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Timestamp: 2017-04-27 19:49:34
Document Index: 335479544

Matched Legal Cases: ['§ 501', '§ 508', '§ 501', '§ 501', '§ 508', '§ 501', '§ 512', '§ 6033', '§ 3306', '§ 501', '§ 512', '§ 501', '§ 512', '§ 6033', '§ 501', '§ 512', '§ 3306', '§ 170', '§ 170', '§ 170', '§ 1', '§ 501', '§ 170', '§ 170', '§ 170', '§ 1', '§ 1', '§ 501', '§ 501', '§ 501', '§ 501', '§ 1']

Faithful Legal Services for the Benefit of Religious Organizations | Holland & Knight LLP - JDSupra
Florida lawyers Jason E. Havens and Thomas O. Wells discuss how attorneys can advise religious organizations regarding their tax-exempt (charitable) status, unrelated business income tax (UBIT) issues, and reporting and record-keeping requirements. The authors also provide an overview of charitable gift planning techniques to benefit religious organizations, including outright gifts, charitable remainder trusts (CRTs), charitable lead trusts (CLTs), charitable gift annuities (CGAs), and pooled income funds (PIFs), all from the charity's fundraising and the donor's perspectives. With religious organizations typically receiving more than one-third of all charitable gifts in the United States, this article serves as an important introduction to the nonprofit/exempt organization and charitable planning issues that these organizations face.
Download PDF In Moses’ day, people tithed regularly. But the concept of tithing has since changed. In 2001, Americans donated an average of 3.2% of their income to charity according to one well-known survey. Jool Nie Kang, Note, Tithing: A Fraudulent Transfer or a Moral Obligation?, 18 BANK. DEV. J. 399, 411 (2002) (citing Independent Sector’s 2001 Giving and Volunteering Survey). Beyond tithing, numerous changes have adversely affected faithbased nonprofit organizations (“religious organizations”) in the United States. These changes include the tragedy of September 11, 2001, which resulted in droves of Americans looking to their religious organizations for comfort, support, and encouragement but not necessarily donating additional income because of the concurrent economic contraction. As a result, religious organizations need skilled attorneys now as much as ever to assist them in three primary areas of taxation and estate planning: (1) tax planning and counsel to the religious organization about its own tax issues, (2) tax planning to and education of its donors about charitable planning techniques to benefit the religious organization, and (3) tax planning for related entities of the religious organization, which can be used to further its charitable purposes. This article generally explores these primary areas. It is the authors’ hope that this article will equip others to serve religious organizations. Tax Issues of Religious Organizations Avast array of tax issues confronts religious organizations. Acomprehensive discussion of these issues is obviously beyond the scope of this article, but a brief discussion of several of the main issues with which religious organizations must deal follows. Preliminarily, advisors should consider the use of a relatively new “quick reference” resource that has not received much attention in legal literature. On July 20, 2002, the IRS released a very useful tool to help religious organizations and their advisors address a variety of tax issues. IRS Publication 1828, Tax Guide for Churches and Religious Organizations, serves as an outline that advisors can use to educate a religious organization on the main tax issues that can arise, including taxexempt status, unrelated business income tax (UBIT), and reporting and recordkeeping requirements. Publication 1828 is available from the IRS web site at the “Charities & Non-Profits” area, www.irs.gov/charities/index.html (as of April 30, 2003). It is also available from the IRS main “Forms and Publications” page, at www.irs.gov/formspubs/index.html (as of April 30, 2003). Many of the IRS forms mentioned in this article are listed on the extremely helpful “Tax-Exempt Organizations Tax Kit” page, at www.irs.gov/charities/article/0,,id=96774,00.html (as of April 30, 2003). Tax-Exempt Status The first issue for a religious organization is recognition of its tax-exempt status by the IRS under Code § 501(c)(3), which is more fully explained in IRS Publication 557, Tax-Exempt Status for Your Organization.Asignificant distinction exists between a “church” and a “religious organization” for this purpose. Under Code § 508(c)(1), a “church” (and its “integrated auxiliaries”) automatically qualifies for tax-exempt status and is not required to file an application for a determination letter. As a result, many churches do not have a formal determination letter from the IRS, although they are tax-exempt for federal income tax purposes. Other organizations generally must file Form 1023, Application for Recognition of Exemption Under § 501(c)(3) of the Internal Revenue Code, along with the appropri-Jason E. Havens is a member of the Destin, Florida, law firm of Havens & Miller, P.L.L.C. Thomas O. Wells is a shareholder in the Miami office of Berger Singerman, P.A. By Jason E. Havens and Thomas O. Wells Faithful Legal Services for the Benefit of Religious Organizations Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 22 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. for the Benefit of Religious Organizations n Moses’ day, people tithed regularly. Preliminarily, advisors should consider But the concept of tithing has since By Jason E. Havens the use of a relatively new “quick refer-changed. In 2001, Americans donated and ence” resource that has not received much an average of 3.2% of their income to attention in legal literature. On July 20, charity according to one well-known sur-Thomas O. Wells 2002, the IRS released a very useful tool to vey. Jool Nie Kang, Note, Tithing: A help religious organizations and their advi-Fraudulent Transfer or a Moral Obligation?, sors address a variety of tax issues. IRS Publication 1828, Tax 18 BANK. DEV. J. 399, 411 (2002) (citing Independent Guide for Churches