Victoria Bjorklund
New York Landmarks Conservancy
Common Bond April 1994

This response is drawn from a March 30, 1993 speech by Victoria Bjorklund, given at the Shared Use of Religious Properties workshop sponsored by the New York Landmarks Conservancy's Institute for Sacred Sites. Ms. Bjorklund leads the tax-exempt organizations group at Simpson Thacher & Bartlett in New York City.

A member of our Board- has questioned whether we might owe taxes on money we earn from some of the outside groups that use our building. Is any of this income taxable and, if so, how can we avoid earning taxable income in the future?

Most clergy and church or synagogue administrators never think about federal income taxes because the Internal Revenue Code exempts religious organizations from filing tax returns. However, the Internal Revenue Code taxes any income that a religious institution earns from activities that are unrelated to the accomplishment of its tax-exempt purpose, if they are regularly carried on activities that constitute a trade or business.

Income earned from sources unrelated to an organization's tax-exempt status is referred to as "Unrelated Business Taxable Income" or "UBTI." The Internal Revenue Service (IRS) assesses the "Unrelated Business Income Tax" or "UBIT" on the net UBTI. The tax rates applied to religious organizations are the same rates as apply to business corporations. There is no separate, non-profit rate since, in the eyes of the law, the income earned is unrelated to the organization's tax-exempt purpose.

For example, renting office space and providing ancillary services to an outside agency is a rental activity. Whether the space and services are being offered by a religious organization or a commercial establishment does not change the fact that your organization is offering office space and services, and thus is engaging in a trade or business. You will have a difficult time arguing to the IRS that providing secretaries, fax machines, and copiers with personnel to run them for another organization for a fee is a religious activity intrinsically related to your tax-exempt purposes. Rent attributable to personal property, such as furniture, office equipment, use of your kitchen, use of pots and pans, and so on, can also be taxable if this personal property is leased to a group or organization, so be careful about the personal property that you are providing.

There is an important exception to UBTI, an exception that you should strive for when you are planning your shared-use programs and that is the exception for "passive rents." When your organization is a passive recipient of rents, that rental income falls within this exception to UBTI because you are not really a serious competitor to your commercial counterparts. If you fall outside that exception, however, it is as if you are competing with taxable businesses, and your organization is liable for tax. For example, if your organization is merely renting out a hall for a wedding reception, the organization receives a passive rent that is not taxable. However, if you are providing a significant amount of personal property (such as furniture) or catering services, a photographer, or a wedding consultant, then you are earning some income subject to tax.

When you owe tax on your UBTI, you are required to file "Form 990-T" with the IRS. Quarterly estimated tax payments might also be due. Bear in mind that the statute of limitations never closes on your organization if it earns income and fails to file a return, since it is only by filing a return that you set the time clock in motion on the statute of limitations. So, if you are earning UBTI and the IRS discovers this, you may have liability going back, theoretically, for as long as you have earned that income. As a practical matter, you can usually negotiate with the IRS for a three-year look-back or, in some cases, a six-year look-back. Nevertheless, an unexpected tax liability such as this can be a serious financial blow to many religious organizations.

If you suspect that you may be earning UBTI, talk to your accountant or lawyer.

Look at Form 990-T and read the instructions for it. Be forewarned, neither the instructions nor the regulations governing UBTI refer specifically to religious institutions because the IRS assumes that religious institutions know that they are subject to these taxes.

In the past five years the IRS has discovered that about eleven percent of the gross domestic product is generated by non-profit organizations that largely are untaxed. Consequently, Congress has put great pressure on the IRS to raise revenue from non-profit agencies, including religious institutions, and the law provides that the way to raise that revenue is through UBIT. As more religious organizations work toward raising revenue, IRS agents are going to be knocking on doors and asking to discuss with you why you have not filed Form 990-T. it is the law, and Congress is pressing the IRS to improve compliance with tax laws. Hearings held during the summer of 1993 revealed to Congress that religious organizations may be among those organizations least in compliance with the Internal Revenue Code.

The Internal Revenue Code authorizes the IRS to begin a "church tax inquiry," as that term is- defined in the Code and regulations, if it has a reasonable belief that the religious organization may be carrying on an unrelated trade or business. Rest assured that if you were running a conference center that is competing with commercial conference centers in your community, someone would call your activities to the attention of the IRS. In addition, the IRS staff often reads newspaper listings to see where events are being held. Therefore it is very important to know what income you earn from outside organizations is taxable, and what income is not.

This discussion is for general information only and is not intended to be legal advice. To determine what income your organization may have that is subject to tax or whether your organization's income qualifies for the exception in the law, consult your organization's tax advisor.

Financial Assistance

The Sacred Sites and Properties Fund offers matching grants of up to $15,000 for preservation work to religious institutions in New York State. Eligible properties must be owned by a religious institution and be a local landmark or listed on the State or National Registers of Historic Places. Grants fund planning and restoration work. Priority is given to essential repairs to houses of worship. Note new deadlines for grant requests: May 1 and November 1. Emergency funds are available on an ongoing basis. Contact: Edward T. Mohylowski, New York Landmarks Conservancy, 141 Fifth Ave., New York, NY 10010, and (212) 995-5260. See Sacred Sites Program News, pp. A-2 and A-3, for recent grant awards.

