by Lisa A. Runquist
Revised January, 2001
“Piety is no defense to the assessments of the tax collector.” Scripture Press Foundation v. United States, 285 F.2d 800, 904 (1961), cert denied 368 U.S. 985.
Religious organizations are not exempt from complying with the requirements of the Internal Revenue Code, or applicable state laws. However, there are a number of specific provisions of law, beginning with the United States Constitution and continuing through the Internal Revenue Code, that treat religious organizations, especially those that can be classified as a “church”, differently. The following is a discussion of some of the differences in the treatment of religious organizations when compared to other nonprofit tax exempt organizations. No discussion is included where the corporate or tax law is the same for both religious organizations and other nonprofits [See How to Keep Your Exempt Organization Out of Trouble with IRS for additional discussion of tax issues affecting nonprofits].
1. How the IRS Defines Churches.
The Internal Revenue Code provides certain benefits to churches not available to other nonprofit exempt organizations (including other religious organizations). Because of this, it is important to know how a “church” is defined. It should be noted at the outset, that all references to “church” are interpreted to include synagogues, mosques, temples, and any other organization that has “church-type” characteristics. However, because “church” is the term used in the Internal Revenue Code, this is the term we will use to apply to these varied entities.
There is no precise definition in the Internal Revenue Code of what constitutes a church.(1) A case decided in 1980 sets forth fourteen factors that the IRS has found relevant in making its inquiry into the definition: (2)
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 worship services
13. Sunday schools for religious instruction of the young
14. Schools for the preparation of ministers.
No single factor is controlling(3), and having all fourteen is not necessary. While there is no “legal” requirement that a church have any of these particular characteristics (instituting such a requirement would likely violate the First Amendment as establishing a particular “form” of religion), the IRS is unlikely to recognize an organization as being a church without it having a number of these characteristics. In Publication 557, the IRS states:
Because beliefs and practices vary so widely, there is no single definition of the word “church” for tax purposes. The Internal Revenue Service considers the facts and circumstances of each organization applying for church status.
Each organization that thinks it qualifies as a church should review the fourteen factors to determine its own qualification before the IRS. To the extent possible, the activities and beliefs of the church should be described in such a way as to demonstrate how the church has some or all of these characteristics.(4)
Although churches, along with other nonprofit organizations, are now subject to unrelated business income tax, before 1970, churches were exempt from such tax. Because of the exemption, the term “church” is discussed in IRS Reg. Section 1.511-2(a)(3)(ii), and includes organizations that
“carry out the functions of a church (ministration of sacerdotal functions and 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, again, points out the need for the church itself, to define its beliefs and practices so that they are identifiable, when examined by the IRS.
It should be noted that the IRS will generally not challenge the characterization of an organization as a church if there is another method of challenge that will arrive at the goal. For example, many decisions of the IRS to deny exemption have been based, not on the delicate constitutional issue of whether the organization was a church, but rather on whether the assets of the organization are used for the benefit of private individuals, rather than for “charitable” or “religious” purposes. For example, in the case of Bubbling Well Church of Universal Love, Inc. v. Comm’r of Internal Revenue, the court affirmed the denial of exemption, because the Church failed to show that no part of its net income inured to the benefit of private individuals.(5) And in Founding Church of Scientology v. United States, the court denied the exemption without even considering whether the organization was operated exclusively for religious or educational purposes on the basis that:
“It is our opinion that plaintiff has failed to prove that no part of the corporation’s net earnings inured to the benefit of private individuals …
“The statutory language … makes it eminently clear, however, that Congress intended to extend the exemption only when the sole beneficiary of the institutional operations was the public at large. The substantial import of this express limitation cannot be ignored.” (6)
See also McGahen v. Commissioner,(7) People of God Community v. Commissioner,(8) and Church in Boston v. Commissioner.(9)
As we discuss below in “Restrictions on IRS Review of Church Records”, Section 7611 restricts the ability of the IRS to make church tax inquiries. A church (and any division thereof) is entitled to have the Internal Revenue Service comply with the procedural requirements of Section 7611 of the Internal Revenue Code prior to an audit of its records. For purposes of this Section, a church is defined as any organization claiming to be a church, and any convention or association of churches. Any determination by the IRS that an organization is not a church may be made only after the procedural requirements of I.R.C. Sec. 7611 are met. Until such a determination is made, the IRS must apply the procedural protections of Section 7611 to any organization claiming to be a church. However, a church school that is separately incorporated (which for other reasons may claim that it is an integrated auxiliary of the church) is specifically not included in the definition of a church under this section.(10)
2. Convention or Association of Churches; Integrated Auxiliary of the Church.
In addition to references to a “church”, the Internal Revenue Code sometimes refers to a convention or association of churches or to an integrated auxiliary of a church when discussing a particular matter. A “convention or association of churches” appears to apply either to the particular group of churches as a whole, or to the national or governing entity for the group, if separate from the local churches. However, there had been much confusion and conflict about what would be considered an “integrated auxiliary” of, or “affiliated” with a church, until this was dispelled by a Federal court decision that held (contrary to a then existing IRS regulation),(11) that church affiliated organizations were not required to meet an “exclusively religious” test.(12)
Under the current law, an organization will be found to be an integrated auxiliary of a church if it is a 501(c)(3) corporation that is not a private foundation, is affiliated with a church or convention or association of churches, and is internally supported.(13)
It is affiliated with a church or convention or association of churches if it is(14):
1. Covered by a group exemption letter; or
2. Operated, supervised, or controlled by or in connection with a church or convention or association of churches; or
3. Relevant facts and circumstances show that it is so affiliated. Factors considered include:
a. The organization’s enabling instrument (corporate charter, trust instrument, articles of association, constitution, or similar document) or bylaws affirm that the organization shares common religious doctrines, principles, disciplines, or practices with the church or convention or association of churches.
b. The church or convention or association of churches has authority to appoint or remove or to control the appointment or removal of at least one of the organization’s officers or directors.
c. The corporate name of the organization indicates an institutional relationship with the church or convention or association of churches.
d. The church or convention or association of churches receives reports, at least annually, on the financial and general operations of the organization.
e. An institutional relationship with the organization is affirmed by the church, or convention or association of churches, or a designee thereof.
f. In the event of dissolution, the organization’s assets are required to be distributed to the church or convention or association of churches or to another affiliate thereof.
The absence of one or more of the above factors does not necessarily preclude classification of an organization as being affiliated with a church or convention or association of churches.(15)
It is internally supported, unless it
1. Offers admissions, goods, services or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for an insubstantial portion of the cost); and
2. Normally receives more than 50 percent of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses.
There is a special rule for men’s and women’s organizations, seminaries, mission societies, and youth groups. If they meet the other requirements, they will be considered to be integrated auxiliaries of a church even if they do not meet the internal support requirement.
3. Religious Orders.
Religious orders are considered to be a special type of entity under the Internal Revenue Code. Because of their visibility, religious orders have been considered to be almost exclusively Roman Catholic. However, there are some well established Protestant orders of long standing. Some of these orders have existed from the time of the middle ages. Many of these orders are made up of people who have devoted their entire lives to communal worship and service to God. The members of the order express their commitment by such things as vows of poverty, chastity and obedience. In addition, there are several “modern” entities that have received exemptions as religious orders.(16)
Religious orders are “personal” in the sense that their ecclesiastical jurisdiction does not depend upon geographical boundaries and they do not have territorial boundaries. Religious orders carry on a variety of activities, all of which are, for one reason or another, characterized as “religious”. In addition to the “personal” characteristic of religious orders, such orders often operate various institutions, such as schools and religious “retreat” centers, and may have a specific religious “mission” or “purpose” apart from the individuals who are called out of the world, into the order. However, the “personal” character of religious orders may be the best way of distinguishing a religious order from a church or other type of religious organization. Although a church is often regarded as the body of believers, it is regarded by the Internal Revenue Service as an organization, separate and apart from the people who attend. It may be impossible to define a religious order apart from defining the role and requirements placed upon individuals involved in the religious order (such as vows of poverty, service, etc.).
In 1991, the Internal Revenue Service issued Rev. Proc. 91-20 to provide guidelines in determining when an organization may be considered to be a religious order. As stated therein, the defining characteristics are:
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.
As with the fourteen points concerning a church, the determination of whether an organization is a religious order is a facts and circumstances test; the absence of one or more of these items (with the exception of the first item) is not necessarily determinative.
The legislative history of IRC Section 170 pertaining to the deductibility of contributions, clearly indicates that the term “church” was intended to include religious orders.(17)
4. Nonprofit Religious Organizations Other Than Traditional Churches.
Although a number of laws and case references apply only to “churches,” to “conventions or associations of churches”, or to “integral agencies of churches”, there are many other organizations which, being religious in nature, have the same First Amendment protections. In fact, treatment of these entities in a different manner from churches might violate of the establishment clause (which prohibits preferring one religion over another). Some of these entities may exist as a part of the church, either as a “church”, as part of a “church or association of churches”, or as an “integrated auxiliary of the church.” See Sections 1 and 2, above. Others exist as entities separate and apart from a particular church, but often operate in conjunction with the church. Although much of the law discussed here is applicable to these entities, they also may have other problems and concerns not covered fully in this discussion.
Religious Schools and Seminaries. A religious school is often operated under the corporate structure of the church. As such, it is not a separate entity, and is considered to be, in the law, privy to all of the same protections as the church itself.