and Religious Organizations, serves as an Sector’s 2001 Giving and Volunteering Survey). Beyond outline that advisors can use to educate a religious organizatithing, numerous changes have adversely affected faith-tion on the main tax issues that can arise, including taxbased nonprofit organizations (“religious organizations”) exempt in the United States. These changes include the tragedy of status, unrelated business income tax (UBIT), September 11, 2001, which resulted in droves of Americans and reporting and looking to their religious organizations for comfort, sup-recordkeeping requirements. Publication 1828 is available port, and encouragement but not necessarily donating from the IRS web site at the “Charities & Non-Profits” area, additional income because of the concurrent economic www.irs.gov/charities/contraction. index.html (as of April 30, 2003). It is also available from the As a result, religious organizations need skilled attor-IRS main “Forms and Publications” page, at www.irs.gov/neys now as much as ever to assist them in three primary formspubs/areas of taxation and estate planning: (1) tax planning and index.html (as of April 30, 2003). Many of the IRS forms counsel to the religious organization about its own tax mentioned in this article are listed on the extremely helpful issues, (2) tax planning to and education of its donors “Tax-Exempt Organizations Tax Kit” page, at about charitable planning techniques to benefit the reli-www.irs.gov/charities/article/0,,id=96774,00.html (as of April gious organization, and (3) tax planning for related entities 30, of the religious organization, which can be used to further 2003). its charitable purposes. This article generally explores Tax-Exempt Status these primary areas. It is the authors’ hope that this article The first issue for a religious organization is recognition of its will equip others to serve religious organizations. tax-exempt status by the IRS under Code § 501(c)(3), which is more fully explained in IRS Publication Tax Issues of Religious Organizations 557, Tax-Exempt Status for Your Organization. A significant dis-A vast array of tax issues confronts religious organizations. tinction exists between a “church” and a “religious organiza-A comprehensive discussion of these issues is obviously tion” for this purpose. Under Code beyond the scope of this article, but a brief discussion of § 508(c)(1), a “church” (and its “integrated auxiliaries”) autoseveral of the main issues with which religious organiza-matically qualifies for tax-exempt status and is not required tions must deal follows. to file an application for a determination letter. As a result, many churches do not have a formal determination letter from the IRS, although they are tax-exempt for federal Jason E. Havens is a member of the Destin, Florida, law income tax purposes. Other organizations generally must file firm of Havens & Miller, P.L.L.C. Thomas O. Wells is a Form 1023, Application for Recognition of Exemption Under § shareholder in the Miami office of Berger Singerman, P.A. 501(c)(3) of the Internal Revenue Code, along with the appropri-Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 22 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=93f52397-dbb1-49a9-bb6b-8290c5bcdf84ness involves proceeds from the sale of merchandise, all of which are donated to the organization. Code § 501(a). In addition, rental income, royalties, capital gains, and interest and dividends generally do not constitute unrelated business taxable income unless the activities are financed with borrowed funds. See generally Code §§ 512(b), 514. Reporting and Recordkeeping Requirements Athird issue is reporting and recordkeeping requirements. In general, churches are exempt from filing the annual federal information return, Form 990, Return of Organization Exempt from Income Tax, unless the church has generated gross unrelated business income of $1,000 or more in the subject taxable year. In addition, churches and other religious organizations are required to file Form 990-T, Exempt Organization Business Income Tax Return, if they generate gross unrelated business income of $1,000 or more in a given taxable year. On the other hand, religious organizations other than churches that normally receive gross receipts in excess of $25,000 in a taxable year are required by Code § 6033 to file either Form 990 or the abbreviated version, Form 990-EZ (for organizations with gross receipts of less than $100,000 and total assets of less than $250,000 at the end of the given taxable year). It is important to recognize that state income, sales, and property tax filing requirements, limitations, and exceptions may vary from these federal requirements. Religious organizations, including churches, are generally required to withhold and report employment taxes via Form 941, Employer’s Quarterly Federal Tax Return. Churches and religious organizations are not required to withhold Federal Unemployment Tax Act (FUTA) taxes because their employees are generally not covered under federal or state unemployment laws. Special rules apply to the compensation of ministers. See Code §§ 3306(c), 3309(a). Churches and religious organizations are required to substantiate and ate user fee, to seek a determination of its tax-exempt status. On the other hand, there is no exception to the general tax-exempt status filing requirement for a “religious organization” that is not also a “church.” Thus, religious organizations other than “churches” must file Form 1023. One of the benefits of filing for recognition of tax-exempt status is inclusion in IRS Publication 78, Cumulative List of Organizations. Many advisors use Publication 78 as a resource, particularly when verifying that an organization qualifies for taxexempt status in the context of creating a charitable gift. Therefore, if a church does not seek formal recognition of its tax-exempt status, it could, for example, lose the opportunity to receive a charitable gift because of an insufficient description of its name in a dispositive provision or because a potential donor living