The Omnibus Budget Reconciliation Bill of 1987

Provisions of interest to churches and clergy

Bio

On October 29, 1987, the House of Representatives passed the Omnibus Budget Reconciliation Bill of 1987 (H.R. 3545).

Provisions of interest to churches and clergy include the following:

(1) repeal of the motor fuels and tires excise tax exemptions for buses owned and operated by churches and other nonprofit organizations;

(2) the IRS will begin charging fees for some of its services, including $320 for each exempt organization ruling and $200 for each exempt organization determination;

(3) delays until 1988 the provision in the Tax Reform Act of 1986 requiring taxpayers (including many clergy) who use the estimated tax procedure to pay at least 90% of their current year's taxes in their quarterly estimated tax payments;

(4) employers (including churches) must give effect to replacement withholding allowance certificates (W-4 or W-4A) no later than the start of the first payroll period ending on or after the 30th day after the day on which the employee furnishes the certificate to the employer;

(5) a tax-exempt organization that filed an application for exemption (Form 1023) with the IRS must make available for inspection a copy of the application (including all supporting documentation) at its principal office to any individual during regular office hours; further, if the exempt organization maintains one or more regional or district offices having three or more employees, the required material similarly must be made available for public inspection at each such regional or district office;

(6) the House Ways and Means Committee urged the IRS to monitor the extent to which taxpayers are being properly advised by charitable organizations that their contributions are deductible only to the extent that they exceed the fair market value of any benefits or premiums received in exchange (e.g., if a religious radio program promises to send donors a book in exchange for a suggested donation, the donation is deductible only to the extent that it exceeds the fair market value of the book);

(7) charitable organizations must make available for public inspection during regular business hours their three most recent annual information returns (Form 990); a copy of the annual information return must also be kept at any regional or district office employing three or more persons; however, if a national religious denomination files annual information returns, copies of the return are not required to be made available at local churches since churches would not constitute offices of the national denomination;

(8) various changes have been made in the application for tax exemption (Form 1023), which pertain to information regarding predecessor and affiliated organizations;

(9) a provision in the bill clarifies that tax-exempt organizations will lose their exempt status by participating or intervening in any political campaign in opposition to as well as in support of any candidate for public office;

(10) tax-exempt organizations' distributive share of income from any publicly traded limited partnership is treated as unrelated business taxable income;

(11) benefits payable under certain church self-insured death benefit plans would be excludable from income;

(12) the restrictive rules that now apply to "eligible deferred compensation plans" of tax-exempt organizations (under revised Code section 457) would not extend to "nonelective" deferred compensation plans.

Source: CLTR January/February 1988

Legal Developments

Charitable Contribution Cannot Be Substantiated by Oral Testimony

A taxpayer was denied a charitable contribution deduction where the only evidence offered to substantiate

Richard R. Hammar, Attorney, CPA

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State: Federal
Categories: Charitable Contributions

A taxpayer was denied a charitable contribution deduction where the only evidence offered to substantiate the contribution was oral testimony. Gardner v. Commissioner, T.C.Memo. 1987-420 (1987)

Legal Developments

United States Tax Court Disallowed a $10,000 Charitable Contribution

In 1983, the Universal Life Church (ULC) adopted a "revised receipts and disbursements" program for

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

In 1983, the Universal Life Church (ULC) adopted a "revised receipts and disbursements" program for amounts received as "charitable contributions."

Under the revised program, donors sent contributions along with a listing of personal debts. When the ULC received such a form with a contribution, it would issue checks payable directly to the donor's creditors. Donors were charged a fee for the service, and claimed a charitable contribution deduction for the amount of their "donation" to the church.

The United States Tax Court recently disallowed a $10,000 charitable contribution made by a donor under this program, concluding that there was no evidence that the "contributed funds" were for the payment of any church-related expenses. The court also assessed a negligence penalty, and awarded $5,000 in damages to the federal government on the basis of the "flagrant and abusive" nature of the program. Svedahl v. Commissioner, 89 T.C. ___ (1987).

Legal Developments

Taxpayer Could Only Claim a Charitable Contribution for Amount of the Sales Price Distributed to the Church

Taxpayer X owned a tract of real estate that he agreed to sell to Y.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

Taxpayer X owned a tract of real estate that he agreed to sell to Y.

