffee shop where all profits support mission activities is not tax‐exempt. Operating a coffee shop is not a tax‐exempt activity but a commercial enterprise.


Payroll & Fringe Benefits

a. Advanced Child Tax Credit Payments – Anyone receiving the advanced child tax credit may find themselves with a large tax bill come April 2022. This credit may be especially appropriate for ministers who use the refundable portion of the credit to assist in paying their self‐employment tax. Employees may need to adjust their federal withholding if they are receiving these funds early. Taxpayers may opt‐out of the advance payments.

b. Expanded Tuition Assistance Plans – Originally passed as part of the pandemic relief, tuition assistance plans may now include payments for student loan payments. Expanded by the Consolidated Appropriations Act passed in December of 2020, the benefit can be included in plans through 2025. The cap on overall plan benefits is still $5,250. (There are several hoops to jump through to operate one of these plans!)

c. Arensmeyer v. United States, 2021 WL 2821083 (Ct.of Claims 2021). Bishop cannot recover the funds paid in for self employment tax because he did not receive IRS approval to opt out of SE taxes.

d. Congregation Bais Yakoof v. Commissioner, T.C. Summ. Op. 2020‐21. Church liable for payroll tax and penalties for unpaid payroll taxes. IRS Appeals Officer’s decision not to abate penalties affirmed because the Congregation failed to establish reasonable cause for the nonpayment.

Charitable Contributions

a. Chancellor v. Commissioner, TC Memo 2021‐50 – Taxpayer claimed a contribution deduction for cash contributions and expenses associated with volunteer work performed for her church. The deductions were denied since she couldn’t provide any evidence on who she contributed the cash and since she didn’t provide documentation for dates of service or substantiate her volunteer expenditures.

b. Brown v. Commissioner, T.C. Summ. Op. 2021‐4 – Out‐of‐pocket expenses incurred as a volunteer must still be contemporaneously documented by the charity and likely requires a qualifying acknowledgment from the charity.

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2021 Tax Update for Religious OrganizationsPresented by: Elaine Sommerville, CPAFrank Sommerville, JD, CPA

COVID-19

Copyright Frank & Elaine Sommerville 2021

Leave Sharing Programs – Extended through 2021

Dependent Care - Limits for 2021 go to $10,500

PPP – Forgiveness for many still in the works.

Cafeteria Plans – Mid-year elections available and plan amendments available.

The Employer Retention CreditEligible Employer

2020 Operations were fully or

partially suspended due to government orders affecting commerce, travel or size of gathering

OR

Revenues for the quarter are less than 50% than revenues for the same quarter in 2019 Continues until the calendar

quarter after the first quarter in which revenue exceeds 80% of same quarter for 2019

2021 Operations were fully or

partially suspended due to government orders affecting commerce, travel or size of gathering

OR

Revenues for the quarter are less than 80% than revenues for the same quarter in 2019 If you fail for a quarter,

you may elect to look to the previous quarter for qualification

Copyright Frank & Elaine Sommerville 2021Note: Comparisons to 2020 are only allowed if the employer was not in business in 2019.

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The Employer Retention Credit Amount of the Credit

2020 50% of eligible wages

not to exceed $10,000 per employee for the period March 13, 2020 to December 31, 2020

$5,000 maximum credit per employee for the year

2021 70% of eligible wages

not to exceed $10,000 per employee per calendar quarter

$28,000 maximum credit per employee for the year

Copyright Frank and Elaine Sommerville, CPA 2021

Minister wages do not count as eligible wages for the credit!

COVID-19 & Re-opening Issues

Churches must consider the risks associated with re-opening.

Follow all governmental health directives.

Vaccine policies


IRSActivity

TE/GE issues its fiscal year 2022 programs with a focus on hiring more people and initiating more compliance activities. Hot topics are worker classification and 990-N filing qualifications

Americans for Prosperity – the Supreme Court rules that states cannot require full disclosure of Schedule B information on donors

IRS Dirty Dozen includes various phone and email scams to attempt to get taxpayer data and fake charitable organizations

Collection activity is restarted New Group Exemption Rules – IRS still

reviewing comments & is still working on this. We don’t think it has disappeared.

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Private Benefit and Inurement of Benefit

Private benefit that does not involve a charitable class may threaten exempt status

Inurement of benefit is private benefit that involves persons in control of the church and is absolutely prohibited. The exempt status is threatened, and penalties may be assessed to the individual


Private Benefit/Inurement Rulings

Onojuju v. Commissioner, T.C. Memo 2021-94 – Spouse of doctor assessed intermediate sanctions (225%) because she received checks from nonprofit medical clinic without performing any services.

Vincent J. Fumo v. Commissioner – Individual argued that he was not a disqualified person since he wasn’t an officer or director, but it was ruled he was a person of substantial influence

Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021).The court voided the regulation that required an educational organization’s primary purpose to be education. It must be determined if Mayo Clinic is an educational organization based on the facts and circumstances of the case.


