Church & Clergy Tax Guide

Churches subject to some taxes Churches are subject to a variety of taxes, including property taxes, sales taxes, federal and state payroll taxes, the unrelated business income tax, and various excise taxes.

Federal income taxes Churches are exempt from federal income taxes if they meet six requirements: (1) the church is organized exclusively for exempt purposes; (2) the church is operated exclusively for exempt purposes; (3) none of the church’s net earnings inures to the benefit of any private individuals; (4) the church does not engage in substantial efforts to influence legislation; and (5) the church does not intervene or participate in political campaigns.

Inurement One of the six requirements for exemption from federal income tax is that none of a church’s funds or assets inures to the benefit of a private individual, other than as reasonable compensation for services rendered. Inurement may occur in many ways, including excessive compensation, payment of excessive rent, receipt of less than fair market value in sales or exchanges of property, inadequately secured loans, and the payment of personal expenses of an officer that the church did not characterize as compensation at the time of payment.

Lobbying activities In order to remain exempt from federal income tax, a church must not engage in “substantial efforts” to influence legislation. Insubstantial attempts to influence legislation do not jeopardize a church’s tax-exempt status.

Campaign activities To remain exempt from federal income tax, a church may neither intervene nor participate in a political campaign on behalf of or in opposition to any candidate for public office. There is no exception for “insubstantial” campaign activities.

Basis of tax-exempt status Many courts have ruled that the exemption of churches from federal income tax is a matter of “legislative grace” that is not required by the First Amendment’s “free exercise of religion” and “nonestablishment of religion” clauses.

Securing exempt status Churches are automatically exempt from federal income tax, assuming they meet the conditions summarized above. They may seek IRS recognition of exempt status in order to facilitate the deductibility of donors’ contributions.

Group exemptions Conventions and associations of churches are allowed to obtain a “group exemption ruling” from the IRS. Such a ruling provides recognition of exempt status to all subordinate organizations described in the group exemption ruling request.

Unrelated business income tax (UBIT) The tax code imposes an unrelated business income tax on the unrelated business taxable income of churches and other charities. Unrelated business income generally is income from the operation of a trade or business that is regularly carried on. Certain exceptions apply.

Unemployment taxes The following activities are exempt from unemployment taxes in most states: (1) service performed in the employ of a church or a convention or association of churches; (2) service performed in the employ of an unincorporated, church-controlled elementary or secondary school; (3) service performed in the employ of an incorporated religious elementary or secondary school if it is operated primarily for religious purposes and is operated, supervised, controlled, or principally supported by a church or a convention or association of churches; (4) service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of ministry or by a member of a religious order in the exercise of duties required by such order.

State sales taxes Most states impose a tax on the sale of tangible personal property or the rendering of various services for compensation. Religious organizations are exempt from sales taxes in most states, although the nature of the exemption varies from state to state. Sales made to religious organizations are exempted from sales taxes in many states. Some states exempt sales made by religious organizations, and others exempt sales to or by religious organizations. Many states that exempt sales of property made to religious organizations stipulate that the exemption is available only if the organization uses the purchased property for exempt purposes. Some states are even more restrictive, and some have no specific exemption for sales by or to religious organizations. Table 12-3 on page contains the text of the sales tax exemption statutes of all 50 states.

State property taxes All 50 states exempt some church-owned property from property tax. However, the extent of the exemption varies from state to state. Some states exempt property used exclusively for religious worship, while others exempt property used for religious purposes. Parsonages are exempt in many states. Table 12-4 on page contains the text of the property tax exemption statutes of all 50 states.

Federal, state, and local governments have enacted a variety of tax laws to finance the enormous costs of government. The primary sources of federal revenue are individual and corporate income taxes and Social Security taxes. Other federal taxes include unemployment, estate, and excise taxes. State and local governments often impose income, sales, and property taxes and, in addition, provide employment security through unemployment taxes.

The applicability of any of these various taxes to churches depends upon the following factors: (1) whether the statute that imposes the tax specifically exempts churches; (2) if churches are exempt, whether all conditions for exempt status have been satisfied; and (3) whether a tax that purports to apply to churches is permissible under state and federal constitutions.

The federal tax code (the Internal Revenue Code) uses the term church in many contexts, including the following:

Despite numerous references to the term church, the tax code provides no definition. This is understandable since a definition that is too narrow may interfere with the constitutional guaranty of religious freedom, while a definition that is too broad may encourage abuses in the name of religion. The United States Supreme Court has noted that “the great diversity in church structure and organization among religious groups in this country … makes it impossible, as Congress perceived, to lay down a single rule to govern all church-related organizations.” St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772 (1981).

Several other courts have noted the difficulty of defining the term church, including the following:

In the absence of any meaningful guidance in the tax code and regulations, the courts have developed three different approaches to determine whether an organization qualifies as a church: the De La Salle approach, the associational test, and the IRS’s 14 criteria. These approaches are explained below.

In De La Salle Institute v. United States, 195 F. Supp. 891, 898 (N.D. Cal. 1961), a federal court in California issued a ruling in a case brought by an organization contending that it was exempt from taxation imposed upon its unrelated business income due to its status as a church.

The court in De La Salle concluded that in the absence of a congressional definition of the term church, the term is defined by “the common meaning and usage of the word.” In decisions subsequent to De La Salle, courts have declined to adopt this approach. For example, in American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304 (D.D.C. 1980), the court stated that a general or traditional understanding of the term is elusive because “there is no bright line… and the range of ‘church’ structures… is enormously diverse and confusing.”

Courts also have followed the American Guidance ruling in finding that a church may be distinguished from other religious organizations by fulfillment of an “associational role”: “The means by which an avowedly religious purpose is accomplished separates a ‘church’ from other forms of religious enterprise. At a minimum, a church includes a body of believers or communicants that assembles regularly in order to worship. Unless the organization is reasonably available to the public in its conduct of worship, its educational instruction, and its promulgation of doctrine, it cannot fulfill this associational role.”

Several courts have applied a 14-criteria standard introduced in 1977 by Jerome Kurtz, then Commissioner of Internal Revenue, to determine whether an organization qualifies for church status. The Tax Court has applied the 14 criteria in several cases. The criteria are:

One court noted that some factors are of “central importance,” such as an established congregation served by an organized ministry, regular religious services and education for the young, and dissemination of a doctrinal code. See American Guidance. Another court observed concerns that the criteria could disadvantage rural or newly formed churches, emphasizing the “core requirements.” Spiritual Outreach Society v. Commissioner, 927 F.2d 335 (8th Cir. 1991).

The IRS has acknowledged that “no single factor is controlling, although all 14 may not be relevant to a given determination.” Courts have recognized these criteria, as illustrated below.

The first federal court to recognize the IRS “14 criteria” test involved a claim by a husband and wife that they and their minor child constituted a church. The family insisted that it was a church since the father often preached and disseminated religious instruction to his son; the family conducted “religious services” in their home; and the family often prayed together at home. The court agreed with the IRS that the family was not a church, basing its decision on the 14 criteria. It emphasized the need for an established congregation served by an organized ministry, regular public religious services and education for the young, and dissemination of a doctrinal code. It concluded: “At a minimum, a church includes a body of believers or communicants that assembles regularly in order to worship. Unless the organization is reasonably available to the public… it cannot fulfill this associational role.” American Guidance Foundation v. United States, 490 F. Supp. 304 (D.D.C. 1980). See also Lutheran Social Service of Minnesota v. United States, 758 F.2d 1283 (8th Cir. 1985).

The United States Tax Court ruled that a religious organization formed to “spread the message of God’s love and hope throughout the world” and to “provide a place in which those who believe in the existence of God may present religious music to any persons interested in hearing such” was not a church. The organization maintained an outdoor amphitheater on its property, at which musical programs and an occasional “retreat” or “festival” were conducted about 12 times each year. No other regularly scheduled religious or musical services were conducted. Most of the musical events were held on Saturdays so that persons could attend their own churches on Sundays. Musical services consisted of congregational singing of religious music. A minister always opened and closed these events with prayer. While it did not charge admission to its events, its published schedule of “donations” was similar to admission charges. The organization also maintained a chapel on its property that was open to the public for individual prayer.

The Tax Court concluded that the organization was not a church. It declined to treat the “14 criteria” as the only test, though it acknowledged they can be helpful. The court noted the organization satisfied a few criteria and that some would not be relevant to “a newly created rural organization.” However, it lacked an ecclesiastical government, a formal creed, an organization of ordained clergy, a seminary, and a Sunday school for training youth. It also did not produce its own religious literature (it sold literature produced by others).

A church that once conducted multiple weekly services (up to 350 attendees) ceased regular worship, shifted to radio/publishing, and held occasional regional seminars. The IRS concluded it no longer qualified as a church, emphasizing failure of core criteria such as an established congregation, regular public services, religious education for youth, and dissemination of a doctrinal code.

The IRS rejected a charity’s claim to be a church, applying the 14-factor framework and finding many factors unmet; therefore it could not be treated as a church for tax purposes. (PLR 202317022.)

The examples above show these criteria still influence outcomes. Yet they are troublesome: many bona fide churches—especially newer or independent congregations—could fail several. Criteria 7, 9, and 14 often fit conventions/associations more than local congregations. Some churches may fail as many as 10 of the 14.

Observation The churches described in the New Testament book of Acts would have failed most of these criteria.

The criteria are vague and incomplete. Some apply uniquely to local churches; others do not. The IRS has never stated how many must be met or whether certain factors are determinative. Such vagueness invites ad hoc discretion—something courts often condemn as unconstitutional in other contexts.

Relatedly, the criteria are arguably overbroad: government may not pursue legitimate aims with means that “sweep unnecessarily broadly” and infringe protected freedoms. See N.A.A.C.P. v. Alabama, 377 U.S. 288, 307–08 (1964). While Congress/IRS may identify churches for special tax treatment, they should not rely on a test that jeopardizes bona fide churches. Courts, when a definition is needed, should avoid using the 14 criteria as a controlling guide.

The IRS found a purported church did not qualify where membership consisted primarily of a pastor’s family, meetings occurred in the home, there was no demonstrable outreach, the pastor was self-appointed and not formally ordained, and “religious instruction” was limited to the family. The organization failed the associational test (no public congregation assembling to worship). IRS PLR 201921914 (2018); accord PLR 201926014 (2019).

Key point Despite criticisms, IRS Publication 1828 (Tax Guide for Churches and Religious Organizations) still references the 14 criteria.

In PLR 200830028 (2008), the IRS denied church status (and exemption) in part because the organization lacked a conflict-of-interest policy and was governed solely by a founder and family members, with no regular services, no congregation, no ordained ministry, no worship facility, and no religious schooling.

Significance: While not expressly required by statute or regulation, the absence of a conflict-of-interest policy can weigh against exemption where governance is closely held.

The Code references “conventions or associations of churches” in many sections (e.g., church-plan rules, Form 990 exceptions, church inquiry protections) but does not define the term. A committee report to the Pension Protection Act of 2006 clarified that congregational bodies with substantial church membership do not fail solely because individuals are members or hold voting rights. (IRC § 7701.)

“Mail-order churches” are formed via purchased charters/credentials marketed as tax-reduction tools. While such entities are not per se ineligible, many fail exemption because they serve private interests (e.g., funneling personal living expenses through the entity).

Entities chartered by another exempt organization do not “inherit” its exemption unless covered by a group ruling. Courts have required each chartered body to qualify on its own merits. See Basic Bible Church v. Commissioner, U.S. v. Toy National Bank, Brown v. Commissioner; IRS IRM 7.25.3.6.12 (1999).

IRC § 501(a) exempts § 501(c) organizations. Section 501(c)(3) covers organizations “organized and operated exclusively” for religious/charitable/educational purposes with prohibitions on private inurement, substantial lobbying, and campaign intervention.

Six core conditions for churches (summarized): (1) corporate (or equivalent) form; (2) organized exclusively for exempt purposes; (3) operated exclusively for exempt purposes; (4) no inurement; (5) no substantial lobbying; (6) no campaign intervention.

The IRS treats typical nonprofit religious associations (formed under a constitution/bylaws with elective officers) as “corporations” for exemption purposes. IRM § 7.25.3.2.3 (1999).

An organization meets the test only if its articles limit purposes to § 501(c)(3) purposes and do not authorize more-than-insubstantial non-exempt activities. (Treas. Reg. § 1.501(c)(3)-1(b)(1).) Bylaws alone are insufficient to cure overbroad articles.

Under IRC § 502, an entity primarily operating a commercial trade/business for profit is not exempt merely because it remits profits to an exempt parent (a “feeder”).

To satisfy the organizational test, assets must be dedicated to exempt purposes—typically via an articles clause requiring distribution to another § 501(c)(3) (or government) upon dissolution. Suggested language (IRS Pub. 557):

“Religious purpose” isn’t crisply defined. The IRS has acknowledged religion can include beliefs not centered on a traditional Supreme Being (e.g., Taoism, Buddhism, secular humanism). What matters is that activities are carried on exclusively for religious purposes. Substantial legislative activity disqualifies exemption, regardless of motive (Christian Echoes National Ministry, Inc. v. U.S., 470 F.2d 849 (10th Cir. 1972)).

Publishing can be either a qualifying religious activity or a commercial (nonexempt) business, depending on facts such as pricing, profits, audience, and purpose.

Illustrative outcomes

Broadcasting is analogous to publishing.

Charitable purposes, like religious purposes, constitute a basis for exemption under the tax code. Many churches define their purposes as including both religious and charitable purposes. The income tax regulations define the term charitable as follows:

The IRS has provided additional guidance on the meaning of charitable:

A trust set up for the benefit of an aged clergyman and his wife was held not to be an exempt organization in Carrie A. Maxwell Trust, Pasadena Methodist Foundation v. Commissioner, 2 TCM 905 (1943). The court found the trust to be a private, rather than charitable trust, despite the fact that the elderly gentleman was in financial need. However, an organization may properly have a purpose to benefit a comparatively small class of beneficiaries, provided the class is open and the identities of the individuals to be benefited remain indefinite. It has been held that a foundation set up to award scholarships solely to undergraduate members of a designated fraternity could be exempt as a charitable foundation. Revenue Ruling 56–403.

Churches occasionally engage in activities of a charitable nature. Examples include day-care centers, homes for the aged, orphanages, and halfway houses. Although a church may contend that these activities are religious, the IRS views them as charitable. IRM § 7.25.3.5 (1999, obsolete). Therefore, it is important for a church contemplating any such activities to be sure that its articles of incorporation or other organizing document lists “charitable” purposes among its purposes.

Educational purposes, like religious and charitable purposes, constitute a basis for exemption. The income tax regulations define educational as “the instruction or training of the individual for the purpose of improving or developing his capabilities; or the instruction of the public on subjects useful to the individual and beneficial to the community.” Treas. Reg. § 1.501(c)(3)-1(d)(3).

The IRS maintains that even if a school is operated by a church, it is an educational organization if it has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on. Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii). As a result, the IRS would view many church-operated primary and secondary schools as educational rather than religious institutions.

On the other hand, some courts have ruled that church-operated schools can be considered a part of the church’s religious function. Concord v. New Testament Baptist Church, 382 A.2d 377 (N.H. 1978); Employment Division v. Archdiocese of Portland, 600 P.2d 926 (Ore. 1979). Churches that operate schools or preschools should review their articles of incorporation to see if their statement of purposes includes “educational” activities as well as religious activities.

The income tax regulations specify that an organization can be exempt from taxation even if it engages in activities that are not in furtherance of one or more exempt purposes if such activities compose no more than an “insubstantial” part of the organization’s total activities. Treas. Reg. § 1.501(c)(3)-1(b)(1)(i). Neither the tax code nor the regulations define the term insubstantial. Therefore, this is an issue that must be determined under the facts and circumstances of each case.

To illustrate:

To be exempt from federal income taxes, section 501(c)(3) of the tax code requires that a church be “operated exclusively” for exempt purposes. This requirement is referred to as the operational test. The regulations specify that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of the exempt purposes specified in section 501(c)(3) and if no more than an insubstantial part of its activities are not in furtherance of an exempt purpose.

To illustrate, the tax-exempt status of the following religious organizations was revoked on the ground that they were not operated exclusively for exempt purposes:

A federal appeals court ruled that profitability in and of itself does not necessarily mean that an exempt organization is no longer operated exclusively for exempt purposes. Presbyterian and Reformed Publishing Co. v. Commissioner, 743 F.2d 148 (3rd Cir. 1984). To determine whether such an organization should retain its exemption, the court proposed a two-pronged test: first, what is the purpose of the organization; and second, to whose benefit do its activities and earnings inure? The court upheld the tax-exempt status of a profitable religious publisher that continued to adhere to its exempt religious purposes and that diverted none of its net earnings to the personal benefit of any individual. The court concluded that “success in terms of audience reached and influence exerted, in and of itself should not jeopardize the tax-exempt status of organizations which remain true to their stated goals.”

Example The IRS ruled that a “coffee shop” established by a church for personal evangelism in an urban area did not qualify for tax-exempt status, since it was indistinguishable in operation from secular, for-profit coffee shops. In rejecting the coffee shop’s application for tax-exempt status, the IRS noted that one of the requirements for exemption enumerated in section 501(c)(3) of the tax code is that the organization seeking exempt status must be “organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.” This essential requirement was not met in this case, the IRS concluded:

Example An organization applied to the IRS for recognition of tax-exempt status as a church. The IRS turned down the application for several reasons, including the following: (1) the church’s board of directors were all members of the pastor’s family; (2) the pastor served for life and could not be removed; and (3) the pastor had complete control over all activities and officers. The IRS concluded:

In order to be tax exempt under section 501(c)(3) of the tax code, no part of a church’s net earnings may inure to the personal benefit of an insider, and the church must not provide a substantial “private benefit” to anyone. The related concepts of inurement and private benefit are summarized below.

A church is not entitled to exemption from federal income taxes if any part of its net earnings inures or accrues to the benefit of a private individual other than as reasonable compensation for services rendered or as distributions in direct furtherance of the church’s exempt purposes. The IRS construes this requirement as follows:

In Private Letter Ruling 201517014 (2015), the IRS made the following comments regarding the meaning of the inurement prohibition:

The IRS concluded that an exempt organization under examination was not eligible for tax-exempt status for the following reasons:

The IRS concluded:

In Private Letter Ruling 201533022 (2015), the IRS revoked the tax-exempt status of a public charity because of the inurement of its assets to the personal benefit of its president. The charity was formed to educate people about the Christian faith. Its activities consisted of creating and running a website, where it posted daily devotionals and articles. Donations were also solicited on the website, and donors were assured that their donations were tax-deductible.

The IRS noted the following prohibited inurement practices in this case:

The IRS concluded:

The IRS Internal Revenue Manual lists several examples of unreasonable compensation, including the withdrawal of an exempt organization’s earnings by an officer under the guise of salary payments, receipt of less than fair market value in sales of property, and inadequately secured loans to an officer.

