Governance Structures and Governance Structures and Unique Tax Issues for Unique Tax Issues for Religious Organizations Religious Organizations April 29, 2011 Stuart J. Lark, Esq. J. Hugh Jones, Esq. Holme Roberts & Owen LLP 90 S. Cascade Ave., Suite 1300 Colorado Springs, CO 80903 (719) 473-3800 #213127v4
Governance Structures and Unique Tax Issues for Religious Organizations Accommodations to protect the religious character and mission of religious organizations include the following: Tax Exemptions Additional Exemptions for Churches, Religious Orders, and Ministers Employment Accommodations Other Accommodations 2
Tax Exemptions Income Tax I.R.C. 501(c)(3): Organized and operated exclusively for religious purposes Colorado state law defers to federal law The U.S. Supreme Court has held that these kinds of tax exemptions are constitutional 3
Tax Exemptions Income Tax No tax definition of “religion,” “religious organization,” or “religious purposes” Courts avoid deciding whether various beliefs or activities qualify as religion or religious Southern Church of Universal Brotherhood Assembled Not religious versus not bona fide 4
Tax Exemptions Property Tax Colorado Constitution: “Property . . . used solely and exclusively for religious worship . . . shall be exempt from taxation” Longstanding liberal rule of construction 5
Tax Exemptions Property Tax Maurer v. Young Life , 779 P.2d 1317 (Colo. 1989) “Although not all the activities conducted on the Young Life properties are inherently religious in nature, by considering the character of the owner . . . the Board could and did conclude that any nonreligious aspects of these activities were necessarily incidental to the religious worship and reflection purposes for which Young Life claimed the properties were used” 6
Tax Exemptions Property Tax Statutory religious property tax exemption amended in 1990 Exempt property may be used for any religious purpose Denial shall be based only upon ground that: the religious mission and purposes are not religious beliefs sincerely held by the owner, the property is not actually used for the purposes set forth in such application, or the property is used for private gain or corporate profit 7
Tax Exemptions Current Property Tax Case YMCA of the Rockies Mountain camp activities in a “Christian Environment” Clear Christian mission and motivation Voluntary participation Chaplain program Long term strategy for mission No distinctly religious requirements for employees or guests 8
Tax Exemptions Sales/Use Tax Colorado statute exempts: “All sales made to charitable organizations, in the conduct of their regular charitable functions and activities” “Charitable organization” is defined to include entities organized and operated exclusively for religious purposes 9
Tax Exemptions Sales/Use Tax “Regular [religious] functions and activities” Broad interpretation: All activities motivated by a religious purpose Narrow interpretation: Only activities with sufficient amount of distinctly religious content In 2009, Colorado Supreme Court held that courts cannot distinguish between the religious and secular activities of a religious organization for sales tax exemption purposes Consistent with Maurer and broad interpretation 10
Tax Exemptions Sales/Use Tax Sales and use taxes may also be imposed at the city or county level A number of “home rule municipalities” have their own sales tax exemption provisions City of Pueblo exempts “charitable organizations,” which is defined to include “religious organizations” described in I.R.C. § 501(c)(3) 11
Tax Exemptions Sales/Use Tax Villa Pueblo Towers A senior residential facility operated by a Catholic organization in furtherance of Catholic mission No required activities Argued that entire operation is a religious activity 12
Tax Exemptions Key Issues for Religious Tax Exemptions Can there be separate religious exemptions? Should a religious exemption be limited to exclusively religious activities? Should there be an exemption for exclusively religious activities (which clearly do not lessen a governance tax burden)? Do different approaches to accomplishing a religious mission matter? 13
Additional Exemptions for Churches, Religious Orders, and Ministers Key Definitions Church IRS has created 14-point checklist Some courts have adopted the associational test In 2010, the Federal Circuit held that sermons broadcast over the radio and internet at set times, during which listeners could call and interact with the pastor, did not satisfy the associational test Religious Order IRS has identified 7 characteristics Minister of the Gospel IRS has identified 4 common duties Challenges Definitions based on theological tenets Diversity of religious beliefs 14
Additional Exemptions for Churches, Religious Orders, and Ministers Unemployment Insurance Colorado exempts all services performed: (a) In the employ of (1) a church, (2) a convention or association of churches, or (3) a church- controlled organization or elementary or secondary school that is operated primarily for religious purposes; or (b) By a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order 15
Additional Exemptions for Churches, Religious Orders, and Ministers Unemployment Insurance Colorado Supreme Court has interpreted the church exemption narrowly Upheld use of 7-point test to determine whether an employer qualifies as a church that is more narrow than the federal 14-point test “Church congregations normally cross all sex and age barriers” 16
Additional Exemptions for Churches, Religious Orders, and Ministers Unemployment Insurance Colorado Supreme Court has also interpreted the “operated primarily for religious purposes” clause narrowly The court said: “It is the organization’s activities, and not its motivations or goals, that determine exempt status” This interpretation calls into question the status of activities that serve both religious and charitable purposes 17
Additional Exemptions for Churches, Religious Orders, and Ministers Social Security and Income Tax Withholding Compensation paid by a church or religious order to a minister for performing services in the exercise of ministry is: Taxed under the Self-Employment Contributions Act (SECA) Not subject to income tax withholding 18
Additional Exemptions for Churches, Religious Orders, and Ministers Minister’s Housing Allowance Ministers may exclude from gross income (1) the rental value of a home furnished as part of their compensation; or (2) the housing allowance paid as part of their compensation Housing allowance must actually be used to rent or provide a home and must not exceed the fair rental value of the home The fair rental value language was added as part of the Clergy Housing Allowance Clarification Act of 2002, which was passed to moot a case pending before the Ninth Circuit 19
Additional Exemptions for Churches, Religious Orders, and Ministers Minister’s Housing Allowance In 2009, the Freedom From Religion Foundation filed a claim in the Eastern District of California challenging the constitutionality of the minister’s housing allowance In 2010, the U.S. Tax Court held that a minister could receive a housing allowance for more than one home 20
Additional Exemptions for Churches, Religious Orders, and Ministers Employee Benefit Plans Under § 4(b)(2) of ERISA, “church plans” are exempt from certain reporting, disclosure, and fiduciary requirements A “church plan” is defined as “a plan established or maintained by a church or by a convention or association of churches exempt from tax under I.R.C. § 501” 21
Additional Exemptions for Churches, Religious Orders, and Ministers Exemption Applications and Annual Information Returns Churches and certain other religious organizations are not required to: Apply for and obtain recognition of tax-exempt status File annual information returns 22
Additional Exemptions for Churches, Religious Orders, and Ministers Church Tax Inquiries IRS may only initiate an examination of a church if the appropriate regional IRS commissioner (or a higher official) reasonably believes, based on written facts and circumstances, that the organization may not be exempt as a church, may be carrying on an unrelated trade or business, or otherwise may be engaged in taxable activities 23
Employment Accommodations Employment Nondiscrimination Exemptions Federal laws State/local laws Limited religious exemptions Only activities furthering religious purposes No exemption if supported by tax funds (18 states) Other protected classifications with religious significance Church autonomy/ministerial exception Minister employment cases (e.g., gender discrimination) 24
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