in another state cannot remember the name of the church when creating an estate plan. Recently, a viable alternative to Publication 78 has developed. In 1994, Philanthropic Research, Inc. created “GuideStar, The National Database of Nonprofit Organizations,” available at www.guidestar.org (as of April 30, 2003). GuideStar functions as the Internet equivalent (or perhaps the functional replacement) of Publication 78, allowing advisors, donors, and religious organizations to research more than 850,000 charities in the GuideStar database. Through GuideStar, a church can become more “visible” by registering for a free listing in the extensive database. Areligious organization may jeopardize its tax-exempt status. Religious organizations, like all tax-exempt entities organized under Code § 501(c)(3), cannot benefit or serve the interests of any private individual or organization. Rather, religious organizations must exist to benefit the public, including their members. In other words, a religious organization cannot function as a “shell” or “front” for the sole benefit of an individual related to the organization, a prohibition known as “private inurement.” In addition, a religious organization may not promote or serve the interests of any private individual or organization, known as the prohibition against “private benefit.” Religious organizations and Section 501(c)(3) organizations, in general, must also avoid substantial lobbying activity. As explained in Publication 1828, lobbying activity is generally measured by the “substantial part test,” which considers the facts and circumstances of whether a substantial part of an organization’s activities are focused on attempting to influence legislation. Likewise, all Section 501(c)(3) organizations are prohibited from engaging in any political campaign activity. Unrelated Business Income Tax Asecond issue for a religious organization is the unrelated business income tax (UBIT). If a religious organization engages in income-producing activities that are unrelated to its tax-exempt purposes, the net income from those activities will generally be subject to UBIT. Many organizations do not understand that raising money to further their religious purposes is not, in and of itself, “related” for purposes of UBIT analysis, and as a result, this issue arises in a number of circumstances. For example, a religious organization might decide to rent its parking spaces to devoted Southeastern Conference football fans attending the Tennessee-Florida game. Even though the net income will be used to further the organization’s religious activities, the act of renting the spaces is not, itself, related to its religious purposes. Athree-part test determines whether net income constitutes UBIT: (1) the income-producing activity constitutes a trade or business, (2) the trade or business is conducted regularly, and (3) the trade or business is not substantially related to the organization’s exempt purpose. Code § 512(a)(1). Despite the finding of UBIT, the resulting net income might not be subject to UBIT under one of the following three exceptions: (1) substantially all of the work in operating the trade or business is performed by volunteers, (2) the activity is conducted by the organization primarily for its members’ convenience, or (3) the trade or busi-Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 23 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. ate user fee, to seek a determination of mote or serve the interests of any pri-ness involves proceeds from the sale of its tax-exempt status. On the other vate individual or organization, known merchandise, all of which are donated hand, there is no exception to the gen-as the prohibition against “private ben-to the organization. Code § 501(a). In eral tax-exempt status filing require-efit.” Religious organizations and addition, rental income, royalties, capiment for a “religious organization” Section 501(c)(3) organizations, in gen-tal gains, and interest and dividends that is not also a “church.” Thus, reli-eral, must also avoid substantial lobby-generally do not constitute unrelated gious organizations other than ing activity. As explained in Publication business taxable income unless the “churches” must file Form 1023. 1828, lobbying activity is generally activities are financed with borrowed One of the benefits of filing for measured by the “substantial part test,” funds. See generally Code §§ 512(b), recognition of tax-exempt status is which considers the facts and circum-514. inclusion in IRS Publication 78, stances of whether a substantial part of Cumulative List of Organizations. Many an organization’s activities are focused Reporting and Recordkeeping advisors use Publication 78 as a on attempting to influence legislation. Requirements resource, particularly when verifying Likewise, all Section 501(c)(3) organiza-A third issue is reporting and that an organization qualifies for tax-tions are prohibited from engaging in recordkeeping requirements. In generexempt status in the context of creat-any political campaign activity. al, churches are exempt from filing the ing a charitable gift. Therefore, if a annual federal information return, church does not seek formal recogni-Unrelated Business Income Tax Form 990, Return of Organization tion of its tax-exempt status, it could, A second issue for a religious organiza-Exempt from Income Tax, unless the for example, lose the opportunity to tion is the unrelated business income church has generated gross unrelated receive a charitable gift because of an tax (UBIT). If a religious organization business income of $1,000 or more in insufficient description of its name in engages in income-producing activities the subject taxable year. In addition, a dispositive provision or because a that are unrelated to its tax-exempt churches and other religious organizapotential donor living in another state purposes, the net income from those tions are required to file Form 990-T, cannot remember the name of the activities will generally be subject to Exempt Organization Business Income