Key Point: The related concepts of unreasonable compensation, excess benefit transactions, and intermediate sanctions are addressed under “General Considerations” on page .

Example The IRS issued a private letter ruling revoking a church’s tax-exempt status on the ground that its assets were used for the private benefit of its founder. The IRS concluded:

Examples of inurement

Key Point: Another result of inurement is the potential disqualification of a church to receive tax-deductible charitable contributions. In one case a religious ministry paid for a minister-employee’s personal expenses, including scholarship pledges made in the minister’s name and a season ticket for a local college football team. The tax code allows a charitable contribution deduction for contributions made to a charity, “no part of the net earnings of which inures to the benefit of any private shareholder or individual.” IRC 170. The court noted that the minister received payments from his employer (football tickets and scholarship pledges) and that these payments inured to his benefit. In addition, the minister failed to establish that the payments were compensation. Accordingly, the minister was not allowed to deduct the contributions he made to his employer. Whittington v. Commissioner, T.C. Memo. 2000-296 (2000).

Example The Tax Court ruled that a church did not qualify for tax-exempt status because its publishing activities constituted a substantial nonexempt activity. The pastor of the church wrote several books and pamphlets that were published and sold by the church. He claimed that the church’s book-publishing activities were a significant aspect of its activities. The court concluded:

Example The IRS denied tax-exempt status to a religious organization (the “applicant”) as a result of no-interest loans it made to various individuals that served a private rather than a charitable or religious purpose. The applicant’s corporate charter described its purposes to include the maintenance of a house of worship and seminary. The governing board of the applicant was comprised of three individuals, all of whom have both family and business relationships. The applicant’s religious tenets prohibited it from charging interest on loans.

Example A Pennsylvania court addressed the issue of whether a church acted properly when it dissolved due to declining attendance, sold its assets, and transferred most of the $750,000 sales price to the pastor as compensation for wages it was previously unable to pay. The state had claimed that by voting to approve the compensation package, the pastor and other members of the church board violated a fiduciary duty imposed by the nonprofit corporation law and engaged in “self-dealing to inure benefits to private individuals.” A state appeals court dismissed the church’s appeal on a technical ground. But as the trial court in this case noted, such dispositions of the proceeds from the sale or church assets have a number of potential legal and tax consequences, including potential inurement of the church’s assets for the private benefit of an individual in violation of the tax code. In re First Church, 2011 WL 2302540 (Pa. Common. 2011).

Example The IRS ruled that a religious ministry’s payment of its president’s personal expenses amounted to inurement, disqualifying the ministry from tax-exempt status. An IRS investigation revealed that the president used ministry funds for personal use, and it cited several examples, including the following: payment of car repairs, dental expenses, meals, safe deposit expenses, gas expenses, and personal massage fees; no-interest or low-interest loans; and reimbursement of unsubstantiated business expenses. The IRS noted that “overall, the provisions governing organizations exempt under section 501(c)(3) prohibit charitable organizations from allowing their assets to inure to the benefit of any individual or entity. Violations of these requirements are grounds for revocation of exemption.” The IRS referenced the Tax Court’s decision in Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531 (1980).

IRS Private Letter Ruling 201534014 (2015)

Closely related to but distinguishable from inurement is the concept of private benefit. The IRS defines private benefit as follows:

Note the following two important distinctions between inurement and private benefit:

Key Point: The tax code prohibits religious organizations from engaging in “substantial” efforts to influence legislation. A few courts have attempted to clarify the key word substantial. One court concluded that the “substantial” requirement is not met if less than 5 percent of an organization’s time and effort is devoted to lobbying activities. Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955). Another court ruled that an organization that devoted 16–20 percent of its budget to lobbying activities was engaged in substantial efforts to influence legislation. Haswell v. U.S., 500 F.2d 1133 (Ct. Cl. 1974). The IRS has never endorsed a percentage definition of the word substantial.

Section 501(c)(3) of the tax code exempts from federal income taxation a church or religious organization organized and operated exclusively for exempt purposes and “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.”

Note that there are two distinct limitations. First, churches may not engage in substantial efforts to influence legislation. Second, churches may not participate or intervene in any political campaign, even to an insubstantial degree. The first of these limitations is addressed in this subsection. The second limitation is addressed in the following subsection.

To be exempt from federal income taxation, no “substantial part” of a church’s activities can be the “carrying on of propaganda, or otherwise attempting to influence legislation.” This limitation was enacted by Congress in 1934. Unfortunately, however, it is not entirely clear why the limitation was adopted. The following reasons have been suggested:

One commentator has observed that “it is fair to assume that Congress gave virtually no thought to what it was doing when it enacted the [limitation on legislative activities], and it is highly unlikely that it ever imagined that the [limitation] might be applied to threaten a church.” Note, Church Lobbying: The Legitimacy of the Controls, 16 Houston L. Rev. 480 (1979).

Before analyzing this limitation in more detail, it must be emphasized that it is seldom enforced against churches, despite many potential violations. For example, many churches and religious denominations have lobbied actively for or against specific legislation concerning civil rights, workers’ rights, peace, nuclear disarmament, aid to the poor, women’s rights, abortion, various treaties, education, sale and advertising of alcoholic beverages, Sunday closing restrictions, sales and property tax exemptions, lotteries, and gambling. Despite the long history of legislative activity, only one religious organization has lost its tax-exempt status because of political activities. That case is discussed in detail later in this subsection. Nevertheless, in recent years the political activities of churches and religious organizations have been scrutinized more aggressively by the IRS, Congress, the public, and various special interest groups.

Why has the limitation on substantial legislative activity been enforced so infrequently? One reason is the limitation’s ambiguity. Specifically, what is meant by the terms legislation, attempts to influence legislation, and substantial? These definitional problems, coupled with the limitation’s uncertain purpose and the reluctance of the courts (and to a lesser extent the IRS) to attack the exempt status of churches, have all contributed to the sporadic enforcement of the “legislative activity” limitation.

The income tax regulations, interpreting the legislative activity limitation, provide that neither a church nor any other organization can be exempt from federal income taxation if its charter empowers it “to devote more than an insubstantial part of its activities to attempting to influence legislation by propaganda or otherwise,” or if “a substantial part of its activities is attempting to influence legislation by propaganda or otherwise.” Treas. Reg. § 1.501(c)(3)-1(c)(3)(ii).

The regulations further provide that

This language helps clarify the meaning of legislation and attempts to influence legislation but does not define the critical term substantial. The regulations also provide that an organization cannot be exempt if is has the following two characteristics:

The regulations also provide that “the fact that an organization, in carrying out its primary purpose, advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying under section 501(c)(3) so long as it [does not violate any of the regulations quoted above].” Treas. Reg. § 1.501(c)(3)-1(d)(2).

The IRS Internal Revenue Manual provides the following additional information regarding the limitation on legislative activities:

Attempts to influence legislation that are less than a substantial part of the organization’s activities will not deprive it of exemption. Whether a specific activity of an exempt organization constitutes a “substantial” portion of its total activities is a factual issue, and there is no simple rule as to what amount of activities is substantial. The earliest case on this subject, Seasongood v. Commissioner, held that attempts to influence legislation that constituted 5 percent of total activities were not substantial. Seasongood provides only limited guidance because the court’s view of activities to measure is no longer supported by the weight of precedent. Further, it is not clear how the court arrived at the 5-percent figure. Most courts have not attempted to measure activities by percentage or have stated that a percentage test is not conclusive. IRM § 7.25.3.17.2 (1999, obsolete).

The courts, with one notable exception, have held that exempt religious organizations have not violated the ban on legislative activities.

EXAMPLE A federal appeals court ruled that the Methodist Episcopal Church was exempt despite lobbying activities carried on by its “Board of Temperance, Prohibition and Public Morals,” since such activities were motivated by religious beliefs. The court observed:

EXAMPLE A federal court concluded that a religious organization that had been established to promote observance of the Sabbath was exempt despite its opposition to legislation that would permit commercial activity on Sundays, since such legislative efforts were “incidental” to its religious purposes. Lord’s Day Alliance v. United States, 65 F. Supp. 62 (E.D. Pa. 1946).

EXAMPLE A federal appeals court concluded that a church-related organization was tax-exempt despite the fact that it proposed 36 legislative bills (18 of which were enacted). Again, the legislative activity was considered to be consistent with the organization’s exempt status since it all related directly to the organization’s religious purposes. International Reform Federation v. District Unemployment Compensation Board, 131 F.2d 337 (D.C. Cir. 1942).

The one case in which a religious organization’s tax-exempt status was revoked because of political activities was Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972). Christian Echoes was a religious organization founded to disseminate conservative Christian principles through radio and television broadcasts and literature. Publications and broadcasts appealed to the public to react to a wide variety of issues in specific ways, including:

The organization also attempted to influence legislation by molding public opinion on the issues of firearms control, the Panama Canal treaty, and civil rights legislation.

In 1966 the IRS notified the organization that its exemption was being revoked for three reasons: (1) it was not operated exclusively for charitable, educational, or religious purposes; (2) it had engaged in substantial activity aimed at influencing legislation; and (3) it had directly and indirectly intervened in political campaigns on behalf of candidates for public office. Christian Echoes filed suit in federal court, challenging the IRS action, and a federal district court ruled in its favor. This ruling was reversed by a federal appeals court.

The federal appeals court began its opinion by observing that “tax exemption is a privilege, a matter of grace rather than right,” and that the limitations on exempt status set forth in section 501(c)(3) of the tax code are valid restrictions on the privilege. The limitations on political activity “stem from the congressional policy that the United States Treasury should be neutral in political affairs and that substantial activities directed to attempts to influence legislation or affect a political campaign should not be subsidized.” The court emphasized that prohibited legislative activity was not limited to attempts to influence specific legislation before Congress. Quoting the income tax regulations (excerpted above), the court concluded that efforts to influence legislation must be interpreted much more broadly and include all indirect attempts to influence legislation through a “campaign to mold public opinion.” The fact that specific legislation is not mentioned is irrelevant.

The court rejected the “5-percent test” applied by a federal appeals court in a previous case as a measure of substantial legislative activities, noting that “a percentage test to determine whether the activities were substantial obscures the complexity of balancing the organization’s activities in relation to its objectives and circumstances.” Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955) (5 percent of an organization’s time devoted to lobbying was not substantial).

Christian Echoes’ contention that revocation of its tax-exempt status violated the constitutional guaranty of religious freedom was rejected by the court. Rejecting the notion that the guaranty of religious freedom “assures no restraints, no limitations and, in effect, protects those exercising the right to do so unfettered,” the court concluded that the limitations on political activities set forth in section 501(c)(3) of the tax code were constitutionally valid: “The free exercise clause of the First Amendment is restrained only to the extent of denying tax exempt status and then only in keeping with an overwhelming and compelling governmental interest: that of guarantying that the wall separating church and state remains high and firm.”

From the perspective of many churches, the Christian Echoes decision is unsatisfactory for at least three reasons. First, the court gave an excessively broad definition of the term attempts to influence legislation, including within that term indirect attempts to mold public opinion despite the income tax regulations’ statement (quoted above) that an organization’s exempt status is not jeopardized if it, in carrying out its primary purpose, “advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views.” Second, the court rejected the 5-percent test for determining whether legislative activity is substantial but replaced it with an ambiguous “balancing test.” Churches can never know in advance whether their legislative activities are substantial under the Christian Echoes standard. Third, the court gave insufficient weight to the constitutional guaranty of religious freedom.

The United States Supreme Court refused to review the Christian Echoes case, and it has not directly addressed the issue of the validity of the limitations on church political activity. However, the Supreme Court has rendered two decisions that are relevant to this issue.

First, in a 1970 opinion upholding the constitutionality of state property tax exemptions for church sanctuaries, the court observed: “Adherents of particular faiths and individual churches frequently take strong positions on public issues including . . . ​vigorous advocacy of legal or constitutional positions. Of course, churches as much as secular bodies and private citizens have that right.” Walz v. Tax Commission, 397 U.S. 664 (1970). This is a recognition that churches have a right to engage in “vigorous advocacy” of legal or constitutional positions.

Second, in 1983 the court was presented with a direct challenge to the constitutionality of the limitation on substantial legislative activity. Regan v. Taxation With Representation, 461 U.S. 540 (1983). Taxation With Representation (TWR), a nonprofit taxpayers’ rights organization, was denied tax-exempt status by the IRS on account of its legislative activities. TWR appealed to the courts, arguing that the limitation on legislative activities was unconstitutional. The Supreme Court disagreed. Noting that tax exemptions are “a matter of grace that Congress can disallow as it chooses,” the court concluded that “Congress is not required by the First Amendment to subsidize lobbying.” Significantly, the court observed that a section 501(c)(3) organization is free to establish an exempt organization under section 501(c)(4) of the tax code to conduct lobbying activities. Section 501(c)(4) exempts from federal income taxation those “civic leagues” organized and operated for the “promotion of social welfare.” Such organizations are exempt from tax and can engage in lobbying but cannot receive tax-deductible contributions. As a result, the court suggested that TWR establish a separate 501(c)(4) organization to conduct its lobbying activities and then apply for exemption under section 501(c)(3). The court noted that “the IRS apparently requires only that the two groups be separately incorporated and keep records adequate to show that tax-deductible contributions are not used to pay for lobbying.”

The legal precedent summarized above suggests several conclusions. They are listed below, along with a few additional observations.

IRS Publication 1828, Tax Guide for Churches & Religious Organizations (the “Guide”), notes that “a church or religious organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.”

On the other hand, some lobbying activities will not jeopardize a church’s exempt status: “Churches and religious organizations may, however, involve themselves in issues of public policy without the activity being considered lobbying. For example, churches may conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues in an educational manner without jeopardizing their tax-exempt status.”

Only substantial lobbying activity will jeopardize a church’s exempt status. The tax code does not define the term substantial. The Guide clarifies that

It is truly lamentable that the IRS continues to refuse to provide churches with any meaningful guidance as to the definition of “substantial” lobbying activities. Churches may engage in insubstantial efforts to influence legislation, but once such efforts become substantial, the church’s tax-exempt status is in jeopardy. For now, church leaders must remain in the dark concerning the definition of these terms. The only clarification the Guide provides is that the IRS will consider both time and expenses devoted to lobbying activities in assessing whether those activities are substantial. But what amount of time or expenses constitutes substantial activity?

The prohibition of more than insubstantial efforts to influence legislation is illustrated by the following examples.

EXAMPLE A few times each year, members of First Church circulate petitions among church members following worship services. The petitions enable members to express their support of or opposition to bills pending before Congress or the state legislature. The petitions do not identify the church, and the church itself takes no official position on any of the issues addressed. Such activities clearly do not jeopardize the church’s tax-exempt status, for two reasons. First, they are not substantial. While this term has not been defined with clarity, it could not reasonably be construed in such a way as to cover the activities that occur at First Church. No precedent suggests that such activities are substantial. They involve an expenditure of neither funds nor time by the church. Second, the church itself is not directly involved in the activity. Rather, concerned members of the congregation are simply using the occasion of church services as an opportunity to canvass their fellow members. A church is a public forum, and as such it is an appropriate location for citizens to exercise their constitutional right to petition their government, as long as the church itself is not involved in supporting or opposing specific legislation.

EXAMPLE Church members are permitted to post materials addressing legislative issues on a bulletin board at Grace Church. The church does not screen materials placed on the board. This practice will not jeopardize the church’s tax-exempt status, since it does not constitute an attempt to influence legislation.

EXAMPLE Calvary Church adopts a resolution at a church business meeting, expressing support for a constitutional amendment banning abortions. This resolution, by itself, should not jeopardize the church’s exempt status, since it does not constitute a substantial attempt to influence legislation.

EXAMPLE Peace Church permits a group dedicated to nuclear disarmament and world peace to use a room in the church for a two-hour meeting once each month. No rent is charged, and the room would otherwise be vacant if not used by the group. This activity, by itself, will not jeopardize the church’s tax-exempt status, since it does not constitute a substantial attempt to influence legislation. The church is expending no funds and allows only a minimal or incidental use of its facilities.

No intervention or participation in political campaigns

Key Point: “Although charities are precluded from intervening in political campaigns, the IRS has seen a growth in the number and variety of allegations of such behavior by section 501(c)(3) organizations during election cycles. The increase in allegations, coupled with the dramatic increases in money spent during political campaigns, has raised concerns about whether prohibited funding and activity are emerging in section 501(c)(3) organizations. If left unaddressed, the potential for charities, including churches, being used as arms of political campaigns and parties will erode the public’s confidence in these institutions.” (Excerpt from a 2006 IRS executive summary of its final report on the Political Activities Compliance Initiative.)

The participation by churches and church leaders in political campaigns is an American tradition. Common examples include

Unfortunately, it is not well understood that these kinds of activities, as well-meaning as they may be, jeopardize a church’s exemption from federal income taxation. This is because section 501(c)(3) of the tax code prohibits tax-exempt organizations (including churches) from any intervention or participation in political campaigns on behalf of or in opposition to any candidate for public office. To be sure, there have been massive violations of this prohibition during every presidential election year with not a word of protest from the IRS. But things are changing. In 1999 the IRS for the first time revoked the exempt status of a church for its involvement in a political campaign, and over the past few years, the IRS has made a number of pronouncements indicating that church political activities no longer will be ignored.

Key Point: A good example of church intervention in political campaigns was the 1988 presidential election. Not only were two ordained ministers seeking the office of president (Jesse Jackson and Pat Robertson), but each was actively and enthusiastically supported by large numbers of churches.

Key Point: It is absolutely essential for church leaders to understand the ban on church involvement in political campaigns and to evaluate church practices to ensure compliance.

The legal basis for the limitation on church political activities is section 501(c)(3) of the tax code, which exempts from federal income taxation any church organized and operated exclusively for religious, charitable, educational, or other exempt purposes and “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.”

Note two distinct limitations here. First, churches may not engage in substantial efforts to influence legislation. Second, churches may not participate or intervene in any political campaign, even to an insubstantial degree. The first limitation is referred to as the “lobbying” limitation, and it was addressed in the previous subsection. The second limitation is referred to as the “campaign” limitation, and it is addressed in this subsection.

It should be emphasized that none of the political activities described above is illegal. The primary legal consequence of church political activity is that the church’s exemption from federal income taxation may be jeopardized.

To be exempt from federal income taxation, a church may not “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.” This limitation has an unusual and unfortunate history. It was proposed in 1954 by then Senator Lyndon B. Johnson of Texas as a floor amendment to the tax code (the so-called Johnson Amendment), and it was passed without explanation. Apparently, Senator Johnson was attempting to limit the political activities of a private foundation that had supported one of his opponents in a Texas election. It is clear that few, if any, Senators contemplated in 1954 that the newly enacted limitation could be used to threaten the tax-exempt status of churches. However, the limitation is worded in absolute terms—prohibiting any attempts by churches or any other tax-exempt organizations to participate or intervene in a political campaign—and therefore does pose a significant threat to churches. Unlike the limitation on attempts to influence legislation, there is no requirement that the participation or intervention in a political campaign be substantial. Presumably, one isolated event could be construed as intervention in a political campaign.