In order to avoid reporting all of the sales proceeds as income, X instructed the escrow officer to distribute a portion of the sales proceeds to First Church and then pay him the balance. The Tax Court, affirming a well-established tax principle, refused to let X avoid realization of the total sales proceeds through his "anticipatory assignment of income." X was required to report the total sales price as income, and then claim a charitable contribution for the amount of the sales price distributed to the church. Ankeny v. Commissioner, T.C. Memo. 1987-247.

Legal Developments

Court Upheld Validity of a Will Leaving Large Portion to a Baptist University

The Arkansas Supreme Court upheld the validity of a will that left a large portion

Richard R. Hammar, Attorney, CPA

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State: Arkansas
Categories: Charitable Contributions

The Arkansas Supreme Court upheld the validity of a will that left a large portion of an elderly widow's estate to a Baptist university.

The decedent's surviving heirs argued that the will was invalid since the decedent lacked mental capacity at the time the will was executed. To support their claim, the heirs alleged that at the time she executed her will the decedent was in a state of grief over the loss of her husband and was manifesting eccentric behavior. In addition, the heirs argued that the decedent had never expressed an interest in the university during her lifetime. Such evidence, concluded the court, fell far short of that required to establish mental incapacity. Baerlocker v. Highsmith, 730 S.W.2d 237 (Ark. 1987).

Legal Developments

Charitable Contribution Definition

Supreme Court remarks shed light on donations to church.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

The United States Supreme Court has remarked that a charitable contribution is in essence "a transfer of money or property [to a charity] … in excess of any benefit received in return."

Accordingly, a charitable contribution is deductible "only if and to the extent it exceeds the market value of the benefit received" and "only if the excess payment was made with the intention of making a gift."

Based on this language, a donor may deduct "contributions" to a church school attended by his or her child only to the extent that the contribution exceeds the fair market value of the child's tuition. Similarly, a "contribution" for which a donor receives a premium (e.g., a Bible, record, book) is deductible only to the extent it exceeds the value of the premium.

But what about contributions to a church? Could it not be argued that they are nondeductible since the donor receives substantial services in return (worship services, sacraments, sermons, hospital calls, counseling, etc.)? This fascinating question was recently presented to a federal court of appeals.

In affirming the deductibility of charitable contributions to churches, the court relied on the following two considerations:

how could a court or the IRS ever place a value on the benefits and services associated with church membership; and
any attempt to do so would involve an "excessive entanglement" between church and state in violation of the first amendment's nonestablishment of religion clause.

Hernandez v. Commissioner, 819 F.2d 1212 (1st Cir. 1987).

Legal Developments

Check the Date on Your Checks

The Tax court disallowed a charitable contribution deduction in 1981 for two checks dated in

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

The Tax court disallowed a charitable contribution deduction in 1981 for two checks dated in 1980 but allegedly delivered to the charity in early 1981, because the taxpayer could not prove that the checks were in fact delivered in 1981. The Court relied on the well-established rule that checks constitute a charitable contribution only upon delivery (or mailing) to the charity. Marshall v. Commissioner, T.C. Memo. 1986-582.

Legal Developments

Couple Denied a Deduction for Noncash Property

A couple was denied a deduction for noncash property given to the Salvation Army because

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

A couple was denied a deduction for noncash property given to the Salvation Army because they failed to substantiate the market value of the donated property. The only evidence offered to substantiate the contribution was a receipt from the Salvation Army that did not describe the property or state its value, and that cautioned that the Salvation Army was not an appraiser and accordingly could not be expected to fix a value for donated property.

The Tax Court concluded that such evidence was not adequate to support the deduction. It should be noted that the Salvation Army acted properly in refusing to value the donated property. Churches are not appraisers. When receipting a donor who contributes non- cash property, churches should only identify the donated property, the donor, and the date of contribution. Churches should also advise donors of the special substantiation rules that now apply to contributions of non- cash property valued by the donor at $500 or more. Goldstein v. Commissioner, T.C. Memo. 1987-47.

Source: Church Law & Tax Report March/April 1987.

Legal Developments

Disallowed a Charitable Contribution

The Tax Court disallowed a charitable contribution deduction by a taxpayer who failed to establish

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

The Tax Court disallowed a charitable contribution deduction by a taxpayer who failed to establish the amounts or recipients of his alleged contributions. The taxpayer argued unsuccessfully that disclosing such information would violate his religious freedom. Bruno v. Commissioner, T.C. Memo. 1986-571.