I, nor anyone I have worked with in my career at Robinson, Grimes & Company, could ever really be considered a fan of the IRS. I suppose that is the way it should be and the folks who matter to our practice the most – our clients – are okay with that. However, not too long ago I was researching tax court cases for a client issue and came across a case where I literally became a fan -- at least for a few moments.
The case involved a large “religious” charity, dutifully filed as and approved to be a tax exempt organization. Just the fact that there was a tax court case titled with a large religious tax exempt organization made me read on. It seems the founder and his wife drew very meager salaries from the church, a total of $20,000 in 1970, as their desire to minister was reward enough. However, it also seems that in their time away from the church office they lived on a yacht in the Mediterranean Sea. They traveled to the most luxurious places on earth -- all on “church business.” Even in 1970 it would have been difficult for a couple with four children to live their lifestyle on a $20,000 salary. Well, the IRS and the Tax Court saw through that, as one of the church’s stated policies was to “Make money.” In the court’s words, the church “fails to qualify for tax-exempt status because a portion of its net earnings inured to the benefit of private individuals. In order to qualify for tax-exempt status, not only must an organization establish that it is organized and operated exclusively for exempt purposes, but it must also prove that no part of its net earnings inures to the benefit of any private shareholder or individual.” I cheered as I read the verdict – don’t cheat on your income taxes under the guise of religion.
There have been several high profile court cases over the recent years where the IRS has challenged a non-profit’s earnings and won. A good example is a nature/environmental organization owning and operating a sawmill and drilling for oil under a preserve. Really? They also sold premium land to certain affiliated individuals at significant losses, only to have the individual turn around and “donate” a large sum to the charity, thereby making the organization whole but also giving the buyer a huge tax deduction that was not deserved. These activities did not line up with their approved tax exempt purpose, and that put everything at risk. If you are an environmental organization, be an environmental organization. Cases like these have made the IRS overcompensate and impose burdensome and costly reporting on good-intentioned, well-meaning charities that try to do things the right way.
If you have a charity or are thinking of starting one, here are some points to consider:
- Let it pass the “Mom Test.” If everything -- and I mean everything -- about your organization was posted on the front page of your local newspaper, would your mom approve? When considering an action, expense, or board decision, think, “would all the details look good in the newspaper?’
- Your reputation is your most valuable asset. Protect it.
- Have good “governance.” Make sure decisions, expenses and activities are in line with the mission.
- Try really hard not to have conflicts of interest between the organization and officers or contributors. Sometimes organizations are too small and need help from board members or officers. However, if there HAS to be a transaction that has an appearance of a conflict of interest, have transparency.
- Have good record keeping. Your best defense to any question is good documentation. In addition, with the many non-profit failures as described above, the annual filing for tax exempt entities has gotten more and more in depth. The best way to file complete and accurate returns in a way that is the least administratively burdensome is to maintain good accounting records. It is also necessary to maintain good records of board and committee minutes.
- Make sure the organization is not involved in any substantial non-exempt activity.
- Make sure all your tax filings are up to date and keep them that way.
If we can be of assistance to your tax exempt entity, please give us a call.
Jason Blair, Partner and very limited IRS fan