Despite the absolute and unconditional prohibition against church intervention in political campaigns and repeated flagrant violations of it by churches, only one church has lost its exempt status for transgressing this limitation. A few other religious organizations that were not churches lost their exempt status, in part because of their intervention in political campaigns. Also, the IRS threatened to revoke the exempt status of a prominent televangelist’s ministry because of his intervention in a political campaign. These cases are discussed later in this chapter. But in general the IRS has chosen not to enforce the ban on political activities by churches. Why has the IRS been reluctant to enforce this limitation? A number of explanations are possible:

These definitional problems, coupled with the limitation’s uncertain purpose and the reluctance of the courts (and to a lesser extent the IRS) to attack the exempt status of churches, have all contributed to the sporadic enforcement of the campaign limitation. Let’s turn to the relevant provisions of the income tax regulations and the Internal Revenue Manual, as well as court decisions and IRS rulings, for these shed additional light on the meaning of this significant limitation.

There have been several recent attempts to eliminate the Johnson Amendment, including the following. None has been successful.

Note: In a letter to the Department of Justice in 2014, the IRS made the following disclosures: “The [internal] Political Activities Referral Committee” has determined that as of June 23, 2014, 99 churches merit a high-priority examination. Of these 99 churches, the number of churches alleged to have violated the prohibition during 2010 is 18, during 2011 is 18, during 2012 is 65, and during 2013 is one.”

The IRS and FFRF reached a settlement of the case that was approved by the court in an order dated July 29, 2014. As a result of the settlement, the FFRF voluntarily dismissed its lawsuit. The court’s order reads, in part: “The reason the parties seek the dismissal is that the FFRF is satisfied that the IRS does not have a policy at this time of non-enforcement specific to churches and religious institutions.”

The FFRF brief in support of the settlement and its motion to dismiss the lawsuit states:

CAUTION: It now appears that the roadblock to IRS enforcement of the ban on campaign activities by churches, created by the Minnesota federal district court in a 2009 ruling (see below), has been removed. As a result, the IRS likely will be more vigorous in challenging the limitation in future cases. Church leaders should bear this in mind when considering support of or opposition to candidates for public office and should consult with legal counsel to assess the risks and options.

The income tax regulations interpreting the limitation on political campaign intervention provide that neither a church nor any other organization can be exempt from federal income taxation if its charter empowers it “directly or indirectly to participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office.” The regulations further provide:

This regulation provides some clarification. In particular:

The IRS has published a Tax Guide for Churches and Religious Organizations (the “Guide”) that provides churches with basic information on compliance with federal tax law. IRS Publication 1828. The Guide addresses political campaign activities more fully than any other issue. Below are some of the key clarifications. (Also see Table 12-1 for a summary analysis of political activities.)

The Guide acknowledges that the campaign activity prohibition “is not intended to restrict free expression on political matters by leaders of churches or religious organizations speaking for themselves, as individuals” (emphasis added). Nor are leaders “prohibited from speaking about important issues of public policy.” However, “religious leaders cannot make partisan comments in official organization publications or at official church functions.” To avoid potential “attribution” of their comments outside of church functions and publications, “religious leaders who speak or write in their individual capacity are encouraged to clearly indicate that their comments are personal and not intended to represent the views of the organization.” The Guide illustrates political activity by religious leaders with the following examples.

EXAMPLE Minister A is the minister of Church J, a section 501(c)(3) organization, and is well known in the community. With their permission, Candidate T publishes a full-page ad in the local newspaper listing five prominent ministers who have personally endorsed Candidate T, including Minister A. Minister A is identified in the ad as the minister of Church J. The ad states, “Titles and affiliations of each individual are provided for identification purposes only.” The ad is paid for by Candidate T’s campaign committee. Since the ad was not paid for by Church J, the ad is not otherwise in an official publication of Church J, and the endorsement is made by Minister A in a personal capacity, the ad does not constitute campaign intervention by Church J.

EXAMPLE Minister B is the minister of Church K, a section 501(c)(3) organization, and is well known in the community. Three weeks before the election, he attends a press conference at Candidate V’s campaign headquarters and states that Candidate V should be reelected. Minister B does not say he is speaking on behalf of Church K. His endorsement is reported on the front page of the local newspaper, and he is identified in the article as the minister of Church K. Because Minister B did not make the endorsement at an official church function, in an official church publication or otherwise use the church’s assets, and did not state that he was speaking as a representative of Church K, his actions do not constitute campaign intervention by Church K.

EXAMPLE Minister C is the minister of Church I, a section 501(c)(3) organization. Church I publishes a monthly church newsletter that is distributed to all church members. In each issue, Minister C has a column titled “My Views.” The month before the election, Minister C states in the “My Views” column, “It is my personal opinion that Candidate U should be reelected.” For that one issue, Minister C pays from his personal funds the portion of the cost of the newsletter attributable to the “My Views” column. Even though he paid part of the cost of the newsletter, the newsletter is an official publication of the church. Because the endorsement appeared in an official publication of Church I, it constitutes campaign intervention attributed to Church I.

EXAMPLE Minister D is the minister of Church M, a section 501(c)(3) organization. During regular services of Church M shortly before the election, Minister D preached on a number of issues, including the importance of voting in the upcoming election, and concluded by stating, “It is important that you all do your duty in the election and vote for Candidate W.” Because Minister D’s remarks indicating support for Candidate W were made during an official church service, they constitute political campaign intervention by Church M.

Many churches have invited political candidates to address the congregation during a worship service. Sometimes the candidate is a member of the church. In other cases the candidate contacts the senior pastor and asks for permission to address the congregation. Do such activities jeopardize a church’s tax-exempt status? The Guide addresses these questions directly in two separate contexts: (1) political candidates who address a church congregation as a candidate, and (2) political candidates who do not address a church congregation as a candidate.

The Guide notes that when a candidate is invited to speak at a church as a political candidate, the factors to consider in deciding whether the church participated or intervened in a political campaign include the following:

The Guide notes that in determining whether candidates are given an equal opportunity to participate, a church should consider the nature of the event to which each candidate is invited, in addition to the manner of presentation. For example, a church that “invites one candidate to speak at its well-attended annual banquet, but invites the opposing candidate to speak at a sparsely attended general meeting, will likely violate the political campaign prohibition, even if the manner of presentation for both speakers is otherwise neutral.”

Sometimes a church invites several candidates to speak at a public forum. The Guide warns that if such a forum is operated to show a bias for or against any candidate, it would be prohibited campaign activity since it would be considered intervention or participation in a political campaign. The Guide suggests that when a church invites several candidates to speak at a forum, it should consider the following factors: (1) whether questions for the candidate are prepared and presented by an independent, nonpartisan panel; (2) whether the topics discussed by the candidates cover a broad range of issues that the candidates would address if elected to the office sought and are of interest to the public; (3) whether each candidate is given an equal opportunity to present his or her views on the issues discussed; (4) whether the candidates are asked to agree or disagree with positions, agendas, platforms or statements of the organization; and (5) whether a moderator comments on the questions or otherwise implies approval or disapproval of the candidates.

The Guide illustrates these rules with the following examples.

EXAMPLE Minister E is the minister of Church N, a section 501(c)(3) organization. In the month prior to the election, Minister E invited the three Congressional candidates for the district in which Church N is located to address the congregation, one each on three successive Sundays, as part of regular worship services. Each candidate was given an equal opportunity to address and field questions on a wide variety of topics from the congregation. Minister E’s introduction of each candidate included no comments on their qualifications or any indication of a preference for any candidate. The actions do not constitute political campaign intervention by Church N.

EXAMPLE The facts are the same as in the preceding example except that four candidates are in the race rather than three, and one of the candidates declines the invitation to speak. In the publicity announcing the dates for each of the candidate’s speeches, Church N includes a statement that the order of the speakers was determined at random and that the fourth candidate declined the church’s invitation to speak. Minister E makes the same statement in his opening remarks at each of the meetings in which one of the candidates is speaking. Church N’s actions do not constitute political campaign intervention.

EXAMPLE Minister F is the minister of Church O, a section 501(c)(3) organization. The Sunday before the November election, Minister F invited Senate Candidate X to preach to her congregation during worship services. During his remarks, Candidate X stated, “I am asking not only for your votes, but for your enthusiasm and dedication, for your willingness to go the extra mile to get a very large turnout on Tuesday.” Minister F invited no other candidate to address her congregation during the Senatorial campaign. Because these activities took place during official church services, they are attributed to Church O. By selectively providing church facilities to allow Candidate X to speak in support of his campaign, Church O’s actions constitute political campaign intervention.

The Guide acknowledges that a church may invite political candidates (including church members) to speak in a noncandidate capacity. For example, some candidates are invited to speak at church services because they are public figures (such as an expert in a nonpolitical field, a celebrity, or one who has led a distinguished military, legal, or public service career). When a candidate is invited to speak at an event in a noncandidate capacity, it is not necessary for the church or religious organization to provide equal access to all political candidates. However, if the candidate is publicly recognized by the church or if the candidate is invited to speak, the Guide lists the following factors to be considered in deciding if the candidate’s appearance results in political campaign intervention:

In addition, “the church should clearly indicate the capacity in which the candidate is appearing and should not mention the individual’s political candidacy or the upcoming election in the communications announcing the candidate’s attendance at the event.”

Key Point: Note that the significance of a candidate speaking in a noncandidate capacity is that the church is not required to give other candidates an equal opportunity to address the congregation.

The Guide lists the following examples of a public official appearing at a church in an official capacity and not as a candidate.

EXAMPLE Church P, a section 501(c)(3) organization, is located in the state capital. Minister G customarily acknowledges the presence of any public officials present during services. During the state gubernatorial race, Lieutenant Governor Y, a candidate, attended a Wednesday evening prayer service in the church. Minister G acknowledged the Lieutenant Governor’s presence in his customary manner, saying, “We are happy to have worshiping with us this evening Lieutenant Governor Y.” Minister G made no reference in his welcome to the Lieutenant Governor’s candidacy or the election. Minister G’s actions do not constitute political campaign intervention by Church P.

EXAMPLE Minister H is the minister of Church Q, a section 501(c)(3) organization. Church Q is building a community center. Minister H invites Congressman Z, the representative for the district containing Church Q, to attend the groundbreaking ceremony for the community center. Congressman Z is running for reelection at the time. Minister H makes no reference in her introduction to Congressman Z’s candidacy or the election. Congressman Z also makes no reference to his candidacy or the election and does not do any fund-raising while at Church Q. Church Q has not intervened in a political campaign.

EXAMPLE Mayor G attends a concert performed by a choir of Church S, a section 501(c)(3) organization, in City Park. The concert is free and open to the public. Mayor G is a candidate for reelection, and the concert takes place after the primary and before the general election. During the concert, Church S’s minister addresses the crowd and says, “I am pleased to see Mayor G here tonight. Without his support, these free concerts in City Park would not be possible. We will need his help if we want these concerts to continue next year, so please support Mayor G in November as he has supported us.” As a result of these remarks, Church S has engaged in political campaign intervention.

Some churches engage in voter education activities by distributing voter guides. Voter guides generally are distributed during an election campaign and provide information on how candidates stand on various issues. A church will jeopardize its tax-exempt status if it distributes a voter guide that favors or opposes candidates for public elected office, since this will amount to prohibited political campaign activity.

The Guide lists the following factors to consider in deciding whether a voter guide constitutes prohibited political campaign activity:

The Guide addresses voter guides with the following examples.

Example Church R, a section 501(c)(3) organization, distributes a voter guide prior to elections. The voter guide consists of a brief statement from the candidates on each issue made in response to a questionnaire sent to all candidates for governor of State I. The issues on the questionnaire cover a wide variety of topics and were selected by Church R based solely on their importance and interest to the electorate as a whole. Neither the questionnaire nor the voter guide, through their content or structure, indicate a bias or preference for any candidate or group of candidates. Church R is not participating or intervening in a political campaign.

Example Church S, a section 501(c)(3) organization, distributes a voter guide during an election campaign. The voter guide is prepared using the responses of candidates to a questionnaire sent to candidates for major public offices. Although the questionnaire covers a wide range of topics, the wording of the questions evidences a bias on certain issues. By using a questionnaire structured in this way, Church S is participating or intervening in a political campaign.

Example Church T, a section 501(c)(3) organization, sets up a booth at the state fair where citizens can register to vote. The signs and banners in and around the booth give only the name of the church, the date of the next upcoming statewide election, and notice of the opportunity to register. No reference to any candidate or political party is made by volunteers staffing the booth or in the materials available in the booth, other than the official voter registration forms, which allow registrants to select a party affiliation. Church T is not engaged in political campaign intervention when it operates this voter registration booth.

Example Church C is a section 501(c)(3) organization. C’s activities include educating its members on family issues involving moral values. Candidate G is running for state legislature, and an important element of her platform is challenging the incumbent’s position on family issues. Shortly before the election, C sets up a telephone bank to call registered voters in the district in which Candidate G is seeking election. In the phone conversations, C’s representative tells the voter about the moral importance of family issues and asks questions about the voter’s views on these issues. If the voter appears to agree with the incumbent’s position, C’s representative thanks the voter and ends the call. If the voter appears to agree with Candidate G’s position, C’s representative reminds the voter about the upcoming election, stresses the importance of voting in the election and offers to provide transportation to the polls. C is engaged in political campaign intervention when it conducts this get-out-the-vote drive.

Key Point: Voter education activities are permissible and will not constitute intervention in political campaigns so long as the activities are neutral and nonpartisan. If the questions or presentation of the voter education activity demonstrates a particular bias in favor of or in opposition to a particular candidate or candidates, then the church’s exempt status is threatened.

In a fact sheet issued in 2006, the IRS made the following two clarifications regarding voter guides:

IRS rulings addressing campaign activities by religious and charitable organizations are summarized below.

The IRS revoked the tax-exempt status of a religious organization (not a church) for intervening in a political campaign. The organization was established for religious and charitable purposes, including the protection of (1) religious liberty, (2) the rights of unborn children, and (3) the rights of parents to raise their children without government interference.

The organization encouraged members to run for local political office, and it published a voter survey presenting the views of presidential and vice-presidential candidates on abortion, homosexuality, school prayer, secular humanism, and the “equal rights amendment.” The survey also reported the positions of state political candidates on a variety of issues including the state income tax, parents’ rights, abortion, the equal rights amendment, homosexual rights, church school freedom, evolution, state lotteries, and prostitution. The survey disclaimed any attempt to judge a candidate’s private morality or to “rate” or endorse any candidate. The stated purpose of the surveys was to present the candidates’ positions on family and moral issues.

The organization did represent that the survey was designed to “enable Christians to vote intelligently.” The organization also claimed great success in defeating state legislation abridging Christian rights, and it announced its legislative agenda for the following year. It contacted legislators concerning proposed legislation and urged members to do the same. Nearly 76 percent of its total budget was spent on legislative activities.

The IRS General Counsel’s Office ruled that the organization’s tax-exempt status would have to be revoked on the basis of its political activities. It began its opinion by noting that section 501(c)(3) of the tax code (under which churches and many religious organizations are exempt) requires that an exempt organization not participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office. The IRS concluded that the organization violated this requirement. It observed:

The IRS went on to provide important clarification as to the meaning of “participation” or “intervention” in political campaigns. The IRS observed:

The IRS noted that some doubt existed as to whether precinct committeemen were candidates for public office, but it concluded that they were. It also conceded that the organization could allege that it merely educated its members on civics and government and therefore was furthering its exempt purposes. However, it rejected such a view on the basis of all the facts. This ruling represents the view of the IRS national office, and it should be carefully considered by any church or religious organization contemplating similar activities.

The IRS announced in 1974 that an exempt organization that operated a broadcasting station presenting religious, educational, and public interest programs was not participating in political campaigns on behalf of candidates for public office by providing reasonable air time equally available to all legally qualified candidates for election to public office and by endorsing no candidate or viewpoint. The IRS observed that

The IRS also emphasized that before and after each broadcast, the organization stated that the views expressed were those of the candidate and not the station, that the station endorsed no candidate or viewpoint, that the presentation was made as a public service to educate the electorate, and that equal opportunity would be presented to all bona fide, legally qualified candidates for the same public office to present their views.

Key Point: Several rulings of the IRS have applied the ban on intervention in political campaigns to “voter education” activities. Such rulings demonstrate that certain nonpartisan voter education activities do not constitute prohibited political activity. However, certain other so-called voter education activities may violate the ban on political activities.

In 1978 the IRS evaluated four voter education activities. The relevant portion of the ruling is set forth below:

Organization A has been recognized as exempt under section 501(c)(3) of the tax code by the Internal Revenue Service. As one of its activities, the organization annually prepares and makes generally available to the public a compilation of voting records of all members of Congress on major legislative issues involving a wide range of subjects. The publication contains no editorial opinion, and its contents and structure do not imply approval or disapproval of any members or their voting records.

The “voter education” activity of Organization A is not prohibited political activity within the meaning of section 501(c)(3) of the tax code.

Organization B has been recognized as exempt under section 501(c)(3) of the tax code by the Internal Revenue Service. As one of its activities in election years, it sends a questionnaire to all candidates for governor in State M. The questionnaire solicits a brief statement of each candidate’s position on a wide variety of issues. All responses are published in a voters guide that it makes generally available to the public. The issues covered are selected by the organization solely on the basis of their importance and interest to the electorate as a whole. Neither the questionnaire nor the voters guide, in content or structure, evidences a bias or preference with respect to the views of any candidate or group of candidates.

The “voter education” activity of Organization B is not prohibited political activity within the meaning of section 501(c)(3) of the tax code.

Organization C has been recognized as exempt under section 501(c)(3) of the tax code by the Internal Revenue Service. Organization C undertakes a “voter education” activity patterned after that of Organization B in Situation 2. It sends a questionnaire to candidates for major public offices and uses the responses to prepare a voters guide which is distributed during an election campaign. Some questions evidence a bias on certain issues. By using a questionnaire structured in this way, Organization C is participating in a political campaign in contravention of the provisions of section 501(c)(3) and is disqualified as exempt under that section.

Organization D has been recognized as exempt under section 501(c)(3) of the tax code. It is primarily concerned with land conservation matters.

The organization publishes a voters guide for its members and others concerned with land conservation issues. The guide is intended as a compilation of incumbents’ voting records on selected land conservation issues of importance to the organization and is factual in nature. It contains no express statements in support of or in opposition to any candidate. The guide is widely distributed among the electorate during an election campaign.

While the guide may provide the voting public with useful information, its emphasis on one area of concern indicates that its purpose is not nonpartisan voter education.

By concentrating on a narrow range of issues in the voters guide and widely distributing it among the electorate during an election campaign, Organization D is participating in a political campaign in contravention of the provisions of section 501(c)(3) and is disqualified as exempt under that section.

