Key point 5-01.01. The IRS has adopted a 14-criteria test for use in determining whether or not a particular entity is a church for purposes of federal tax law. This test is theologically flawed, and is subject to challenge.
As noted above, the Internal Revenue Code contains several references to the term church, but provides no adequate definition. This is understandable, since a definition that is too narrow potentially interferes with the constitutional guaranty of religious freedom, while a definition that is too broad will 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.”43 St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772, 782 n.12 (1981).Nevertheless, the Code contains some limited attempts to define churches and related organizations.
Prior to 1970, the income tax regulations specified that the term church44 Treas. Reg. § 1.511-2(a)(3)(ii) (emphasis added).included
a religious order or religious organization if such order or organization (a) is an integral part of a church, and (b) is engaged in carrying out the functions of a church, whether as a civil law corporation or otherwise. In determining whether a religious order or organization is an integral part of a church, consideration will be given to the degree to which it is connected with, and controlled by, such church. A religious order or organization shall be considered to be engaged in carrying out the functions of a church if its duties include the ministration of sacerdotal functions and the conduct of religious worship. … What constitutes the conduct of religious worship or the ministration of sacerdotal functions depends on the tenets and practices of a particular religious body constituting a church.
This language implied that a church is an organization whose “duties include the ministration of sacerdotal functions and the conduct of religious worship.”
Section 3121(w) of the Code, which permits churches and church-controlled organizations to exempt themselves from the employer’s share of social security and Medicare taxes (if certain conditions are met), defines the term church as follows:
For purposes of this section, the term “church” means a church, a convention or association of churches, or an elementary or secondary school which is controlled, operated, or principally supported by a church or by a convention or association of churches. For purposes of this subsection, the term “qualified church-controlled organization” means any church-controlled tax-exempt organization described in section 501(c)(3), other than an organization which—(i) offers goods, services, or facilities for sale, other than on an incidental basis, to the general public, other than goods, services, or facilities which are sold at a nominal charge which is substantially less than the cost of providing such goods, services, or facilities; and (ii) normally receives more than 25 per cent of its support from either (I) governmental sources, or (II) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities which are not unrelated trades or businesses, or both.45 I.R.C. § 3121(w)(3).
In 1974, the IRS proposed, but never adopted, the following definition of a “church” as part of proposed regulations addressing charitable contributions:
A church or convention or association of churches is … an organization of individuals having commonly held religious beliefs, engaged solely in religious activities in furtherance of such beliefs. The activities of the organization must include the conduct of religious worship and the celebration of life cycle events such as births, deaths and marriage. The individuals engaged in the religious activities of a church are generally not regular participants in activities of another church, except when such other church is a parent or subsidiary organization of their church.46 Quoted in GCM 37116 (1977).
In the context of charitable contribution deductions, the Internal Revenue Code defines the term church, or convention or association of churches as a “church, or convention or association of churches.”47 Treas. Reg. § 1.170A-9(a).
These definitions clearly are inadequate, and provide very little help in applying the many Internal Revenue Code sections pertaining to churches. The IRS has attempted to fill this definitional vacuum by compiling a list of 14 “criteria” which presumably characterize a church:
- a distinct legal existence
- a recognized creed and form of worship
- a definite and distinct ecclesiastical government
- a formal code of doctrine and discipline
- a distinct religious history
- a membership not associated with any other church or denomination
- an organization of ordained ministers
- ordained ministers selected after completing prescribed studies
- a literature of its own
- established places of worship
- regular congregations
- regular worship services
- Sunday schools for religious instruction of the young
- schools for the preparation of ministers
No single factor is controlling, although all fourteen may not be relevant to a given determination.48 The 14 criteria seem to have originated in a 1959 IRS ruling that found the Salvation Army to be a church. See Rev. Rul. 59-129, 1959-1 C.B. 58, and GCM 37116 (1977).
These criteria have been applied by the IRS and the courts in several cases, as noted below.
This definition is addressed fully in a companion text.49 R. Hammar, CHURCH & CLERGY TAX GUIDE.
