Church Unemployment Tax Audits Require High-level Approval

Prohibitions on government intervention into matters of religion have long meant that churches may not be subject to a tax inquiry unless a high-level Treasury official has a reasonable belief “(on the basis of facts and circumstances recorded in writing) that the church … may not be exempt, by reason of its status as a church, from tax under section 501(a), or may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation….” [26USCx7611] However, the IRS was, until recently, unwilling to extend this protection to unemployment tax audits. This has changed with the issuance of Memorandum SBSE-04-1215-0085, by which the Small Business/Self-Employed Division of the IRS has determined that the church audit procedures set forth in section 7611 of the Internal Revenue Code apply to church employment tax inquiries. Under Code section 7611, the IRS may begin a church tax inquiry only by satisfying statutory “reasonable belief requirements” and “notice requirements.” Code section 7611 also restricts the scope of church examinations and limits the period for conducting them. This new guidance is effective upon issuance (12/17/2015). 

Transit and Parking Benefits

In an effort to provide parity for employees who use public transit rather than drive cars that need to be parked at some cost, the Consolidated Appropriations Act, 2016 Public Law No. 114-113 amended section 132(f) (2) of the Internal Revenue Code to increase the income exclusion for a transit pass from $130 per participating employee to $250 per employee for the period January 1, 2015, through December 31, 2015. For 2016 the monthly exclusion for both parking and a transit pass is $255. The IRS is clarifying how the retroactivity will be handled. See Notice 2016- 6, IRS, (Jan. 12, 2016)

Private Foundations May Invest to Further Charitable Purpose

The IRS seems to be encouraging private foundations to focus on charitable mission when investing with the issuance of Notice 2015-62. This notice provides guidance on the application of section 4944 of the Internal Revenue Code (Code) to investments that are made by private foundations for purposes described in section 170(c)(2)(B), but are not program-related investments (PRIs) as defined in section 4944(c) and the regulations thereunder. 

“Only a jeopardizing investment is subject to tax under section 4944. Under the regulations, an investment made by a private foundation will not be considered to be a jeopardizing investment if, in making the investment, the foundation managers exercise ordinary business care and prudence (under the circumstances prevailing at the time the investment is made) in providing for the long-term and short-term financial needs of the foundation to carry out its charitable purposes. Although the regulations list some factors that managers generally consider when making investment decisions, the regulations do not provide an exhaustive list of facts and circumstances that may properly be considered. When exercising ordinary business care and prudence in deciding whether to make an investment, foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purposes. Foundation managers are not required to select only investments that offer the highest rates of return, the lowest risks, or the greatest liquidity so long as the foundation managers exercise the requisite ordinary business care and prudence under the facts and circumstances prevailing at the time of the investment in making investment decisions that support, and do not jeopardize, the furtherance of the private foundation’s charitable purposes. For example, a private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation’s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.”

This notice should provide some comfort to private foundations that want to encourage charities to engage in profit-making social enterprises with a goal of self-sufficiency.