This ruling amplified Revenue Ruling 78-248 (quoted above). An exempt organization engaged in various charitable and educational activities, maintained an office that monitored and reported on judicial and legislative activities and developments, and distributed a monthly newsletter to some 2,000 interested persons nationwide. The monthly newsletter contained expressions of the organization’s views on a broad range of legislative and judicial issues and occasionally encouraged readers to contact governmental officials to support or oppose specific action.

Following each session of Congress, the organization published a summary of the voting records of all incumbent members of Congress on selected legislative issues important to it, together with an expression of the organization’s position on those issues. Each incumbent’s votes were reported in a way that illustrated whether he or she voted in accordance with the organization’s position of each issue. However, the newsletter was politically nonpartisan and contained no reference to any political campaigns, candidates, or statements endorsing or rejecting any incumbent as a candidate for public office. Further, no mention was made of an individual’s overall qualification for public office, nor was there any comparison with candidates that might be competing with the incumbents in future political campaigns. Publication of voting records usually occurred after the adjournment of a particular session of Congress and was not geared to the conduct of any particular election.

Under these circumstances, the IRS ruled that the organization had not engaged in prohibited political activity:

In view of the foregoing, other factors must be examined to determine whether in the final analysis the organization is participating or intervening in a political campaign.

In the instant case, the organization will not widely distribute its compilation of incumbents’ voting records. The publication will be distributed to the organization’s normal readership who number only a few thousand nationwide. This will result in a very small distribution in any particular state or congressional district. No attempt will be made to target the publication toward particular areas in which elections are occurring nor to time the date of publication to coincide with an election campaign.

In view of these facts, Situations 3 and 4 of Revenue Ruling 78-248 [quoted above] are distinguishable from the present case, and the organization will not be considered to be engaged in prohibited political campaign activity.

In this news release the IRS issued guidance to tax-exempt organizations, including churches, on the prohibition of involvement in political campaigns. Here is the full text of the IRS guidance:

First, it indicates that the IRS intends to focus more directly on the political activities of exempt organizations, including churches. Future presidential campaigns may not be “business as usual” in terms of IRS nonenforcement of the ban on political activities by exempt organizations.

Second, the announcement clearly specifies five activities of exempt organizations that the IRS deems inappropriate. These are

Third, the news release indicates that the IRS is relying on the federal appeals court’s decision in The Association of the Bar of the City of New York v. Commissioner, 858 F.2d 876 (2nd Cir. 1988). In the “New York Bar” case, a federal appeals court ruled that the New York City bar association did not qualify for exemption from federal income taxation under section 501(c)(3) of the tax code, since its practice of rating candidates for judgeships constituted a prohibited participation in political campaigns. The bar association claimed that its rating system did not constitute prohibited participation in political campaigns, since the ratings (1) were nonpartisan, (2) involved merely the collection and dissemination of objective data, and (3) were not a substantial part of its activities. The court rejected these claims and revoked the exempt status of the bar association.

In rejecting the association’s first claim (that its ratings were nonpartisan), the court observed that “a candidate who receives a ‘not qualified’ rating will derive little comfort from the fact that the rating may have been made in a nonpartisan manner.” As to the association’s second claim (that the ratings were mere presentations of objective facts), the court observed that “a representation that a candidate is able and has proper character and temperament is a subjective expression of opinion” rather than a mere recital of facts. Finally, the court rejected the association’s argument that its exempt status was not affected because the ratings were not a substantial part of its activities. “The short answer to this argument,” noted the court “is that Congress did not write the statute that way.” While section 501(c)(3) provides that an exempt organization’s attempts to influence legislation will not jeopardize its exempt status unless such activities are substantial in nature, the requirement of substantiality does not apply to participation in political campaigns.

The court did refer with approval to Revenue Ruling 80-282 (summarized above) upholding the exempt status of an organization that published a voter education newsletter. The IRS emphasized the following factors: (1) the voting records of all incumbents were presented; (2) candidates for reelection were not identified; (3) no comments were made about a candidate’s overall qualifications for public office; (4) no statements were made endorsing or rejecting any incumbent as a candidate for public office; (5) the organization did not widely distribute its compilation of incumbents’ voting records; and (6) no attempt was made to target the publication toward particular areas in which elections were occurring, nor was the publication timed to coincide with election campaigns.

The appeals court’s decision, and the IRS reliance on it, is of relevance to churches for a number of reasons. It demonstrates that

During one of its radio broadcasts, a church’s founder told the audience that they should not vote for a particular candidate for president in the general election. On a second occasion the founder again told listeners that the named candidate should not be elected president of the United States. The founder offered no disclaimer indicating that the views were his own and not those of his church. He insisted that his statements did not constitute intervention by the church in a political campaign on behalf of, or in opposition to, a candidate for public office, since (1) his statements were taken out of context; (2) the statements reflected his personal views and not those of the church; and (3) the political activity, even if a technical violation, was insubstantial given the overall volume of statements made by the founder and disseminated through books, pamphlets, audio and videotapes.

The IRS rejected each of these claims and concluded that the church had violated section 501(c)(3)’s ban on campaign intervention. First, it noted that the founder had stated during his radio broadcasts that it would be “dangerous to be an American” and that he would likely “go into exile” if a particular candidate were elected. These were “clear statements in opposition to a candidate” made on behalf of the church that were “clearly and unequivocally intended to influence listeners on how to vote in the presidential election.” Second, the IRS rejected the founder’s claim that his statements were his own and should not be imputed to his church. It observed:

Finally, the IRS rejected the church’s argument that the political statements should be disregarded because they were insubstantial. The IRS noted that section 501(c)(3) contains no exception for insubstantial campaign intervention (although an exception does exist for insubstantial attempts to influence legislation).

In 2006 the IRS issued a nine-page fact sheet to help churches and other public charities comply with the tax code’s prohibition of campaign activities. The fact sheet explains that “with the 2006 campaign season approaching, the IRS is launching enhanced education and enforcement efforts, based on the findings and analysis of the 2004 election cycle. The IRS is providing this fact sheet to help ensure that charities have enough advance notice of the types of problems that have occurred, the legal strictures against engaging in political activities and how to avoid these problems.”

The IRS fact sheet includes much of the same information that is included in the IRS Tax Guide for Churches and Religious Organizations (summarized above). It contains the following additional information that will be helpful to church leaders in understanding the prohibition of campaign activities.

The fact sheet clarifies that charities “may encourage people to participate in the electoral process through voter registration and get-out-the-vote drives, conducted in a non-partisan manner.” On the other hand, “voter education or registration activities conducted in a biased manner that favors (or opposes) one or more candidates is prohibited.”

The fact sheet acknowledges that churches and other charities may “take positions on public policy issues, including issues that divide candidates in an election for public office.” However, they

The fact sheet lists the following factors that will be considered in deciding if a communication results in political campaign intervention:

The fact sheet cautions that “a communication is particularly at risk of political campaign intervention when it makes reference to candidates or voting in a specific upcoming election. Nevertheless, the communication must still be considered in context before arriving at any conclusions.”

The fact sheet cautions that “if an organization posts something on its website that favors or opposes a candidate for public office, the organization will be treated the same as if it distributed printed material, oral statements or broadcasts that favored or opposed a candidate.” With regard to links to candidate-related material on a church’s website, the fact sheet notes:

The fact sheet contains the following examples:

EXAMPLE M, a section 501(c)(3) organization, maintains a website and posts an unbiased, nonpartisan voter guide that is prepared consistent with the principles discussed in the voter guide section above. For each candidate covered in the voter guide, M includes a link to that candidate’s official campaign website. The links to the candidate websites are presented on a consistent neutral basis for each candidate, with text saying “For more information on Candidate X, you may consult [URL].” M has not intervened in a political campaign because the links are provided for the exempt purpose of educating voters and are presented in a neutral, unbiased manner that includes all candidates for a particular office.

EXAMPLE Church P, a section 501(c)(3) organization, maintains a website that includes such information as biographies of its ministers, times of services, details of community outreach programs, and activities of members of its congregation. B, a member of the congregation of Church P, is running for a seat on the town council. Shortly before the election, Church P posts the following message on its website, “Lend your support to B, your fellow parishioner, in Tuesday’s election for town council.” Church P has intervened in a political campaign on behalf of B.

The fact sheet made the following two clarifications regarding voter guides:

This ruling presents 21 examples involving campaign activities, along with the IRS analysis. The IRS notes that each of these examples involves only one type of activity and that “in the case of an organization that combines one or more types of activity, the interaction among the activities may affect the determination of whether or not the organization is engaged in political campaign intervention.” The 21 examples are segregated under various topics. Most involve secular charities. Three examples addressing church practices are summarized below:

EXAMPLE Minister C is the minister of Church L, a section 501(c)(3) organization, and Minister C is well known in the community. Three weeks before the election, he attends a press conference at Candidate V’s campaign headquarters and states that Candidate V should be reelected. Minister C does not say he is speaking on behalf of Church L. His endorsement is reported on the front page of the local newspaper, and he is identified in the article as the minister of Church L. The IRS concluded that “because Minister C did not make the endorsement at an official church function, in an official church publication or otherwise use the church’s assets, and did not state that he was speaking as a representative of Church L, his actions do not constitute campaign intervention by Church L.”

EXAMPLE Minister F is the minister of Church O, a section 501(c)(3) organization. The Sunday before the November election, Minister F invites Senate Candidate X to preach to her congregation during worship services. During his remarks, Candidate X states, “I am asking not only for your votes, but for your enthusiasm and dedication, for your willingness to go the extra mile to get a very large turnout on Tuesday.” Minister F invites no other candidate to address her congregation during the senatorial campaign. Because these activities take place during official church services, they are attributed to Church O. The IRS concluded that “by selectively providing church facilities to allow Candidate X to speak in support of his campaign, Church O’s actions constitute political campaign intervention.”

EXAMPLE Church P, a section 501(c)(3) organization, maintains a website that includes such information as biographies of its ministers, times of services, details of community outreach programs, and activities of members of its congregation. B, a member of the congregation of Church P, is running for a seat on the town council. Shortly before the election, Church P posts the following message on its website: “Lend your support to B, your fellow parishioner, in Tuesday’s election for town council.” The IRS concluded that “Church P has intervened in a political campaign on behalf of B.”

Court decisions addressing campaign activities by religious organizations are summarized below.

Branch Ministries, Inc. v. Commissioner, 99-1 USTC ¶50,410 (D.D.C. 1999), aff’d, 211 F.3d 137 (D.C. Cir. 2000. On October 30, 1992, four days before a presidential election, Branch Ministries, Inc., doing business as the Church at Pierce Creek (the “church”), expressed its concern about the moral character of candidate Bill Clinton in a full-page advertisement in the Washington Times and in USA Today. The advertisement proclaimed, “Christian Beware. Do not put the economy ahead of the Ten Commandments.” It asserted that Bill Clinton supported abortion on demand, homosexuality, and the distribution of condoms to teenagers in public schools. The advertisement cited various biblical passages and stated that “Bill Clinton is promoting policies that are in rebellion to God’s laws.” It concluded with the question, “How then can we vote for Bill Clinton?” At the bottom of the advertisement, in fine print, was the following notice: “This advertisement was co-sponsored by The Church at Pierce Creek . . . ​and by churches and concerned Christians nationwide. Tax-deductible donations for this advertisement gladly accepted. Make donations to: The Church at Pierce Creek,” and a mailing address was provided. The IRS later issued a letter stating that the church’s status as a section 501(c)(3) tax-exempt organization was revoked.

The church filed a lawsuit challenging the revocation of its exempt status. The church claimed that the decision of the IRS to revoke its tax-exempt status was unconstitutionally motivated due to the conservative political and religious beliefs of the church. The court noted that to win a selective prosecution claim, the church must clearly establish “(1) that the prosecutorial decision had a discriminatory effect, and (2) that it was motivated by a discriminatory purpose or intent.” The court continued:

The court concluded that the church had failed to present “clear evidence” of either requirement, and the IRS therefore was entitled to summary judgment on this claim:

The church also asserted that the revocation of its tax-exempt status violated the right to free exercise of religion guaranteed by the Religious Freedom Restoration Act (RFRA) and the First Amendment. The court concluded that the church had failed to establish that the revocation of its tax-exempt status substantially burdened its right to freely exercise its religion: “A substantial burden exists where the government puts substantial pressure on an adherent to modify his behavior and to violate his beliefs, or where the government forces an individual to choose between following the precepts of her religion and forfeiting benefits, on the one hand, and abandoning one of the precepts of her religion.”

The church claimed that the decision of the IRS to revoke its section 501(c)(3) status had imposed a number of burdens, including exposure to federal income taxation and the likelihood that contributions will decrease since donors will not be eligible to deduct their contributions to the church. The court acknowledged that the church was “probably correct” in claiming that the revocation had imposed these burdens, but it insisted that the church had “failed to establish that the revocation has imposed a burden on their free exercise of religion” (emphasis added). The court emphasized that the church had a choice—it “could engage in partisan political activity and forfeit its section 501(c)(3) status or it could refrain from partisan political activity and retain its section 501(c)(3) status.” The court insisted that this choice was unconnected to the church’s ability to freely exercise its religion.

This ruling was affirmed by federal appeals court in 2000. Branch Ministries v. Rossotti, 2000 USTC ¶50,459 (D.C. Cir. 2000).

Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972). The first case in which a religious organization’s tax-exempt status was revoked because of political activities was the Christian Echoes case. Christian Echoes was a religious organization founded to disseminate conservative Christian principles through radio and television broadcasts and literature. While the federal appeals court that upheld the IRS revocation of the organization’s exempt status focused primarily on the organization’s efforts to influence legislation (discussed in the previous subsection), it also relied in part on the organization’s participation in political campaigns:

A disturbing and often-overlooked aspect of this decision is the fact that Christian Echoes lost its exempt status in part because it “attacked President Kennedy in 1961,” even though the next presidential election was three years away. The ban on intervention in political campaigns refers specifically to statements made in support of or in opposition to “candidates” for public office. The court apparently concluded that any office holder is a candidate. If this is true, then the ruling effectively prohibits churches and other exempt organizations from ever criticizing any office holder. Fortunately, no other court, or the IRS, has agreed with this result. In fact, a subsequent ruling of the United States Supreme Court seems to repudiate this radical conclusion.

In First National Bank of Boston v. Belloti, 435 U.S. 765 (1978), the Court ruled that business corporations have a constitutional right to speak out on public issues, and therefore it was impermissible for a state to penalize corporations for doing so. The Court observed that “if a legislature may direct business corporations to ‘stick to business,’ it also may limit other corporations—religious, charitable, or civic—to their respective ‘business’ when addressing the public. Such power in government to channel the expression of views is unacceptable under the First Amendment.” At the least, this language can be read to repudiate the expansive interpretation given by the Christian Echoes court to the limitation on church intervention in political campaigns. It is possible that the Supreme Court’s ruling also undermines the entire limitation, though such an interpretation cannot at this time be made with confidence.

Christian Echoes’ contention that revocation of its tax-exempt status violated the constitutional guaranty of religious freedom was rejected by the court. Rejecting the notion that the guaranty of religious freedom “assures no restraints, no limitations and, in effect, protects those exercising the right to do so unfettered,” the court concluded that the limitations on political activities set forth in section 501(c)(3) of the tax code were constitutionally valid: “The free exercise clause of the First Amendment is restrained only to the extent of denying tax exempt status and then only in keeping with an overwhelming and compelling governmental interest: that of guarantying that the wall separating church and state remains high and firm.”

From the perspective of many churches, the Christian Echoes decision is unsatisfactory for at least two reasons. First, the court gave an excessively broad definition of the limitation on intervention in political campaigns. Second, the court gave insufficient weight to the constitutional guaranty of religious freedom.

The United States Supreme Court refused to review the Christian Echoes case, and it has not directly addressed the issue of the validity of the limitation on church political activity. However, as noted above, its opinion in the Belloti case certainly undermines the validity of the limitation.

Citizens United v. Federal Election Commission, 130 S.Ct. 876 (2010). In ruling that portions of the federal Bipartisan Campaign Reform Act of 2002 (BCRA) were unconstitutional, the United States Supreme Court observed: “The government may not suppress political speech on the basis of the speaker’s corporate identity. No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations.” This ruling provides indirect support for challenging the constitutionality of section 501(c)(3)’s ban on campaign intervention by churches and other religious organizations.

Key Point: The Supreme Court’s ruling in First National Bank of Boston v. Belloti, 435 U.S. 765 (1978), seems to preclude a broad interpretation of the ban on political activities. The court observed that “if a legislature may direct business corporations to ‘stick to business,’ it also may limit other corporations—religious, charitable, or civic—to their respective ‘business’ when addressing the public. Such power in government to channel the expression of views is unacceptable under the First Amendment.”

As noted above, a church’s exemption from federal income tax may be revoked by the IRS if it violates the ban on intervention or participation in a political campaign. This is a severe penalty that the IRS has imposed against only one church (and a few other religious organizations).

Section 4955 of the tax code permits the IRS to assess a tax against an exempt organization that spends funds for political activities in violation of the 501(c)(3) limits discussed in this chapter. This tax can be assessed in addition to revocation of exempt status, or instead of revocation. The tax is equal to 10 percent of political expenditures made by an exempt organization. An additional tax of 2.5 percent of the amount of political expenditures can be assessed against any “manager” who authorized the expenditure unless the manager did not act willfully or his or her decision was based on reasonable cause. If the exempt organization does not correct its political expenditure, the tax can be increased to 100 percent of the amount of a political expenditure (for the organization) or 50 percent (for the manager). Correction is defined as “recovering part or all of the expenditure to the extent recovery is possible, establishment of safeguards to prevent future political expenditures, and where full recovery is not possible, such additional corrective action as is prescribed by the [income tax regulations].” The income tax regulations (adopted by the IRS in December 1995) specify that

Note that the tax imposed by section 4955 only applies when an exempt organization expends funds on political activities. It will not apply to those political activities described in this chapter that involve little, if any, political expenditures.

Example The IRS concluded that revocation of a church’s exempt status because of its pastor’s vocal opposition to certain political candidates was not warranted. Instead, it imposed a tax under section 4955 of the tax code. The IRS noted that the church made a political expenditure when it purchased broadcast airtime for the broadcasts in which the statements were made opposing a presidential candidate. As a result, the church was liable for a tax equal to 10 percent of the amount of each political expenditure. In addition, the founder “is an organization manager liable for a tax of 2.5 percent of the value of each political expenditure.” Further, there was “no evidence to suggest that his political statements on those shows were not willful or were due to reasonable cause. Accordingly, waiver of the tax is not warranted.”

Since the political expenditures were not corrected by the church within the taxable period, the church was liable for a 100-percent tax on the amount of each political expenditure, as provided in section 4955, and the founder was liable for a tax of 50 percent of the amount of each political expenditure. The IRS concluded that the church’s other directors did not have “sufficient knowledge to be held jointly and severally liable with the founder for the taxes under section 4955.” IRS Letter Ruling 200437040.

