Cory Halliburton | TaxConnections

10 Aug 2022

Church Status: Can (And Should) Your Religious Nonprofit Seek Church Status With The IRS?

Can and should your religious organization seek church status with the IRS? A look at a few pros, cons, and due diligence considerations.

Through over 15 years of representing nonprofit organizations, one thing is for certain–there are infinite exempt purposes that may be served within the confines of section 501(c)(3) of the Internal Revenue Code. No matter how similarly situated for tax purposes, every tax-exempt or nonprofit organization has unique attributes of governance, operations, and focus. The same is certainly true in the religious organizations space. As my long-time religious law mentor once said, “God loved us so much there is a church, synagogue, mosque, temple, or other place of worship available for every individual to pray and seek peace.”

Some of my nonprofit clients exist primarily to advance religious purposes—religion is a core and fundamental focus of all things organizational and operational for those organizations. That focus does not, however, make those organizations a “church,” as that term is defined (or considered) by the Internal Revenue Service. As in any organization structure, there are advantages and disadvantages to church status.

Written by Cory Halliburton | Posted in Religious Non Profit Status With IRS

02 Aug 2022

E Pluribus Unum – A Child’s Question Leads To A Silent Courtroom

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E Pluribus Unum – A Child’s Question Leads To A Silent Courtroom

In 2018 I prosecuted a criminal contempt action in a state court civil proceeding. The contempt action was very difficult for my clients, my law firm, my family, the courts, and opposing counsel. For the first time in my career, I received legitimate threats of harm from an opposing party, and the animosity among some who were involved had reached a tipping point the likes of which I had never seen before.

Somehow, and with cooperation from opposing counsel and the courts, a resolution was reached. I insisted that all terms, including testimony from opposing party (after being informed of and waiving 5th Amendment Miranda Rights), be placed on the record in open court. So, a final hearing was scheduled.

Two of my children accompanied me on the train from Grapevine, Texas to Fort Worth for the final hearing in the proceeding. While on the train, and as I was wondering what I wanted to say at that final hearing, one of my kiddos asked, “Daddy, what does E Pluribus Unum mean?”

Written by Cory Halliburton | Posted in TaxConnections

21 Jul 2022

Arbitration | A Look-Back On An Arbitration Effort to Remember

A Look-Back on an Arbitration Effort to Remember

On July 15, 2022, Jason Freeman and I concluded a five-day long arbitration. Not between ourselves; rather, we served as counsel for long-time clients in a business dispute that, by agreement with an opposing party, required resolution of disputes by private, confidential arbitration. Thus, the details of the dispute and proceeding are, well, private and confidential and so shall they remain. But, my high-level thoughts on the process involved are ripe for an Insights post.

Arbitration is a form of alternative dispute resolution. Arbitration is a way to resolve disputes outside the public eye that looks upon the courts of law. A dispute submitted to arbitration is usually decided by one or more persons who are selected by the parties to serve as the arbiters or arbitrators. Basically, the parties to the dispute consent to allow the arbiter—usually an attorney or expert in the matter in dispute—to render an award in arbitration, just like a judge might enter in a court of law.

Written by Cory Halliburton | Posted in Arbitration

15 Jul 2022

Adverse Rulings From The IRS Exempt Organizations Division. How Can Your Organization Learn From Others’ Mistakes?

On July 1, 2022, the IRS, Director of Exempt Organizations issued an array of final adverse determinations with respect to organizations seeking exemption under 26 U.S.C. sections 501(c)(3), 501(c)(4), and 501(c)(7). In these Private Letter Rulings, the IRS Exempt Organizations Division denied tax-exempt status to the organizations. A common theme runs through all the Rulings: The organization applying or under review for tax exemption failed the organization test and/or the operational test applicable to the requirements for the exemption sought.

Private Letter Rulings are not binding on any taxpayer except the taxpayer to whom the Ruling is directed. But, the Rulings are instructive and give an idea of the organizational and operational criteria that the IRS Exempt Organizations Division needs or wants to see in order to grant tax exemption. Due care should be taken with applications for tax exemption. The exemption, if available, is a privilege, not a right, and the IRS is not shy to deny that privilege when appropriate based on the organization or operations of the applying entity.

