My 2 cents worth:
This thread is not as clear cut as it may appear on first look. Consider the following issues.
1) What is a “church”?
2) What labors are available to SE for a “minister”?
3) What activity qualifies a “church” to be a “church”?
4) Does the rental activity have a way to become connected to the church?
5) What is unrelated business income?
6) How does debt financing impact the church?
7) How does debt financing impact the sale of the land?
Answer: #1
*****Neither Congress nor the IRS has provided much guidance as to the meaning of the term “church” in I.R.C. § 170 or what is required for an institution to qualify for that designation. As the trial court observed, neither the statute nor any IRS regulation defines that statutory term. See Foundation II, 88 Fed. Cl. at 218; Am. Guidance Found. v. United States, 490 F.Supp. 304, 306 (D.D .C.1980) (Congress has offered “virtually no guidance” as to what it meant by the term “church” in section 170.).
https://caselaw.findlaw.com/us-federal- ... .html*****As long as regular church services are taking place, let us assume enough of the “14 tests” have been met to say a “church” exists.
Answer: #2
See
https://www.ssa.gov/OP_Home/cfr20/404/404-1023.htm for discussion on ministerial –vs – non-ministerial duties. Ministerial duties do not include property management. Thus, the church would be wrong to send a W2 including property management tasks. This is not to say the monies received are “self-employment” because they appear to be W2 from the rental activity (unless “pastor” is otherwise in the property management business as an independent contractor). But, that question is a thread to itself.
Answer: #3
Post #3 links to a list of 14 “tests”. It is only these 14 “tests” which qualify for exclusion from needing to file Form 990. Any other revenue becomes unrelated business income, and Form 990-T is needed.
Answer: #4
The rental activity needs to stand on its’ own. The rental activity is NOT a church. The rental activity should file Form 1023. Once 1023 has been approved, utilize Form 8940 (see table 1 in the 8940 instructions) to request classification as “an integrated auxiliary of a church”. Please read the Federal Register for clarity on this topic.
https://www.gpo.gov/fdsys/pkg/FR-1995-1 ... -30839.htm Answer: #5
Justice Stevens on dissent in United States – vs - American Bar Endowment Et. Al (477 US 105, 106 S. Ct. 2426, 91 L.Ed.2nd 89. United States –vs – American Bar Endowment No. 85-599. 1986) states the following:
“An understanding of the purpose of the unrelated business income tax ... As noted, that purpose is to protect commercial enterprises from the unfair competition that may be generated by the operation of competing businesses by tax-free organizations.”
If a revenue stream does not promote community welfare (thus not available to the general public), such revenue stream is unrelated. (135 TC 276, 135 TC No 13. Ocean Pines Association –vs- Commissioner. No. 5127-08, 2010. See page 281.) In the current context, while “rental” would promote community welfare, because the activity is not a “church” activity it fails to be a CHURCH community activity. Thus, until Form 8940 is approved, the church has UBIT from rental and needs to file Form 990-T.
The United State Supreme Court has issued a unanimous decision giving much insight into the term “unrelated business income” (475 US 834, 106 S. Ct. 1591, 89 Led.2d 841. United States –vs- American College of Physicians. No. 84-1731. 1986).
Answer: #6
In my opinion, it might now get ugly! Was the property being sold used in conjunction with the church or the “rental business”?
Case # 1: Property used with CHURCH type of function. Look to Section §1.514(b)-1 and apply the 85% test. Either in or out.
Case #2: Property used in the “rental business”. As said earlier, “rental business” is not a CHURCH function. Thus, revenue is always unrelated business income for the church until Form 8940 approved.
Answer: #7
Look to §1.514(a)-1 (a) (1) (v) for guidance.
Enjoy,,,,,,,,,,,,