Key Point: Responding to public criticism that it audits churches for political activity based on political ideology, the IRS asked the Treasurer Inspector General for Tax Administration (TIGTA) to examine its selection procedures. The TIGTA randomly selected 60 IRS cases of suspected church political activity and found no evidence of ideological bias since 26 of the cases involved pro-conservative churches (43 percent), 16 involved pro-liberal churches (26 percent), and in the remaining cases the churches had no known ideological preference.

Is the exemption of churches and other religious organizations from federal income taxation mandated by the First Amendment, or is it merely a matter of legislative grace? Several courts have held that religious organizations have no constitutional right to be exempted from federal income taxes and that tax exemptions are “a matter of grace rather than right.” To illustrate, one court has observed:

On the other hand, for as long as federal income taxes have had any potential impact on churches, religious organizations have been exempted from such taxes. Walz v. Tax Commission, 397 U.S. 664 (1970). Significantly, the exemption of churches is automatic. Unlike other charities, churches are not required to apply for and receive IRS recognition of tax-exempt status. IRC 508(c)(1)(A). This assumes that the church satisfies the conditions enumerated in section 501(c)(3) of the tax code (summarized above). Whether this legislative history indicates a congressional determination that tax exemption of churches is constitutionally mandated is unclear. As noted previously in this chapter, churches and other religious organizations that engage in substantial efforts to influence legislation, that intervene in political campaigns, that are not operated exclusively for religious purposes, that are not organized exclusively for religious purposes, or the net earnings of which inure to the benefit of a private individual are not entitled to exemption. Further, in 1969 Congress elected to tax the unrelated business income of all religious organizations, including churches. IRC 511(a)(2)(A). Certainly such factors militate against the conclusion that religious organizations are constitutionally immune from taxation.

The United States Supreme Court, in upholding the constitutionality of state property tax exemptions for properties used solely for religious worship, suggested that a constitutional basis may exist for property tax exemptions. Walz v. Tax Commission, 397 U.S. 664 (1970). The court emphasized that the First Amendment forbids the government from following a course of action, be it taxation of churches or exemption, that results in an excessive governmental entanglement with religion. The court reasoned that eliminating the tax exemption of properties used exclusively for religious worship would be unconstitutional since it would expand governmental entanglement with religion: “Elimination of exemption would tend to expand the involvement of government by giving rise to tax valuation of church property, tax liens, tax foreclosures, and the direct confrontations and conflicts that follow in the train of those legal processes.”

The court observed that “exemption creates only a minimal and remote involvement between church and state and far less than taxation of churches” and that “the hazards of churches supporting government are hardly less in their potential than the hazards of government supporting churches.” The court concluded that the grant of a tax exemption is not an impermissible sponsorship of religion, since “the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.” Such reasoning suggests that the exemption of religious organizations from federal income taxation may be rooted in part in the United States Constitution, at least to the extent that it can be demonstrated that the taxation of religious organizations would lead to substantial governmental entanglement with religion far greater than the entanglement occasioned by exemption.

On the other hand, the Supreme Court ruled unanimously in 1990 that the State of California could tax the sale of religious literature by Jimmy Swaggart Ministries, a religious organization organized “for the purpose of establishing and maintaining an evangelistic outreach for the worship of Almighty God . . . ​by all available means, both at home and in foreign lands,” including evangelistic crusades, missionary endeavors, radio broadcasting, television broadcasting, and publishing. Jimmy Swaggart Ministries v. Board of Equalization, 110 S. Ct. 688 (1990).

In 1982 the court ruled that the First Amendment guaranty of religious freedom was not violated by requiring Amish employers to withhold Social Security taxes from their employees’ wages. United States v. Lee, 455 U.S. 252 (1981). The court acknowledged that subjecting Amish employers to compulsory withholding of Social Security taxes violated their religious convictions. However, the court concluded that this interference with religious convictions was outweighed by an “overriding governmental interest”:

The court concluded that “because the broad public interest in maintaining a sound tax system is of such a high order, religious belief in conflict with the payment of taxes affords no basis for resisting the tax.” This language would appear to diminish the availability of a constitutionally mandated exemption of churches from federal income taxation.

The exemption of religious organizations from federal income taxation does not constitute an impermissible “establishment of religion” in violation of the First Amendment. United States v. Dykema, 666 F.2d 1096 (7th Cir. 1981); Swallow v. United States, 325 F.2d 97 (10th Cir. 1963). The United States Supreme Court has observed that “there is no genuine nexus between tax exemption and establishment of religion.” Walz v. Tax Commission, 397 U.S. 664 (1970).

Before 1969 there was no legal requirement that an organization file with the IRS an application for tax-exempt status. Rather, an organization was automatically exempt if it met the requirements set forth in section 501(c)(3) of the tax code. In general, those requirements are as follows: (1) the organization is organized exclusively for exempt (e.g., religious, charitable, educational) purposes; (2) the organization is operated exclusively for exempt purposes; (3) none of the organization’s net earnings inures to the benefit of any private individuals; (4) the organization does not engage in substantial efforts to influence legislation; and (5) the organization does not intervene or participate in political campaigns. Although many organizations voluntarily applied for IRS recognition of exempt status by filing a Form 1023 (Application for Recognition of Exemption) under Section 501(c)(3) of the tax code, many did not.

The Tax Reform Act of 1969 added section 508 to the tax code. This section stipulated that after October 9, 1969, no organization, with a few exceptions, would be treated as exempt unless it gave notice to the IRS, in the manner prescribed by regulation, that it was applying for recognition of exempt status under section 501(c)(3). This is commonly referred to as the “508(a) notice.” The income tax regulations state that the 508(a) notice is given by submitting a properly completed Form 1023 to the appropriate IRS district director.

Section 508(c) and the income tax regulations state that the following organizations are exempted from the 508(a) notice requirement and therefore are not required to file a Form 1023 to be exempt from federal income tax:

The recognition of the exempt status of an organization without the need for complying with the section 508(a) notice requirement of course assumes that all of the prerequisites contained in section 501(c)(3) of the tax code have been satisfied.

The IRS maintains that although such organizations are not required to file a Form 1023 to be exempt from federal income taxes or to receive tax-deductible charitable contributions, they may “find it advantageous to obtain recognition of exemption.” IRS Publication 557. Presumably, such organizations might voluntarily wish to obtain IRS recognition of tax-exempt status in order to assure contributors who itemize their deductions that donations will be tax-deductible.

The IRS maintains a cumulative list of organizations described in section 501(c)(3) of the tax code, formerly known as Publication 78. The list is available only as a searchable database on the IRS website (“Exempt Organizations Select Check”). Contributions made to an organization whose name does not appear on the cumulative list may be questioned by the IRS, in which case the contributor would have to substantiate the deductibility of his or her contributions by demonstrating that the donee met the requirements of section 501(c)(3) and was exempt from the notice requirements. Similarly, some potential contributors may be reluctant to contribute to a religious organization not listed on the IRS cumulative list.

Key Point: A federal court in California summarily rejected as “frivolous” a religious ministry’s claim that it was exempt from all taxes and IRS regulation because it was a “section 508(c)(1)(A)” church. See Chapter 1 for details. The court correctly noted that section 508(c)(1)(A) of the federal tax code “merely exempts churches and certain other religious bodies from the necessity of applying for recognition of their exempt status under § 501(c)(3) and from requirements that they file tax returns. Nothing in [the] statute suggests that a bank’s financial records concerning the financial activity of a religious organization are exempt from investigation.” The court concluded: “The IRS has broad investigative authority, including the authority to examine records or witnesses in order to determine whether tax liability exists or to make a return where none has been made. In short, [the ministry’s] arguments have no basis in law, and are frivolous.” Steeves v. IRS, 2020 WL 5943543 (S.D.C. 2020).

In 2013 the American Atheists, Inc., Atheists of Northern Indiana, Inc., and Atheist Archives of Kentucky, Inc. (collectively, the “Atheists”) filed a lawsuit in federal district court in Kentucky seeking a court order enjoining the IRS Commissioner from enforcing certain provisions of the Internal Revenue Code that the Atheists claimed were preferentially applied to churches and religious organizations. According to the Atheists, the tax code treats religious organizations more favorably than nonreligious charities, and this favorable treatment represents an unconstitutional preference for religion in violation of the First Amendment’s prohibition of an establishment of religion.

Although the Atheists did not specifically identify the statutes and regulations they were challenging, the court surmised that the following provisions of the tax code probably were the ones the Atheists were challenging:

The Atheists’ lawsuit asserted that the tax code’s differing treatment of churches violates the Fifth Amendment’s guaranty of the equal protection of law and the First Amendment’s ban on any establishment of religion. The Atheists asked the court to issue a judgment “declaring that all tax code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations of the Equal Protection of the Laws required pursuant to the Due Process Clause of the Fifth Amendment . . . ​and the Establishment Clause of the First Amendment of Constitution of the United States of America; and enjoining the IRS from continuing to allow preferential treatment of religious organizations and churches.”

The federal government, which is tasked with the responsibility of defending against challenges to federal laws, including the tax code, asked the court to dismiss the Atheists’ lawsuit on the technical ground that the Atheists lacked “standing” to litigate in federal court.

Standing is a technical requirement in any federal court lawsuit and derives from Article III of the United States Constitution, which confines the judicial power of the federal courts to actual “cases” or “controversies.” It has been described by the United States Supreme Court as follows: “The party who invokes the power [of the federal courts] must be able to show not only that the statute is invalid, but that he has sustained or is immediately in danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers in some indefinite way in common with people generally.” Doremus v. Board of Ed. of Hawthorne, 342 U.S. 429 (1952).

The court concluded that the Atheists failed to allege any direct injury that could establish standing to prosecute their claims. It noted that their assertion that they would not qualify as a church or religious organization was mere speculation. The court referred to several cases where state and federal law have recognized nontheist organizations as tax-exempt religious organizations and noted that “a review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning.” As a result, “the Atheists’ assertion that they are subjected to unconstitutional discrimination and coercion due to their alleged inability to gain classification as religious organizations or churches under section 501(c)(3) is mere speculation.”

The Atheists claimed that they had a special kind of standing, known as “taxpayer standing,” that did not require proof of direct injury. In general, taxpayers lack standing to challenge federal laws based on their status as taxpayers since their “injury” is too remote. But the United States Supreme Court carved out a narrow exception in 1968 in cases challenging legislation on the basis of the First Amendment’s nonestablishment of religion clause. Taxpayers have standing in such cases to challenge direct transfers of tax revenue to religious organizations since “the taxpayer’s allegation in such cases would be that his tax money is being extracted and spent in violation of specific constitutional protections against such abuses of legislative power.” Flast v. Cohen, 392 U.S. 83 (1968).

The Kentucky court concluded that the Atheists lacked taxpayer standing:

Each year, tens of thousands of organizations file individual applications with the IRS for recognition of tax-exempt status. But for more than 70 years, the IRS has also had procedures permitting certain affiliated organizations to obtain recognition of their exemption on a group basis rather than by filing separate applications. Under the group procedure, an organization (called the central organization) submits a request for recognition of exemption for a group of organizations that are affiliated with it and under its general supervision and control (called the subordinate organizations). If the IRS grants this request, the central organization is authorized to add other similar subordinates to the group as well as to delete subordinates that no longer meet the group exemption requirements. As a result of the group exemption procedure, subordinate organizations covered by group exemptions are relieved from filing their own individual applications for recognition of exemption with the IRS.

Group exemptions are an administrative convenience for both the IRS and organizations with many affiliated organizations. Subordinates in a group exemption do not have to file, and the IRS does not have to process, separate applications for exemption. Consequently, subordinates do not receive individual exemption letters.

Exempt organizations that have, or plan to have, related organizations that are very similar to each other may apply for a group exemption. Groups of organizations with group exemption letters have a “head” or main organization, referred to as a central organization. The central organization generally supervises or controls many affiliates, called subordinate organizations. The subordinate organizations typically have similar structures, purposes, and activities.

To qualify for a group exemption, the central organization and its subordinates must have a defined relationship. Subordinates must be

In 1980 the IRS issued Revenue Procedure 80-27, which sets forth the rules for obtaining a group exemption. Basically, the central organization submits a letter to the IRS on behalf of itself and its subordinates. The letter should include the following:

Upon receipt of a request for group exemption, the IRS first determines whether the central organization and the existing subordinates qualify for tax exemption.

Once the IRS grants the exemption, the central organization is responsible for the following:

Annual updates must contain the following:

With limited exceptions, churches are subject to the same general requirements on group rulings as other organizations. However, churches are not required to file annual updates notifying the IRS of changes in the composition of the group.

Currently, there are more than 4,300 group exemptions covering some 500,000 subordinate organizations. These statistics do not include church group exemptions because they are not required to file annual information reports with the IRS regarding additions and deletions of subordinate organizations from their group exemptions. Some church group exemptions cover thousands and even tens of thousands of subordinate organizations. The IRS Advisory Committee on Tax Exempt and Government Entities (ACT) estimates that there are 100,000 to 150,000 churches covered by group exemptions.

The central organization that holds a group exemption (rather than the IRS) determines which organizations are included as subordinates under its group exemption ruling. Therefore, you can verify that an organization is a subordinate under a group exemption ruling by consulting the official subordinate listing approved by the central organization or by contacting the central organization directly. You may use either method to verify that an organization is a subordinate under a group exemption ruling.

Subordinate units that are included in group exemption letters are not listed separately in Tax Exempt Organization Search (Publication 78 data). Donors should obtain a copy of the group exemption letter from the central organization. The central organization’s listing in Tax Exempt Organization Search will indicate that contributions to its subordinate organizations covered by the group exemption ruling are also deductible, even though most subordinate organizations are not separately listed in Tax Exempt Organization Search or on the Exempt Organizations Business Master File. Donors should then verify with the central organization, by either of the methods indicated above, whether the particular subordinate is included in the central organization’s group ruling. The subordinate organization need not itself be listed in Tax Exempt Organization Search or on the EO Business Master File. Donors may rely on central organization verification about deductibility of contributions to subordinates covered in a Section 501(c)(3) group exemption ruling.

These two provisions, which were also contained in the prior version of Publication 4573 (2006), are of immense help to churches responding to requests for proof of their exempt status. Such requests come from a variety of sources, including banks, state and local government agencies, the postal service, and the IRS. In the past, the IRS annually mailed to every central organization a list of its subordinate organizations for verification and return. As of January 1, 2019, the IRS stopped providing these lists to central organizations because, as the IRS explained, the provision of such lists was not required and imposed a significant administrative burden upon it. This makes the above two clarifications in IRS Publication 4573 of critical importance since central organizations no longer have an annual letter from the IRS that can be used to verify the exempt status of its subordinates.

In May 2020, the IRS released Notice 2020-36, which contains substantial changes to the group exemption procedure set forth in Revenue Procedure 80-27. Among the changes and clarifications are the following:

The descriptions of general supervision and control apply only for purposes of “this proposed revenue procedure and § 1.6033-2(d) of the Treasury Regulations (relating to group returns).” This is a significant clarification since it will make it less likely that plaintiffs will succeed in holding churches and denominational agencies liable for the liabilities of subordinates on the basis of the requirement in the group exemption procedure that the central organization exercises “general supervision and control” over them.

Key Point: In 2019 and 2020, the IRS updated the group exemption procedure in significant ways.

Key Point: As of January 1, 2019, the IRS stopped mailing lists of parent and subsidiary accounts to central organizations (group exemption holders) for verification and return. Central organizations (except churches) must still comply with the annual reporting requirements in section 6 of Revenue Procedure 80-27. As noted in the Revenue Procedure, the required information must be submitted at least 90 days before the close of the central organization’s annual accounting period. So, for example, a central organization with a June 30, 2024, year end would submit its update by March 31. The required information includes the names, addresses, and employer identification numbers of subordinate organizations that have terminated, disaffiliated from the group, been added to the group, or changed names or addresses. If there are no changes, the central organization must submit a statement to that effect. Annual updates should be sent to the following address: Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201. With limited exceptions, churches are subject to the same general requirements relating to group rulings as other organizations. However, churches are not required to file annual updates notifying the IRS of changes in the composition of the group.

The IRS Tax Guide for Churches and Religious Organizations (Publication 1828) defines the term integrated auxiliary as follows:

Men’s and women’s organizations, seminaries, mission societies, and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirements. More guidance as to the types of organizations the IRS will treat as integrated auxiliaries can be found in the Code of Regulations, 26 CFR section 1.6033-2(h).

The same rules that apply to a church apply to the integrated auxiliary of a church, with the exception of those rules that apply to the audit of a church.

An organization meets the “affiliation” test in any one of the following three ways: (1) it is covered by a group exemption letter (see above); (2) it is operated, supervised, or controlled by or in connection with a church or convention or association of churches; or (3) relevant facts and circumstances show that it is so affiliated. Factors to be considered include the following:

The tax regulations clarify that “absence of one or more of the following factors does not necessarily preclude classification of an organization as being affiliated with a church or a convention or association of churches.”

An organization satisfies this requirement unless it both:

Four points should be noted:

The regulations provide the following examples:

In general, the philosophy of the tax code and regulations is that if an organization is internally supported by a church or religious denomination, there is no compelling reason why that organization should file annual information returns (Form 990) or an application for exemption from federal income tax (Form 1023). On the other hand, if an organization is not internally supported but instead is supported through public donations or the sale of products or services, then public accountability through returns and applications is necessary.

The income tax regulations specify that an organization that has been determined by the IRS to be exempt may rely upon such determination “so long as there are no substantial changes in the organization’s character, purposes, or methods of operation.” Treas. Reg. § 1.501(a)-1(a)(2). As a result, all exempt organizations are under a duty to notify the IRS of any substantial changes in character, purposes, or methods of operation.

Most organizations exempt from federal income tax must file an annual information return (IRS Form 990) with the IRS. The Form 990 requirement, and its application to religious organizations, is addressed under “Form 990 (Annual Information Returns)” on page [ref].

An exemption ruling or determination letter may be revoked or modified by a ruling or determination letter addressed to the organization or by a revenue ruling or other statement published in the Internal Revenue Bulletin. The revocation or modification may be retroactive if the organization omitted or misstated a material fact or operated in a materially different manner. Treas. Reg. § 601.201(n)(6)(i).

Loss of a church’s exempt status would have a variety of negative consequences, including:

Key Point: The Church Audit Procedures Act provides churches with a number of important protections in the event of an IRS inquiry or examination. However, there are some exceptions.

Section 7602 of the tax code gives the IRS broad authority to examine or subpoena the books and records of any person or organization for tax administration purposes. This authority applies to churches. See, e.g., United States v. Coates, 692 F.2d 629 (9th Cir. 1982); United States v. Dykema, 666 F.2d 1096 (7th Cir. 1981); United States v. Freedom Church, 613 F.2d 316 (1st Cir. 1979).

