In a previous blog , I described the revocation of church status of the Foundation for Human Understanding.  In that case, the Federal Circuit Court of Appeals  discussed three different tests to determine church status.  These tests (naturally) intrigued me so gave up playing angry birds for three days to dedicate myself to researching all of the cases I could find that determine church status.  I determined that all of the different approaches that have been used to determined if an organization is a church (and there are more than 3) could all fit under one of the tests–the approach set forth in the 1980 District Court case: American Guidance Foundation, Inc. v. U.S.  In short, the test requires examining 14 Factors established by the IRS and requires at a minimum that the organization have “a body of believers or communicants that assembles regularly in order to worship.”  For anyone who finds this interesting or is suffering from insomnia, the full paper can be accessed here.

On July 7, the IRS released its Exempt Organization Newsletter, Issue Number 2011-12.  Topics include the following:

1. Notice and Request for Comments Regarding the Community Health Needs Assessment Requirements for Tax-Exempt Hospitals
2. Report of the Advisory Committee on Tax-Exempt and Government Entities
3. New YouTube Video: How to Get Your Tax-Exempt Status Back
4. New Directive on Booster Clubs and Non-Exempt Activity
5. Summer SSA/IRS Reporter
6. New IRS Webinar Recordings
7. Save the Date:  NASCO Annual Conference Scheduled for October 3, 2011
8. Register Now for Nationwide Tax Forums

Click here to review IRS Newsletter Issue 2011-12.

On June 13, the IRS released its Exempt Organization Newsletter, Issue Number 2011-11.  Topics include the following:

1. IRS Names New Members to Advisory Committee on Tax-Exempt and Government Entities — Public Meeting to be Held June 15
2. Report of Foreign Bank and Financial Accounts (FBAR) Due June 30
3. Guidance for Organizations Automatically Revoked for Failure to File Annual Return or Notice for Three Consecutive Years and Contributors
4. Return Preparer Office Now on Facebook

Click here to review IRS Newsletter Issue 2011-11.

Notice 2011-52 describes regulatory provisions that Treasury and the IRS intend to propose regarding the community health needs assessment (CHNA) requirements applicable to charitable hospital organizations under the Patient Protection and Affordable Care Act of 2010. The notice describes how hospital organizations can document a CHNA in a written report, make the CHNA widely available to the public and adopt an implementation strategy to meet the health needs identified through the CHNA.

For decades there has been a risk and concern whether the IRS would seek to apply the gift tax to contributions made to a Section 501(c)(4) social welfare organization.  In May the IRS confirmed that it had sent letters to five donors who had not filed gift tax returns in connection with a contribution to a Section 501(c)(4) in order to determine if returns should have been filed and if the gifts were taxable.  Obviously, the impact of taxing contributions to Section 501(c)(4) organizations is substantial and arguably represents a deviation from “industry” practice. 

On July 7, the IRS Deputy Commissioner for Services and Enforcement announced that any current audits should be closed and that his office will be coordinating with the Office of Chief Counsel to determine whether there is a need for further guidance in this area.  Click here to read his full statement.  The IRS website was also updated on July 7 to provide “questions have arisen regarding the applicability of the gift tax to contributions to 501(c)(4) organizations. The IRS has little history to draw from in this area and the limited guidance we previously issued on this matter is almost thirty years old.  While we review the need for additional guidance or legislation, we will not use resources to pursue examinations on this issue.  Any future action we take will be prospective and after notice to the public.  As we consider this issue, it is possible that Congress may choose to clearly articulate through legislation the applicability of the gift tax to contributions to 501(c)(4) organizations.”

This is good news for now – and it will be interesting to see how the IRS and/or Congress handle this important issue.

The so-called “private benefit doctrine” prohibits 501(c)(3) organizations from providing a “substantial” benefit to private parties. Much has been said and written about what constitutes a substantial benefit; for purposes of this blog, I will simply provide an example to illustrate the point. An organization that presents musical performances, for example, may generally qualify under 501(c)(3). But if it (i) pays its performers twice fair market value, (ii) arranges for all performers to sign a subsequent contract with a for-profit arts company or (iii) if it only performs for one wealthy family, then it would violate the private benefit doctrine by providing a prohibited substantial benefit to (i) the actors, (ii) the for-profit company or (iii) the wealthy family.

In PLR 201125045, the organization’s mission was to “foster intercultural understanding to the world through cultural exchange” and it sought 501(c)(3) status on the basis that it furthers an educational purpose through its promotion of cultural exchange. The organization operated a website that enabled a “global community of members to establish personal profiles”, create friendships online and meet individuals willing to offer free accommodations during personal travel. Unfortunately for the organization, the IRS determined that the the organization did not qualify for 501(c)(3) status because its primary purpose was providing free accommodations to its members during personal travel, which violated the private benefit doctrine. This is similar to circumstance (ii) above; it behooves a 501(c)(3) organization to examine its activities and transactions through the lens of the private benefit doctrine.