Unrelated Business Income - Church sale of land

Technical topics regarding tax preparation.
#1
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My client, a church has as it substantial activity the renting of rooms to individuals who have been in prison and are transitioning out into society. Many of these felons live in these units or homes for a year or more. They pay below market rents and each house has a leader who receives a lowered rent for making sure that the peace is kept and other duties are performed. The church has tithes of approximately 100k per year, mostly from the pastors themselves and about 1.2 million from housing rents; they charge late fees and an incoming fee. They provide a church service once per week and minister in the prisons. Is this a church?

They had a piece of property that was sold and an underlying debt associated with the land was paid off in the amount of 40k; is this payoff unrelated business income?
 

#2
novacpa  
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Do they pay local Real Estate Tax on the homes, or are they "tax exempt"?
I take it - they did not file to be recognized as a "tax exempt organization" IRC Sec 501(c)(3)?
 

#3

#4
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they did not file to be tax exempt under 501c3, they are just proclaiming they are a church and have not filed a document of anykind with the IRS.

I am concerned about whether they are actually a church and I have read tirelessly on this subject and still cannot convince myself they are a church and I am looking for others to reflect their perspective.

the homes that they rent to ex felons are rented from third parties by the organization. The (the organization) rent from X and then lease to Y.
 

#5
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Why do *they* seem to be focused on being a *church*?

Mightn't knowing their motives in that regard help you to help them understand that whatever *they* are looking for might be found by the organization describing itself as a *charitable organization* and not - i.e., not necessarily - a **church**?
 

#6
JR1  
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Churches are exempt from a bunch of stuff, including filing 990's. So it's a big deal.

That has nothing to do with UBIT, tho'. There are ways out and the easiest is to not have a profit per se. Same is true on all the rentals, which would be subject to UBIT as I understand, when there's debt. No profit, no UBIT.
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#7
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Once overhead is allocated, then I am thinking there is little to no profit on the rentals.

Also, at issue is the sold land which had underlying debt. Is the payoff of the debt associated with vacant land UBTI?
 

#8
JR1  
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Paying off debt is never anything. All that matters is the profit on the deal, but if you don't have overall profit, doesn't matter.
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#9
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What makes this question so important is the profit, which was 232k.
 

#10
JR1  
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Nice. I see your problem from here!
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#11
sjrcpa  
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Was the property that was sold just land? How was the land used before it was sold? If they just held it, and it was not income producing, the sale is likely not UBTI. If you delve into the Regs I believe there are some examples about land. I haven't looked at them in a while.

Same client? viewtopic.php?f=8&t=12262&p=110970#p110970
 

#12
Doug M  
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Seems like the question remains unanswered. Is this a church? Here is the data base to search.

https://www.irs.gov/charities-non-profi ... ion-search
 

#13
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Szoboszlay wrote:they did not file to be tax exempt under 501c3, they are just proclaiming they are a church and have not filed a document of anykind with the IRS.

I am concerned about whether they are actually a church and I have read tirelessly on this subject and still cannot convince myself they are a church and I am looking for others to reflect their perspective.

the homes that they rent to ex felons are rented from third parties by the organization. The (the organization) rent from X and then lease to Y.


As you're aware, churches can automatically qualify for 501(c)3 exemption without filing 1023 and user fee, as long as they meet specific criteria. https://www.irs.gov/pub/irs-pdf/p1828.pdf

I'm curious...does it OPERATE like a church, per the link posted by Doug M, and part of their missions/outreach is providing temporary housing and helping transition felons to a normal life in society? Though, that alone does not disqualify it from being UBI.
 

#14
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they provide church services once per week and minister in the prisons to some extent. The tithes that they receive represent about 5% of the total cash receipts. They spend most of their time, over 90% managing the housing for the felons. Setting rents, collection, charging late fees, assisting with job placement, some counseling. Again, their tithing receipts are about 100k, and rent receipts about 1.2m.

My concern is doing minimal church related activities to have the opportunity to file no returns, and pay no payroll taxes for the so called pastors of the organization. Only one pastor actually ministers to felons, the other pastors manage the housing.
 

#15
JR1  
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That's ok. Beaten in the other thread.

Let's move on. What do you do with 230k of UBIT???
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#16
Doug M  
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I never new a church did not need to file an initial 1023.

Is the money going to be used to purchase more property to allow more people to get on their feet?
 

#17
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Szoboszlay wrote:they provide church services once per week and minister in the prisons to some extent. The tithes that they receive represent about 5% of the total cash receipts. They spend most of their time, over 90% managing the housing for the felons. Setting rents, collection, charging late fees, assisting with job placement, some counseling. Again, their tithing receipts are about 100k, and rent receipts about 1.2m.

My concern is doing minimal church related activities to have the opportunity to file no returns, and pay no payroll taxes for the so called pastors of the organization. Only one pastor actually ministers to felons, the other pastors manage the housing.


Not following the description, how the money flows (follow the money!). Is it that the "ministers" tithe 5% of their income, taking a charitable contribution deduction on that, and then they pay themselves salaries without payroll tax? Does payroll include revenue from other sources or just the tithing donations? Do they all have other jobs that they tithe from or just the church job income? And where does the 1.2M in rent receipts come from, is some of it grant or gov't money of some kind (Sec 8, whatever)? How do they own property to rent out, who paid for it?

What are the religious services? Associated with an established religion or did they just make something up of their own?

There is a version of this where some property owners concocted a "church" fiction to collect tax-free government housing funds. Some SROs in SF appear to be cash machines for their operators...nothing would surprise me.
 

#18
JR1  
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Cynics. lol
Sounds very legit to me, but that's a world I run in.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#19
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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,,,,,,,,,,,,
 

#20
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I see an issue with the fact that the church is not supported by donations and offerings. It looks more like a rental operation than a 501(c)(3).
 

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