However, when a school is separately incorporated, it may either be controlled by a church or churches, or may have an independent board of directors with no church affiliation, even though it is religious in nature. When separately organized, it is sometimes treated in the same manner as a church, and sometimes as a religious organization other than a church. For example, a church school may be an “integrated auxiliary of the church”, pastors working with the school may be able to obtain a parsonage allowance, and the school may be able to have a church retirement plan that is exempt from ERISA requirements. On the other hand, a separately incorporated school is not accorded the same safeguards and protections from an IRS audit as are given to a church.
Parachurch Organizations. The term, “parachurch” is not a legal term at all, and has been developed by the religious community to refer to religious organizations which have some of the characteristics of a church, but which are not the typical local church with a defined congregation. Some of these “parachurch” organizations are treated as churches for some reasons, and as religious organizations which are not churches for others.
Religious Social Welfare Organizations. In addition to the above mentioned types of entities, there are also religious organizations which are organized to provide some social benefit. Although this may be done for religious purposes (such as to fulfill the Scriptural directive to take care of widows and orphans), the organization itself is normally not considered to be a church. In addition, such an organization may have to continually justify receiving the benefits of protection of the First Amendment as a religious organization, and may often find itself subject to more intensive governmental regulation than a traditional church, even though it is performing similar activities. These organizations are generally not treated as churches, and must comply with the same regulations and requirements as other nonprofits.
Supporting Organizations. As with other 501(c)(3) organizations, it is not uncommon to have an organization formed as a supporting organization of a church or convention or association of churches. Such an organization will normally be formed as an integrated auxiliary of a church or convention or association of churches.
International Operations. Some religious organizations, including churches, are international in scope. In addition to the other concerns that these entities may have, they must also contend with special United States tax regulations concerning the spending of money overseas, which are designed to assure that the money is used for the designated purpose. They must also be concerned with the laws of the various countries in which they operate, or from which they receive funding. Both of these concerns must be adequately addressed before such an organization can operate fully and within the law. This applies, whether or not the organization is considered to be a church.
It should be noted that the freedom of religion guaranteed by the First Amendment to the United States Constitution is peculiarly American. Other countries generally do not provide the same protections to religious organizations as are found in the United States.
OBTAINING FEDERAL EXEMPT DETERMINATION LETTER/
Most nonprofits must file an application for determination of exempt status with the Internal Revenue Service within the first fifteen months of their existence in order for donations to the organization to be deductible, and for the organization to be tax exempt. Churches are exempt from this requirement under I.R.C. Sec. 508.(18) However, religious organizations that are not churches are subject to the same filing requirements to establish their exempt status as are other nonprofits. See Appendix A for list of organizations exempt from filing Form 1023, Application for Recognition of Exemption.
If an exempt determination letter is obtained, the organization is listed in a publication entitled “Cumulative List of Exempt Organizations”. This publication is referred to by large donors who want to make sure they will get a deduction for their contributions, and by IRS tax auditors. If a contributor is audited, his or her contribution deduction will be allowed on the basis of the church being listed in the above-mentioned publication or by proof of the organization having received an exempt determination letter.
In addition to obtaining individual exemption letters, many church denominations have established group exemptions that allow the individual churches to have the benefit of an exempt determination letter without a separate filing.
If an exempt determination letter has not been obtained and there is no applicable group exemption letter, the ultimate deductibility of the contribution becomes the responsibility of the contributor who must prove that the church is exempt. This can be done, but must be established each time an individual is audited. Another result of not obtaining an exempt determination letter is that any minister ordained under that church corporation may have problems if and when he or she attempts to become exempt from self-employment tax (see “Social Security Exemption – Pastors”, below).
Because of these potential problems, it is recommended that churches obtain an exempt determination letter from the IRS by filing Form 1023.
Like churches, religious orders are not required to obtain an exempt determination from the IRS. However, if the organization chooses not to seek such a determination, it will not be treated as exempt until it goes through the filing process if it is later found not to be a religious order. Although this is also true of churches, religious orders do not have the protections from audit granted to a church under section 7611 of the Internal Revenue Code (see below).
Section 6033 of the Internal Revenue Code requires annual Form 990 filings of certain organizations but exempts churches, integrated auxiliaries, conventions or associations of churches, and exclusively religious activities of any religious order(19). Rev. Proc. 96-10 also exempts from the requirement that Forms 990 be filed, certain church affiliated organizations that manage funds and retirement programs for the church, integrated auxiliary, or convention or association of churches. See Appendix B for list of organizations exempt from filing Form 990s.
All other religious organizations are subject to the 990 reporting requirements.
Federal tax law requires tax-exempt organizations to make certain documents available for public inspection. This includes federal applications for tax exemption (Form 1023), and federal informational returns (e.g. Form 990, 990-EZ) available for inspection by anyone who requests to see them. Exempt organizations must also provide copies of these documents (or any part of them), without charge, other than a reasonable fee for reproduction, and actual postage costs to anyone who requests them, either in person or in writing. This applies to every organization that has received an exempt determination from the IRS under section 501(c) and includes churches that have established their exempt status. Even though they do not have to file Form 990 and thus do not have to make these forms available for inspection, they must still make the Form 1023 available for inspection, and make copies available if requested. The application for tax exemption must include any prescribed form (e.g. Form 1023), all documents and statements filed as a part of the application or as part of any follow-up correspondence in support of the application, and any letters or documents issued by the IRS in regard to the application, including additional questions about the application.
If there is no prescribed form (for example, with an application for a group exemption), the application includes the application letter, copy of the articles of incorporation, bylaws, financial statements, statements describing the organization, its purpose and its activities, and statements showing the sources of the organization’s income and the disposition thereof, and any other documents required by the IRS or submitted in support of the application.
Group Exemption. If a local church did not file its own application for tax exemption, it must still, upon request, make available for inspection or provide copies of the application as filed by its parent organization, including any documents submitted to include the local church under the group exemption letter. If the parent organization submits a directory of organizations covered by the group exemption letter, the local church only need furnish the application itself, and the pages of the directory that specifically refer to it. The requester may also request, from the parent organization at its principal office, inspection or copies of the application for group exemption or the group returns, and the material submitted to include the local church specified by the requester.
Future Disclosure Issues. In the Joint Committee on Taxation Staff Report issued in 2000, the staff recommended significant expansion of disclosure requirements. The study noted that it did “not address disclosure rules relating to churches, because the issues relating to churches are unique.”(20) Rather, it determined that the impact of disclosure on churches should be considered separately:
“Churches have historically been treated differently than other types of tax-exempt organizations. Under present law, churches generally have not been required to make any disclosures to the IRS or to the public in general. Furthermore, requiring disclosure by churches may raise Constitutional issues regarding the separation of church and state that do not arise with respect to other types of tax-exempt organizations. Because the issues relating to churches are unique, the Joint Committee staff believes these issues would need to be separately studied before any recommendations could be made.”(21)
In responding to this, former Assistant Commissioner (EP/EO) James J. McGovern stated, “If you are truly interested in the scope and operation and size of the [exempt organizations] sector, you can’t ignore the fact that approximately one third of the 1.3 million exempt organizations are churches. And there are virtually no data available with respect to the size, scope, operations, finances, and revenue.”
OBTAINING STATE EXEMPT DETERMINATION LETTER
Some states, such as California, require that all nonprofits, including churches, apply for and obtain a tax exempt determination letter from the state prior to being exempt from taxation and prior to contributions being deductible. This process requires much of the same information as the Internal Revenue Service determination. However, churches do not have to file the annual information return with the California Franchise Tax Board, and religious organizations do not have to furnish their 990’s to the California Attorney General.
REQUIREMENTS FOR EXEMPT STATUS
Obtaining a determination of exempt status is not automatic. As part of a filing for exempt determination with the IRS, a church must answer a number of specific questions about its church operation. In addition to showing the IRS the existence of “church” characteristics (see Schedule A to Form 1023), the organization must also show compliance with the standard requirements for tax exempt status. It must be both organized and operated for religious purposes. The purpose and objective to which the income of the religious organization is devoted is the ultimate test in determining whether it is operated exclusively for an exempt purpose.(22) The presence of a single non-exempt purpose, if substantial in nature, can destroy the exemption.(23)
Exempt status under Section 501(c)(3) of the Internal Revenue Code has been denied or revoked for reasons such as:
A) Church did not submit detailed statement of purpose and activities and other proof of religious activities (see, e.g. United Libertarian Fellowship, Inc. v. Comm’r of Internal Revenue).(24)
B) Private inurement was found to result from benefits being furnished to individuals.(25) “[T]o the extent that the personnel of a religious organization, particularly a select few, materially profit from the organization’s activity, the sincerity of the claimed religious beliefs may be called into question.”(26)
C) The purpose of the organization is against public policy or results in racial discrimination (this has been applied to a religious educational institution and to church schools, but has not been extended directly to churches at this point). See “Proof of Racial Nondiscrimination”, below.
D) The organization has engaged in political activity. See “Lobbying/Political Activity”, below.
E) The organization has engaged in substantial business unrelated to the purposes of the organization.(27)
F) The organization was a “feeder organization” described in Section 502, and was engaged solely in the operation of a business for profit, even though the profits were used to support a nonprofit organization.
1. In General.
Section 501(c)(3) of the Internal Revenue Code provides in part that corporations are exempt from taxation when they are:
“organized and operated exclusively for religious, charitable, … or educational purposes …, 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.”
A “substantial amount of lobbying” has often been defined as approximately five percent of the organization’s income. There is no case law and no regulation to this effect. However, five percent has often been assumed to be insubstantial.
