Is the IRS Back in Church?

With fall approaching, the next election cycle is just around the corner – just in time for new IRS developments affecting churches and other religious institutions.  As with all section 501(c)(3) organizations, religious institutions are prohibited from engaging in “political campaign activities.” That is, they may not advocate for or against a particular candidate for office, or otherwise seek to influence an election.  For many, such restriction seems like a constitutional violation of First Amendment free speech and religious liberty protections.  In recent years, IRS officials have ref

By Executive Order – No LGBT Discrimination

President Obama recently signed an executive order prohibiting federal contractors and subcontractors from engaging in employment decisions based on sexual orientation and gender identity.  The President’s order amends previous executive orders regarding employment discrimination dating back to the 1960s, which were implemented to prevent racial discrimination in hiring and contracting decisions made by organizations receiving federal funding. Previously, the order prohibited employment decisions based on race, color, religion, sex, or national origin.  President Obama extended the order to

Section 501(c)(2) Tax-Exempt Title Holding Corporations: The Good, the Bad, and Other Options

The Problem of Risk to Nonprofits

Lawyers often advise to “separate valuable assets from risky activities.”  It’s a legal maxim with which nonprofit directors and officers should be familiar. Keeping valuable assets away from risky activities may provide an organization with protection in the event of a lawsuit or other liability.  Exempt organizations have sometimes used  501(c)(2) title-holding corporations or other tax-exempt corporate structures to provide such protection.  Nonprofit leaders should be aware of the protections available through such risk management options.

Consider the following scenario: A terrible accident occurs on the grounds of a nonprofit preschool.  Multiple parties later sue the preschool for accident-related injuries.  The preschool has substantial and valuable real property holdings.  If the preschool is held liable for damages resulting from the accident, the outcome for the church may be catastrophic.  The organization’s insurance protection may be stretched beyond policy limits.  If the insurance coverage limits are reached or portions are outside the scope of the coverage itself, the organization is ultimately responsible.  In a worst-case scenario, a court may order liquidation of the organization’s real property to pay the judgment. 

Mitigating Risk and Other Benefits – the 501(c)(2)

Dating back to 1916, Congress has provided nonprofit entities with a means to mitigate risk.  Presently, the 501(c)(2) title-holding corporation provides such protection.  A 501(c)(2), like its section 501(c) siblings, is exempt from federal income tax.  The (c)(2), however, has a single limited purpose:  to hold title to property on behalf of another exempt entity.  A (c)(2) is generally controlled by a parent tax-exempt organization, and the (c)(2) holds title to property (which can be real, personal, or intellectual property), which may be used for the parent’s exempt purposes.  Income from the (c)(2) passes to the parent.   In theory, if the parent organization is sued, as in the above example, its liability from potential damage suits should be limited to the organization itself, and not the separate legal entity that holds title to the property held.  In reality, the limitation of liability will depend on several variables, such as proper legal structuring of the entities and the organizations’ observance of corporate formalities.  Before structuring such an arrangement, interested entities should consult with experienced legal counsel.