Private Benefit/Inurement Rulings

PLR 202118022 – Organization formed to provide funds for veterans to receive therapy denied exempt status. The therapy was only provided by an organization owned by the founder/president of the exempt organization.

PLR 202052049 – girls’ hockey group operated with member-designated accounts that relieved the burden of the parents more than furthered exempt purposes


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Mandatory Tests for Exemption

All 501(c)(3) organizations must meet two crucial tests to qualify as an exempt organization Organizational test – fulfilled

through mandatory provisions in core governing documents

Operational test – fulfilled by operating exempt purposes

Organizational Test& Operational Test Rulings

Tikar, Inc. v. Commissioner -Organization formed to exhibit and promote African art and artifacts failed to be exempt- only arranged for limited exhibitions throughout the years and artifacts were owned by the founder.

PLR 202138010 – Organization sought exemption and church status, but the religious activities centered on the use of a controlled and illegal substance and would constitute the distribution of the substance.

PLR 202140017 – Organization formed to support and promote vintage car racing failed the organizational test. Faulty dissolution clause and purposes clause. The operational test failed since events were deemed to be primarily for recreational and entertainment purposes and were more social events than educational events.

More Rulings

PLR 202125022 - Documents fail organizational test since the purpose clause is too broad and the operations of a membership club for equine activities is not an exempt purpose.

PLR 202105009 – purpose & dissolution clause missing, and an adult softball team is not an exempt purpose.

PLR 202103018 – purpose & dissolution clause missing and operating for social and recreational purposes is not an exempt purpose


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Grant Programs

All grant programs must be constructed so that they are not operated in a manner that creates private benefit for a noncharitable class

Grant Program Rulings PLR 202127041 – Organization allowed “members”

to work at concession stands and earn money allocated to their personal accounts. Since the organization requires applicants to provide services to qualify for a scholarship, the scholarships represent taxable income. Since the organization awards scholarships without complying with Section 117, the organization is not tax exempt.

PLR 202113009 – Organization formed to provide for the medical needs of one of its directors was denied exempt status.

PLR 202113008 – Providing for medical treatment and other personal circumstances for members, but members were limited to specific families. Charitable class to limited. (Original exemption only granted since the organization filed Form 1023‐EZ and lied as to having a valid purpose clause in its documents.)


More Rulings for Grant Programs

PLR 202105010 – Organization formed to assist students in paying off student loans does not qualify because they didn’t limit assistance to a charitable class

PLR 202101006 – Even though others might be assisted in the future, the organization fails exempt status since it was primarily for one beneficiary


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UNRELATED BUSINESS INCOME

UBI isn’t bad unless it is substantial. It just requires proper identification and reporting.


UBI Rulings

E-filing required of all Forms 990-T now PLR 202053020 – organization formed

to create and distribute religious movies not exempt since it operates in the same manner as any other similar for-profit organization

PLR 202015021 – Grocery store in low-income neighborhood not exempt operation

PLR 202007019 & PLR 201934008 –Operating a coffee shop where all profits support mission activities or to create community relationships creates unrelated business income because operating a coffee shop is not a tax-exempt activity.


Payroll The number one way a church will end up writing a check to the IRS is due to errors and missteps with payroll related issues


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Payroll tips and rulings

Advanced Child Tax Credit Payments –Beware!! Receiving these will affect taxpayer’s tax estimate and they may need to adjust withholding

Tuition Assistance Plans – Plans may be expanded to allow for reimbursement of student loan payments

Arensmeyer v. United States - Bishop cannot recover the funds paid in for self employment tax because he did not receive IRS approval to opt out of SE taxes.

Congregation Bais Yakoof v. Commissioner – Congregation still liable for penalties on unpaid payroll taxes.


Charitable Contributions

Some rules apply to churches, but most of the rules apply to the donors. Churches should be careful about “assisting” donors in securing their contributions.


Charitable ContributionsRulings

Viola Chancellor – Taxpayer claimed a contribution deduction for cash contributions and expenses associated with volunteer work performed for her church, but she couldn’t substantiate any of it

Brown v. Commissioner -Out-of-pocket expenses incurred as a volunteer must still be contemporaneously documented by the charity and likely requires a qualifying acknowledgment from the charity.

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Frank Sommerville, JD, CPAWeycer, Kaplan, Puluski & Zuber, P.C.fsommerville@nonprofitattorney.comNonprofitattorney.blogspot.com

Elaine Sommerville, CPASommerville & Associates, [email protected]

NOW AVAILABLEVisit ChurchLawAndTaxStore.com to order the 2nd Edition of Church Compensation: From Strategic Plan to Compliance by Elaine Sommerville, CPA.


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Takeaways & Things to Do

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