The 14 criteria clearly are vague and inadequate. Some apply exclusively to local churches, others do not. And the IRS does not indicate how many criteria an organization must meet in order to be classified as a church. The vagueness of the criteria necessarily means that their application in a particular case will depend on the discretionary judgment of a government employee. This is the very kind of conduct that the courts repeatedly have condemned in other contexts as unconstitutional. To illustrate, the courts consistently have invalidated municipal ordinances that condition the constitutionally protected interests of speech and assembly upon compliance with criteria that are so vague that decisions essentially are a matter of administrative discretion. The United States Supreme Court has held that “[it] is a basic principle of due process that an enactment is void for vagueness if its prohibitions are not clearly defined. … A vague law impermissibly delegates basic policy matters to [government officials] for resolution on an ad hoc and subjective basis with the attendant dangers of arbitrary and discriminatory application.”50 Grayned v. City of Rockford, 408 U.S. 104, 108-09 (1972).
This same reasoning also should apply in the context of other fundamental constitutional rights, such as the First Amendment right to freely exercise one’s religion. The IRS should not be permitted to effectively limit the right of churches and church members to freely exercise their religion on the basis of criteria that are as vague as the 14 criteria listed above, and whose application in a particular case is essentially a matter of administrative discretion.
The criteria also are constitutionally suspect on the related ground of “overbreadth.” The Supreme Court “has repeatedly held that a governmental purpose to control or prevent activities constitutionally subject to state regulation may not be achieved by means which sweep unnecessarily broadly and thereby invade the area of protected freedoms. The power to regulate must be so exercised as not, in attaining a permissible end, unduly to infringe the protected freedom. Even though the governmental purpose be legitimate and substantial, that purpose cannot be pursued by means that broadly stifle fundamental personal liberties when the end can be more narrowly achieved.”51 N.A.A.C.P. v. Alabama, 377 U.S. 288, 307-08 (1964).Congress and the IRS undoubtedly have the authority to identify those churches that are not qualified for the tax benefits afforded by federal law, but they may not do so on the basis of criteria that sweep so broadly as to jeopardize the standing of legitimate churches. The courts understandably find the task of defining the term church perplexing. But they should avoid referring to the 14 criteria as support for their conclusions, particularly in cases involving “mail-order churches” and other obvious shams for which the definitional question is not in doubt.
The IRS has successfully challenged a variety of tax-evasion schemes that have operated under the guise of a church. These schemes usually involve some or all of the following characteristics: An individual forms his own church, assigns all or a substantial part of his income to the church, takes a vow of poverty, declares himself to be the minister, retains control over all church funds and property, designates a substantial housing allowance for himself, and reports the income that he has assigned to his church as a charitable contribution deduction on his federal tax return. In most cases the church has no building other than the personal residence of the “minister,” and it conducts few if any religious activities. Since the minister often purchases his credentials and church charter by mail, such schemes commonly are referred to as mail-order churches. The IRS consistently has refused to recognize such entities as entitled to exemption from federal income taxation. This determination often is based on the fact that the net earnings of the alleged church “inure” to the benefit of private individuals, not because the organization is not a church.
A number of federal courts have defined the term church without reference to the 14 criteria, and have concluded that the term may include a private elementary and secondary school maintained and operated by a church,52 St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772 (1981).a seminary,53 EEOC v. Southwestern Baptist Theological Seminary, 651 F.2d 277 (5th Cir. 1981).and conventions and associations of churches.54 De La Salle Institute v. United States, 195 F. Supp. 891 (N.D. Cal. 1961); Senate Report 2375, 81st Congress, 2d Session, p. 27.
The United States Supreme Court has held that some church-controlled organizations that are not separately incorporated may be regarded for tax purposes as part of the church itself.55 St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772 (1981) (the Court declined to rule on the status of separately incorporated, church-controlled organizations). See also Treas. Reg. § 1.6033-2(g)(5)(iv), example 6; Lutheran Social Service of Minnesota v. United States, 758 F.2d 1283 (8th Cir. 1985).