Definition of “Religious Order”

The IRS recently issued guidance on the definition of this term.

The IRS has issued guidance on the definition of the term "religious order."

The Internal Revenue Code exempts from self-employment taxes, FICA taxes, and federal income tax withholding, compensation received for services performed by a member of a religious order in the exercise of duties required by the order. Neither the Code, nor the income tax regulations, defines the term "religious order." To provide some certainty regarding the definition of a religious order, the IRS has published 7 characteristics that traditionally have been associated with religious orders. The IRS came up with this list by reviewing the court decisions that have addressed the issue. From now on, the IRS will use the following characteristics in determining whether or not an organization is a religious order:

(1) The organization is described in section 501(c)(3) of the Code. (2) The members of the organization vow to live under a strict set of rules requiring moral and spiritual self-sacrifice and dedication to the goals of the organization at the expense of their material well-being. (3) The members of the organization, after successful completion of the organization's training program and probationary period, make a long-term commitment to the organization (normally, more than two years). (4) The organization is, directly or indirectly, under the control and supervision of a church or convention or association of churches, or is significantly funded by a church or convention or association of churches. (5) The members of the organization normally live together as part of a community and are held to a significantly stricter level of moral and religious discipline than that required of lay church members. (6) The members of the organization work or serve full-time on behalf of the religious, educational, or charitable goals of the organization, (7) The members of the organization participate regularly in activities such as public or private prayer, religious study, teaching, care of the aging, missionary work, or church reform or renewal.

The IRS has stated that "generally, the presence of all the above characteristics is determinative that the organization is a religious order" and that "the absence of one or more of the other enumerated characteristics is not necessarily determinative in a particular case. Generally, if application of the above characteristics to the facts of a particular case does not clearly indicate whether or not the organization is a religious order, the [IRS] will contact the appropriate authorities affiliated with the organization for their views concerning the characteristics of the organization and their views will be carefully considered." It is interesting that one of the cases the IRS relied on involved a claim by a Baptist church that the services of its church secretary, organist, custodian, and choir director were exempt from tax withholding since the church was a "religious order." In rejecting the church's claim, the court defined a "religious order" as "a religious body typically an aggregate of separate communities living under a distinctive rule, discipline or constitution; a monastic brotherhood or society." Under the new IRS definition, there will be very few organizations that will be able to justify an exemption from FICA or tax withholding on the ground that they are "religious orders." Organizations that currently are relying upon an exemption from FICA coverage or the income tax withholding rules on the basis of "religious order" status should carefully review the new IRS definition to assess its impact. The IRS has invited comments on its definition of "religious order." Comments, or suggestions for additional factors to consider, may be sent to the Internal Revenue Service, Assistant Chief Counsel (Employee Benefits and Exempt Organizations), Attn: CC:EE:5, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Be sure to refer to "Revenue Procedure 91-20." IRS Revenue Procedure 91-20.

Tax Legislation

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