• In a truly remarkable case, a District of Columbia court of appeals upheld the validity of a statute that jeopardizes the tax-exempt status of every church in the District of Columbia. Here are the facts. Several years ago, the United States Congress enacted a law (as part of the District of Columbia Code) that specifies: “Upon the dissolution of any society or congregation the estate and property of such society or congregation shall revert back to the persons, their heirs, and assigns who may have given or contributed to the purchase of or payment for the same, according to their respective rights.” D.C. Code § 29-911. A church’s members voted to dissolve the church. The church’s assets were sold for nearly $1 million. The church’s members adopted a plan for distributing the $1 million among themselves. In an attempt to stop this distribution, 2 of the church’s 6 trustees filed a lawsuit claiming that the statute (and planned distribution) were unlawful. The court rejected the trustees’ contention, and concluded that it was permissible for a statute to provide for the distribution of church assets to members following the church’s dissolution. It relied primarily on an 18th century legal treatise, and court rulings from the 19th century, as support for its conclusion that “any property which may have been given or contributed to a religious society reverts to the original donor or his heirs upon dissolution.” The court further noted that applying the statute “would not impermissibly entangle the court in matters of religious governance,” since “the court is being asked to do nothing other than apply a neutral property disposition rule involving no consideration of religious doctrine.” Incredibly, the court’s ruling completely ignores the plain language of the income tax regulations. Section 501(c)(3) of the Internal Revenue Code requires that churches be “organized exclusively” for exempt purposes in order to qualify for tax-exempt status. The income tax regulations (adopted by the United States Treasury Department), interpret this requirement as follows:
An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would … be distributed for one or more exempt purposes …. However, an organization does not meet the organizational test if its articles [of incorporation] or the law of the state in which it was created provide that its assets would, upon dissolution, be distributed to its members …. Reg. § 1.501(c)(3)-1(b)(4) (emphasis added).
Clearly, the District of Columbia statute, quoted above, provides for the distribution of a church’s assets to its members upon the church’s dissolution. According to the plain meaning of the quoted regulation, this means that every church in the District of Columbia is disqualified for tax-exempt status under Code section 501(c)(3). What is indeed amazing is that Congress enacted both the District of Columbia statute, and section 501(c)(3) of the Internal Revenue Code. The court’s decision, in relying on 18th and 19th century precedent (predating the Internal Revenue Code) in support of its conclusion, did nothing to help resolve this fundamental dilemma. It will be interesting to see how the IRS, and Congress, respond. Obviously, the best approach would be for Congress to immediately repeal section 29-911 of the District of Columbia Code. Until it does so, the tax-exempt status of every church in the District will be needlessly threatened. Prince v. Firman, 584 A.2d 8 (D.C. App. 1990).
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