The Rural New York Historic Preservation Grant Program, administered by the Preservation League of New York State, offers grants of up to $5,000 to help plan for the rehabilitation, restoration, continued use, and re-use of historic buildings, areas, and landscapes. There will be two funding cycles in 1994. Applications must be postmarked by March 15, 1994 for the first cycle and by September 15, 1994 for the second. Contact the Preservation League office nearest your project site for a grant application and further assistance. Tania Werbizky, Director of Preservation League of New York State, Suite 302, Fleet Building, Ithaca, NY 14850, (607) 272-6510; or Sheryl Adler, Program Assistant, Preservation League of New York State, 44 Central Ave., Albany, NY 12206, (518) 462-5658.

The Not-for-Profit and Public Facility Energy Conservation Rebate Program offers rebates of up to $25,000 for energy efficiency improvements to facilities owned or leased by non-profit organizations in New York State. Call the toll-free New York Energy Hotline at (800) 423-7283.

The Preservation Services Fund of the National Trust for Historic Preservation offers grants to prepare a condition survey or master plan or a feasibility study for a building. Grants average $1,000 to $1,500. Deadlines are February 1, June 1, and October 1. In New York and New England, contact the Northeast Regional Office, National Trust for Historic Preservation, Seven Faneuil Hall Marketplace, Fifth Floor, Boston, MA 02109, (617) 523-0885. Direct other requests to Pauline O'Hare, National Trust for Historic Preservation, 1785 Massachusetts Ave., NW, Washington, DC 20036, (202) 673-4197.

Technical Assistance

The Technical Preservation Services Center (TPSC) answers questions on maintenance and preservation, distributes technical information on repair and restoration methods, and consults with owners of landmark-quality buildings in New York City. Expanded services are available to non-profit and religious property owners. TPSC is a program of the New York Landmarks Conservancy. Call Mark A. Weber, at (212) 995-5260.

The Preservation League of New York State's Technical Assistance Center advises on rehabilitation and restoration procedures; conducts building inspections; studies stabilization, restoration, and rehabilitation options and priorities; and prepares conditions surveys and historic structure reports. Priority is given to non-profits. Call Tania Werbizky, Director, or Sheryl Adler, Program Assistant, Preservation League of New York State, 44 Central Ave., Albany, NY 12206, (518) 462-5658.

Partners for Sacred Places is a national non-profit organization dedicated to the sound stewardship and preservation of older religious properties. Partners maintains an information clearinghouse on some 335 topics related to religious property care, offers a traveling workshop series and publications, and sponsors an annual Sacred Trusts conference. It consults with denominational, preservation, and community groups interested in creating new assistance programs on a local level. Contact Diane Cohen or Bob Jaeger, Partners for Sacred Places, 1616 Walnut St., Suite 2310, Philadelphia, PA 19103, (215) 546-1288.

Helpful Publications

Inspecting and Maintaining Religious Properties addresses the inspection and maintenance of the roof, walls, and perimeter drainage systems, with an emphasis on reducing energy costs. It provides guidelines for organizing records and implementing a maintenance program. Edited by Landmarks Conservancy staff, with chapters by Wesley Haynes, Andrew Rudin, and J. Thomas Ryan, P.E. Cost: $20.25, postpaid, from the New York Landmarks Conservancy, 141 Fifth Ave., New York, NY 10010, (212) 995-5260.

Signs of Grace, a fifteen-minute videotape presentation (VHS format) produced by the New York Landmarks Conservancy, is about people and the work they do to maintain their churches, synagogues, and meeting houses. With the Rev. Thomas F. Pike, Rector of the Parish of Calvary and St. George's in New York City, as a thoughtful guide, Signs of Grace illustrates how, in both poor and wealthy neighborhoods, in rural and urban settings, the preservation of religious buildings is integral to the concept of mission. Cost: $15.00, postpaid, from the New York Landmarks Conservancy, 141 Fifth Ave., New York, NY 100105 (212) 995-5260.

Managing the Non-Profit Organization: Principles and Practices (235 pp., Harper Business, paper, $12), by Peter F. Drucker, presents the tasks, responsibilities, and practices necessary to manage non-profit organizations, including religious institutions. Examples illustrate leadership, mission, goals, resources, marketing, development, and decision making. Interviews with expert's address key issues in the non-profit sector. Available in bookstores nationwide.

Stained Glass in Houses of Worship, published by Inspired Partnerships, is designed to help lay leaders and clergy understand the history, art, and value of their stained glass, and to know the best ways to restore, backlight, and protect their windows. The material is presented in an easy-to-read informational style that will assist property stewards in evaluating their windows and working with stained glass professionals. The publication is illustrated and includes a window survey form.

Cost: $6.00, postpaid, from Inspired Partnerships, 53 W. Jackson Blvd., Suite 852, Chicago, IL 60604-3611, (312) 294-0077.

Preservation Brief #33: The Preservation and Repair of Historic Stained and Leaded Glass, developed by Inspired Partnerships for the National Park Service, emphasizes the history of stained and leaded glass nationwide. Cost: $1.50 from the Government Printing Office, Washington, DC 20402-9325, and (202) 783-3238. Refer to GPO stock # 024-005-001122-6.