In 1984 Congress enacted the Church Audit Procedures Act to provide churches with important protections when faced with an IRS audit. The Act’s protections are contained in section 7611 of the tax code. Section 7611 imposes detailed limitations on IRS examinations of churches. The limitations can be summarized as follows.

Section 7611 uses the terminology church tax inquiries and church tax examinations instead of audits. A church tax inquiry is defined as any IRS inquiry to a church (with exceptions noted below) for the purpose of determining whether the organization qualifies for tax exemption as a church or whether it is carrying on an unrelated trade or business or is otherwise engaged in activities subject to tax. An inquiry is considered to commence when the IRS requests information or materials from a church of a type contained in church records.

The IRS may begin a church tax inquiry only if

As noted above, the IRS may begin a church tax inquiry only if “an appropriate high-level Treasury official” reasonably believes on the basis of written evidence that the church is not exempt (by reason of its status as a church), may be carrying on an unrelated trade or business, or is otherwise engaged in activities subject to taxation. The tax code defines an “appropriate high-level Treasury official” as “the Secretary of the Treasury or any delegate of the Secretary whose rank is no lower than that of a principal Internal Revenue officer for an internal revenue region.” IRC 7611(h)(7).

Note the following developments regarding this definition:

The church is allowed a reasonable period in which to respond to the concerns expressed by the IRS in its church tax inquiry. If the church fails to respond within the required time, or if its response is not sufficient to alleviate IRS concerns, the IRS may, generally within 90 days, issue a second notice, informing the church of the need to examine its books and records.

After the issuance of a second notice, but before the commencement of an examination of its books and records, the church may request a conference with an IRS official to discuss IRS concerns. The second notice will contain a copy of all documents collected or prepared by the IRS for use in the examination.

The IRS may begin a church tax examination of a church’s records or religious activities only under the following conditions: (1) the requirements of a church tax inquiry have been met; and (2) an examination notice is sent by the IRS to the church at least 15 days after the day on which the inquiry notice was sent, and at least 15 days before the beginning of such an examination, containing the following information: (a) a copy of the inquiry notice, (b) a specific description of the church records and religious activities which the IRS seeks to examine, (c) an offer to conduct an informal conference with the church to discuss and possibly resolve the concerns giving rise to the examination, and (d) a copy of all documents collected or prepared by the IRS for use in the examination, and the disclosure of which is required by the Freedom of Information Act.

KEY POINT If at any time during the inquiry process the church supplies information sufficient to alleviate the concerns of the IRS, the matter will be closed without examination of the church’s books and records.

Church records (defined as all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors) may be examined only to the extent necessary to determine the liability for and amount of any income, employment, or excise tax.

Example A federal district court in South Carolina rejected an attempt by a religious corporation to block IRS summonses seeking the production of the corporation’s bank records at eight banks. In rejecting the church’s argument, the court observed:

The court added that “occasional correspondence from the IRS that did not constitute church tax inquiries does not count” in applying the Church Audit Procedures Act’s prohibition of repeat inquiries addressing the same issue within a five-year period. Bible Study Time v. United States, 2017 WL 897818 (D.S.C. 2017).

Religious activities may be examined only to the extent necessary to determine whether an organization claiming to be a church is, in fact, a church.

The two-year limitation can be suspended (1) if the church brings a judicial proceeding against the IRS; (2) if the IRS brings a judicial proceeding to compel compliance by the church with any reasonable request for examination of church records or religious activities; (3) for any period in excess of 20 days (but not more than six months) in which the church fails to comply with any reasonable request by the IRS for church records; or (4) if the IRS and church mutually agree.

KEY POINT A federal appeals court ruled that the revocation of a church’s tax-exempt status by the IRS could not be challenged on the ground that the IRS’s examination of the church exceeded the two-year limit imposed by the Church Audit Procedures Act. The court noted that the Act specifies that “no suit may be maintained, and no defense may be raised in any proceeding . . . ​by reason of any noncompliance by the [IRS] with the requirements of this section.” Music Square Church v. United States, 2000-2 USTC ¶50,578 (Fed. Cir. 2000).

The IRS can make a determination, based on a church tax inquiry or church tax examination, that an organization is not a church that is exempt from federal income taxation, or that is qualified to receive tax-deductible contributions, or that otherwise owes any income, employment, or excise tax (including the unrelated business income tax), only if the appropriate regional legal counsel of the IRS determines in writing that there has been substantial compliance with the limitations imposed under section 7611 and approves in writing of such revocation of exemption or assessment of tax.

Church tax examinations involving tax-exempt status or the liability for any tax other than the unrelated business income tax may be begun only for any one or more of the three most recent taxable years ending before the examination notice date. For examinations involving unrelated business taxable income, or if a church is proven not to be exempt for any of the preceding three years, the IRS may examine relevant records and assess tax as part of the same audit for a total of six years preceding the examination notice date. For examinations involving issues other than revocation of exempt status or unrelated business taxable income (such as examinations pertaining to employment taxes), no limitation period applies if no return has been filed.

If any church tax inquiry or church tax examination is completed and does not result in a revocation of exemption or assessment of taxes, then no other church tax inquiry or church tax examination may begin with respect to such church during the five-year period beginning on the examination notice date (or the inquiry notice date if no examination notice was sent) unless such inquiry or examination is (1) approved in writing by the Assistant Commissioner of Employee Plans and Exempt Organizations of the IRS, or (2) does not involve the same or similar issues involved in the prior inquiry or examination. The five-year period is suspended if the two-year limitation on the completion of an examination is suspended.

Example A federal district court in South Carolina ruled that “occasional correspondence from the IRS that does not constitute church tax inquiries does not count” in applying the Church Audit Procedures Act’s prohibition of repeat inquiries addressing the same issue within a five-year period. Bible Study Time v. United States, 2017 WL 897818 (D.S.C. 2017).

The limitations on church tax inquiries and church tax examinations do not apply to

Example A married couple (the “pastors”) were employed as pastors of a church in Louisiana. The church is a nonprofit church corporation exempt from federal income taxation. The IRS assigned an agent to conduct an investigation of the pastors’ tax liability for the 2011 tax year. The pastors had not filed a federal income tax return for 2011 or any year since 1996. The agent examined the pastors’ bank accounts at three area banks and noted inconsistencies. He issued a summons to each of the three banks. The pastors filed a petition in a federal court to quash the summonses. The court noted that “Congress has endowed the IRS with broad authority to conduct tax investigations” and that for a summons to be enforceable under the so-called Powell test, the IRS must show that (1) the summons was issued for a legitimate purpose; (2) the sought-after information may be relevant to that purpose; (3) the IRS is not already in possession of the information; and (4) the IRS has followed the administrative steps required by the Internal Revenue Code.” United States v. Powell, 379 U.S. 48 (1964). The government’s burden under the Powell test is “slight or minimal” and “can be fulfilled by a ‘simple affidavit’ by the IRS agent issuing the summonses.” The court concluded that the IRS had satisfied all four factors under the Powell test. It quoted from a federal appeals court ruling: “Allowing the IRS access to information to determine the correct tax liability of the taxpayer, the church’s minister, does not restrict the church’s freedom to espouse religious doctrine nor to solicit members or support.” United States v. Grayson County State Bank, 656 F.2d 1070 (5th Cir. 1981).

In the past, the IRS did not apply the protections of section 7611 to employment tax inquiries in which it sought to determine a church’s compliance with payroll tax reporting requirements. However, in 2016 the IRS issued an internal memorandum “to provide clarification for and updates to [IRS examiners’] responsibilities regarding employment tax examinations of churches.” The IRS memo notes that “prior to this guidance memo [IRS agents] were instructed that section 7611 procedures do not apply to employment tax inquiries.” The IRS memo amends the Internal Revenue Manual with the insertion of the following new section 4.23.2.13(2): “Section 7611 procedures apply to employment tax inquiries. Examiners should not initiate any examinations on a church. If for some reason an employment tax examiner encounters a church employment tax issue, the examiner should immediately contact the Program Manager, Exam, Programs and Review (EPR) in TE/GE Exempt Organizations Examinations.”

The amendment is effective immediately and will be incorporated into the next revision of the Internal Revenue Manual.

For many years, the IRS asked Congress to provide a remedy other than outright revocation of exemption that it could use to combat excessive compensation paid by exempt organizations. In 1996 Congress responded by enacting section 4958 of the tax code. Section 4958 empowers the IRS to assess intermediate sanctions in the form of substantial excise taxes against insiders (called “disqualified persons”) who benefit from an excess benefit transaction.

Section 4958 also allows the IRS to assess excise taxes against a charity’s board members who approved an excess benefit transaction. These excise taxes are called “intermediate sanctions” because they represent a remedy the IRS can apply short of revocation of a charity’s exempt status. While revocation of exempt status remains an option whenever a tax-exempt organization enters into an excess benefit transaction with a disqualified person, it is less likely that the IRS will pursue this remedy now that intermediate sanctions are available.

The tax regulations specify that

If the IRS has not complied substantially with (1) the notice requirements, (2) the requirement that an appropriate high-level Treasury official approve the commencement of a church tax inquiry, or (3) the requirement of informing the church of its right to an informal conference, the church’s exclusive remedy is a stay of the inquiry or examination until such requirements are satisfied.

The fact that the IRS has authority to examine church records and the religious activities of a church or religious denomination does not necessarily establish its right to do so. The courts have held that an IRS summons or subpoena directed at church records must satisfy the following conditions to be enforceable.

Good faith in this context means that (1) the investigation will be conducted pursuant to a legitimate purpose; (2) the inquiry is necessary to that purpose; (3) the information sought is not already within the IRS’s possession; and (4) the proper administrative steps have been followed. In United States v. Powell, 379 U.S. 48 (1964), the United States Supreme Court held that in order to obtain judicial enforcement of a summons or subpoena, the IRS must prove “that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already in the Commissioner’s possession, and that the administrative steps required by the tax code have been followed.” Powell did not involve an IRS examination of church records. In United States v. Holmes, 614 F.2d 985 (5th Cir. 1980), a federal appeals court held that section 7605(c) narrowed the scope of the second part of the Powell test from mere relevancy to necessity in the context of church records since it required that an examination of church records be limited “to the extent necessary.” The “necessity test” should apply to church inquiries or examinations conducted under section 7611 since the same language is employed. United States v. Church of Scientology, 90-2 U.S.T.C. ¶ 50,349 (D. Mass. 1990).

An IRS subpoena will not violate a church’s First Amendment rights unless it substantially burdens a legitimate and sincerely held religious belief and is not supported by a compelling governmental interest that cannot be accomplished by less restrictive means. This is a difficult test to satisfy, not only because few churches can successfully demonstrate that enforcement of an IRS summons or subpoena substantially burdens an actual religious tenet, but also because the courts have ruled that maintenance of the integrity of the government’s fiscal policies constitutes a compelling governmental interest that overrides religious beliefs to the contrary. See, e.g., St. German of Alaska Eastern Orthodox Catholic Church v. Commissioner, 840 F.2d 1087 (2nd Cir. 1988); United States v. Coates, 692 F.2d 629 (9th Cir. 1982); United States v. Life Science Church of America, 636 F.2d 221 (8th Cir. 1980); United States v. Holmes, 614 F.2d 895 (5th Cir. 1980); United States v. Freedom Church, 613 F.2d 316 (1st Cir. 1979).

See generally United States v. Coates, 692 F.2d 629 (9th Cir. 1982); United States v. Grayson County State Bank, 656 F.2d 1070 (5th Cir. 1981); EEOC v. Southwestern Baptist Theological Seminary, 651 F.2d 277 (5th Cir. 1981) (application of 1964 Civil Rights Act’s reporting requirements to seminary did not violate First Amendment).

Federal law provides that if the IRS wants to retroactively revoke the tax-exempt status of a church, it must show either that the church “omitted or misstated a material fact” in its original exemption application or that the church has been “operated in a manner materially different from that originally represented.” Treas. Reg. 601.201(n)(6)(i).

Although IRS authority to examine and subpoena church records is broad, it has limits. To illustrate, one subpoena was issued against all documents relating to the organizational structure of a church since its inception; all correspondence files for a three-year period; the minutes of the officers, directors, trustees, and ministers for the same three-year period; and a sample of every piece of literature pertaining to the church. United States v. Holmes, 614 F.2d 985 (5th Cir. 1980). See also United States v. Trader’s State Bank, 695 F.2d 1132 (9th Cir. 1983) (IRS summons seeking production of all of a church’s bank statements, correspondence, and records relating to bank accounts, safe deposit boxes, and loans held to be overly broad). A court concluded that this subpoena was “too far reaching” and declared it invalid. It noted, however, that a “properly narrowed” subpoena would not violate the First Amendment. Another federal court that refused to enforce an IRS subpoena directed at a church emphasized that “the unique status afforded churches by Congress requires that the IRS strictly adhere to its own procedures when delving into church activities.” United States v. Church of Scientology of Boston, 739 F. Supp. 46 (D. Mass. 1990).

The court also stressed that the safeguards afforded churches under federal law prevent the IRS from “going on a fishing expedition into church books and records.”

The limitations of section 7611 are illustrated by the following examples.

Some church leaders have pondered the use of separate corporations for one or more of the following reasons:

Key Point: In some cases, use of a title-holding corporation will not succeed in insulating the exempt organization from liability. While it is true that a title-holding corporation, like any corporation, generally is responsible for its own liabilities and obligations, it is also true that if a sufficient “unity of interest” exists between the exempt organization and its title-holding corporation, a plaintiff may be able to “pierce the corporate veil” and make the exempt organization responsible for the obligations and liabilities of the title-holding corporation. Courts generally will pierce the corporate veil only in extreme cases. It is reserved for those cases in which the officers or directors utilized the corporate entity as a sham to perpetuate a fraud, to shun personal liability, or to encompass other truly unique situations. Several factors may persuade a court to pierce the corporate veil, including (1) failure by the title-holding corporation to follow corporate formalities (meetings, etc.); (2) undercapitalization of the title-holding corporation; (3) commingling of assets; and (4) common management.

For many years the tax code has exempted certain title-holding corporations from federal income taxation. This exemption originally was created to overcome state laws prohibiting charities from holding title to property, although in more recent years the objective has increasingly been protection against legal liability.

Currently, title-holding companies are recognized as exempt under sections 501(c)(2) and 501(c)(25) of the federal tax code. Section 501(c)(2) provides for recognition of exemption of single-parent title-holding companies, and section 501(c)(25) describes multiple-parent title-holding companies. Each section is described below.

Section 501(c)(2) of the tax code provides that “corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to [a tax-exempt organization]” qualify for tax-exempt status. The IRS has observed:

The following rules apply to section 501(c)(2) title-holding corporations:

Permitting title-holding corporations to invest in real estate implies that they can earn income by renting this real estate to the general public. An IRS revenue ruling describes a corporation that held title to a building containing offices that were rented to the general public. The corporation collected the rents, paid the expenses incurred in operating and maintaining the building, and turned over the remainder to a parent charitable organization. The title-holding company rendered no substantial services to the tenants other than normal maintenance of the building and grounds. The IRS concluded that income from renting offices to the general public did not preclude exemption under section 501(c)(2). Note that the title-holding corporation itself collected the rent, paid the expenses, and provided normal maintenance services. There is no requirement that a title-holding corporation hire a management company to carry out these activities. Revenue Ruling 69-381.

IRS Publication 598 states: “When an exempt title-holding corporation, described in section 501(c)(2), pays any of its net income to an organization that itself is exempt from tax under section 501(a) [such as a church or a convention or association of churches] and files a consolidated return with that organization, the title-holding corporation is treated, for unrelated business income tax purposes, as organized and operated for the same purposes as the exempt organization. Thus, a title-holding corporation whose source of income is related to the exempt purposes of the payee organization is not subject to the unrelated business income tax if the title-holding corporation and the payee organization file a consolidated return. However, if the source of the income is not so related, the title-holding corporation is subject to unrelated business income tax.”

While title-holding corporations are eligible for exemption from federal income taxation, they may be subject to a franchise tax in some states.

Congress added section 501(c)(25) to the tax code in 1986. In enacting this section, Congress allowed certain pension trusts, governmental entities, and 501(c)(3) organizations wider latitude to pool their resources in their real property investments than permitted for section 501(c)(2) title-holding companies. Even though the purpose of section 501(c)(25) was to recognize title-holding companies with multiple parents as exempt from federal tax, the vast majority of section 501(c)(25) applicants have a single parent.

Section 501(c)(25) specifies that a corporation or trust may qualify for tax-exempt status if it has no more than 35 shareholders or beneficiaries; has only one class of stock or beneficial interest; and is organized for the exclusive purposes of acquiring, holding title to, and collecting income from real property and remitting the entire amount of income from such property (less expenses) to one or more organizations described in section 501(c)(25)(C) (including religious and other organizations, government entities, and pension funds).

The following rules apply to section 501(c)(25) title-holding corporations:

Section 502 of the tax code specifies that “an organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501.” However, section 502(b) excludes various types of activities from the term trade or business, including “the deriving of rents” that would be excluded from unrelated business taxable income (UBTI) under section 512(b)(3) of the tax code. Section 512(b)(3) excludes from UBTI “all rents from real property,” subject to various exceptions. Section 512(b)(4) provides, however, that notwithstanding this exclusion, rents from “debt-financed property” are included in UBTI.

Church leaders may wish to consult with an attorney to explore the feasibility and possible advantages of using a title-holding corporation for one or more of the reasons mentioned above. Given the complexity of such an arrangement, it is essential that church leaders retain an attorney with experience in creating title-holding corporations.

Key Point: Limited liability corporations (LLCs) are another device used by some charities to insulate themselves from liability for the obligations of affiliated entities. This is another option that should be considered along with title-holding corporations.

Prior to 1950, a growing number of tax-exempt organizations were engaged in profitable business activities in competition with taxable organizations. In some cases these business activities had little or no relation to the exempt organization’s purposes other than the production of revenue to carry out those purposes. This led Congress, in the Revenue Act of 1950, to impose a tax—the unrelated business income tax (UBIT)—on the unrelated business income of certain otherwise exempt organizations. The Report of the Senate Finance Committee stated the purpose of the new tax as follows:

The Revenue Act of 1950 exempted certain organizations from the unrelated business income tax provisions, including churches and conventions or associations of churches. However, it soon became apparent that many of the exempted organizations were engaging, or were apt to engage, in unrelated business. For example, churches were involved in various types of commercial activities, including publishing houses, hotels, factories, radio and television stations, parking lots, newspapers, bakeries, and restaurants. Congress responded in the Tax Reform Act of 1969 by subjecting almost all exempt organizations, including churches and conventions or associations of churches, to the tax on unrelated business income. IRC 511(a)(2)(A). Accordingly, for taxable years beginning after December 31, 1969, churches and conventions or associations of churches became subject to the tax on unrelated business income.