Tax church when creating an estate plan. UBIT. Many organizations do not Return, if they generate gross unrelated Recently, a viable alternative to understand that raising money to fur-business income of $1,000 or more in a Publication 78 has developed. In 1994, ther their religious purposes is not, in given taxable year. On the other hand, Philanthropic Research, Inc. created and of itself, “related” for purposes of religious organizations other than “GuideStar, The National Database of UBIT analysis, and as a result, this churches that normally receive gross Nonprofit Organizations,” available at issue arises in a number of circum-receipts in excess of $25,000 in a taxable www.guidestar.org (as of April 30, stances. For example, a religious organ-year are required by Code § 6033 to file 2003). GuideStar functions as the ization might decide to rent its parking either Form 990 or the abbreviated ver-Internet equivalent (or perhaps the spaces to devoted Southeastern sion, Form 990-EZ (for organizations functional replacement) of Publication Conference football fans attending the with gross receipts of less than $100,000 78, allowing advisors, donors, and Tennessee-Florida game. Even though and total assets of less than $250,000 at religious organizations to research the net income will be used to further the end of the given taxable year). It is more than 850,000 charities in the the organization’s religious activities, important to recognize that state GuideStar database. Through the act of renting the spaces is not, itself, income, sales, and property tax filing GuideStar, a church can become more related to its religious purposes. requirements, limitations, and excep-“visible” by registering for a free list-A three-part test determines tions may vary from these federal ing in the extensive database. whether net income constitutes UBIT: requirements. A religious organization may jeop-(1) the income-producing activity con-Religious organizations, including ardize its tax-exempt status. Religious stitutes a trade or business, (2) the churches, are generally required to organizations, like all tax-exempt enti-trade or business is conducted regular-withhold and report employment taxes ties organized under Code § 501(c)(3), ly, and (3) the trade or business is not via Form 941, Employer’s Quarterly cannot benefit or serve the interests of substantially related to the organiza-Federal Tax Return. Churches and reliany private individual or organiza-tion’s exempt purpose. Code gious organizations are not required to tion. Rather, religious organizations § 512(a)(1). Despite the finding of UBIT, withhold Federal Unemployment Tax must exist to benefit the public, the resulting net income might not be Act (FUTA) taxes because their including their members. In other subject to UBIT under one of the fol-employees are generally not covered words, a religious organization cannot lowing three exceptions: (1) substantial-under federal or state unemployment function as a “shell” or “front” for the ly all of the work in operating the trade laws. Special rules apply to the comsole benefit of an individual related to or business is performed by volunteers, pensation of ministers. See Code the organization, a prohibition known (2) the activity is conducted by the §§ 3306(c), 3309(a). as “private inurement.” In addition, a organization primarily for its members’ Churches and religious organizareligious organization may not pro-convenience, or (3) the trade or busi-tions are required to substantiate and Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 23 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=93f52397-dbb1-49a9-bb6b-8290c5bcdf84Outright Gifts First, donors can make outright gifts to religious organizations. IRS Publication 526, Charitable Contributions, provides a practical guide for such donors, including the issues arising from tithing. One of the most important aspects of the rules governing outright charitable gifts is the applicable percentage limitation of the gift, which is either 20%, 30%, or 50%, depending on the donor’s adjusted gross income, the type of property contributed, and the type of charity receiving the gift. These rules, outlined in Publication 526, apply not only to outright gifts, but also to gifts made in trust. See also Code § 170. Charitable Remainder Trusts Second, if donors desire to benefit religious organizations in trust, donors can create a charitable remainder trust (CRT) to benefit religious organizations. Generally, a CRT benefits the donor and/or his or her spouse during their lifetimes, with the remaining trust assets distributed to one or more charitable organizations at the expiration of the trust term. The term of a CRT generally cannot exceed 20 years if expressed as a fixed term, but it may continue until the death of the last income beneficiary. The donor receives a charitable deduction based upon the anticipated value of the remainder interest to be distributed to the charitable organization. Many varieties of charitable remainder trusts have developed over the years. The most “basic” varieties include the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). In a CRAT, the donor receives a fixed annual distribution, generally expressed as a dollar figure or a percentage of the CRAT’s assets based on the initial net fair market value of the CRAT’s assets. In a CRUT, the donor receives an annual fixed distribution equal to at least 5% of the annual fair market value of the CRUT’s assets. As a result, the distributions from the CRUT can fluctuate and can increase with the appreciation in the CRUT’s investment portfolio, but the CRAT can provide a hedge against potential donors on the basic requirements and uses of charitable planning techniques. One of the most helpful resources, the Charitable Giving and Tax-Exempt Organizations Handbook, was produced by the tax attorneys of McGuire, Woods LLP several years ago and is available at www.mcguirewoods.com/news-resources/publications/taxation/charitable_giving_handbook.asp (as of April 30, 2003). The Charitable Giving and