In Ocean Pines Association, Inc. v. Commissioner; 135 T.C. No. 13; No.5127-08 (30 Aug 2010), the Tax Court held that income from two parking lots was taxable to a non-profit association.

The Ocean Pines Association is a homeowners group in a community with a population of 10,496. It operates many recreational facilities in Ocean Pines, but owns a beach property and two parking lots with some usage restricted to members.

In 2003, the parking lots produced $232,089 in revenue, with $39,092 in expenses. $61,024 of the revenue was from leasing the property to third party businesses from 4:00pm to 3:00am each day. The balance of the revenue was from payments by association members for parking stickers that permitted them to use the parking lots and surrounding facilities during the summer.

The IRS assessed a deficiency for years 2003 and 2004 because the association did not file Form 990-T, Exempted Organization Business Income Tax Return. The IRS stated that the revenue from the parking lot was unrelated business taxable income to the association and accessed a deficiency.

The Association claimed that the revenue from the parking lots was not subject to UBI. First, the parking lot was "substantially related" to its use of facilitating the community welfare. Second, the revenue from the parking lot constituted rent from real property and therefore was exempted.

The court noted that under Sec. 513(a) a charity may escape taxation on revenue for activities that are related to its exempted purpose. However, if the activity is "regularly carried-on" and is "not substantially related" to the exempt purpose, then it is taxable.

Clearly, the parking lots were regularly carried-on business activity. The issue was whether or not a parking lot is related to the community welfare. Because the use of the parking lot was limited to the members, the court determined that it was not exempted. If a homeowner's association provides services to its members, that service is not for the general public and therefore not exempted.

The second claim by the association is that the parking lot fees were "rents from real property." If this is so, then under Sec. 512(b)(3)(A)(i), they would be excluded from unrelated business taxable income. However, the court noted that Reg. 1.512(b-1(c)(5) states that the furnishing of hotel services or "use or occupancy of space and parking lots" is not exempted. However, because the lease revenue for the evening use of the parking lots was a lease payment by a third party, which is exempted from UBI.

In Bahman Ahahmadian et ux. v. Commissioner; T.C. Summ. Op. 2010-126; No. 14476-09S (30 Aug. 2010), the Tax Court determined that a deduction of $24,500 was not qualified.

The taxpayers had supported an organization with the title "Radio Freedom". At one time, the taxpayer and other individuals had operated Radio Freedom. It existed for the purpose of "educating the people about the meaning of freedom."

The principal operator of Radio Freedom initially stated that it was a non-profit and documents had been filed with the IRS to obtain tax exemption. Later, the operator claimed it was now a for-profit. Radio Freedom ceased operations in 2007.

Taxpayers contributed $24,500 to Radio Freedom in 2006 and claimed a deduction on their tax return. The IRS denied the deduction and issued a deficiency.

The court noted that gifts are deductible to qualified charities that are operated exclusively for an exempted purpose. Sec. 170(c)(2).

Organizations that are eligible for charitable gifts are reported in IRS Publication 78, Cumulative Lists of Organizations described in Sec. 170(c) of the Internal Revenue Code of 1986. Publication 78 is available on www.irs.gov.

Radio Freedom was not listed in Publication 78. While it is still possible for some gifts to be deductible because some charitable organizations are not listed in Publication 78, the obligation rests with the taxpayer to demonstrate that the organization is a qualified recipient. In this case, the taxpayers did not meet that burden and the deduction was denied.

In D. Charles Dickow v. United States et al.; No. 1:09-cv-10786 (18 Aug 2010), the estate sought to file a request for a refund over three years after the initial due date for the estate tax return. The court determined that the refund filing was not within the required period of time.

Decedent Margaret Dickow passed away on January 15, 2003 and IRS Form 706 United States Estate Tax Return was due on October 15, 2003. The executor filed IRS Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate Taxes) and received an extension until April 15, 2004. On that date the executor was waiting for an appraisal of a substantial real estate asset and filed a second Form 4768. The second Form 4768 had "REQUEST FOR SECOND EXTENSION" typed on the top of the form.

The IRS did not grant the second extension and sent a delinquency notice. The executor filed IRS Form 706 on September 30, 2004 and included a refund request. The executor had previously paid $945,000 to the IRS on the initial Form 706 due date and received a refund of $337,139.81.

Approximately three years later on September 10, 2007, the executor filed an amended IRS Form 706 and claimed an additional refund of $239,768.48. The IRS denied the additional refund on the ground that the filing was not within the required three year period under Sec. 6511(a).

The court determined that the key issue is whether or not the second requested extension would permit a three year look-back for the amended IRS Form 706 filing on September 10, 2007.

IRS Form 4768 permits an extension in three cases. First, there is an automatic extension for six months. Second, an executor may request an additional extension if he or she is "out of the country." Finally, there is an "extension for cause" if the automatic six-month extension has not been requested and the executor can demonstrate appropriate reasons for the IRS to allow a later request for extension.

Because the IRS did not have the authority to extend for the second six months, the late request for refund was appropriately denied.

The estate also claimed that under a theory of "equitable estoppel," the IRS should be required to permit the late filing. However, the court noted that there was no "affirmative misconduct" on the part of the IRS that would permit a theory of equitable estoppel.

In Foundation of Human Understanding v. United States; No. 2009-5129 (16 Aug 2010), the Court of Appeals for the Federal Circuit determined that the Foundation of Human Understanding (FHU) did not meet the requirements to qualify as a church.

FHU and its founder Roy Masters started operation in 1963. Following incorporation of FHU, it applied for tax exempt status. The IRS denied that request in 1983 and the FHU brought an action before the Tax Court.

In 1987 the Tax Court ruled that FHU was a church. It listed four grounds for that decision. FHU owned a church building and conducted services each week in Los Angeles. It operated a religious school named The Brighton Academy, it acquired the Tall Timber Ranch in Selma, Oregon as a seminar and retreat center and it conducted services at a church building in Grants Pass, Oregon.

In 2001, the IRS began a second review of FHU for the years 1998 to 2000. Following that review, the IRS determined that FHU no longer qualified as a church. FHU contested that decision and the United States Court of Federal Claims supported the IRS determination.

The court determined that there are two principal tests to decide whether or not an organization is a church. The first is a series of 14 criteria created by the IRS Commissioner in a 1979 speech. These include (1) a distinct legal existence; (2) a recognized creed and form of worship; (3) a definite and distinct ecclesiastical government. (4) a formal code of doctrine and discipline; (5) a distinct religious history; (6) a membership not associated with any other church or denomination; (7) an organization of ordained ministers; (8) ordained ministers selected after completing prescribed studies; (9) a literature of its own; (10) established places of worship; (11) regular congregation; (12) regular religious services; (13) Sunday schools for religious instruction of the young; and (14) schools for the preparation of its ministers.

The second test is the "associational test." It has been preferred by several courts as opposed to the "14 criteria" approach. Under the associational test, a church must demonstrate that it has a "body of believers or communicants that assembles regularly."

During the period of years in question, FHU did not conduct regular religious services. It held 21 seminars in various locations during the three years. FHU also broadcast sermons and messages over the radio and the internet. Because of the seminars and internet broadcasts, FHU claimed that it still should be treated as a church.

However, FHU no longer had regular services with a body of believers and therefore failed the association test. The internet sermons and radio broadcasts did not provide the opportunity to interact and associate that would be present with the body meeting periodically for worship. Therefore, FHU no longer qualified as a church.