Religious Organizations

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On October 23, 2019, Governor Andrew M. Cuomo, signed legislation incorporating the federal Johnson Amendment into New York law. As previously described, the Johnson Amendment denies tax-exempt status under section 501(c)(3) of the Internal Revenue Code (the “Code”) to (and imposes excise taxes on) any organization that engages in political campaign activities. The new legislation amended section 1116 of New York Tax Law, which will now deny tax-exempt status for N.Y tax purposes to any organization that engages in political campaign activities, either on behalf or in opposition of any candidate for public office.

On March 15, 2019, the U.S. Court of Appeals for the Seventh Circuit held in Gaylor v. Mnuchin that the tax exemption for “ministers of the gospel” (defined below) under Section 107(2) of the Internal Revenue Code (the “Code”) does not violate the Establishment Clause[1] of the First Amendment…

House Republican Tax Bill Imposes Excise Tax on Wealthy Private Universities and Excess Compensation of Highly Paid Employees; Subjects State Pension Plans to UBTI Rules

On Thursday, November 2, House Republicans led by Speaker Paul Brady (R-WI) and Chairman of the House Ways & Means Committee Kevin Brady (R-TX), released the first public draft of the much-anticipated Tax Cuts and Jobs Act (the “bill”). (Our full coverage of the bill can be found here.)

In addition to providing substantial rate cuts for corporations and many pass-through businesses and repealing the estate tax, the 429-page document contains several provisions of interest to public charities and private foundations (as well as their advisors).

The United States Supreme Court unanimously ruled in favor of religiously-affiliated hospitals and healthcare organizations in holding that a pension plan need not be established by a church in order to qualify for ERISA’s church plan exemption. Petitioners are religiously affiliated non-profit healthcare organizations appealing decisions by the Third, Seventh, and Ninth Circuit Courts of Appeal that a church must establish an ERISA-exempt church plan. Respondents are current and former employees of these organizations.

Introduction

On May 4, 2017, President Trump signed an executive order that directs the executive branch to limit its enforcement of the “Johnson Amendment.” As previously reported, the Johnson Amendment prohibits organizations that are exempt under section 501(c)(3) of the Internal Revenue Code from engaging in political campaign activities.¹ The executive order limits enforcement of the Johnson Amendment or any other adverse action against any individual or religious organization for speaking about moral or political issues from a religious perspective. The executive order is unlikely to have any meaningful practical effect because, as has been widely reported, the Johnson Amendment is not currently being enforced.

The executive order also directs the Secretaries of Treasury, Labor, and Health and Human Services to write regulations to address objections to the requirement in the Affordable Care Act that employers fund contraceptive health services for their employees.

While speaking at the National Prayer Breakfast on February 2, 2017, President Trump reaffirmed his commitment to repeal the law that restricts organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code (“Code”) from engaging in political campaign activities. This law, enacted in 1954, is commonly known as the Johnson Amendment since it was proposed by then-Senator Lyndon B. Johnson.  During the breakfast, President Trump stated: “I will get rid and totally destroy the Johnson Amendment and allow our representatives of faith to speak freely and without fear of retribution. I will do that.  Remember.”  This statement is in line with President Trump’s campaign promises.  In his acceptance speech at the Republican National Convention, Trump expressed his commitment to repeal the Johnson Amendment to provide freedom of speech to all Americans.

When we last blogged about the “seemingly innocuous five line tax benefit” in Section 107 of the Internal Revenue Code, a District Court judge in California was reviewing a complaint filed by the Freedom From Religion Foundation, a nonprofit membership organization challenging this 90 year old provision.
Eight years after President Bush signed the new law on May 20, 2002, Judge Shubb of the Eastern District of California (on May 21, 2010) declined to dismiss the latest challenge to the parsonage exemption. A finding of unconstitutionality can cost clergy billions of dollars in tax over the next few years. This burden would likely be passed on to the religious institutions that employ clergy.
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Parsonage is a seemingly innocuous five line tax benefit in the Code.  This “innocent” provision of the Code, Section 107, appears to have befuddled many ministers and their professional advisors, however.

About 90 years ago, Congress promulgated an exclusion from income for the rental value of the housing provided to a “minister of the gospel,” which includes priests, rabbis, imams and any other duly ordained, commissioned or licensed member of the clergy.  Alternatively, the minister can exclude the rental allowance paid as part of compensation, to the extent actually used as rent or other costs of home ownership.  Since 2002, the allowance is capped at fair rental value, including furnishings and appurtenances (such as a garage), plus the cost of utilities.

While there are IRS publications that explain the tax nuances of parsonage (e.g., Publication 517 and The Tax Guide for Churches and Religious Organizations), the unusual tax treatment of ministers can still be very confusing.