Tax-Exempt Organizations Handbook provides an overview of the charitable planning tax rules, reporting requirements, and charitable giving techniques, with their respective tax consequences. Another resource that advisors can use to find research materials and explanations of technical charitable planning matters is the Planned Giving Design Center (PGDC), available at www.pgdc.net (as of April 30, 2003). The PGDC was created by Kallina & Ackerman, LLP in 1998. After freely registering, advisors can access the “Gift Planner’s Digest,” which features monthly professional articles on charitable planning, Kallina & Ackerman’s sample charitable remainder trust (CRT) forms, and much more. Advisors may find other helpful charitable planning Internet sites via “Legal Research for Estate Planners” (www.jasonhavens.net), the personal site of one of the authors. disclose information regarding the charitable contributions they receive. Charities must furnish written acknowledgements to a donor who contributes more than $250 at any single time before the donor can claim a charitable contribution deduction on his or her federal income tax return. Code § 170(f)(8). As part of that acknowledgement, the charity must provide additional information to a donor if the donor receives goods or services in exchange for a single contribution, called a “quid pro quo” contribution. Code § 170(f)(8)(B)(iii). If a donor receives an “intangible religious benefit” in return for his or her contribution, the acknowledgment must state that fact. Exceptions to the quid pro quo disclosure rule are set forth in the Treasury Regulations and are summarized in Publication 1828. See Treas. Reg. § 1.170A-13(f). For example, if the donor contributes $100 and then receives a ticket to a fundraising event valued at $50, the quid pro quo contribution must be disclosed, even though the deductible amount does not exceed $75. Accordingly, religious organizations need to track their donors’ contributions carefully. Finally, all charitable organizations, including churches and religious organizations, are required to maintain financial records. The IRS provides no specific format for recordkeeping by churches and religious organizations. No time requirements are specified for this purpose either, although Publication 1828 illustrates guidelines for retention of records by churches and religious organizations. Planning Techniques to Benefit Religious Organizations Entire treatises address the subject of charitable planning techniques, which can certainly be used to benefit religious and other nonprofit organizations. Again, a broad discussion of this topic is beyond the scope of this article. Several techniques, however, should be highlighted. As a preliminary matter, advisors can use general explanations available freely to educate religious organizations and The first issue for a religious organization is recognition of its tax-exempt status by the IRS under Code § 501(c)(3). Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 24 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. disclose information regarding the potential donors on the basic require-Outright Gifts charitable contributions they receive. ments and uses of charitable planning First, donors can make outright gifts to Charities must furnish written techniques. One of the most helpful religious organizations. IRS Publication acknowledgements to a donor who resources, the Charitable Giving and Tax-526, Charitable Contributions, provides a contributes more than $250 at any sin-Exempt Organizations Handbook, was pro-practical guide for such donors, includgle time before the donor can claim a duced by the tax attorneys of McGuire, ing the issues arising from tithing. One charitable contribution deduction on Woods LLP several years ago and is of the most important aspects of the his or her federal income tax return. available at www.mcguirewoods.com/rules governing outright charitable Code § 170(f)(8). As part of that news-resources/publications/taxation/gifts is the applicable percentage limitaacknowledgement, the charity must charitable_giving_handbook.asp (as of tion of the gift, which is either 20%, provide additional information to a April 30, 2003). The Charitable Giving 30%, or 50%, depending on the donor’s donor if the donor receives goods or and Tax-Exempt Organizations Handbook adjusted gross income, the type of services in exchange for a single contri-provides an overview of the charitable property contributed, and the type of bution, called a “quid pro quo” contribu-planning tax rules, reporting require-charity receiving the gift. These rules, tion. Code § 170(f)(8)(B)(iii). If a donor ments, and charitable giving tech-outlined in Publication 526, apply not receives an “intangible religious bene-niques, with their respective tax only to outright gifts, but also to gifts fit” in return for his or her contribution, consequences. made in trust. See also Code § 170. the acknowledgment must state that fact. Exceptions to the quid pro quo dis-Charitable Remainder Trusts closure rule are set forth in the Second, if donors desire to benefit reli-Treasury Regulations and are summa-The first issue gious organizations in trust, donors can rized in Publication 1828. See Treas. create a charitable remainder trust Reg. § 1.170A-13(f). For example, if the for a religious (CRT) to benefit religious organizadonor contributes $100 and then tions. Generally, a CRT benefits the receives a ticket to a fundraising event organization is donor and/or his or her spouse during valued at $50, the quid pro quo contribu-their lifetimes, with the remaining trust tion must be disclosed, even though recognition of assets distributed to one or more charithe deductible amount does not exceed table organizations at the expiration of $75. Accordingly, religious organizaits tax exempt the trust term. The term of a CRT gentions need to track their donors’ contri-erally cannot exceed 20 years if butions carefully. status by the expressed as a fixed term, but it may Finally, all charitable organizations, continue until the death