Church sold donated land

[Margaret CPA in OH]

My church inherited from a member a tiny parcel in WV that had mineral rights. For several years we've received about $25 in royalties. The fracking machine has now rolled over the area.

After much deliberation and preceding threatened condemnation, the church session agreed to sell the parcel for $4500 plus $1500 damages. The appraised value of the land was about $12 but they really, really, really wanted to put their pipe under that tenth of an acre.

So I believe we must file a 990-T and try to get the basis of the land for Schedule D. In my opinion it was investment property. But what to do with the damages. The contract states the $4500 is 1099 reportable but not the $1500 so just let it go?

Thanks for input. For the first time since 1867, we have to file a tax return.

[JohnH]

_{Is any reporting required, since the church is tax exempt?}

[MAMalody]

Generally, there is not reporting requirement.

[Jack from Ohio]

It seems to me that selling one asset does not constitute receiving income from a business source.  I do not think this triggers the 990.

[jklcpa]

The threshold is $1,000 for triggering reporting of UBI on 990-T by organizations exempt under 501(a), and the damages already exceed that.  Margaret, why do you think the damages aren't taxable?

[Margaret CPA in OH]

There is a reporting requirement as Judy noted that we exceed the $1000 threshold certainly for the sale of the asset. I was just questioning about the damages as the contract states it is non-1099 reportable. Yes, it also exceeds the $1000 threshold but, as a tax-exempt entity, I wasn't sure whether damages, not reported on a 1099, would also be included on the 990-T. I couldn't find a specific reference.

I just know I will questions asking why we have to report anything at all. The sale proceeds are clear, the damages, not so much to me.

If we end up paying the 15% tax, it is still much more than we ever imagined we would receive so not a huge problem and we still are blessed with this cash to be used now for additional local mission.

[BulldogTom]

Doesn't that property get a basis equal to the FMV on the date of the donation?

 

Not sure myself just asking the question.

 

Tom

Newark, CA

[jklcpa]

I think that too, Tom, and Margaret said the appraised value was $12, and that the fracking company really wanted that land to continue the pipeline and paid a big premium for it.

 

I'm unsure about the penalty inclusion. I wouldn't rely on what some lawyer wrote into a contract, and that was the reason I asked. Punitive damages are definitely includable, but what if they are compensatory received by a non-human exempt entity? I think they still might be taxable, but really unsure about that.

[kcjenkins]

Without any way of knowing, not being there to discuss it with the parties, the term 'damages' does seem to imply that portion was compensatory rather than punitive.   

[Margaret CPA in OH]

I don't have the document in front of me but I believe the damages were compensatory. The money was voluntary to keep us from continuing our objection. It cost them less to pay us off than go to court.

My research so far is showing that the sale of the land for the $4500 actually may not be taxable for capital gain as an exempt organization selling raw land is a passive investment activity not resulting in unrelated business income (Tax Planning and Compliance for TE Organizations, 5th ed., Jody Blazek). We have never done anything with the land, kept it for investment purposes (and to prevent fracking) and it is a one-time liquidation.

Just not sure about the damages and not sure about not reporting the $4500 when we will receive a 1099.

[Gail in Virginia]

Typically, compensatory damages are not reportable because (at least in theory) all they do is restore you to wholeness - there is no profit or income.  Now in this particular case, I am not sure what kind of damage was suffered that resulted in compensatory damages...

[JohnH]

" Intangible religious un-benefit ? "

[Lion EA]

Is the church a part of a main-stream religion?  If so, perhaps that national church or even a more regional division has already encountered this situation and researched it....

[Margaret CPA in OH]

Lion, thanks for the tip. Presbyterian Church USA is pretty main stream. I will be in the church office Friday so will have access to the contract and call the national office. Thanks again to all!

[kcjenkins]

Typically, compensatory damages are not reportable because (at least in theory) all they do is restore you to wholeness - there is no profit or income.  Now in this particular case, I am not sure what kind of damage was suffered that resulted in compensatory damages...

The damage would be the cost of a legal battle, both past and future.  Non-taxable.  

[JJStephens]

As a general rule, 3 conditions must be met for income to be considered UBI: 

1. The revenue generating activity must be a trade or business, and
2. The activity must be regularly carried on, and
3. The activity must not be substantially related to the organizations exempt purpose (even if the funds are used exclusively to further exempt activities). 'Not substantially related' means that the activity that produces the income does not make an important contribution to the exempt purposes of the organization other than to provide funds to advance those purposes. It does not matter that the income is used exclusively to fund exempt activities. The deciding criteria is whether the activity (itself) that generated the income is directly related to the organization's exempt purpose.

It seems to me the church did not regularly carry on a trade or business of investing in real estate. Therefore, the income would not be subject to UBIT.

[Margaret CPA in OH]

Thanks, JJStephens, for the reminder of UBI conditions. Things are looking better all the time! I have yet to call the national PCUSA regarding the capital gain reporting. It seems clear that it isn't taxable but it kind of goes against my professional grain and experience to not report something on a 1099.