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roachboy · 07-27-2006, 12:15 PM

because, seaver, churches pay not taxes because they a religious organizations.
the criteria for tax exempt status is clear about the distinction.
read it, if you like.

Quote:

Religious Organization Workbook*
>Tax Status
>A. Federal

Intro

Just because an organization is incorporated under either the Religious Corporation Act or the General Not For Profit Act does not mean that it is automatically exempt from federal income taxes. It may or may not qualify for exemption from federal income tax. If it does qualify, a determination should be made as to whether it would be advantageous to seek exemption. Most religious organizations seek a confirmation from the Internal Revenue Service that they are tax exempt for two reasons. First, it exempts the organization from paying federal income taxes. Second, it enables donors to claim a federal income tax deduction for contributions made. Without this benefit, many religious organizations would find it difficult to operate. For further information, see IRS publication 557, Tax Exempt Status for Your Organization. <http://ftp.fedworld.gov/pub/irs-pdf/p557.pdf>
1. Initial Filings Required with the IRS

Religious organizations seeking recognition of exemption from federal income tax must use a form specifically prescribed by the IRS, Form 1023 - Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. <http://ftp.fedworld.gov/pub/irs-pdf/k1023.pdf>

Religious organizations that are part of a larger religious organization should see whether the organization has a group exemption from the IRS.
2. Tax Reporting Requirements

Exempt organizations, other than private foundations, must file an annual return with the IRS on either a Form 990 or a Form 990-EZ. However, the following types of religious organizations are exempt from this filing requirement:

· A church, an interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church.

· A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs.

· A school below college level affiliated with a church or operated by a religious order, even though it is not an integrated auxiliary of a church.

· A mission society sponsored by or affiliated with one or more churches or church denominations, more than one-half of the activities of which society are conducted in, or directed at persons in, foreign countries.

· An exclusively religious activity of any religious order.

· A religious or apostolic organization described in section 501(d) of the Internal Revenue Code. (Required to file Form 1065, U.S. Partnership Return of Income.)

· An exempt organization (other than a private foundation, discussed in chapter 3) having gross receipts in each tax year that normally are not more than $25,000. (See the instructions for Form 990 for more information about what constitutes annual gross receipts that are normally not more than $25,000.)
3. Special Issues

Organizations that are exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code are commonly referred to as "501(c)(3) organizations." Such organizations are prohibited from participating or intervening in political campaigns on behalf of or in opposition to any candidate for national, state or local political office. If a 501(c)(3) organization engages in prohibited political campaign activity, the IRS may assess substantial fines against the organization and challenge its tax exempt status, thereby threatening the organization's ability to receive tax-deductible contributions.

It is important to know what activity is prohibited political campaigning and what is not. Consequently, we have summarized some of the IRS rules to help you distinguish prohibited political campaigning from permitted political activity.

Prohibited political activity is any political campaigning undertaken by or in the name of a 501(c)(3) organization. Prohibited political campaigning includes:

· Directly or indirectly supporting or opposing any candidate for elective public office. Examples include making statements supporting or opposing a candidate in a sermon or church bulletin, editorializing in a religious periodical, or distributing campaign literature or biased voter education material;

· Providing financial support to any candidate, which would include, making direct monetary contributions to a candidate, providing free or selective use of the organization's volunteers or paid staff to the candidate, allowing a candidate to use the organization's facilities or office equipment, or providing candidates with the organization's mailing lists on a preferential basis without charge;

· Distributing campaign literature or biased voter education material on the organization's premises, through its mailings, during worship services, or by other means, such as using stationary identifying the organization to send out letters supporting or opposing particular candidates. Examples of this kind of prohibited political activity would include:

· the distribution by volunteers of the 501(c)(3) organization or by representatives of a candidate or a political party of flyers for candidates during an organization's rummage sale;

· the distribution by a candidate at an organization's event of campaign buttons or other items; or

· the distribution by local community group affiliated with the organization political literature supporting or opposing a candidate on stationary that identifies the group's affiliation with the 501(c)(3) organization.

· Publishing paid political advertising, biased coverage of candidate activity or opinions that endorse or oppose a particular candidate in the organization's bulletin or other publication; or

· Endorsing a candidate at an official function of the organization or in an official publication of the organization.