Key Point: An organization determines its unrelated business taxable income by subtracting from its gross unrelated business income deductions directly connected with the unrelated trade or business. In determining unrelated business taxable income, an organization that operates multiple unrelated trades or businesses aggregates income from all such activities and subtracts from the aggregate gross income the aggregate of deductions. As a result, an organization may use a deduction from one unrelated trade or business to offset income from another, thereby reducing total unrelated business taxable income. The Tax Cuts and Jobs Act of 2017 included a provision, effective for 2018 and future years, clarifying that a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year.

The tax code specifies that if an exempt organization acquires real property mainly to use it for exempt purposes within 10 years, it will not be treated as debt-financed property if it is in the neighborhood of other property that the organization uses for exempt purposes and if the intent to use the property for exempt purposes within 10 years is not abandoned. This exception to the definition of debt-financed property is referred to as the “neighborhood land rule.” IRC 514(b)(3).

The neighborhood land rule does not apply to property 10 years after its acquisition. Further, the rule applies after the first five years only if the organization satisfies the IRS that use of the land for exempt purposes is reasonably certain before the 10-year period expires. The organization need not show binding contracts to satisfy this requirement, but it must have a definite plan detailing a specific improvement and a completion date, and it must show some affirmative action toward the fulfillment of the plan. This information should be forwarded to the following address for a ruling at least 90 days before the end of the fifth year after acquisition of the land:

If using private delivery service, use the following address:

The income tax regulations authorize the IRS to grant a reasonable extension of time for requesting the ruling if the organization can show good cause. Treas. Reg. § 1.9100-1. If the neighborhood land rule does not apply because the acquired land is not in the neighborhood of other land used for an organization’s exempt purposes or because the organization fails to establish after the first five years of the 10-year period that the property will be used for exempt purposes, but the land is used eventually by the organization for its exempt purposes within the 10-year period, the property is not treated as debt-financed property for any period before the conversion.

The neighborhood land rule applies to churches and associations and conventions of churches, but with two important differences:

As a result, if a church or an association or convention of churches acquires real property for the primary purpose of using the land in the exercise or performance of its exempt purposes, beginning within 15 years after the time of acquisition, the property is not treated as debt-financed property as long as the organization does not abandon its intent to use the land in this manner within the 15-year period.

This exception for a church or association or convention of churches does not apply to any property after the 15-year period expires. Further, this rule will apply after the first five years of the 15-year period only if the church or convention or association of churches establishes to the satisfaction of the IRS that use of the acquired land in furtherance of the organization’s exempt purposes is reasonably certain before the 15-year period expires. IRS Letter Ruling 9603019.

If a church or an association or convention of churches (for the period after the first five years of the 15-year period) cannot establish to the satisfaction of the IRS that use of acquired property for its exempt purpose is reasonably certain within the 15-year period, but the land is, in fact, converted to an exempt use within the 15-year period, the land is not to be treated as debt-financed property for any period before the conversion. The same rule for demolition or removal of structures (discussed below) applies to a church or an association or convention of churches.

A church purchased an adjacent apartment building with the intent to demolish it after the mortgage loan was paid off and to build a parking lot for the additional spaces needed for its congregation. Rental income received from the apartment building would be used to help defray the cost of demolition and paving. The church expected that in the next few years after the mortgage was paid off, it would use the parking lot exclusively for its members. The church asked the IRS for a ruling that the neighborhood land rule resulted in none of the rental income being subject to the unrelated business income tax.

The IRS agreed and granted the ruling. It noted that rental income from debt-financed property generally is subject to the unrelated business income tax. But under the neighborhood land rule, if a church acquires property for the purpose of using it in the exercise of its exempt purpose within 15 years of the time of acquisition, the property will not be treated as debt-financed property so long as the church does not abandon its intent to use the land in such a manner within the 15-year period. Further, the neighborhood land rule applies after the first five years of the 15-year period only if the church establishes to the satisfaction of the IRS that future use of the acquired land in furtherance of its exempt purpose before the expiration of the 15-year period is reasonably certain. This information must be forwarded to the IRS for a ruling at least 90 days before the end of the fifth year after acquisition of the land. The IRS concluded:

A church purchased two adjacent parcels of land with debt financing. The land had no structures other than a ground-level parking lot. The church used the land in part for church parking. It also leased the property to a company under a 10-year lease for public parking during periods (most of the week) when the church was not in session. The rent payments were a flat fee. The lessee was responsible for paving, lighting, and cleaning. The church purchased the land for church expansion. Its proposed plans called for constructing a building that would be used for church activities. The church submitted a letter to the IRS asking for a ruling that the property would be exempt from the unrelated business income tax based on the neighborhood land rule. The IRS issued a ruling in which it concluded:

A church purchased a tract of land one mile from its main location to facilitate future programs and activities. The property included two buildings. The church developed a plan to construct an additional building on the property for church activities. Architectural plans were approved, and a formal fund-raising campaign was launched. The church asked the IRS for a ruling to the effect that rental income it received from the two buildings on the property was exempt from the unrelated business income tax as a result of the neighborhood land rule. The IRS concluded that the neighborhood land rule applied:

The IRS ruling stressed:

A church purchased property for future expansion. The property was paid for with a loan secured by a mortgage on the property. For the first five years, the church rented the property to four separate tenants under three-year leases. Four years after the purchase, the church’s long-range planning committee awarded a contract to an architectural firm to conduct a space-and-facilities study of the property to determine how it could be used to fulfill long-range needs. One year later, the committee accepted the firm’s new plan. The scheduled completion date for the renovation and conversion of the property was 12 years after purchase.

According to the plan, the church would build a retreat center on the property. The first floor would provide spaces for classes, lectures, study groups, and other events. The second floor would provide private apartments for visiting pastors and retreat guests. Although the existing structure on the property was not a registered historic landmark, any changes were subject to local review and approval. Since the local review board preferred renovation to demolition of historic structures, the plan recommended refurbishing the front, adding new construction, and only demolishing the rear of the existing building.

Within 90 days prior to the fifth year after acquisition of the property, the church submitted a request to the IRS for a ruling that the rental income from its debt-financed property would be exempt from the unrelated business income tax because of the neighborhood land rule. The IRS ruled that the neighborhood land rule did not apply after the fifth year:

A church purchased land using debt financing in the neighborhood of its existing facility in order to build a larger facility. The land consisted of several acres of land that was undeveloped except for two small buildings. The church borrowed funds to buy the land. It rented a portion of the property for cattle grazing and received royalty payments from a lease of mineral rights to an oil company. The church asked the IRS for a ruling that the neighborhood land rule applied, and therefore the rental and royalty income the church received from its debt-financed property was not subject to the unrelated business income tax.

A church congregation is growing rapidly. The church purchases property as a site for a future facility. The property consists of 10 acres of land and a building. The purchase price was $100,000. The church plans to construct a new sanctuary on the property within three years. The church later changes its plans and purchases a different tract of land. It sells the 10-acre tract for $150,000. At the time of sale, the property had a mortgage debt of $80,000. Is the gain from the sale of this property subject to the unrelated business income tax? No, because of the neighborhood land rule. If a church acquires real property with the intention of using the land for exempt purposes within 15 years, it will not be treated as debt-financed property, regardless of whether it is in the neighborhood of other property that the church uses for exempt purposes. As noted below, this rule applies only if the church intends to demolish any existing structures and use the land for exempt purposes within 15 years and this intent is not abandoned.

A church purchases a home at the edge of its parking lot so it can later demolish the home to expand the parking lot if the need arises. The home cost $100,000, and the church paid this amount without incurring any indebtedness. The church begins renting the home to a family. Is rental income received by the church subject to the unrelated business income tax? No. Rental income is exempted from the definition of unrelated business income, except for rental income received from the rental of debt-financed property. Since the home is not debt-financed, the rental income is not taxable.

Same facts as the previous example, except that the church borrowed $75,000 from a bank to purchase the home. While rental income from debt-financed property generally is subject to the unrelated business income tax, an exception is made if a church intends to use the property for exempt purposes within 15 years (and this exempt use will require the demolition of any structure on the property). This is the so-called neighborhood land rule. Note, however, that the neighborhood land rule applies after the first five years following acquisition of the property only if the church satisfies the IRS that use of the land for exempt purposes is reasonably certain before the 15-year period expires. The church need not show binding contracts to satisfy this requirement; but it must have a definite plan detailing a specific improvement and a completion date, and it must show some affirmative action toward the fulfillment of the plan. This information should be forwarded to the IRS (to the address noted above) for a ruling at least 90 days before the end of the fifth year after acquisition of the property.

A church purchased three parcels of land with the intent to use the land for its exempt purposes. Since its acquisition of the properties, the church engaged in various planning and improvement activities demonstrating that it had not abandoned its initial intent for the use of the land. The church’s current plan anticipates that each existing structure will be demolished as required by section 514(b)(3)(C)(i) of the tax code, and construction of a new facility, parking, and grounds improvements will begin within the next four to seven years. If an organization abandons its intent to demolish existing structures and use the land in furtherance of exempt purposes, the land will be treated as debt-financed property. The church has already demolished one of the three buildings and begun to use the property on which it was situated for the exempt purposes of the church, specifically as an outside gathering space for children’s camps, open-air classrooms, a meditation garden, and other activities. The church has also engaged an engineering company and consulted with at least one construction company regarding demolition of the remaining structures and the development of the properties. The church has started a capital drive to reduce outstanding debt and set target dates for future capital drives to support construction and grounds work. The church-approved plan provides that the new, expanded church facilities will be completed and placed into service before the expiration of the 15-year period commencing on the date of acquisition of these properties.

The church asked the IRS for a ruling that the acquired land will not be treated as debt-financed property under section 514(b) of the Code for 15 years from the date of acquisition, because the land qualifies for the neighborhood land use exception set forth under section 514(b)(3). The IRS granted the requested ruling. It concluded:

The neighborhood land rule applies to any structure on the land when acquired only so long as the intended future use of the land in furtherance of the organization’s exempt purpose requires that the structure be demolished or removed in order to use the land in this manner. Thus, during the first five years after acquisition (and for later years if there is a favorable ruling), improved property is not debt-financed so long as the organization does not abandon its intent to demolish the existing structures and use the land in furtherance of its exempt purpose. If an actual demolition of these structures occurs, the use made of the land need not be the one originally intended as long as its use furthers the organization’s exempt purpose.

The neighborhood land rule does not apply to structures erected on land after its acquisition.

When the neighborhood land rule does not initially apply but the land is used eventually for exempt purposes, a refund or credit of any overpaid taxes will be allowed for a prior tax year. A claim must be filed within one year after the close of the tax year in which the property is actually used for exempt purposes.

The tax regulations contain the following examples illustrating the demolition rule (noting these involve a university, so a 10-year period applies; for churches, the period is 15 years):

An exempt university acquires a contiguous tract of land on which there is an apartment building. The university intends to demolish the apartment building and build classrooms and does not abandon this intent during the first four years after acquisition. In the fifth year after acquisition it abandons the intent to demolish and sells the apartment building. Under these circumstances, such property is not debt-financed property for the first four years after acquisition even though there was no eventual demolition or use made of such land in furtherance of the university’s exempt purpose. However, such property is debt-financed property as of the time in the fifth year that the intent to demolish the building is abandoned and any gain on the sale of the property is subject to section 514.

Assume the facts as stated in the previous example except that the university did not abandon its intent to demolish the existing building and construct a classroom building until the eighth year after acquisition when it sells the property. Assume further that the university did not receive a favorable ruling that future use in furtherance of its exempt purpose before the expiration of the 10-year period is reasonably certain. Under these circumstances, the building is debt-financed property for the sixth, seventh, and eighth years. It is not, however, treated as debt-financed property for the first five years after acquisition.

Assume the facts as stated in the previous example except that the university received a favorable ruling that future exempt use before the expiration of the 10-year period is reasonably certain. Under these circumstances, the building is not debt-financed property for the first seven years after acquisition. It only becomes debt-financed property as of the time in the eighth year when the university abandoned its intent to demolish the existing structure.

Assume that a university acquired a contiguous tract of land containing an office building for the principal purpose of demolishing the office building and building a modern dormitory. Five years later the dormitory has not been constructed, and the university has failed to satisfy the IRS that the office building will be demolished and the land will be used in furtherance of its exempt purpose and consequently has failed to obtain a favorable ruling. In the ninth taxable year after acquisition, the university converts the office building into an administration building. Under these circumstances, during the sixth, seventh, and eighth years after acquisition, the office building is treated as debt-financed property because the office building was not demolished or removed. Therefore, the income derived from such property during these years shall be subject to the tax on unrelated business income.

Assume the facts as stated in the previous example except that instead of converting the office building to an administration building, the university demolishes the office building in the ninth taxable year after acquisition and then constructs a new administration building. Under these circumstances, the land would not be considered debt-financed property for any period following the acquisition, and the university would be entitled to a refund of taxes paid on the income derived from such property for the sixth through eighth taxable years after the acquisition.

The second limitation on the exemption of dividends, interest, annuities, royalties, capital gains and losses, and rents from the tax on unrelated business income relates to the interest, annuities, royalties, and rents of organizations that are controlled by a tax-exempt organization. Under section 512(b)(13) of the tax code, the exclusion of interest, annuities, royalties, and rents from the definition of unrelated business income does not apply if such amounts are derived from organizations that are controlled by a church or other tax-exempt organization. When a tax-exempt organization controls another organization, the interest, annuities, royalties, and rents from the controlled organization are taxable to the controlling organization at a specific ratio, depending on whether the controlled organization is exempt or nonexempt. All deductions directly connected with amounts included in an organization’s gross income under this provision are allowed.

The organization from which the interest, annuities, royalties, and rents are received is called the controlled organization, and the exempt organization receiving these amounts is called the controlling organization. In the case of a nonstock organization, the term control means that at least 80 percent of the directors or trustees of such organization are either representatives of or directly or indirectly controlled by the controlling organization. A trustee or director is controlled by an exempt organization if the organization has the power to remove the trustee or director and designate a new trustee or director.

When the controlled organization is an exempt organization, the interest, annuities, royalties, and rents received by the controlling organization are includible in its unrelated business taxable income in the same ratio as the ratio of the controlled organization’s unrelated business taxable income to its taxable income determined as if the exempt controlled organization were not tax-exempt.

Some churches rent spaces in their parking lot to patrons of neighboring businesses during the week. Other churches have constructed storage units on their property and rent excess units to the public. Is the rental income from such activities subject to the unrelated business income tax? Does it matter that the church owns the property debt-free? The answer to these questions is contained in the following tax regulation:

This regulation clearly removes payments for the use of parking lot spaces from the definition of rental income, and therefore such payments are not exempt from unrelated business income tax on that basis. In addition, the IRS has applied this regulation to rental income from storage units. Consider the following example.

A charity provided storage rental units on its property. It insisted that the rental income it earned was not taxable, since the property was owned debt-free. The IRS disagreed:

Note: The IRS Tax Guide for Churches and Religious Organizations (Publication 1828) clarifies that income from the rental of spaces in a church parking lot is taxable only if spaces are used by the general public. If, instead, a church charges its own members a fee for using its parking lot, these payments would not be taxable. The Guide explains that fees from a lot used by the general public are taxable (not substantially related to exempt purposes and not treated as rent from real property), but rent paid by a third-party operator under a lease of the church’s lot would be excluded as rent from real property.

Practice tips

Core rule: For works created by employees within the scope of employment, the employer (church) is the author and copyright owner unless a signed writing says otherwise (17 U.S.C. §201(b)).

Scope of employment test (Restatement factors): the work is the kind the employee is hired to do; created substantially during authorized time/at workplace; and motivated, at least in part, to serve the employer.

If the church keeps the IP and earns royalties:

Governance & compliance watch-outs

Quick checklist for churches

In summary, the following activities ordinarily are exempt from state unemployment taxes:

KEY POINT: Some churches that operate private schools have separately incorporated them in order to reduce the church’s risk of liability. Unfortunately, separate incorporation will have little effect on the church’s liability for the obligations of the school—unless the church relinquishes control of the school. If a church is willing to relinquish control, then the school becomes largely independent. This has a number of consequences, including the following: (1) liability of the church is reduced; and (2) employees of the school are not covered by federal or state unemployment law in most states.

Little doubt exists regarding the exemption of buildings used exclusively for religious worship. Every state exempts such buildings from taxation. To illustrate, many state laws exempt “houses of religious worship.” Others exempt “places used for religious worship” or “buildings for religious worship” or “property used exclusively for worship.” Many states simply exempt all property used exclusively for religious purposes or religious worship. Such an exemption certainly is broad enough to include buildings used for religious worship.

Questions may arise, however, in several ways, including the following:

Some or all of these questions may not be addressed in an exemption statute, and this can lead to confusion and even litigation. Each of these issues is addressed below.

How much of the property surrounding a church sanctuary is exempt from taxation? Many statutes do not address this issue directly but rather exempt all property used exclusively for religious purposes. Some statutes simply state that the “grounds” or land adjacent or appurtenant to the sanctuary are exempt, without any attempt to clarify how much land is contemplated by the exemption. Other statutes clarify that the land surrounding the sanctuary is exempt to the extent that it is reasonably necessary to the accomplishment of the church’s purposes. A few statutes specify how much of a church’s property is exempt. For example, one state constitution specifies that up to one-half acre is exempt in cities or towns, and up to two acres “in the country.” Other state laws exempt church grounds up to five acres, 15 acres, 30 acres, and 320 acres.

Churches occasionally rent a portion of their property. Does this affect the exempt status of the property? Some statutes specify that church property is not eligible for exempt status if it is rented or otherwise used for commercial, investment, or other nonexempt purposes. The same result may be presumed under state laws exempting property that is used exclusively for religious purposes. Other states recognize the “partial exemption” rule, under which the rental of a portion of exempt property does not affect the exempt status of the entire property but only of that portion actually rented. This rule is summarized in the following subsection. A few courts have concluded that the existence of rental income does not necessarily affect the exempt status of church-owned property. University Christian Church v. City of Austin, 724 S.W.2d 94 (Tex. App. 1986) (a church rented two of its parking lots).

Many states recognize the “partial exemption” rule. Under this rule, property that is used in part for exclusively religious purposes is entitled to a partial exemption based on the percentage of use or occupancy that is devoted to an exempt use. The rule is based on statute in some states and upon judicial decisions in others. To illustrate, one state statute specifies:

Another statute provides: “If any portion of such real property is not so used exclusively to carry out thereupon one or more of such purposes but is leased or otherwise used for other purposes, such portion shall be subject to taxation and the remaining portion only shall be exempt.”

Several courts have recognized the principle of partial exemption. On the other hand, a few courts have ruled that if any part of a building is used for commercial purposes, the entire facility is subject to tax.