Because of the lack of clarity concerning lobbying, Section 501(h) of the Code was adopted to provide a safe harbor for organizations that choose to take advantage of the election. However, an organization cannot make such an election if it is:
“(A) described in section 170(b)(1)(A)(i) (relating to churches),
(B) an integrated auxiliary of a church or of a convention or association of churches, or
(C) a member of an affiliated group of organizations (within the meaning of section 4911(f)(2)) if one or more members of such group is described in subparagraph (A) or (B).” Section 501(h)(5) of the Code.
In other words, churches and their related entities cannot make the safe harbor election under Section 501(h) of the Code. This means that, although churches and related entities are not bound by the terms of Section 501(h), neither can they rely on its safe harbor provisions in the event they wish to engage in any lobbying.
3. Political Activity.
There is a complete prohibition against any type of political activity, which is supporting or opposing candidates for public office. There is no 5% leeway for this type of activity which may not be engaged in by the church.(28) No political campaign activities are allowable.
Some activities relating to elections have been found not to constitute prohibited electioneering. For example, nonpartisan voter education activities are permitted. However, where the publication limits its focus to particular issues of importance to the organization, or otherwise indicates bias, this would not qualify as being nonpartisan voter education.
Political campaign intervention by 501(c)(3) churches is a hot topic with the IRS and increasingly with Congress. Political activities are likely to result in not just warnings, but revocations. One case has already resulted in a revocation. In 1992, the Church at Pierce Creek placed an ad in the Washington Times which stated: “Christians Beware: Do not put the economy ahead of the Ten Commandments. Did you know that Gov. Bill Clinton — supports abortion on demand — supports the homosexual lifestyle and wants homosexuals to have special rights — promotes giving condoms to teenagers in public schools? Bill Clinton is promoting policies that are in rebellion to God’s laws … HOW, THEN, CAN WE VOTE FOR BILL CLINTON?” After auditing the church, the IRS revoked the church’s tax exemption. The U.S. District court upheld the IRS’s revocation of exempt status, stating, “While plaintiffs probably are correct that the revocation has imposed a burden on their ability to engage in partisan political activity .. they have failed to establish that the revocation has imposed a burden on their free exercise of Religion.”(29) The United States Court of Appeals subsequently upheld this decision.(30) Perhaps most importantly, the Court found that the church had failed to show selective prosecution by the IRS.
And in March of 1998, the Christian Broadcasting Network announced that it had reached an agreement with the IRS whereby it would retain its exempt status as a 501(c)(3) organization, but because it intervened in partisan politics, it would lose its exempts status for 1986 and 1987, would make a significant payment to the IRS, agree not to take part in prohibited campaign activities, and take other steps, such as increasing the number of outside directors, to ensure tax compliance.(31)
The issue of whether the Christian Coalition is exempt has also been an issue since its formation in 1990. It applied for exempt status as a 501(c)(4) social welfare organization. “Following reports in June  that the application had been denied, the organization split into two entities: the for-profit Christian Coalition International, and the Christian Coalition of America, which assumed the already-secured section 501(c)(4) classification of the Christian Coalition of Texas.”(32) However, the Christian Coalition subsequently sued the IRS over its exempt status. On July 25, 2000, the Court ordered the IRS to refund taxes paid for the 1990 tax year, in the amount of $169.26, after the IRS conceded, in court, that the organization had operated as a 501(c)(4) organization during that year.(33)
Other churches and religious organizations that take steps to become publicly involved in partisan politics can expect to be reported to the IRS by organizations such as Americans United for Separation of Church and State, which have made complaints about several churches recently, and are expected to continue vigilance in this area.
If a church is considering participation in any activity that might be included in the definition of lobbying or participating in political activity, check with legal counsel first. Churches and other religious organizations cannot rely upon the IRS to overlook activities that may endanger their exempt status.
IRS REVIEW OF CHURCH RECORDS
RESTRICTIONS ON REVIEW
Section 7611 of the Internal Revenue Code places restrictions on when the IRS may engage in a church tax inquiry or examination. The church, and any division thereof, is entitled to have the Internal Revenue Service comply with the procedural requirements of this section prior to an audit of its records.
Section 7611 of the Code requires that there be a reasonable belief on the part of an IRS Regional Commissioner or higher Treasury official, on the basis of facts and circumstances recorded in writing, that the church organization is carrying on an unrelated trade or business, is engaged in taxable activity, or does not qualify for tax exemption, before an audit may begin.
If there is such a “reasonable belief”, the church must be given written notice before such an audit may begin. The church then has a chance to explain itself to the IRS before an audit is started.
Section 7611(h)(1) defines church to include any organization claiming to be a church, and any convention or association of churches.
Section 7611(d) states in part, that:
The Secretary may–
(A) determine that an organization is not a church which–
(i) is exempt from taxation by reason of section 501(a), or
(ii) is described in section 170(c)…
only if the appropriate regional counsel of the Internal Revenue Service determines in writing that there has been substantial compliance with the requirements of this section and approves in writing of such revocation, notice of deficiency, or assessment.
If an organization claims to be a church, then the Code itself states that Section 7611 is applicable and must be complied with. However, a church school that is separately incorporated is not included in the definition. Reg. Section 301.7611-1, A-3.
Thus Congress has attempted to protect churches from “excessive” inquiries by IRS agents unless the IRS: (1) has some basis for believing the church is engaged in unrelated trade or business or does not qualify for tax exemption; and (2) notifies the church in advance of the audit.
An exception is where the IRS is auditing an individual. If information is needed from the church to aid in that audit, the IRS can make inquiries of the church in the same way as it would any other organization, without any prior written notice. However, its inquiry must be limited to questions relating to the individual’s tax liability. For example, a United States District Court denied a church request to quash a summons for church records pertaining to the tax liability of church officers. The court rejected the argument that Section 7611 shielded the church from producing anything other than payroll records and W-2 information, on the basis that Section 7611 applies only to church examinations and not to individual taxpayers.(34)
Section 7611(c) contains a two year limitation on the period of time in which an examination must be completed, unless the time is suspended for one of the reasons listed. In the case of Music Square Church, an exempt determination was issued in 1981. In December of 1989, the IRS initiated a church tax inquiry; in 1996, a final adverse determination letter was issued, revoking the exempt status, retroactive to 1981 on the basis that the church was so closely operated and controlled by the founder, Tony Alamo, that there was not substantive independent existence, and that the organization was formed for the principal purpose of wilfully attempting to defeat or evade federal income tax. The church filed a summary judgment motion on the basis that the IRS lacks discretion to suspend the 2 year limitation, and that the final determination letter was void as being untimely. the Federal Circuit, agreeing with the Court of Federal Claims affirmed the denial of the motion, on the basis that 7611(c)(1) is goal oriented, and that the sole remedy for the taxpayer is contained in Section 7611(e)(1).(35)
WHAT MAY BE IN AN IRS SUMMONS?
Once an audit is started, the IRS may issue a summons to the church to gather information needed for a determination as to exempt status. A Federal Circuit Court of Appeals case lists the proper subjects of inquiry for such a summons:
“[W]e shall now turn our attention to the question whether (and to what extent) the material subpoenaed by the IRS summons directed to Dykema and his Christian Liberty Corporation is relevant and material to the inquiries which it is the statutory duty of the IRS to pursue.
Item 1. Calls for records of receipts and disbursements during the tax years under investigation. In particular it seeks records or contributions to the organization and of sales of merchandise and payroll records. It seems clear that this information would be relevant to determining whether the organization was a church supported by members or a commercial organization whose income was derived from sales of merchandise. Payroll records would also show whether the employees were a normal church staff or a commercial sales organization.
Item 2. Calls for balance sheets for the period in question. This is a normal type of financial record and would undoubtedly be useful to the investigation.
Item 3. Requests the formal documents of the church’s organizational structure essential to the question of organization, namely the corporate certificate and the articles filed with the State, and the Bylaws.
Item 4. Calls for correspondence files. This would be relevant to determination whether normal church-type activities were being conducted, or commercial operations, or attempts to influence legislation or elect political candidates.
Item 5. Asks for names of officers, directors, trustees or ministers.
Item 6. Calls for minutes of meetings, obviously a proper means of scrutinizing the official actions of the organization.
Item 7. Calls for specimens of publications.
Item 8. Asks for names of persons ordained or otherwise given recognition by the organization. This inquiry is appropriate as standard “boiler plate” material since a number of meretricious religious groups do operate “diploma mills” purporting to license “ministers” indiscriminately.
Item 9. Inquires as to subordinate affiliates.
Item 10. Seeks documentary evidence of the performance of sacerdotal functions.
Item 11. Seeks “documents reflecting the principles, creeds, precepts, doctrines, practices and disciplines” espoused by the organization.
Item 12. Calls for documents reflecting conditions for church membership or ordination.
Item 13. Inquires as to “vows of poverty.” Here again it is unlikely that this inquiry affects this particular small church, but again it is easy to return a simple negative answer, if appropriate. The inquiry is proper for a standard IRS list since it is common knowledge that such vows have been known in Roman Catholic tradition for many centuries. A notable example is St. Francis of Assisi.
Item 14. Seeks documentary evidence of assignment of income to the organization.