501(c)(3) organizations may engage in the following political activity since the IRS does not view such activity as political campaigning:

· Sponsoring voter registration drives and encourage citizens to vote, provided that no candidate or political party is supported or opposed at the drive;

· Attempting to educate voters about issues or candidates' positions on the issues through the publication and/or distribution of unbiased, nonpartisan voter guides. To be considered unbiased, voter guides must cover a wide range of issues that are selected on the basis of their importance to the electorate and must report the issues in an accurate manner with no editorial comment. Unbiased voter guides are generally based on the results of candidate polls or questionnaires to candidates that were not designed to make candidates appear acceptable or unacceptable to the 501(c)(3) organization. Biased voter guides, which are considered campaigning, are guides that would include statements or material that would make evident that the candidate agrees or disagrees with the organization's position or that the organization agrees or disagrees with the candidate's position.

· Sponsoring nonpartisan public forums, debates, or lectures, provided that all qualified candidates are invited, that the questions and topics addressed at the event cover a broad range of issues, that each candidate has an equal opportunity to present his/her view, and that the moderator does not show approval or disapproval of any particular candidate's response or presentation;

b) Unrelated Business Activities and Taxes

Under the Internal Revenue Code, organizations that are exempt from income tax under Section 501(c)(3) of the Code are subject to tax on the unrelated business taxable income they earn each year. The primary purpose of the unrelated business income tax laws are to eliminate a source of unfair competition by placing the unrelated business activities of exempt organizations upon the same tax basis as the commercial business endeavors with which they compete.

The term "unrelated business taxable income" is the income generated by an exempt organization "from any unrelated trade or business" which it regularly carries on. A trade or business is "unrelated" to an exempt organization if it is not substantially related to the organization's exempt purpose. A trade or business is "substantially related" to an organization's exempt purpose if it contributes importantly to the accomplishment of the organization's exempt purpose. Whether or not a trade or business is substantially related to an organization's exempt purposes depends upon the facts of each particular case. The term unrelated trade or business does not include any trade or business which is carried on primarily for the convenience of the exempt organization's members, students, patients, officers or employees and also does not include a trade or business where substantially all of the work to carry out the trade or business is performed by persons who do not receive any form of compensation for their services.

Certain types of income, which would otherwise satisfy the definition of unrelated business taxable income, are nonetheless excluded from taxation. Among the types of income generally excluded from taxation as unrelated business taxable income are income earned from the rental of real property, royalty income, interest and dividends.

Among the types of activities that may generate unrelated business taxable income for an exempt organization include income earned from the operation of a bookstore, a cafeteria, or a publishing company. If the services being provided by the exempt organization can be or are also provided by a non-exempt organization, it is more likely that the IRS will consider the income to be taxable. To prevent taxation, an organization must be able to demonstrate that the activity which generates the income contributes importantly to the mission of the organization and that the organization does not derive an unfair competitive advantage over commercial enterprises by being able to treat the income from the activity as nontaxable.

Religious organizations exempt from taxation as 501(c)(3) organizations should consult with an accountant and/or an attorney if it appears that they engage in activities that could generate taxable income.

c) Intermediate Sanctions

Section 4958 of the Internal Revenue Code imposes a two-tier excise tax on "disqualified persons" engaging in "excess benefit transactions" with section 501(c)(3) organizations. These so-called "intermediate sanctions" apply to churches as well as other tax-exempt organizations. However, a special rule applies - the procedures of the "Church Audit Procedures Act" will be used "in initiating and conducting any inquiry or examination into whether an excess benefit transaction has occurred between a church and a disqualified person. The Church Audit Procedures Act imposes detailed limitations on IRS examinations of churches:

The first-tier tax is 25 percent of the amount of "excess benefit." The second-tier tax, which is imposed if the excess benefit transaction is not corrected through repayment, is 200 percent of the amount of excess benefit. These taxes are imposed on the disqualified person, not the exempt organization. Thus, if compensation or other transactions with disqualified persons are determined to be excessive, the result for the disqualified person is either repayment of the excessive amount and payment of a tax of 25 percent of that amount or payment of taxes of 25 percent and 200 percent of the excess amount. This tax is imposed whether or not the disqualified person's participation was knowing or willful.

Trustees, directors, and officers can have personal exposure for excess benefit transactions. If the excise tax is imposed on a disqualified person, "organization managers" of the tax-exempt organization, as defined below, are also subject to an excise tax if they knowingly participate in an excess benefit transaction. This tax does not apply if their participation is not willful and is due to reasonable cause. The tax is ten percent of the excess benefit amount, up to an aggregate maximum of $10,000 per transaction.

If an excise tax is imposed on disqualified persons or organization managers, a penalty equal to the amount of the tax may also be imposed for repeated or willful and flagrant violations.

The excise tax may be imposed instead of revocation of tax exemption or, in extreme cases, intermediate sanctions may be imposed along with revocation of exemption.