of the last including churches and religious IRS under income beneficiary. The donor receives organizations, are required to maintain a charitable deduction based upon the Code § (c)( ) financial records. The IRS provides no anticipated value of the remainder specific format for recordkeeping by interest to be distributed to the charitachurches and religious organizations. ble organization. No time requirements are specified for Another resource that advisors can Many varieties of charitable remainthis purpose either, although use to find research materials and der trusts have developed over the Publication 1828 illustrates guidelines explanations of technical charitable years. The most “basic” varieties for retention of records by churches planning matters is the Planned include the charitable remainder annuand religious organizations. Giving Design Center (PGDC), avail-ity trust (CRAT) and the charitable able at www.pgdc.net (as of April 30, remainder unitrust (CRUT). In a CRAT, Planning Techniques to Benefit 2003). The PGDC was created by the donor receives a fixed annual dis-Religious Organizations Kallina & Ackerman, LLP in 1998. tribution, generally expressed as a dol-Entire treatises address the subject of After freely registering, advisors can lar figure or a percentage of the CRAT’s charitable planning techniques, which access the “Gift Planner’s Digest,” assets based on the initial net fair marcan certainly be used to benefit reli-which features monthly professional ket value of the CRAT’s assets. In a gious and other nonprofit organiza-articles on charitable planning, Kallina CRUT, the donor receives an annual tions. Again, a broad discussion of this & Ackerman’s sample charitable fixed distribution equal to at least 5% topic is beyond the scope of this article. remainder trust (CRT) forms, and of the annual fair market value of the Several techniques, however, should be much more. Advisors may find other CRUT’s assets. As a result, the distribuhighlighted. helpful charitable planning Internet tions from the CRUT can fluctuate and As a preliminary matter, advisors can sites via “Legal Research for Estate can increase with the appreciation in use general explanations available freely Planners” (www.jasonhavens.net), the the CRUT’s investment portfolio, but to educate religious organizations and personal site of one of the authors. the CRAT can provide a hedge against Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 24 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=93f52397-dbb1-49a9-bb6b-8290c5bcdf84inflation in the portfolio. More advanced versions of CRTs include the Net Income CRUT (NICRUT) and the Net Income CRUT with Make-Up Provisions (NIMCRUT). These CRTs generally provide additional flexibility by varying the income distribution to the donor, depending on the performance of the CRT’s investment portfolio and also on the determination of income for state trust accounting purposes. Advisors should consult one of the numerous helpful articles on the various “flavors” of CRTs. Charitable Lead Trusts Third, donors can create a charitable lead trust (CLT). The CLT basically works in the opposite manner of a CRT. In other words, the charitable organization receives the income interest, with the remaining trust assets distributed to beneficiaries at the expiration of the trust term. The donor receives a charitable deduction based upon the anticipated value of the income interest to be distributed to the charitable organization. The CLT generally comes in two “flavors,” the charitable lead annuity trust (CLAT) and the charitable lead unitrust (CLUT). Again, advisors should consult one of the many useful articles available on CLTs. Charitable Gift Annuities Fourth, some religious organizations may be able to offer charitable gift annuities. In basic terms, the donor contributes property to the religious organization, and the religious organization agrees to provide an annuity to the donor either for a specified period of time or for the donor’s lifetime. The remaining assets in the annuity at its expiration pass to the religious organization. See generally Terry L. Simmons, Planning Opportunities with Gift Annuities, in CHARITABLE GIVING TECHNIQUES (ALI-ABA May 30–31, 2002). The major drawback to a charitable gift annuity is the liability of the organization to pay the annuity out of its general assets, which can pose serious problems if the religious organization experiences financial difficulties or the investment portfolio of the charitable gift annuity does not perform adequately. In addition, many states highly regulate charitable gift annuities, which may make it impossible or impractical for many small organizations to undertake an effective charitable gift annuity program. Attorneys must obviously approach advice in this context with caution because of the ethical issues that might arise. If the attorney represents the religious organization, he or she should generally recommend independent counsel for the potential donor interested in a charitable trust to benefit the religious organization. This problem does not generally arise in the charitable gift annuity situation, when the attorney has prepared the charitable gift annuity in the past and is not involved in the donor’s decision to create his or her charitable gift annuity. For an example of one of the many issues in this context, see John B. Jarboe, Undue Influence & Gifts to Religious Organizations, 35 CATH. LAW. 271 (1994). Pooled Income Fund Finally, religious organizations should consider a pooled income fund. The religious organization creates the pooled income fund, which is managed by trustees appointed by the religious organization. Instead of an annuity or a unitrust interest, the pooled income fund creates a lifetime income interest for the donor’s benefit. The donor contributes property to the fund in exchange for units, which entitle the named beneficiary to a proportional share of the fund’s actual income during each year for the named beneficiary’s lifetime (or for a series of joint lives). At the death of the last