Is a church building under construction exempt from property taxes? Unfortunately, few statutes address this question directly. One statute specifies that “all grounds and buildings used or under construction by . . . ​religious institutions and societies” (emphasis added) are exempt from tax. Another statute specifies:

Some churches lease the property they use for worship services and other activities. Does the fact that a church leases the property it uses qualify the property for exemption from tax? Most property tax exemption statutes only apply to property that is owned by a church or other specified charity. The fact that a church leases property does not ordinarily render the property exempt from tax. Some statutes refer to property that is used for religious purposes. Property leased by a church for religious purposes may qualify for exemption under such a statute.

Some churches have separate buildings that are used for the church’s youth ministries. Such buildings may be exempt from property taxes.

A parsonage is a church-owned property used as a residence by a minister. Many states exempt such properties from taxation. Some states impose restrictions on the exemption. For example, a few states exempt parsonages only up to a specified dollar value, exempt only one parsonage for each church, or exempt the grounds surrounding a parsonage only up to a specified area. The exemption does not extend to residences owned by ministers themselves. To illustrate, one court ruled that a parsonage was no longer entitled to exemption after the church sold it to its minister. Watts v. Board of Assessors, 414 N.E.2d 1003 (Mass. 1981). The minister had title to the parsonage conveyed to himself and his wife as trustees of the church with the understanding that if he ever relocated, the church would buy the property back by paying him the purchase price he had paid plus the appreciation value. The court concluded that the “parsonage” was owned by a private individual, not by the church, and therefore was not entitled to exemption.

A few courts have ruled that church-owned parsonages may be exempt from property taxation even though they enjoy no specific statutory exemption. For example, one court concluded that a church-owned parsonage that served various religious purposes, such as a meeting place for church groups and a place for providing religious services, including pastoral counseling, was exempted from taxation by the general exemption of property used exclusively for religious purposes. Immanuel Baptist Church v. Glass, 497 P.2d 757 (Okla. 1972). But several other courts have ruled that parsonages are taxable unless they are specifically exempted. Salt Lake County v. Tax Commission ex rel. Good Shepherd Lutheran Church, 548 P.2d 630 (Utah 1976).

In general, to be exempt from property taxation, a parsonage must be actually and exclusively used as an integral part of the operations of the church rather than as a mere convenience to a minister. Clinton Township v. Camp Brett-Endeavor, Inc., 1 N.J. Tax 54 (1980). To illustrate, one court concluded that a dwelling used for several hours a week by a clergyman for commercial purposes did not qualify for a property tax exemption. Ballard v. Supervisor of Assessments, 306 A.2d 506 (Md. 1973). However, one court upheld the exemption of a parsonage even though the clergyman’s wife engaged in a part-time interior designing business and occasionally used a bedroom for business purposes. Congregation Beth Mayer, Inc. v. Board of Assessors, 417 N.Y.S.2d 754 (1979).

In holding that a parsonage can meet the definition of “property used exclusively for religious purposes,” one court observed that “a parsonage qualifies for an exemption even if it reasonably and substantially facilitates the aims of religious worship and religious instruction because the pastor’s religious duties require him to live in close proximity to the church or because the parsonage has unique facilities for religious worship and instruction or is primarily used for such purposes.” McKenzie v. Johnson, 456 N.E.2d 73 (Ill. 1983).

Summarized below are cases in which the courts have concluded that various housing arrangements did not constitute tax-exempt parsonages.

Other courts have construed the term parsonage more broadly and have found the following dwellings to be tax-exempt parsonages under applicable state law.

Key Point: A few statutes specifically include housing of denominational officials within the definition of parsonage. See Table 12-4 on page .

Generally, the courts have concluded that a church is not limited to one parsonage. As a result, unless the state property tax law specifies otherwise, a church having two or more full-time ministers may provide a tax-free parsonage to each. Congregation B’Nai Jacob v. City of Oak Park, 302 N.W.2d 296 (Mich. 1981); In re Marlow, 237 S.E.2d 57 (S.C. 1977); Cudlipp v. City of Richmond, 180 S.E. 525 (Va. 1971).

Many churches own tracts of vacant land for purposes of recreation or future expansion. Are such properties exempt from taxation? Courts have come to both conclusions. The key decisions are summarized below.

These cases demonstrate that undeveloped land acquired by a church for future expansion may be eligible for tax exemption if it is not used commercially and it either (1) is needed as a buffer zone to insulate the adjacent church facility from industrial development; or (2) is used by church youth groups and other groups associated with the church for religious purposes or recreational purposes, or is otherwise integrated into the church’s activities.

A number of courts have held that vacant land ordinarily is not used exclusively for religious purposes and does not qualify for exemption. This almost always will be the result if the land is used for commercial purposes (such as farming) or if no religious or charitable activities occur on the land or such uses are insignificant.

Church-owned retreats and campgrounds have presented considerable difficulty for tax assessors. Several courts have concluded that a campground or retreat center owned and operated by a religious organization is exempt from property taxation if the activities conducted on the property are directly related to the religious purposes for which the organization was established. A few state property tax statutes specifically exempt church-owned campgrounds.

EXAMPLE The Minnesota Supreme Court ruled that a religious camp was entitled to an exemption from property taxes even though it was still under development. A tax-exempt organization operated summer Bible camps on leased property. It later acquired its own property for operation of the camps. It applied for exemption of the new property from taxation, but its application was denied on the ground that the organization had not obtained the necessary governmental approvals to operate its summer camps. The Minnesota Supreme Court ruled that it was inappropriate to deny the exemption based on the fact that the camps were not fully operational. The court observed:

The court sent the case back to the lower court to determine whether sufficient progress had been made in obtaining the necessary governmental approvals to justify tax-exempt status for the property. Living Word Bible Camp v. County of Itasca, 829 N.W.2d 404 (Minn. 2013).

EXAMPLE The New Hampshire Supreme Court ruled that a church-operated campground did not qualify for exemption from property tax, except for a small chapel. The court based this conclusion on the fact that the operation of the campground did not benefit “the general public or a substantial and indefinite segment of the general public” because of the following factors: (1) the church’s organizational documents state that the camp was to be used for members of the church; (2) the camp’s own rules specify that “our programs and facilities are primarily reserved for the members of our [church]”; (3) no advertisements for the camp are sent to those outside of the church’s membership; (4) while the camp is used by secular groups, this use is only “occasional and infrequent”; and (5) people who stay at the camp, even those associated with secular groups, must agree with the basic beliefs of the church.

The court concluded, “Where an organization makes efforts to limit its services, and targets its benefits only to its members, that organization is not obligated to serve an indefinite segment of the population . . . ​and is not eligible for a charitable tax exemption.” The court also ruled that the camp did not qualify for exemption based on its religious nature except for the chapel and “those portions of the administrative offices, maintenance center, barn and workshop that are reasonably related to the function of the chapel.” East Coast Conference of the Evangelical Covenant Church of America v. Town of Swanzey, 786 A.2d 88 (N.H. 2001).

EXAMPLE A New York court denied exemption to a church camp that derived 25 percent of its income from nonexempt uses since the nonexempt uses were substantial enough to preclude a finding that the property was used exclusively for religious purposes. Mount Tremper Lutheran Camp, Inc. v. Board of Assessors, 417 N.Y.S.2d 796 (1979).

EXAMPLE The New York Court of Appeals (the highest state court in New York) ruled that 64 bungalows, six house trailers, and a 10-acre wooded section of a 31-acre religious campground were exempt from property taxes as property “used exclusively for religious purposes.” The court concluded that the bungalows, trailers, and 10-acre wooded section all met this test. It observed: “If [the organization] was unable to provide residential housing accommodations to its faculty, staff, students and their families, its primary purposes of providing rigorous religious and educational instruction . . . ​would be seriously undermined. Thus, these housing facilities are ‘necessary and reasonably incidental’ to the primary purpose of the facility, and this is so notwithstanding the existence of limited housing facilities nearby.” For the same reasons, the court concluded that the trailer provided to the full-time caretaker was exempt. The court also concluded that the 10-acre wooded section was exempt since it too was “incidental to the primary religious purpose of the entire 31-acre parcel.” Hapletah v. Town of Fallsburg, 590 N.E.2d 1182 (N.Y. 1992). See also Eternal Flame of Hope Ministries v. King, 908 N.Y.S.2d 456 (N.Y.A.D. 2010).

EXAMPLE A New York court ruled that a campground owned and operated by a religious organization was not exempt from property taxation. The religious organization consists of lay church members. It owns and operates a campground that is open to the general public and is attended primarily by persons who are not members of the church. The camping program includes whirlpool and sauna treatments, instruction to assist persons who want to quit smoking, video programs on a variety of health issues, outdoor activities, and classes in cooking. Guests are not required to attend or participate in any religious activities. Advertisements for the camping program do not indicate that it is religious in nature or related to the church. In ruling that the campgrounds were not exempt from property taxation, the court observed: “Although health and physical well being are central concerns of the [church], in this case the health-related services are directed . . . ​to non-adherents of its religious principles. The fact that advertising for those services is aimed at the public as a whole supports the conclusion that the camp is not used primarily for . . . ​religious purposes. Also significant is the fact that guests are not required to participate in any prayer services, indoctrination, or similar activities.” Living Springs Retreat v. County of Putnam, 626 N.Y.S.2d 268 (A.D. 2 Dept. 1995).

EXAMPLE A North Carolina court ruled that a 532-acre church camp was exempt from property taxation because it was used primarily for religious purposes. In response to the county’s argument that the camp could not be exempt from property tax since it charges some campers a fee, sold some timber from a portion of the property, and allows the facilities to be used by nonchurch groups, the court observed:

Appeal of Mount Shepherd Methodist Camp, 462 S.E.2d 229 (N.C. App. 1995).

EXAMPLE The Ohio Supreme Court ruled that a religious retreat that provided rest and recuperation to pastors and other church leaders was not eligible for exemption from property taxes. The property consists of 71 acres improved with two main buildings, an inn and a manor, each of which contains several bedrooms. In addition, there is a swimming pool, basketball court, fishing ponds, and a “prayer walk” through the wooded property. The retreat center submitted an application for exemption from property taxes based on a state law exempting (1) houses used exclusively for public worship, (2) church-owned property used primarily for church retreats and camps, and (3) property used exclusively for charitable purposes. The tax assessor ruled that the property was not exempt on any of these grounds, since the property was not used to “facilitate public worship in a principal, primary and essential way.” Instead, the property offered only an indirect support of worship that did not qualify the property to be viewed as “used exclusively for public worship.” Further, the property did not qualify as a church retreat because it was not owned by a church and was not used for church retreats but for “sabbaticals” for pastors and church leaders. Finally, the assessor ruled that the property was not eligible for exemption based on charitable use, since the facilities were “not open or available to the general public,” and “any benefit to the public or mankind generally is an indirect result of the applicant’s activity of providing pastors and other church leaders with a place for sabbaticals.” The retreat center appealed to the Ohio Supreme Court, which ruled that the property was not exempt. Innkeeper Ministries, Inc. v. Testa, 2016 WL 4009986 (Ohio 2016).

EXAMPLE Exemption was denied to a 155-acre church camp used for recreational, craft, and religious activities, since the property tax law exempted only actual places of religious worship from the tax. However, a chapel and a minister’s residence located on the property were deemed exempt. Davies v. Meyer, 541 S.E.2d 827 (Tex. 1976).

Example A Pennsylvania court ruled that only half of a church’s new administrative building was exempt from property taxes. The church had constructed a large administrative building (the Center) that was used for the pastor’s office, the church’s business office, meeting rooms, and a chapel. Upon completion of the Center, the County listed it on the tax assessment rolls as a commercial office building and, therefore, taxable. The church appealed, arguing that the Center was entitled to exemption from tax because the offices, conference rooms, and chapel are used by the pastor, church officers, and staff to conduct routine business of the church and are directly related to the worship, prayer, mission, and spiritual outreach purposes of the church. The County eventually agreed to exempt 50 percent of the Center. The church asked a court to rule that the entire building was exempt from tax, but the court concluded that only half the building was exempt. The court noted that a state law exempts from property tax “all churches, meeting-houses, or other actual places of regularly stated religious worship, with the ground thereto annexed necessary for the occupancy and enjoyment of the same.” The court concluded:

Administrative regional or national offices of religious denominations may be exempt from taxation, depending on the wording of the exemption statute and the property’s actual use.

Example The Ohio Supreme Court ruled that property owned by a denominational agency (the “regional church”) and used as an administrative office was not exempt from property taxation. The property was used for several purposes, including (1) executive offices; (2) support staff; (3) conference rooms and classrooms for church leadership meetings and ministerial teaching and training; (4) offices for youth and Christian education, women’s ministries, evangelism, and home missions; and (5) religious publishing for affiliated churches. The regional church summed up the use of the property as “facilitating the proclamation of the Gospel of Jesus Christ and supporting public worship.” Its application for property tax exemption was denied on the ground that the property was being used “for purposes that are merely supportive of public worship” and therefore did not qualify for exemption under a state law that exempted from taxation property used exclusively for public worship or charitable purposes. Church of God v. Levin, 918 N.E.2d 981 (Ohio 2009).

A few state property tax statutes specifically exempt church-operated retirement homes. In other states the courts have been asked to determine the exempt status of such facilities. Predictably, different conclusions have been reached. Courts that have found such facilities to be exempt generally do so on the basis of an exemption applicable to property used for charitable rather than religious purposes.

The tax-exempt status of property used for the publication of religious literature is another question that has been addressed by a number of courts. Most courts have concluded that property owned by a religious organization and used for religious purposes is exempt under statutes exempting property used exclusively for religious purposes. To illustrate, the following printing operations have been held to be exempt from tax.

A few courts have denied tax-exempt status to property used for religious publishing. To illustrate, a Pennsylvania court ruled that a nonprofit corporation that published religious materials was not exempt from property taxes. Scripture Union v. Deitch, 572 A.2d 51 (Pa. Common. 1990). The publisher (which was not affiliated with a church or denomination) published quarterly Bible study guides that it made available for a suggested annual donation of $20. The court noted that the property of “purely public charities” is exempt from taxation under state law and that an institution qualifies as a purely public charity only if it (1) advances a charitable purpose, (2) donates a substantial portion of its services, (3) benefits a substantial and indefinite class of persons who are legitimate subjects of charity, (4) relieves the government of some of its burdens, and (5) operates entirely free from the private profit motive.

The court concluded that the publisher failed to satisfy a number of these requirements. For example, only 14 percent of its materials were distributed without charge—too low to comprise a substantial portion of its total materials. Further, the court rejected the publisher’s claim that its operating deficits for the previous two years demonstrated that it operated on a nonprofit basis. The court observed that the deficits existed only because of large expenses labeled in the publisher’s financial statements simply as “other expenses.” When questioned about the nature of these expenses, the publisher’s president could not identify them. The court found this evidence insufficient to support the publisher’s contention that it operated without a profit motive. The court concluded that the publisher failed to demonstrate that it relieved the government of some of its burden. The publisher had emphasized that “our purpose is to introduce people to God through the Jewish Christian scriptures in such a way that they are made aware of the difference between right and wrong, and the importance of choosing the right, and in such a way that they are introduced to the importance of loving their neighbor and of fulfilling a responsible role in their families, their workplace, and in society.” While acknowledging that this indeed was a laudable objective, the court could not agree that the publisher was relieving a governmental burden, since the constitution “prohibits the government from endorsing any religion.”

Another court denied exemption to a Bible society that printed and distributed Bibles but that was not affiliated with any particular religion or denomination. American Bible Society v. Lewisohn, 369 N.Y.S.2d 725 (1975), aff’d, 386 N.Y.S.2d 49 (1976). It is unlikely that a church-owned printing facility would qualify for an exemption in those states that exempt only buildings and property used exclusively for religious worship. Even in these states, however, church-owned printing facilities may be exempt as a charitable organization. Missouri Conference Association of Seventh-Day Adventists v. State Tax Commission, 727 S.W.2d 940 (Mo. App. 1987).

Many statutes exempt property used exclusively for religious purposes. An exclusive use generally is construed to mean a primary, inherent, or principal use, in contrast to secondary or incidental uses. The courts have ruled that the term exclusively does not necessarily mean “directly” or “immediately”; that a use that is incidental and reasonably necessary to an exempt use is properly exempted from tax; and that the exemption of property used exclusively for exempt purposes does not require constant activity or vigorous or obvious activity, but rather requires that the property be devoted to no other use than that which warrants the exemption. If part of a church-owned property is used for commercial purposes, the entire property cannot be considered to be used exclusively for religious purposes. However, as noted previously, some states recognize the partial exemption rule, under which only the portion of church-owned property that is used for nonexempt purposes is denied exempt status.

The fact that a religious organization has received a determination letter from the IRS acknowledging that it is exempt from federal income taxation as an organization described in section 501(c)(3) of the tax code does not necessarily entitle the organization to a property tax exemption. It is important to recognize that in many states property used for religious purposes is not automatically exempt from taxation. An application must be filed with local tax authorities in such states. Failure to do so will result in loss of exemption, at least for the current year.

In most states, property acquired by a church after the tax assessment date is not entitled to exemption for the current year, even though it is used exclusively for religious purposes. To illustrate, under New Jersey law the taxable or exempt status of any tract of property is determined as of the tax assessment date (October 1 of the preceding calendar year). A church purchased property on December 12 and used it immediately for exclusively religious purposes. The church applied for a tax exemption for that year but was informed that no exemption would be available because the property was not owned by the church as of October 1. The church claimed that it was doctrinally opposed, on the basis of biblical passages, to paying taxes with funds obtained from tithes and contributions and that requiring the church to pay property taxes would violate the constitutional guaranty of religious freedom.

A state court acknowledged that “the free exercise of religious beliefs can be crushed and closed out by the sheer weight of the tribute which is exacted.” Bethany Baptist Church v. Deptford Township, 542 A.2d 505 (N.J. Super. 1988). However, it also noted that “it is equally well-settled that religious groups are not free from all financial burdens of government” and that “not all burdens on religion are unconstitutional.” A state may “justify a limitation on religious liberty by showing that it is essential to accomplish an overriding governmental interest” and that there exists “no less restrictive means” of achieving the state’s interest.

The court emphasized that the issue was not the tax-exempt status of church property—since New Jersey law clearly exempted such properties from tax. Rather, the issue was whether the constitutional guaranty of religious freedom requires church-owned property to be exempt from taxation the moment it is acquired. The court concluded that the church’s religious freedom claim was outweighed by a compelling state interest—the “broad public interest in maintaining a sound tax system.” Specifically, the court observed that “mid-year cancellation of tax liability by reason of a property so listed becoming exempt during the year would result in major dislocation and an unfair burden to the remaining taxpayers.” Further, “a requirement imposed by the [courts] mandating that property acquired by an exempt owner must receive an exemption at the exact time of its acquisition would severely impair the ability of the tax authorities to predict revenues for the tax year.”

In conclusion, the court observed that the maintenance of “an organized society that guarantees religious freedom to a great variety of faiths requires that some religious practices yield to the common good.”

Does a state or local government have the authority to assess a fee or special assessment against church property in lieu of a direct tax? A few courts have addressed this question with conflicting results.