In short, detailed examination of the fourteen items embraced in the summons discloses that all of them are appropriate inquiries relevant and necessary to the proper performance of tasks entrusted to the IRS by Congress.”(36)
It should be noted, however, that just because the IRS begins an examination, not all records are automatically open to examination. For example, in U,S. v. Church of World Peace, it was determined that a summons seeking a list of members and the names of persons for whom marriage ceremonies were performed by the church would not be enforced, as the Service failed to show that the requested records were necessary to determine either the tax exempt status or the amount of any tax liability.(37) And in U.S. v. Church of Scientology of Boston, Inc., the IRS argued that if its examination was for the right purpose, it would look at “whatever books, or documents, or records are ‘relevant,’ or would ‘cast some light upon’ potential liability.” The court disagreed, and held that “to examine books, the IRS must meet these ‘reasonable belief’ requirements and it must also meet the ‘extent necessary’ requirements.”(38)
Donor Substantiation (Intangible Religious Benefits)
Charities that provide benefits to their donors must disclose the value of those benefits to the donors; donors who wish to claim charitable income tax deductions must obtain records from the charitable recipient to substantiate the gift; and charities must make certain information available to the general public on request. Under Section 170(f)(8), donors who claim a deduction for a charitable contribution of $250 or more are responsible for obtaining from the donee charity, and maintaining in their records, substantiation of that contribution. The document substantiating the contribution must be a contemporaneous written acknowledgment from the charity — that is, it must be received by the earlier of (a) the date the donor actually files the tax return for the year in which the gift was made, or (b) the due date (including extensions) of the return. The IRS does not require any particular form. However, the notice must contain the following information:
(a) The amount of cash paid and a description (but not necessarily the value) of any non-cash property transferred to the charity;
(b) Whether or not the charity provided any goods or services in consideration for the cash or property;
(c) A description and good faith estimate of the value of any goods or services provided by the charity in consideration for the cash or property; and
(d) If applicable, a statement indicating that the charity has provided intangible religious benefits.
If the goods and services consist solely of intangible religious benefits, the charity is not required to describe or value those benefits. It is sufficient merely to state the fact that only intangible religious benefits were provided. Intangible religious benefits are those provided by an organization which is organized exclusively for religious purposes and which generally are not sold in a commercial transaction. However, tuition for education leading to a recognized degree, goods available commercially, and the like are not considered intangible religious benefits even if provided by an exclusively religious organization.
Charitable Contributions Shielded from Bankruptcy of the Donor
There have been a number of instances where, after a person declares bankruptcy, the trustee has attempted to, and in many instances, has been successful in requiring contributions to various charities to be put back into the bankruptcy estate, if the contribution had been made within one year of the bankruptcy filing.
In order to provide some protection to the innocent charity, in June of 1998, the “CHARITY DONATION PROTECTION ACT.”, S. 1244, was adopted. This change in the law shields some charitable contributions from the reach of the bankruptcy trustee. It will also allow people in bankruptcy to continue to make charitable gifts, as long as the gifts do not exceed 15% of their income.
The contributions that are protected, are gifts of cash and financial instruments (e.g. stocks, bonds, options, and derivatives) to “religious and charitable” organizations exempt under Section 170(c)(1) or (c)(2) of the Internal Revenue Code. Contributions of other types of personal property and real property continue to be open to challenge. In addition, contributions must be made directly by the individual, and not through a corporation, in order to be protected. If, prior to the bankruptcy, a person can show that they regularly gave over 15% every year, then the 15% threshold for contributions made before the bankruptcy may be increased. However, the 15% limit for the individual currently in bankruptcy will not be increased.
UNREASONABLE COMPENSATION ISSUES
1. CEP Audits of Televangelists
After many years of auditing exempt organizations on a “hit and miss” type basis, the IRS developed a coordinated examination procedure that it is using to audit exempt organizations. When the IRS began these exams, one type of organization subject to these exams were televangelists.
Probably the most common reason today for revocation of exemption is inurement, including issues of excessive compensation. This is also the area that appears to make it to the front page of the newspaper most quickly. As a result, the compensation paid to executives, insiders, directors, and officers, should be carefully reviewed. If the organization is reluctant to have this information made public, it is likely that the IRS will find it to be unreasonable, and thus in violation of the requirement that no funds of a nonprofit inure to the benefit of any private individual.
The examinations of media evangelists support this finding. On June 30, 1993 it was reported that there were seven such cases involved in the coordinated examination procedure. Five of these had issues of inurement, two had issues of private benefit, and five had employment tax issues being examined. The IRS also reported that of the twenty-one media evangelist examinations it was conducting or had conducted, five involved private benefit issues, fourteen involved inurement issues involving compensation, five involved other types of inurement, eight had employment tax issues, and sixteen had income tax issues.
The determination of reasonableness of compensation, as well as what benefits are taxable to the individual are the same for exempt organizations as it is for taxable corporations. Section 162 and its regulations apply to exempt organizations and their employees.
2. Intermediate Sanctions
Because of excesses such as those found with some televangelists, there have been many attempts to provide the IRS with more tools. This attempt was finally achieved with the adoption of what is commonly referred to as “intermediate sanctions”. This law allows the IRS to impose excise (penalty) taxes on certain individuals who have received a benefit worth more than what they gave in return to the exempt organization. In other words, it penalizes the individual(s) who received the excess benefit from the nonprofit, rather than the organization. The effective date is September 14, 1995. This law applies to churches and other religious organizations, as well as other nonprofit charitable organizations.
Essentially, Intermediate Sanctions may be imposed on anyone who is a disqualified person (anyone who, within a 5 year lookback period, is or was in a position to exercise substantial influence over the organization) when that person is found to have received an excess benefit (e.g. compensation in excess of the value of services received, certain revenue sharing agreements, or payments which are not treated as compensation by the nonprofit and/or the taxpayer) from the covered nonprofit. If the disqualified person receives a benefit in excess of the value of services/property contributed, he/she must undo the excess benefit and may have to pay a penalty, based upon the amount of the excess benefit and the timeliness of the correction. (25% of the excess benefit, and if not paid timely, an additional 200% of the excess benefit). In addition, anyone approving the transaction may also be subject to penalty (10% up to $10,000 per transaction).
The Temporary regulations state that the procedures of section 7611 will be used in initiating and conducting any inquiry or examination into whether an excess benefit transaction has occurred between a church and a disqualified person. For purposes of this rule, the reasonable belief required to initiate a church tax inquiry is satisfied if there is a reasonable belief that a section 4958 tax is due from a disqualified person with respect to a transaction involving a church.
As is noted above, section 7611 does not limit the ability of the IRS to examine an individual, even when that examination requires review of church records. Therefore, since the intermediate sanctions law is directed at the disqualified individual(s) rather than the organization, the Service can be expected to pursue inquiries in this area.
The most likely situation where a church would be involved in an intermediate sanctions matter is where the pastor, who will almost always be considered to be a disqualified person (able to exercise substantial influence over the church) receives a substantial salary. It is strongly recommended that any church or religious organization that provides compensation to its pastor, or otherwise engages in a situation which involves a disqualified person, carefully review the law and the steps that can be taken to limit any potential liability. See INTERMEDIATE SANCTIONS – New Regulations for more specific information.
EMPLOYMENT TAXES AND REPORTING
1. Withholding — Employees
Generally, a church, like any other employer, is required to deduct taxes from the wages of employees. IRC §§ 3102 and 3402(a). Therefore, church employees, other than ministers, are subject to withholding.
Wages include compensation for services performed, including salaries and the cash value of other benefits not specifically excluded. IRC § 3121(a). Specific exclusions exist for certain health, disability and death benefits.
Employees are defined by the IRS as follows:
“Generally, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so.” -Treas. Reg. § 31.3401(c)1(b).
Employers are not required to withhold taxes from payments to persons performing services as independent contractors. Independent contractors are generally persons in business for themselves who offer their services to the public.
Requiring a church to withhold and pay taxes on behalf of its employees is not violative of the First Amendment:
“We do not mean to say that religious groups and the press are free from all financial burdens of government. … It is clear … that a taxing statute is not contrary to the provisions of the first amendment unless it directly restricts the free exercise by an individual of his religion. We think it clear that, within the intendment of the first amendment, the Internal Revenue Code, in imposing the income tax and requiring the filing of returns and the payment of the tax is not to be considered as restricting an individual’s free exercise of his religion.” (citations omitted)(39)
This matter was again litigated after the IRS made a $3.5 million assessment in 1994 against the Indianapolis Baptist Church for unpaid social security taxes and income tax withholdings and interest and penalties; the church did not pay, and the government filed suit in 1988. In 1999, the United States District Court rejected the argument of the church that the First Amendment bars any application of the federal laws to the church, holding both that the broad public interest in maintaining a sound tax system is an overriding governmental interest, and that the tax system has a secular purpose that neither advances nor inhibits religion, and does not foster an excessive entanglement with religion. The 7th Circuit granted summary judgment to the government, ruling that the application of neutral, minimally intrusive federal employment tax laws to religious entities does not violate the First Amendment to the Constitution. The court also determined that the Religious Freedom Restoration Act did not reverse this holding.(40) Since that time, the United States District Court has ordered the leaders of the church to surrender its property to the government to satisfy the liens.(41)
2. Withholding — Ministers.
Employers are not required to withhold taxes for “services performed by a duly ordained, commissioned or licensed minister of a church in the exercise of his ministry”. IRC § 3401(a)(9). Therefore, a church does not have to withhold income taxes from compensation paid to the pastor.
However, if both the church and the minister agree, a minister may enter into an agreement with the church to withhold and pay income tax. The agreement may be terminated at any time by mutual consent. IRC § 3402(p). If the church does not withhold, the minister must pay quarterly estimated taxes pursuant to IRC § 6315 et seq.
