Business-savvy church leaders sometimes use business jargon to describe their activities and efforts. A recent IRS denial of exemption for a nonprofit religious organization highlights why this practice can be problematic.
IRS Denial Based on Business Jargon
In a denial letter released on March 8, 2013, the IRS addressed a 501(c)(3) exemption application by a religious organization. The organization described itself as having three divisions: a Ministry Division, a Consulting Division, and a Merchandising Division. While these activities are common among religious nonprofits, the terminology used raised concerns.
The IRS noted frequent use of business jargon, including terms like “divisions,” “branches,” and “brands.” The following excerpt from the ruling illustrates the issue:
“In addition to your frequent references to Taxpayer, Church, and Website as ‘brands,’ you described the majority of your activities in the context of business models, supply chains, marketing strategies, and other, typically business-oriented approaches.”
Understanding the Commerciality Doctrine
The IRS and courts apply a “commerciality doctrine” to determine whether nonprofit organizations qualify for 501(c)(3) exemption. While not explicitly defined in the tax code, this doctrine assesses whether revenue-generating activities are overly commercial, potentially undermining an organization’s exempt purpose.
Using business jargon may give the impression that an organization operates in a commercial capacity, which could affect its exemption eligibility. Though semantics alone aren’t grounds for exemption denial, excessive use of business terms can create unnecessary challenges.
Best Practices for Churches
- Use mission-focused language: Ensure your descriptions highlight religious or nonprofit purposes rather than commercial operations.
- Exercise caution with terminology: Avoid terms like “brands,” “supply chains,” or “marketing strategies” unless absolutely necessary.
- Review your documentation: Audit your bylaws, applications, and public materials to ensure alignment with nonprofit standards.
- Seek professional advice: Consult with a tax professional to evaluate language and practices that may raise concerns with the IRS or other authorities.
Why Terminology Matters
Excessive business terminology doesn’t align with the core principles of nonprofit organizations. It may inadvertently signal to tax authorities that the organization’s purpose is commercial rather than charitable or religious. While terminology alone won’t result in exemption denial, it can influence IRS evaluations.
Conclusion
Churches and nonprofit organizations should carefully evaluate their use of business jargon to avoid creating the impression of commercial intent. By focusing on mission-driven language, churches can reduce risks and maintain compliance with tax-exempt standards.
FAQs
1. What is the commerciality doctrine?
The commerciality doctrine evaluates whether revenue-generating activities by nonprofits are conducted in a highly commercial manner, potentially undermining their exempt purpose.
2. Can business jargon alone lead to tax exemption denial?
No, semantics alone won’t result in denial. However, excessive use of business terms can influence IRS evaluations and create unnecessary challenges.
3. How can churches avoid IRS concerns about terminology?
Focus on mission-driven language, avoid excessive business jargon, and ensure all documentation reflects nonprofit purposes.
4. Should churches consult a tax professional for guidance?
Yes, consulting a tax professional can help churches evaluate their language, practices, and compliance with IRS standards.