The tax code prohibits churches and other public charities from participating in political campaigns on behalf of or in opposition to candidates for public office.

Church Law and Tax 2004-11-01


Key point. The tax code prohibits churches and other public charities from participating in political campaigns on behalf of or in opposition to candidates for public office. Violations of this prohibition can result in revocation of a church’s tax-exempt status, or the imposition of excise taxes under section 4955 of the tax code, or both.

* The IRS issued a ruling in which it addressed a number of important issues including (1) the impact an accumulation of assets has on a church’s tax-exempt status; (2) the prohibition of political campaign intervention by churches and church leaders; and (3) the definition of the term “church” for federal tax purposes. A church conducted three or four weekly worship services on its premises for a number of years. These services were attended by up to 350 persons. Over time, the church stopped conducting regular worship services and embarked upon radio and publishing activities and occasional regional seminars where the church’s founder disseminated his religious views, counseled the audience, and raised funds. These ventures proved successful, and the church accumulated large sums of money and acquired substantial real estate properties. On a couple of its radio broadcasts the founder urged listeners not to vote for a particular candidate in a presidential election. The IRS reviewed the church’s status, and its political activities, and reached the following conclusions:

accumulation of assets

The first issue was whether the church’s accumulation of substantial assets, including commercial properties, affected its tax-exempt status. The IRS noted that a tax-exempt organization can justify a significant accumulation of assets only if it can demonstrate that the assets are necessary for its reasonably anticipated needs. To do this, the organization “must demonstrate a need warranting such accumulation and the existence, as of the end of the relevant taxable year, of specific, definite and feasible plans to use the accumulation within a reasonable time to meet this need.” The IRS concluded, “While this case is close, we think that the church has provided sufficient information as to its needs and reasonably anticipated needs for its accumulations.” The IRS pointed out that for several years the church operated its tax-exempt programs at substantial deficits, and the income from the investment real estate was available to cover the deficits.

The IRS noted that the church’s board consisted of its founder, his wife, and a son. It then remarked,

Small, closely controlled exempt organizations’and especially those that are closely controlled by members of one family’with related business entities require thorough examination to insure that the arrangements serve charitable purposes rather than private interests. Qualifying for exemption is a facts and circumstances test. There is nothing that precludes an organization that is closely controlled or has related for-profit organizations from qualifying, or continuing to qualify, for exemption. However, the lack of institutional protections, that is, a board of directors comprised of active, disinterested persons, and the potential for such organizations to be abused requires IRS to closely examine actual operations to analyze whether they continue to serve exclusively charitable purposes. Further, the fact that the IRS has concluded that a closely held organization has operated so as to continue to qualify for exemption does not guarantee that it will continue to do so in the future.

political activities

Section 501(c)(3) of the tax code exempts from federal income taxes a church or other religious organization that is 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 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, on behalf of or in opposition to any candidate for public office. Violation of the second limitation (often called the “campaign” limitation) may result in revocation of exempt status and the imposition of excise taxes.

During one of its radio broadcasts, the 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,

Where an official publication or [broadcast] of an organization contains the organization’s opposition to a candidate, the statement of opposition should be imputed to the organization, particularly when the statement is represented to reflect the views of its minister. A religious organization’s publications and the acts of the minister at official functions of the organization are the principal means by which an organization communicates its official views to its members. It is, therefore, evident that the statements made by the minister on the organization’s official broadcast should be imputed to the organization. The only exception would be where the organization has clearly informed the members prior to the act that the publication or broadcast does not speak for the organization and the organization does not utilize either the minister or the publication to generally represent the views of the organization. Thus, the founder’s opposition to [a presidential candidate] should be imputed to the church since he was a minister of the church, and the statement of opposition (and implied endorsement of his principal opponent) was contained in an official program of the church.

Finally, the IRS rejected the church’s argument that the political statements should be disregarded since 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).

section 4955

The IRS concluded that revocation of the church’s exempt status was not warranted, and instead imposed a tax under section 4955 of the tax code. Section 4955 permits the IRS to assess a tax against an exempt organization that spend funds for political activities in violation of 501(c)(3). This tax can be assessed in addition to revocation of exempt status, or instead of revocation. The tax is equal to 10% of “political expenditures” made by an exempt organization. An additional tax of 2.5% 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, then the tax can be increased to 100% of the amount of a political expenditure (for the organization) or 50% (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 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, as a section 501(c)(3) organization, was liable for a tax equal to 10% of the amount of each political expenditure. In addition, the founder “is an organization manager liable for a tax of 2.50% 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% tax on the amount of each political expenditure, as provided in section 4955, and the founder was liable for a tax of 50% 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.”

The IRS noted that the regulations explaining section 4955 provide, “There may be individual cases where, based on the facts and circumstances such as the nature of political intervention and the measures that may have been taken by the organization to prevent a recurrence, the IRS may exercise its discretion to impose a tax under section 4955 but not to seek revocation of the organization’s tax-exempt status.” The IRS concluded that this case was one in which it should impose only the section 4955 tax, and not revoke exempt status. It concluded, “Out of [numerous] two-hour broadcasts during the presidential election campaign, the political intervention statements constituted only two brief paragraphs. No other political intervention statements during the three years in issue appear to have occurred. The organization has since adopted a policy to prevent recurrences of such statements. The Section 501(c)(3) exemption ruling should not be revoked.”

definition of “church”

The IRS concluded that the church had ceased to qualify as a “church” for federal tax purposes. In reaching its decision, the IRS noted that the organization failed most of the 14 criteria used by the IRS in identifying churches. These 14 criteria are: (1) a distinct legal existence; (2) a recognized creed and form of worship; (3) a definite and distinct ecclesiastical government; (4) a formal code of doctrine and discipline; (5) a distinct religious history; (6) a membership not associated with any other church or denomination; (7) an organization of ordained ministers; (8) ordained ministers selected after completing prescribed studies; (9) a literature of its own; (10) established places of worship; (11) regular congregations; (12) regular religious services; (13) Sunday schools for religious instruction of the young; and (14) schools for the preparation of its ministers. The IRS concluded that “while some of these are relatively minor, others, e.g. the existence of an established congregation served by an ordained ministry, the provision of regular religious services and religious education for the young, and the dissemination of a doctrinal code, are of central importance.”

Conceding that “both the courts and the IRS agree that there is no bright-line test as to whether an organization is a religious organization or a church,” it concluded, based on an analysis of the 14 criteria that the organization in this case no longer qualified as a church. The IRS observed, “Most important, it no longer possesses the regular church services which have been held to be a prerequisite for church status. It no longer has the minimum for church status’a body of believers or communicants that assembles regularly in order to worship. It no longer has a defined congregation of worshipers, nor an established place of worship, nor regular religious services. Nor does it have other substantial church characteristics. Its ministers officiated at no more than [a few] weddings or other ministerial events or sacerdotal functions during the years ….”

Application. This ruling is important because it sheds light on the IRS position on a couple of critical issues, including political activities and the definition of a church. Also significant is the court’s decision to impose taxes under section 4955 of the tax code instead of revoking the “church’s” tax-exempt status as a result of the founder’s open opposition to a presidential candidate on one of the church’s radio broadcasts. This is an important point, since it demonstrates that revocation of tax-exempt status is not the only possible penalty that can be imposed upon a church for intervening in a political campaign on behalf of or in opposition to a candidate. The IRS can assess the taxes authorized under section 4955, or revoke exempt status, or both. In this case, the IRS concluded that revocation was not appropriate given the relatively insignificant amount of political statements that had been made by the pastor. IRS Letter Ruling 200437040.

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