3. Social Security — Employees.
Before 1984, churches were exempt from withholding social security (FICA) taxes, and from paying the employers share thereof. Effective January 1, 1984, Internal Revenue Code § 3121(w)(1) provides that a church or qualified church organization that is “opposed for religious reasons to the payment of the tax” may file an election to be excluded from payment of the tax. Under that section, a church that was already an employer on July 1, 1984 had to file a Form 8274 with the Internal Revenue Service before October 30, 1984 in order to remain exempt. Churches that did not have employees at that time must file (or have filed) the form prior to the due date of their first employer quarterly return. Churches that have declared themselves exempt may revoke their exemption after 1986, but the law does not specify the procedure for revocation. IRC Sec. 3121(w)(2).
if a church makes this election, it does not have to withhold FICA taxes from the salaries of their non-minister employees. However, the non-ministry employees are then required to pay their own social security tax at the self-employed rate (generally equal to the combined employer and employee rate). IRC 1402(j).
The constitutionality of the Social Security withholding scheme was tested in Bethel Baptist Church v. U.S..(42) Bethel contended that the withholding requirement violated the First Amendment by forcing the church or its members to pay social security taxes in violation of their basic religious convictions. Bethel also argued that it was unnecessary, as Bethel provided its own retirement system to church member employees.
The Court ruled that although compulsory participation in the social security system may interfere with the free exercise rights of religious groups, the government’s interest in tax collection outweighs any private religious interest in nonpayment of taxes. (43)
4. Social Security — Ministers.
Ministers are always treated as self-employed with respect to the social security program. IRC 3121(b)(8)(A), IRC 1402(a)(8). In other words, a minister will never be included in FICA; he/she is subject to SECA (unless he/she elects out – see below).
The Self Employment Contributions Act provides that a “duly ordained, commissioned or licensed minister of a church in the exercise of his ministry” is to be treated as self-employed for purposes of social security even if he is considered to be an employee for income tax or other purposes. I.R.C. Sec. 1402(c).
Treas. Reg. Sec. 1.1402(c)-5(a)(2) provides that:
“a duly ordained, commissioned or licensed minister of a church … is engaged in carrying on a trade or business with respect to service performed by him in the exercise of his ministry … unless an exemption under section 1402(e) … is effective….”
Unless he elects to be exempt as set forth below, a minister must attach Schedule SE to his annual income tax return and pay the full amount of the Social Security tax on his NET income received from the ministry.
This net income includes the parsonage housing allowance. Even though a minister can exclude the parsonage allowance in computing his income tax, he must include that amount in computing his self-employment tax. I.R.C. 1402(a)(8). However, once a minister retires, the rental value of any parsonage or parsonage allowance received are not subject to SECA.
Members of a religious order are considered to be self-employed for purposes of social security, the same as ministers. They may apply for social security tax exemption in the same manner as ministers. Although members of a religious order often take a vow of poverty, they are still taxable on income earned from any outside occupation. However, the amount of any earnings turned over to the order will be treated as a charitable contribution.
Social Security Exemption — Pastors
A minister is permitted to withdraw from Social Security coverage if:
a. He is ordained, licensed or commissioned.
b. The church ordaining him is qualified as a tax exempt religious organization.
c. He affirms that he is opposed to coverage because of religious principles.
d. He has informed his ordaining, commissioning or licensing body that he is opposed, because of religious principles, to the acceptance of any public insurance.
e. He has not filed an effective waiver certificate, electing to be covered (Form 2031).
f. The exemption application (Form 4361) is filed within 2 years from the date his tax return is due on self- employment income of $400.00 or more. This two year period cannot be changed. If the two years pass without an application being filed, the opportunity to be exempt expires.
If a pastor applies for exclusion from the self- employment program, and the church in which he was ordained or the church from which he receives compensation has not received an exempt determination letter from the IRS, his application is likely to be rejected, unless the IRS can be shown that the church is exempt under 501(c)(3) of the Code. This can be done either by filing an application for an exempt determination letter, or by filing Form 8123 with the Internal Revenue Service.
If a pastor chooses to elect out, the exclusion will apply only to compensation received as a pastor. Wages received in any other capacity are not exempt.
Members of a religious order who are under a vow of poverty are exempt from the social security program. Members of a religious order not under a vow of poverty are considered self-employed for purposes of the social security program, and can file an application to be considered exempt from self-employment, as can a minister.
Revocation of Election.
About every 10 years, there have been efforts to bring pastors back into the social security system. There is currently an open window that allows pastors who elected out of the social security system to elect back in, if they file no later than the due date (including extensions) of the pastor’s Federal income tax return for the second tax year beginning after 1999. This would generally mean that Form 2031 to elect back in must be filed no later than April 15, 2002. Of course, this means that the pastor is liable for self employment taxes for the tax year for which the election is effective (either the 2000 or the 2001 tax year).
5. Unemployment Tax
In addition to having to withhold and pay income tax and social security taxes, employers are also required to pay unemployment taxes, computed as a percentage of their total payroll. IRC Section 3301. However, unemployment taxes are not payable on services performed:
“(1) in the employ of (A) a church or convention or association of churches or (B) an organization which is operated primarily for religious purposes and which is operated, supervised, controlled or principally supported by a church or convention or association of churches
(2) by a duly ordained, commissioned or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties regulated by such order.” IRC Section 3309(b).
This means that churches are exempt from Federal unemployment tax.
Prior to 1976, elementary and secondary schools were also exempted. An amendment in 1976 removed the exemption. In 1978, the United States Secretary of Labor announced that this amendment required church schools to be covered. A number of church operated elementary and secondary schools challenged the Secretary of Labor’s interpretation.
In St. Martin Evangelical Lutheran Church v. South Dakota,(44) the United States Supreme Court ruled that employees of schools that have no separate legal existence from a church are exempt from the unemployment tax. The Court declined to rule that application of the tax to church run schools was violative of the First Amendment. The Court ruled that Congress intended the exemption to apply since there was no difference between employees of a church and employees of a church run elementary or secondary school.
Church schools that have a separate legal existence may also be exempt from unemployment taxes:
“To establish exemption from FUTA, a separately incorporated church school (or other organization) must satisfy the requirements of Section 3309(b)(1)(B): (1) that the organization `is operated primarily for religious purposes,’ and (2) that it is `operated, supervised, controlled, or principally supported by a church or convention or association of churches.'”(45)
In 1988, the United States Secretary of Labor issued a directive that schools run by a church or group of churches would be exempt (even if separately incorporated), but that schools not directly connected to a church would have to be covered.
IS A MINISTER AN EMPLOYEE OR SELF-EMPLOYED FOR INCOME TAX PURPOSES?
Whether a minister is an employee or is self-employed is a question that has caused controversy among the authors of tax advice books. It is a significant question for many reasons:
(1) Employees are required to report their annual compensation directly on Form 1040, and can claim unreimbursed business expenses on Schedule A only if they itemize deductions, and then only to the extent that such itemized expenses exceed 2% of adjusted gross income and are limited to claiming only 80% of business meals and entertainment expenses. Self-employed persons, on the other hand, report compensation and business expenses on Schedule C. Business expenses are deductible whether or not the minister itemizes deductions, and are not subject to the 2% floor.
(2) Adjusted gross income tends to be higher if a minister reports as an employee, since unreimbursed business expenses are deductions from adjusted gross income. Self-employed persons deduct all business expenses in computing adjusted gross income. This adjusted gross income figure is important because the percentage limitations on charitable contributions and medical expense deductions are tied to adjusted gross income.
(3) The forms used are different. Ministers working for a church or church agency should receive a Form W-2 each year if they are employees, and a Form 1099-MISC if they are self-employed.
(4) Tax-deferred annuities offered by some churches may only be available to employees.
(5) Disability pay exclusion is available only to those having “employee” status.
(6) Once an “employee” status is adopted by issuance of a W-2 Form, it cannot be reversed in the eyes of the I.R.S.
For many years, most ministers reported their income taxes as self-employed persons. This was consistent with the treatment of ALL ministers as self-employed for social security purposes. In 1978, the IRS made statements that were interpreted by some tax advice book authors to REQUIRE ministers to report their income as employees. In Revenue Ruling 80-110, the IRS held that a minister who is “an employee of a church” may not deduct unreimbursed business expenses on Schedule C but rather must use Schedule A. See also Rev. Rul. 79-78. In Publication 517 (“Social Security for Members of the Clergy and Religious Workers”), the IRS lists a comprehensive example demonstrating how a minister who is an “employee of the church” should report his income and business deductions. These pronouncements led some tax advisors to conclude that the IRS now views ALL ministers serving local churches as employees rather than as self-employed. Reliance has also been placed on section 3401(a)(9) of the Internal Revenue Code which states that ministers who are employees of a church are exempt from tax withholding.
What was overlooked was that the I.R.S. pronouncements stated the appropriate manner of reporting income and deductions if employee status was assumed, and were not IRS directives requiring all ministers to report their taxes as employees. Publication 517 recognizes that it is possible for ministers who are employees of their churches to be self-employed with respect to certain services, and no one has seriously questioned whether full-time evangelists are self- employed for income tax purposes. It is, therefore, impossible to generalize that all ministers are employees for income tax purposes.
The soundest analysis of this issue leads one to conclude that ministers should be treated as employees only if they satisfy the common law employee test adopted by the Treasury Department in Treas. Reg. § 31.340(c)1(b).
