I want to say first, that I have not alot of research on this issue. But, I have a hunch that changing the Kingdom Hall loan agreement to a charitable contribution disguise is an attempt to get out of taxes. For those of you that remember, taxes are also the reason that the Watchtower went to a strict donation for books and magazine materials. That, was done for sales taxes after California audited another church imposing back sales taxes for all non-Bible publications that were sold in that State.
From what I can guess, the mother corporation is a 501(c)(3) corporation. The IRS can break a 501(c)(3), turning it into a private foundation. This is when investment income really comes into play. Loan interest would be investment income for the Watchtower. Private Foundation status is probably the Watchtower's worst nightmare. Private foundations are taxed on their interest income, and are watched by the IRS more than ever. If the Watchtower can try to make steps now to turn the interest arrangement into a donation arrangement, then they are covering their arses. There are many, many laws and traps to tax and penalize (i.e. "Excise tax") private foundations from being a quasi-investment house.
**************************** A handful of the IRS taxes on Public Foundations****************
http://www.morganlewis.com/pubs/Tax%20Exempt%20and%20Charitable%20Organizations.pdf
"A public charity that fails to maintain such status will be reclassified as a private foundation. Private foundations are subject to certain restrictions on their operations, embodied in a series of excise taxes described in Section 4940-4945 of the Code. Violations of these provisions may subject the foundations and, in some cases, their foundation managers to excise taxes.
• Section 4940: Imposes an annual excise tax of 2% on the net investment income (including interest, dividends, rents, royalties, and capital gain net income) of private foundations. A private foundation may be able to reduce this tax to 1% by increasing its annual distributions for charitable purposes."
• Section 4942 - Mandatory Distributions: A private foundation is required to make annual “qualifying distributions” in an amount equal to 5% of its net investment assets. Qualifying distributions generally include grants to public charities and direct expenditures for charitable purposes, including administrative expenses associated with the conduct of the foundation’s charitable activities and for the acquisition of assets that will be used for charitable purposes. Grants to most “Type III supporting organizations” and “Type I” and “Type II supporting organizations” in which disqualified persons with respect to the foundation have direct or indirect control are not qualifying distributions. The amount that a foundation must distribute is calculated annually; however, the foundation has two years (the year for which the distributable amount is calculated and the subsequent year) in which to make qualifying distributions of that amount. A foundation may carry forward excess qualifying distributions to reduce the distributable amounts over the next five years.
Failure to comply with the distribution requirement results in an initial penalty tax of 30% of the foundation’s undistributed income (the amount which should have been, but was not, paid out). A foundation has 90 days after notification of its failure to meet the distribution requirement to correct the problem by making additional qualifying distributions. If the foundation does not make the corrective qualifying distributions in a timely manner, Section 4942 imposes an additional tax of 100% of the amount remaining undistributed. Penalties may also be imposed on foundation managers who knowingly approve violations of the applicable requirement.
• Section 4943 - Excess Business Holdings: A private foundation is prohibited from owning more than specified equity interests in business enterprises, including corporations, partnerships, estates or trusts. While the rules are fairly complex, a private foundation, together with all disqualified persons, generally may not hold more than 20% ownership in a business enterprise. The limit increases to 35% if effective control of the business is in the hands of one or more persons who are not disqualified persons. These rules do not apply if the foundation owns less than 2% of a business, or if the business engages in activities that are substantially related to the foundation’s charitable purposes.
If a foundation acquires business holdings other than by purchase (i.e., by gift or bequest), and the additional holdings would result in excess holdings, the foundation effectively has five years to reduce those holdings to permissible levels. The IRS can allow an additional five-year period for the disposition of excess business holdings in the case of an “unusually” large gift or bequest.
The initial tax imposed on a foundation with excess business holdings is 10% of the value of such holdings during the taxable year. The amount of the excess holdings is determined as of the day during the tax year when the foundation’s excess holdings in a business enterprise were the greatest. If the foundation fails to divest itself of the excess holdings within a certain period of time, there is an additional tax of 200% of their value. Penalties may also be imposed on foundation managers who knowingly approve violations of the applicable requirement.
• Section 4944 - Jeopardy Investments: A private foundation is prohibited from making investments that jeopardize its ability to accomplish its exempt purposes. This prohibition is violated if it is determined that the foundation managers, in making an investment, failed to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes. No category of investments is a per se violation of Section 4944, but certain types of investments will be closely scrutinized by the IRS (trading in securities on margin, trading in commodities futures, buying puts, calls and straddles, selling short, etc.). There are exceptions from Section 4944 for investments that are gratuitously transferred to a private foundation and for those that qualify as “program-related” (i.e., where the primary purpose is to achieve a charitable objective rather than to produce income).
An initial tax of 10% of the amount of the investment is levied on the foundation for any violation of Section 4944. In addition, a 5% tax (up to a maximum of $10,000) may be imposed on the foundation managers who knowingly fail to comply. A second-level tax of 25% may be imposed on the foundation (5% for the foundation manager – up to a maximum of $20,000) if the jeopardy situation is not corrected within a certain period.
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Now, even if the IRS does not reclassify the Watchtower to a Private Foundation, there is a small trap, of unrelated business income from a controlled corporation. THowever, I think the WTS can get out of this becuase of the exceptions for interest from property used by the controlled coropration (or expected to be used) in the charity's purpose.
Again, I strongly suspect that this is something tax related. IRS, France, Germany, . .. somewhere, somewhere taxes are driving this decision.