surviving income beneficiary, the beneficiary’s share of the fund’s assets passes to the charitable organization. From the religious organization’s perspective, pooled income funds offer several advantages. Like a charitable gift annuity, the religious organization creates and administers the pooled income fund, reducing legal and accounting costs for the donor and eliminating the need for a separate trust vehicle. The religious organization can also commingle and diversify the investments of the pooled income fund. Similar to a CRT, the donor receives a charitable deduction based upon the anticipated value of the proportionate remainder interest to be distributed from the pooled income fund to the charitable organization. On the other hand, these flexible aspects of pooled income funds may represent disadvantages to a donor who desires more control over the charitable vehicle’s investments. Finally, distributions from a pooled income fund are generally taxed as ordinary income to the named beneficiary under the regular trust income tax rules, as opposed to the tiered system applicable to distributions from CRTs. Finally, the administrative costs associated with creating and maintaining a pooled income fund may place it out of the reach of some organizations. Tax Planning for Religious Organizations’ Related Entities Attorneys representing religious organizations must again refer to the distinction between a “church” and a “religious organization.” Not only do Churches and religious organizations are required to substantiate and disclose information regarding the charitable contributions they receive. Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 25 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. inflation in the portfolio. the investment portfolio of the charita-eliminating the need for a separate More advanced versions of CRTs ble gift annuity does not perform ade-trust vehicle. The religious organization include the Net Income CRUT quately. In addition, many states highly can also commingle and diversify the (NICRUT) and the Net Income CRUT regulate charitable gift annuities, which investments of the pooled income with Make-Up Provisions (NIMCRUT). may make it impossible or impractical fund. Similar to a CRT, the donor These CRTs generally provide addi-for many small organizations to under-receives a charitable deduction based tional flexibility by varying the income take an effective charitable gift annuity upon the anticipated value of the prodistribution to the donor, depending on program. portionate remainder interest to be disthe performance of the CRT’s invest-Attorneys must obviously approach tributed from the pooled income fund ment portfolio and also on the determi-advice in this context with caution to the charitable organization. On the nation of income for state trust because of the ethical issues that might other hand, these flexible aspects of accounting purposes. Advisors should arise. If the attorney represents the reli-pooled income funds may represent consult one of the numerous helpful gious organization, he or she should disadvantages to a donor who desires articles on the various “flavors” of generally recommend independent more control over the charitable vehi-CRTs. counsel for the potential donor interest-cle’s investments. Finally, distributions ed in a charitable trust to benefit the from a pooled income fund are gener-Charitable Lead Trusts religious organization. This problem ally taxed as ordinary income to the Third, donors can create a charitable does not generally arise in the charita-named beneficiary under the regular lead trust (CLT). The CLT basically ble gift annuity situation, when the trust income tax rules, as opposed to works in the opposite manner of a attorney has prepared the charitable the tiered system applicable to distribu-CRT. In other words, the charitable gift annuity in the past and is not tions from CRTs. Finally, the adminisorganization receives the income inter-involved in the donor’s decision to cre-trative costs associated with creating est, with the remaining trust assets dis-ate his or her charitable gift annuity. and maintaining a pooled income fund tributed to beneficiaries at the expira-For an example of one of the many may place it out of the reach of some tion of the trust term. The donor issues in this context, see John B. organizations. receives a charitable deduction based Jarboe, Undue Influence & Gifts to upon the anticipated value of the Religious Organizations, 35 CATH. income interest to be distributed to the L2A71W (.1994). Churches charitable organization. The CLT gener-ally comes in two “flavors,” the charita-Pooled Income Fund and religious ble lead annuity trust (CLAT) and the Finally, religious organizations should charitable lead unitrust (CLUT). Again, consider a pooled income fund. The organizations advisors should consult one of the religious organization creates the many useful articles available on CLTs. pooled income fund, which is manare required to aged by trustees appointed by the reli-Charitable Gift Annuities gious organization. Instead of an annusubstantiate Fourth, some religious organizations ity or a unitrust interest, the pooled may be able to offer charitable gift income fund creates a lifetime income and disclose annuities. In basic terms, the donor interest for the donor’s benefit. The contributes property to the religious donor contributes property to the fund information organization, and the religious organi-in exchange for units, which entitle the zation agrees to provide an annuity to named beneficiary to a proportional regarding the the donor either for a specified period share of the fund’s actual income durof time or for the donor’s lifetime. The ing each year for the named beneficiacharitable remaining assets in the annuity at its ry’s lifetime (or for a series of joint expiration pass to the religious organi-lives). At the death of the last surviving contributions zation. See generally Terry L. Simmons, income beneficiary, the beneficiary’s they receive Planning Opportunities with Gift