Another important factor is the parties’ own characterization of their relationship. For example, if a church and its minister enter into a written contract that specifically characterizes the minister as self-employed, this would be an additional factor to consider.
There is no doubt that many ministers will be employees under the “common law employee test” discussed above. In fact, since 1978, many denominations have formally taken the position that their ministers are employees. However, such a conclusion is not automatic. As has already been indicated, traveling evangelists ordinarily are self-employed, as are ministers of local congregations with respect to certain personal services rendered directly to church members (baptisms, marriages, funerals, etc.).
Ministers of local congregations may be self-employed with respect to their services on behalf of the church as well, provided that they are not “employees” under the common law employee test. There have been a number of cases, going both ways. For example, the Tax Court held that an ordained minister for the United Methodist Church was an employee and thus not entitled to deduct his business expenses on Schedule C. Henry W. Radde, et us. v. Commissioner, T.C. Memo 1997
-490 (1997). But in another case decided the same year, the Court of Appeals found that an ordained minister of the Assemblies of God Church was an independent contractor. Alford v. United States, 1997 TNT 121-34, 79 AFTR2d Par. 97-1045 (1997).
In summary, a minister’s reporting status for federal income tax purposes will be determined on the basis of the common law employee test. Ministers who believe they are self-employed persons should have their church so characterize them in their corporate minutes and should have the church issue them a Form 1099 rather than a Form W-2 at the end of each calendar year.
The IRS has suggested that if a church treated a previous minister, in a substantially similar position, as an employee for any period after 1977, then no minister can be treated as self-employed by that church. See Rev. Proc. 85-18. Prior ministers were treated as employees if the church issued them a W-2, or included their wages on Form 941 or 941E. The same rule applies to a minister who at any time after 1977 was treated as an employee by his or her church.
It should be emphasized that although treatment of an employee means that employee expenses are only deductible on Schedule A rather than Schedule C, there still remain many benefits to being treated as an employee, including the ability of the church to include the pastor in the church cafeteria plan.
IRC Sec. 107 provides that a minister may exclude from his gross income a specified parsonage allowance. An employing church must also ensure that certain requirements are satisfied so that the minister may exclude the allowance from his income.
Treas. Reg. 1.107-1(b) provides in relevant part:
The term “rental allowance” means an amount paid to a minister to rent or otherwise provide a home … if such an amount is designated as rental allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization…The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation…is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of a rental allowance as distinguished from salary or other remuneration. (Emphasis added.)
Thus, Treas. Reg. 1.107-1(b) contains two requirements. First, the designation must be made by a “church or other qualifying organization.” Second, the rental allowance must be “designated in advance” of the payment to the minister.
1. Church or Other Qualifying Organization
There is no precise definition of what constitutes a church. See “Definitions”, above. Neither is there a precise definition of what constitutes another “qualified organization”. As the court observed in Warnke v. United States 641 F.Supp 1083 (1986):
“Regulation 1.107-1(b) does not contain any definition or explanation for the term “qualified organization”. The lack of a statutory or regulatory definition for the term suggests the term is to be given meaning on a case by case basis.” (at 1091)
“Integral agencies” of churches or religious organizations are qualified organizations. IRS Revenue Ruling 72-606. “Religious organization” is undefined by the Code or Regulations.
In Rev. Rul. 72-606 a minister serving as an administrator of an old age home affiliated with a religious organization was denied the rental exclusion on the grounds the home was not an integral agency. The Internal Revenue Service set forth eight criteria to determine whether an organization is an integral agency of a church or religious organization:
1. Whether the religious organization incorporated the institution
2. Whether the corporate name of the institution indicates a church relationship
3. Whether the religious organization continuously controls, manages, and maintains the institution
4. Whether the trustees or directors of the institution are approved by or must be approved by the religious organization or church
5. Whether trustees or directors may be removed by the religious organization or church
6. Whether annual reports of finances and general operations are required to be made to the religious organization or church
7. Whether the religious organization or church contributes to the support of the institution
8. Whether in the event of dissolution of the institution its assets would be turned over to the religious organization or church.
The IRS went on to state:
The absence of one or more of these characteristics will not necessarily be determinative in a particular case. Generally, in reaching a conclusion on the question, when application of the above criteria to the facts does not clearly support an affirmative or negative answer, the appropriate organizational authorities are contacted for a statement, in light of the criteria, whether the particular institution is an integral agency, and their views are carefully considered.
In Rev. Rul. 70-549, a minister who served as head of a department of education of a college supported by donations from a particular church, was allowed rental allowance on the grounds the college was an integral agency of the church.
In Flowers v. United States D.C., 82-1 USTC 9114 (1991), a professor of religion at a church related school was denied the allowance because the school only met two of the tests set forth in Rev. Rub. 72-606.
In Warnke v. United States, 641 F.Supp 1083 (1986) the court stated at 1091:
Based on the limited decisional law, it appears that a qualified organization does not have to be a religiously affiliated entity. See C.T. Boyd, Jr. 42 T.C.M. 1136, T.C. Memo 1981-523; IRS Letter Ruling 8519004, 1/28/85; Melvin L. Libman, 44 T.C.M. 370, Dec. 39, 161(M), T.C. Memo 1982-377. Nor must designation come from the payor of the ministers compensation. Boyd, supra.
In C.T. Boyd, Jr., supra, Boyd was employed as a police chaplain by the Indianapolis Police Department. Parsonage allowance was designated by the Church Federation of Greater Indianapolis, Inc., a non-profit corporation. The court held that designation by an entity other than the employer of the minister was proper, under Treas. Reg. 1.107-1(b).
In a recent Tax Court case, it was determined that two officers of an evanglical organization could exclude housing allowances from their income, even though their church organization was not exempt (its exempt status was revoked in 1994, retroactive to 1985, apparently due to the level of nonexempt activities and/or private inurement).(46)
The extent to which organizations other than churches and integral agencies can designate rental allowances has not been determined by the courts or the Internal Revenue Service.
2. Official Designation
The official designation of rental allowance by a church or other qualified organization need not be in writing. In M. L. Libman,(47) the court upheld an oral designation by the United Jewish Appeal on behalf on a Jewish rabbi. However, because of the language of Treas. Reg. 1.107-1(b), it is strongly suggested that any designation be in writing.
If there is no advance designation by a church or other qualified organization, the rental allowance exclusion will be lost to the minister.(48)
3. Qualifications of Minister
A church can only designate and pay a parsonage allowance to a minister who meets certain qualifications. IRC § 107 refers to a “minister of the gospel.” In discussing this, Treas. Reg. 1.107-1(a) provides that the minister must perform services which are “ordinarily the duties of a minister of the gospel” such as “performance of sacerdotal functions, conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries.”
Treas. Reg. § 107-1(a) also references Treas. Reg. § 1.1402(c)-5, which requires the minister to be ordained, commissioned or licensed, and has a similar list of duties. This requirement of ordination, commissioning or licensing has been clearly required before parsonage will be permitted.
In Rev. Rul. 78-301, the Service ruled that an unordained, but commissioned cantor of the Jewish faith who performed similar duties was allowed the exclusion, while a synagogue administrator was found not to be a minister, because he did not perform religious rites or ceremonies, and there was no evidence of him being a religious leader.(49)
In Kirk v. CIR, 425 F.2d 492 (D.C., 1970) a professional employee of the Methodist Church, was denied the rental exclusion because he “was not an ordained, commissioned, or licensed minister of the gospel. The court stated:
Granting that petitioner performed services that are ordinarily the duties of a minister of the gospel, another requirement of the regulations is that petitioner “be” a minister of the gospel. Specifically, the regulations “require” him to be “a duly ordained, commissioned, or licensed minister of a church or of a religious order. Petitioner is a member of a church which provides for ordination of ministers. He does not claim to be ordained. Nor is he licensed in the sense that he has any official document or other indicia of permission formally conferred upon him, to perform sacerdotal functions. We do not think he is commissioned. No congregation of believers was committed to his charge. The duty of spreading the gospel, either by sermon or teaching, was not formally entrusted to his care. [citation] Furthermore, all the services performed by petitioner in this case were secular in nature. Id. 495.
Ministers of music and education were also found not to qualify because they were not ordained, licensed or commissioned. Rev. Rul. 59-270, 1959-2 C.B. 44.
On the basis of these and similar cases and rulings, it appears that: (1) the minister must have some sort of ordination, licensing or commissioning; and (2) he/she must actually be performing ministerial functions, rites or ceremonies to qualify for parsonage allowance.
4. Computing Parsonage
The organization must designate the amount of the minister’s parsonage in advance. The organization should have the minister report, in advance, the amount of allowable parsonage expected to be incurred. The organization may then designate that amount, plus an additional amount for unexpected expenses, as parsonage allowance for that minister.
The minister must include in income any amounts designated but not actually spent. Therefore, there is no penalty to church or minister for overdesignation.