For additional information on legal and tax issues facing tax-exempt and nonprofit organizations, search this Freeman Law Insights blog for topics such as:

Three-Part blog on Tax Exemption and Unrelated Business Income Rules

Can Nonprofits Fundraise for Other Nonprofits?

What is a Section 509(a)(3) Supporting Organization?

Representing Texas Nonprofit Corporations

Below is a Freeman Law Insights Summary of those recent IRS Private Letter Rulings:

Written by Cory Halliburton | Posted in IRS Private Letter Rulings

29 Jun 2022

What Is A Section 509(a)(3) Supporting Organization?

What is a Section 509(a)(3) Supporting Organization? Can a Section 501(c)(3) organization avoid private foundation status by supporting other than a charity, such as a Section 501(c)(6) organization?

Under Title 26 of the Internal Revenue Code, all organizations described in section 501(c)(3) are considered private foundations, unless one of four exceptions applies. See 26 U.S.C. § 509(a)-(a)(4) (defining “private foundation”).

Those exceptions are, briefly: (1) organizations described in 26 U.S.C. § 170(b)(1)(A) and to whom charitable contributions may be given; (2) publicly supported organizations, as described in paragraph (2) of section 509(a); (3) organizations organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2) of section 509(a); and (4) an organization which is organized and operated exclusively for testing for public safety. See 26 U.S.C. § 509(a)-(a)(4).

This Freeman Law blog focuses on supporting organizations, being those described in paragraph (3) of section 509(a).

Section 509(a)(3)—Supporting Organization.

Section 509(a)(3) is an exception to private foundation status. Section 509(a)(3) describes an organization which:

Written by Cory Halliburton | Posted in Section 509 (a)(3) Organization

17 Jun 2022

Can A Nonprofit Fundraise For Another Nonprofit? Legal And Tax Considerations

Can a Nonprofit Fundraise For Another Nonprofit?

I’ve served as outside general counsel for nonprofit organizations across the nation for over 15 years. This question is re-occurring. So, I thought I would blog a little about it. Not legal or tax advice; just legal and tax information, unless you paid for it…

General Overview

Entity A-501(c)(3) may, generally speaking, engage in fundraising for Entity B-501(c)(3). Ideally, and it is recommended that B’s exempt purposes (and purposes for the funds raised) align with A’s exempt purposes. The core requirements of section 501(c)(3) and related Treasury Regulations provide that A’s assets must be used primarily for the exempt purposes for which A is organized and exempt. Thus, the fundraising activity should contribute importantly to A’s exempt purposes, which can include offering support to other similarly-purposed exempt organizations.

Written by Cory Halliburton | Posted in TaxConnections

08 Jun 2022

Tax Exemption And Unrelated Business Income Rules (UBIT): “Substantially Related” (Part 3 of 3)

This Insights blog is Part 3 of a 3-Part series focused on the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).

Part 1—Tax Exemption and the Framework for the Unrelated Business Income Rules—provided an overview of the organizational and operational tests of section 501(c)(3) of the Code and alluded to the trigger for unrelated business income rules. Part 2–Unrelated Business Income Tax Rules, Modifications, and Exceptions—dived deeper into, well, the specific rules, modifications, and exceptions.

This Part 3 will dive deeper into the meaning of a trade or business that is “substantially related” to an exempt purpose of the tax-exempt organization.

“Substantially Related.”

Written by Cory Halliburton | Posted in UBIT (Unrelated Business Income)

07 Jun 2022

Tax Exemption And Unrelated Business Income Tax (UBIT): Rules, Modifications and Exceptions (Part 2 of 3)

This Insights blog is Part 2 of a 3-Part series focused on the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).

Part 1—Tax Exemption and Unrelated Business Income Tax (UBIT): The Framework—provided an overview of the organizational and operational tests of section 501(c)(3) of the Code and alluded to the trigger for unrelated business income rules.

This Part 2 dives deeper into the unrelated business income tax rules.

Summary of Unrelated Business Income Tax Laws and Regulations.

Generally, a tax-exempt organization must pay income tax on income classified as unrelated business income. 26 U.S.C. § 511(a). An unrelated trade or business is any trade or business, regularly carried on, the conduct of which is not substantially related to the organization’s exempt purpose. 26 U.S.C. § 513(a). Modifications, exclusions, and exceptions exist.

