Religious Institutions Update: November 2013

Nathan A. Adams IV is a Partner in our Tallahassee office.

Timely Topics

Diminished donations have led many faith-based organizations to become more creative about increasing revenue. Sometimes these organizations look beyond ordinary ministry functions to supplement income with unrelated activities. For example, parochial schools may lease property to communications companies for cell towers, churches may lease parking lots, and other religious organizations may offer advertising in publications and on signage. Unwittingly, the institutions may create unrelated business taxable income, which is "the gross income derived by any organization from an unrelated trade or business regularly carried on by it" less certain deductions.

An "unrelated trade or business" is "any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function." The mere fact that the income from the unrelated enterprise facilitates the organization's core ministry is insufficient to avoid unrelated business taxable income. Certain exemptions exist for activities such as rental income derived from real property that is not debt financed or use of real property, substantially all of which (85 percent or more) is used for exempt purposes.

An exempt organization can lose its tax-exempt status if its nonexempt activities or purposes comprise more than an "insubstantial part of its activities." Although there is no exact definition of what is "insubstantial," a rule of thumb many practitioners use is less than 20 percent. Religious institutions that generate unrelated business taxable income must file Form 990-T even if they do not ordinarily file a Form 990. Contact qualified counsel if you are uncertain whether your organization is generating unrelated business taxable income or want to explore this type of revenue as a means to supplement income.

Key Cases

Court Upholds Biblically Based Arbitration Clause in Wrongful Death Case

In Spivey v. Teen Challenge of Fla., Inc., No. 1D12-4377, 2013 WL 5584237 (Fla. 1st DCA Oct. 11, 2013), the court affirmed the trial court's decision to require biblically based arbitration of a wrongful death claim contrary to the personal representative's argument that it violated her free exercise rights. In March 2011, upon Nicklaus Ellison's initial enrollment in the Teen Challenge substance abuse treatment program, he signed an agreement requiring any disputes to be resolved in accordance with the Rules of Procedure for Christian Conciliation by the Association of Christian Conciliation Services. In May 2011, Teen Challenge "discharged"...