There has been an issue of whether the amount of parsonage permitted is limited by the fair rental value of the home. The statute reads: “In the case of a minister of the gospel, gross income does not include
— (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” IRC § 107. Although the plain language of this exclusion would not lean towards such an interpretation, the IRS has argued that the second provision is limited by the first – i.e. that a minister may only exclude parsonage to the extent of the fair market rental value of the home being provided. In a recent tax court opinion, the tax court disagreed with this reading, and found that the actual amount spent in providing a home could be excluded, even if this exceeded the fair market rental value of the home.(50)
EMPLOYEE RETIREMENT INCOME SECURITY ACT/ CHURCH PLANS
The Employee Retirement Income Security Act (ERISA, 29 USC 1001 et sq.) was enacted to regulate certain employee benefit plans, such as pension and profit sharing plans. In enacting the plan, Congress determined:
“many employees with long years of employment are losing retirement benefits owing to lack of vesting provisions …inadequacy of current minimum standards, the soundness and stability of plans…termination of plans before requisite funds have been accumulated… 29 USC 1001(a)
ERISA is a vast body of regulations covering most aspects of employee benefit plans, such as minimum participation and vesting requirements (29 USC 1051-1061), funding requirements (Secs. 1081-1086), reporting and disclosure (Secs. 1021-1031), fiduciary responsibility (1101-1114) and administration and enforcement (Secs. 1131-1242). 29 USC Sec. 1301-1451 deals specifically with benefits upon termination of benefit plans (Plan Termination insurance), with special rules for multiemployer plans.
Generally, contributions to a plan subject to ERISA (and otherwise qualified under IRC Sec. 401) are tax deductible to the employer/contributor. IRC Sec. 401. The benefits to the employee/ beneficiary are not taxable to him until distribution. IRC 402, 403.
“Church Plans” are exempt from regulation by ERISA. 29 USC 1003(b)(2) and 29 USC 1321(b)(3). A “church plan” is defined as:
“a plan established and maintained …for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under [IRC Sec. 501]” 29 USC 1002(33)(A)
Church Plans do not include pension and retirement plans which exist primarily for the benefit of employees employed in connection with an unrelated trade or business of the church. 20 USC 1002(33)(B)(i). Also, in order to qualify as a church plan, substantially all employees included in the plan must be ministers, employees of a church or convention or association of churches, or an employee (or beneficiary of such employee) of an exempt organization controlled by the church. 29 USC 33()(B). However, church plans may include organizations not normally considered “churches”, such as hospitals and educational institutions, as long as there are sufficient church ties, such as the organization operating in accordance with church principles, or promoting the church’s values, and/or being controlled by the church.
Religious Organizations, other than churches, conventions or associations of churches are not exempt from ERISA. 29 USC (33)(A).
A qualified organization maintaining a “church plan” may elect to be subject to ERISA, despite the exemption. Once made, the election is irrevocable. IRC 410(d). Such an election subjects the organization to all the requirements of ERISA (above).
Generally, electing to be subject to ERISA has no tax advantage to a qualified organization. The tax advantages that become available to businesses who are subject to the act are already available to churches, due to their tax exempt status. IRC 501 et seq.
The definition of an employee for purposes of church retirement plans under Section 414 of the Internal Revenue Code includes a minister engaged in the exercise of his ministry “regardless of the source of his compensation.” Therefore, although this would imply that even if the minister is paid as an independent contractor, he should be treated as an employee for purposes of inclusion in a church retirement plan. However, because of some confusion concerning this point, This was clarified by the Small Business Job Protection Act of 1996 to specifically allow the inclusion in a church plan of ordained, commissioned and licensed ministers who, in connection with the exercise of their ministries, are either self-employed or employed by a non-501(c)(3) organization (e.g. chaplain of a prison). IRC § 414(e)(5).
The 2000 Treasury/IRS Business Plan lists as one of its projects, issuing guidance relating to the application of the nondiscrimination and coverage rules to church plans.
PRIVATE SCHOOLS – PROOF OF RACIAL NONDISCRIMINATION
Every organization that claims exemption from federal income taxes under section 501(c)(3) of the Code and that operates, supervises, or controls a private school (or schools) must file a certificate of racial nondiscrimination (Form 5578) each year. this includes churches and other religious organizations. The certificate is due by the 15th day of the fifth month following the end of the organization’s fiscal year. For purposes of this requirement, a “private school” is defined as an educational organization that normally maintains a regular facility and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly conducted. The term includes primary, secondary, preparatory, or high schools, and colleges and universities, whether operated as a separate legal entity or an activity of a church. The term also includes preschools.
PROPERTY TAX EXEMPTIONS.
The property tax treatment of exempt organizations depends on the use which is made of the property. This aspect of taxation is exclusively a matter of state law. For example, some states exempt the parsonage from tax, while others do not.
In the late 1960’s, a challenge was brought in New York, contending that the New York City Tax Commission’s grant of exemption to church property indirectly requires the taxpayer to make a contribution to religious bodies and thereby violates the First Amendment. this case was appealed to the United States Supreme Court, which upheld the exemption as being constitutional. The court discussed the issue of constitutional neutrality, and noted
“the basic purpose of these provisions, which is to insure that no religion be sponsored or favored, none commanded, and none inhibited.”(51) It further noted that the purpose of the exemption was not to advance nor to inhibit religion. “It has not singled out one particular church or religious group or even churches as such; rather, it has granted exemption to all houses of religious worship … We cannot read New York’s statute as attempting to establish religion; it is simply sparing the exercise of religion from the burden of property taxation levied on private profit institutions.”(52)
The court also noted that all 50 states have provided for tax exemption of places of worship, most by constitutional guarantees, for as long as the federal government has exempted them from income tax.
In California the issue is addressed in Article XIII of the California Constitution and in Revenue and Taxation Code Sections 214-215. The Constitution makes certain property tax exemptions mandatory and allows for issuance of a welfare property tax exemption to other entities on a discretionary basis. Church property used exclusively for religious worship is exempt under Article XIII, Section 3(f). If church property is also used for a school, the religious exemption is available under Revenue and Taxation Code Section 207. If the property is used for any other purpose, the church/religious organization must seek a property tax exemption under the “welfare exemption” found in State Constitution Article XIII, Section 4(b) and related provisions of the Revenue and Taxation Code (Sections 214 and 215). This exemption is available to property used exclusively for religious, hospital or charitable purposes and owned by a nonprofit organization organized exclusively for such purpose, no part of whose net earnings inure to the benefit of any private individual. In order to be eligible, the charitable, religious or hospital organization’s articles of incorporation must contain a provision which irrevocably dedicates the entity’s property to religious or charitable purposes upon dissolution (i.e., a “charitable dedication clause”).
It should not be assumed that the property of an exempt organization is automatically exempt. In California, a yearly filing must be made for each of the exemptions claimed. The deadline for filing Welfare Exemptions and the educational property exemption is March 15 of each year; the deadlines for filing notice of the Church and Religious Exemptions is March 31 of each year. If the deadline is not met, the exemption will be deemed to be waived. A late filing may be made, but the full exemption will not be granted.
If a portion of the property is used for the production of unrelated business taxable income, then the organization will only be entitled to a partial exemption.
Again, it should be noted that property tax exemptions are a matter of state law. If the organization has property in other states, their state law should be reviewed to determine the exempt status of each parcel.
SALES AND USE TAXES
As with property tax exemptions, sales tax exemptions are a matter of state law. However, unlike the property tax area, the United States Supreme Court has not been as kind to exemptions for religious organizations.
In fact, in 1989 the Supreme Court struck down a Texas statute exempting religious publications from state sales tax, on the basis that the statute violated the Establishment Clause of the First Amendment, by providing a benefit to religious organizations without providing a comparable benefit to secular organizations.(53) This was a plurality opinion with no majority basis for the holding.
The next year, the Supreme Court went further, and in a unanimous opinion, upheld the imposition of California state sales and use tax liability on a religious entity for sales of religious merchandise on the basis that such a tax did not violate the First Amendment.(54) It did not violate the Free Exercise Clause because it did not unduly burden the free exercise of religion: It is not a flat license tax that results in a prior restraint on the exercise of religious liberty,(55), but applies neutrally to all retail sales of tangible personal property in California; it “is not a tax on the right to disseminate religious information, ideas or beliefs,”(56) but is a tax on all retail sales in California, “regardless of the motivation for the sale or the purchase; there is no danger that appellant’s religious activity is being singled out for special and burdensome treatment;”(57) there is no evidence that the tax violates the organization’s sincere religious beliefs;(58) and to the extent the tax decreased the amount of money the organization has to spend on its religious activities, such burden is not constitutionally significant. It also does not violate the Establishment Clause: “It is neutral and nondiscriminatory on questions or religious belief… threatens no excessive entanglement between church and state;”(59) and most importantly “the imposition of the sales and use tax … does not require the State to inquire into the religious content of the items sold or the religious motivation for selling or purchasing the items, because the materials are subject to the tax regardless of content or motive.”(60) In other words, there is less entanglement caused by taxation of all materials than there would be in providing an exemption only for religious materials.
USE OF TAX EXEMPT BONDS
An issue has been raised as to whether a religious organization may qualify for tax exempt construction bonds. On July 30, 1999, a Richmond, Virginia Circuit Court judge ruled that Regent University in Virginia Beach, Virginia, does not qualify because it is pervasively sectarian, with its primary purpose being religious training.(61) On November 3, 2000, the Virginia Supreme court ruled that Regent University, despite its sectarian status, could obtain the bonds. The Court found that, “Because the bond proceeds are the funds of private investors, the bond proceeds are not governmental aid received by the institution;’ therefore, the issuance of the bonds would not violate the First Amendment.(62)
However, in another case, a United States District Court in Nashville, Tennessee, enjoined the local government from issuing tax-exempt bonds to benefit a pervasively sectarian institution, because such an issuance “created the perception of government endorsement of the religious views” of the organization (David Lipscomb University).(63)
THESE MATERIALS ARE PRESENTED WITH THE UNDERSTANDING THAT, DUE TO THE RAPIDLY CHANGING NATURE OF THE LAW, INFORMATION CONTAINED IN THIS PUBLICATION AND THE PRESENTATION MAY BECOME OUTDATED. AS A RESULT, ANY INDIVIDUAL USING THESE MATERIALS AND INFORMATION PRESENTED MUST ALWAYS RESEARCH ORIGINAL SOURCES OF AUTHORITY AND UPDATE INFORMATION TO ENSURE ACCURACY WHEN DEALING WITH A SPECIFIC CLIENT OR FIRM MATTER. IN NO EVENT WILL THE AUTHOR BE LIABLE FOR ANY DIRECT, INDIRECT OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE OF THESE MATERIALS.