Written by Cory Halliburton | Posted in TaxConnections

20 May 2022

Tax Exemption And Unrelated Business Income Tax (UBIT): The Framework (Part 1 of 3)

This Insights blog is Part 1 of a 3-Part series that provides a focused overview of the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).

This Part 1 sets the framework and provides an overview for the organizational and operational tests applicable to tax-exempt organizations and, without getting into too much detail (yet), the why or when the unrelated business income tax rules come into play for the organization.

General Rule For Tax Exemption Under Section 501(c)(3) of The Code

To be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in section 501(c)(3) of the Code. See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(a)(1). If an organization fails to meet either the organizational test or the operational test, the organization is not qualified for tax exemption under section 501(c)(3) of the Code.

The Organizational Test

Section 1.501(c)(3)-(1) of the Treasury Regulations contains the organizational test:

Written by Cory Halliburton | Posted in Tax Exemption And Unrelated Business Income Tax (UBIT)

11 May 2022

Syndicated Conservation Easements: IRS Scrutiny Continues

On May 2, 2022, the Wall Street Journal published two detailed articles authored by Richard Rubin on the subject of syndicated conservation easements: Conservation Tax-Break Deals Keep Flowing Despite IRS Crackdown (WSJ 2022.05.02) and How a Georgia Pine Farm Became a Significant Tax Deduction (WJS 2022.05.02). In the first article, the author notes that IRS data released in 2020 showed syndicated easement deductions climbing from $6 billion in 2016 to $9.2 billion in 2018. And, the author quotes the head of the IRS’s business and international division as stating, “We don’t feel like we’ve seen the full impact of our [the IRS’s] efforts just yet. . . . We view it as abusive and problematic, and we will continue to throw significant enforcement tools” at abusive syndicated conservation easement tax shelters.

In the second article, the author focuses on a specific 434-acre pine-tree farm in Georgia and its dedication for conservation purposes pursuant to a syndicated easement arrangement. The author writes, “In 2020, some McGinnis family members sold off three-fifths of the property for $310,000. By the end of 2021, the . . . land had been sold again, this time to a business that raised $10.7 million from investors in a land-conservation deal. That transaction could yield its investors millions of dollars more in tax deductions—as well as scrutiny from the Internal Revenue Service.” Rubin writes that billions of dollars of tax revenue are at stake in abusive syndicated conservation easement tax shelters.

Written by Cory Halliburton | Posted in Syndicated Conservation Easements

29 Apr 2022

The IRS Collection Procedure Notice 518 (CP518)

Overview of IRS Notice CP518

The IRS Collection Procedure Notice 518 (CP518) is a notification that the IRS believes a taxpayer—either a business or an individual—has failed to file a required return, either as of the initial deadline for filing or as of any extension deadline. Pursuant to 26 U.S.C. § 6212 and Treasury Regulation § 301.6212-1, the IRS uses CP518 as one of various progressive notifications to taxpayers for tax assessment or collection process. See IRS Guidance for CP 518 Business and IRS Guidance for CP 518 Individual.

Last Known Mailing Address

Pursuant to Section 6212, if the IRS determines that there is a deficiency in respect of any federal income tax, including any excise tax authorized by Chapter 42 of the Internal Revenue Code, the IRS is authorized to send a notice of deficiency to the taxpayer by certified mail or registered mail. The CP518 notice must include a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office.

Written by Cory Halliburton | Posted in IRS Collection Procedure Notice 518 (CP518)

20 Apr 2022

Kohout v. Commissioner: Reconstructing Accounting, Voluminous Writings, And Passthrough Loss

The recent Tax Court case of Kohout v. Commissioner addresses several common evidentiary issues in the context of tax disputes. A summary, chart, or calculation to prove the content of voluminous records may be appropriate and admissible, but the Tax Court, as seen in the Kohout opinion, is quite comfortable with the financial data in, for example, bank statements that are 58-pages in length. A summary of voluminous records must be an accurate compilation of the underlying data; thus, a constructed summary of reconstructed accounting data is a recipe for evidence that lacks credibility or that will be deemed inadmissible by the Tax Court. And, an accounting “reconstructionist” may attempt to reconstruct a taxpayer’s return through the taxpayer’s testimony or word, but the underlying records—bank statements and evidence of transfers—are a better and more probative source for the substance of a taxable transaction. We dive into more detail below:

Written by Cory Halliburton | Posted in Passthrough Loss • Restructuring Accounting