share of the fund’s assets passes to the Annuities, in CHARITABLE GIVING charitable organization. TECHNIQUES (ALI-ABA May 30-31, From the religious organization’s 2002). The major drawback to a charita-perspective, pooled income funds offer Tax Planning for Religious ble gift annuity is the liability of the several advantages. Like a charitable Organizations’ Related Entities organization to pay the annuity out of gift annuity, the religious organization Attorneys representing religious organits general assets, which can pose seri-creates and administers the pooled izations must again refer to the distincous problems if the religious organiza-income fund, reducing legal and tion between a “church” and a “relition experiences financial difficulties or accounting costs for the donor and gious organization.” Not only do Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 25 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=93f52397-dbb1-49a9-bb6b-8290c5bcdf84churches receive special treatment under the Code, namely in the form of exemptions from filing for recognition of tax-exempt status and from filing informational tax returns, but their “integrated auxiliaries” also receive the same preferential treatment. Governmental and judicial authorities have struggled to provide definitions of a “church” and its “integrated auxiliaries.” The guidance provided generally defines an integrated auxiliary as “a [Code] Section 501(c)(3) organization, affiliated with a church, and whose principal activity is ‘exclusively religious.’ ” Nina J. Crimm, Tax Issues of Religious Organizations, 868-1st Tax Mgmt. Portfolio (BNA) 2002 at A-26 (citing, inter alia, Treas. Reg. § 1.6033–2(g)(5)(i)-(iii)). In some cases, a church should consider the formation of a separate entity to undertake certain activities. For example, a church may wish to form an affiliated organization to engage in political or lobbying activities otherwise disallowed by Code § 501(c)(3). The creation of a separate Code § 501(c)(4) organization in such circumstances would insulate the church from jeopardizing its tax-exempt status. A religious organization and other nonprofit organizations often form separate entities for fundraising purposes as well, in part to limit their liability exposure for fundraising activities. Other considerations concerning this topic abound. In general, attorneys should approach the creation, interaction, and administration of the related entities of a religious organization cautiously. Proposed planning should not jeopardize the religious organization’s tax-exempt status. Liability exposure (and management of any risk) is also a serious concern. In some cases, the uncertainties associated with planning for a related entity of a religious organization will justify the request of a private letter ruling from the IRS. Conclusion As this article illustrates, religious organizations definitely need the counsel of attorneys and advisors to assist them, their donors (if appropriate), and their related entities. Attorneys should at least consider giving their time and talents to help religious organizations. Although this area of law is complicated and should be approached with diligence, prudence, and training, its benefits abound. Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 26 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. churches receive special treatment sider the formation of a separate entity jeopardize the religious organization’s under the Code, namely in the form of to undertake certain activities. For tax-exempt status. Liability exposure exemptions from filing for recognition example, a church may wish to form (and management of any risk) is also a of tax-exempt status and from filing an affiliated organization to engage in serious concern. In some cases, the informational tax returns, but their political or lobbying activities other-uncertainties associated with planning “integrated auxiliaries” also receive the wise disallowed by Code § 501(c)(3). for a related entity of a religious organsame preferential treatment. The creation of a separate Code ization will justify the request of a pri-Governmental and judicial authori-§ 501(c)(4) organization in such circum-vate letter ruling from the IRS. ties have struggled to provide defini-stances would insulate the church from tions of a “church” and its “integrated jeopardizing its tax-exempt status. A Conclusion auxiliaries.” The guidance provided religious organization and other non-As this article illustrates, religious generally defines an integrated auxil-profit organizations often form sepa-organizations definitely need the couniary as “a [Code] Section 501(c)(3) rate entities for fundraising purposes sel of attorneys and advisors to assist organization, affiliated with a church, as well, in part to limit their liability them, their donors (if appropriate), and and whose principal activity is ‘exclu-exposure for fundraising activities. their related entities. Attorneys should sively religious.’ ” Nina J. Crimm, Tax Other considerations concerning at least consider giving their time and Issues of Religious Organizations, 868-1st this topic abound. In general, attorneys talents to help religious organizations. Tax Mgmt. Portfolio (BNA) 2002 at A-should approach the creation, interac-Although this area of law is complicat-26 (citing, inter alia, Treas. Reg. tion, and administration of the related ed and should be approached with dili-§ 1.6033-2(g)(5)(i)-(iii)). entities of a religious organization cau-gence, prudence, and training, its bene-In some cases, a church should con-tiously. Proposed planning should not fits abound. Number 5 • Volume 17 • September/October 2003 • American Bar Association • Probate & Property • 26 “Faithful Legal Services for the Benefit of Religious Organizations” by Jason E. Havens and Thomas O. Wells, published in Probate & Property, Volume 17, No.5, September/October 2003 © 2003 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Document hosted at http://www.jdsupra.com/post/documentViewer.aspx?fid=93f52397-dbb1-49a9-bb6b-8290c5bcdf84