1. See Whelan, “Church in the Internal Revenue Code”, 45 Fordham L Rev. 885 (1977).
2. American Guidance Foundation, Inc. v United States 490 F.Supp 304 (1980).
3. It should be noted, however, that in the 1993 (for Fiscal Year 1994) IRS Exempt Organizations Continuing Professional Education Technical Instruction Program Textbook, in Defining “Church” — The Concept of a Congregation, the position is taken that an organization must have a congregation (usually including participation in mutual ceremonies, observances and celebrations important to the religion) in order to be considered a church.” Therefore, although having a congregation may not be sufficient to determine that the organization is a church, not having a congregation is likely to be considered by the IRS to be sufficient to determine that the organization is not a church.
4. A recent issue that has come before the IRS is whether it is possible to have a “virtual” church that does not have a physical presence, but functions over the internet. Although there have been no cases in this area, it appears that if the organization has enough of the characteristics of a church, it should qualify for such status.
5. 74 T.C. 531 (1980), affd. 670 F.2d 104 (9th Cir. 1981).
6. 412 F.2d 1197, 1199 (1969).
7. 76 USTC 468 (1981).
8. 75 USTC 127 (1980).
9. 71 USTC 102 (1978).
10. IRS Reg. Section 301.7611-1, A-3.
11. Reg. 1.6033-2(g)(5)(i), since reversed.
12. Lutheran Social Services of Minnesota v. U.S, 758 F.2d 1283 (CA-8, 1985).
13. IRS Reg. Section 1.6033-2(h)(1)
14. IRS Reg. Section 1.6033-2(h)(2)
15. IRS Reg. Section 1.6033-2(h)(3)
16. For example, SIM, International (Sudan Interior Mission) and Campus Crusade for Christ have both obtained determinations from the Internal Revenue Service that they are religious orders.
17. S. Rep. No. 1622, 83d Congress, 2nd Session at p. 30 (1954).
18. Some states, such as California, do not have the same exemption and may require the church to file to establish its exempt status.
19. Forms 990 would be due on any activities of religious orders that are not “exclusively religious”
20. Joint Committee on Taxation Staff Report, Volume II: Study of Disclosure Provisions Relating to Tax-Exempt Organizations, p.3.
21. id. at p. 14.
22. Church By Mail, Inc. v. C.I.R., 765 F.2d 1387, 1392 (1985).
23. Better Business Bureau v. United States, 326 U.S. 279, 283, 66 S.Ct. 112, 114, 90 L.Ed. 67 (1945).
24. T.C. Memo. 1993-116, USTC Tax Ct. Dkt. No. 1230689X: “This Court has previously held that where the creators control the affairs of the organization, there is an obvious opportunity for abuse, which necessitates an open and candid disclosure of all facts bearing upon the organization, operations, and finances so that the Court can be assured that by granting the claimed exemption it is not sanctioning an abuse of the revenue laws. … Where such disclosure is not made, the logical inference is that the facts, if disclosed, would show that the taxpayer fails to meed the requirements of section 501(c)(3). … Petitioner leaves us no choice but to draw such an inference in the present case.
25. See e.g., Basic Bible Church v. CIR, 74 T.C. 846 (1980) aff’d Granzow v. CIR, 739 F.2d 265 (1984); The Basic Unit Ministry of Alma Karl Schurig v. CIR, 670 F.2d 1210 (1982).
26. Presbyterian & Reformed Publishing Company v. CIR, 743 F.2d 148, 153 (1984).
27. In at least one case involving a religious publishing company, the organization originally was publishing Sunday school materials, but was not making a significant profit. For some reason, although the organization did not change its activities, the materials became very popular, and the amount of money the organization began to make increased dramatically. Although it was the position of the organization that its purpose had not changed, and that the activities continued to be related to its purpose, the court found that it was operated for profit, and that it was no longer tax exempt. Scripture Press Foundation v. United States, 285 F.2d 800, (1961) cert. denied, 368 U.S. 985 (1962).
28. See Church By Mail, Inc. v. C.I.R., 765 F.2d 1387 (1985); Treas. Reg. Sec. 1.501(c)(3)-(1)(c).
29. Branch Ministries Inc., et al., v. Charles O. Rossotti, 40 F.Supp 2d 15 (1999), aff’d 211 F3d 137(2000).
30. The court notes that the church may hold itself out as exempt under 501(c)(3) if it refrains from further political activity, and my reapply for official recognition of exemption. And, like other nonprofits, It can voice its opinions by setting up a separate 501(c)(4) that could, in turn, establish a PAC.
31. EOTR Weekly, Vol. 9, No. 13, march 30, 1998, page 1.
32. Exempt Organization Tax Review, November, 1999, Vol. 26, No.2, p. 195.
33. The Christian Coalition v. United States, No. 00-CV-136 (2/25/2000).
34. Markus Q. Bishop, et ux. v. United States, No. 3:98mc25/RV (3/18/99).
35. Music Square Church v. United States, Nol 99-5109 (Fed Cir. 7/13/00); see also discussion in EOTR Weekly, 7/24/00, Vol 19, No. 4, p. 24-5, and The Exempt Organization Tax Review, September, 2000, Vol. 29, No. 3, p. 515.
36. U.S. v. Dykema, 666 F.2d (1981).
37. 775 F.2d 265.
38. 933 F.2d1074, 1077.
39. Eighth St. Baptist Church, Inc. v United States 291 F. Supp. 603, 604 (1968), aff’d., 431 F.2d 1193 (1970).
40. United States v. Indianapolis Baptist Temple No. 00-1102 (7th Circuit, 8/14/2000); see also, discussion in EOTR Weekly, 3/1/99, Vol. 13, No. 9, p. 56-7.
41. United States v. Indianapolis Baptist Temple, et. al., No. IP98-0498-CB/S (S.D. Ind. 9/28/00).
42. 822 F.2d 1334 (3rd Cir. 1987), cert. denied 485 U.S. 959 (1988).
43. U.S. v. Lee 455 U.S. 252, 102 S. Ct. 1051, 71 L.Ed 2d 127 (1982).
44. 451 US 772 (1981).
45. id. at 782-783, footnote 12.
46. Larry Whittington, et al. v. IRC, T.C. Memo. 2000-96 (9/21/00).
47. M. L. Libman 44 T.C.M. 370, Dec. 39,(161)(M), T.C. Memo 1982-377.
48. Warnke, supra, Ling v U.S. 200 F.Supp 282 (D.C. Minn. 1961), Eden v C.I.R. 41 T.C. 605 (1964).
49. Haimowitz v. Commissioner, 73 T.C.M. (CCH) 1812 (1997).
50. Warren v. CIR, 114 T.C. No. 23 (5/16/2000).
51. Walz v. Tax Commission, 397 U.S. 664, 669 (1970).
52. id. at 672-3.
53. Texas Monthly, Inc. v. Bob Bullock, Comptroller of Public Accounts of the State of Texas, et al., 488 U.S. 361, 109 S. Ct. 647, 102 L. Ed.2d 714 (1989).
54. Swaggart v. Calif. Equalization Bd., 493 U.S. 378, 107 L.Ed.2d 796, 110 S.Ct. 688 (1990).
55. “Our concern in Murdock and Follett — that a flat license tax would act as a precondition to the free exercise of religious beliefs– is simply not present where a tax applies to all sales and uses of tangible personal property in the State.” id at 493 U.S. 387, 107 L.Ed. 2d 808.
56. id at 493 U.S. 389, 107 L.Ed. 2d 809.
57. id at 493 U.S. 390, 107 L.Ed. 2d 809.
58. id at 493 U.S. 391, 107 L.Ed. 2d 810.
59. id at 493 U.S. 394, 107 L.Ed. 2d 812.
60. id at 493 U.S. 396, 107 L.Ed. 2d 813.
61. The Exempt Organization Tax Review, May 2000, Vol. 28, No. 2, pp. 200-1.
62. EOTR Weekly, Vol. 20, No. 8, p. 49, 11/20/00.
63. Steele et al. v. Industrial Development Bond of the Metropolitan Government of Nashville, et al., No. 3:91-042 (M.D. Tenn, 10/24/00).
64. For this purpose, the annual gross receipts of an organization are normally not more than $25,000 if
(a) in the case of an organization that has been in existence for one year or less, the organization has received, or donors have pledged to give, gross receipts of $37,500 or less during the first taxable year of the organization;
(b) in the case of an organization that has been in existence for more than one, but less than three years, the average of the gross receipts received by the organization in the first two taxable years is $30,000 or less; and
(c) in the case of an organization that has been in existence for three years or more, the average of the gross receipts received by the organization in the immediately preceding three years, including the year for which the return would otherwise be filed, is $25,000 or less.
65. Note that this exemption fully encompasses the statutory and regulatory exemptions for Section 501(c)(3) organizations normally having gross receipts of not more than $5,000, described in I(e) and II(b), above.