Must churches obtain official 501(c)(3) status from the Internal Revenue Service to be exempt from taxation?
No, churches are automatically exempt from taxation, according to attorney Marcus Owens, Washington, D.C., a former head of the IRS’ tax-exempt division, now defending a California church against the IRS (see related story on right).
Must churches be 501(c)(3) for their members’ tithes, donations, and gifts to be tax-deductible?
Again, no, according to Owens and to IRS regulations readily accessible to the public.
But even if a church chooses not to be recognized as a 501(c)(3) tax-exempt organization, Owens said, provisions of the federal tax laws prohibiting “intervention in a political campaign” still apply to all churches. If the IRS finds that a church has violated this prohibition, the activities that constituted the violation are subject to an excise tax, according to the IRS.
“A church needs no ruling from the IRS to be exempt from taxation,” Owens said. “It is exempt by virtue of being a church. But churches are still bound by provisions of the Internal Revenue Code in regard to intervening in political campaigns.”
The Church’s Free Speech Rights
Regardless of whether a church has 501(c)(3) status, the church always has the right to speak out on the issues of the day, according to Glen Lavy, a constitutional attorney with the Alliance Defense Fund.
Because the question comes up so often, the ADF on its website (www.alliancedefensefund.org) has provided “Guidelines for Political Activities by Churches and Pastors” (http://www.alliancedefensefund.org/userdocs/GuidelinesforChurchesandPastors.pdf).
“In regard to churches getting involved in social issues, the IRS rule against intervention in a political campaign doesn’t apply,” Lavy said.
What does apply, then?
“IRS rules have the force of law,” Lavy said. “The government’s administrative agencies, like the IRS, have the ability to enact regulations which have validity, unless they are changed by the legislature. Congress has the right to change any regulation.”
The ADF’s “Guidelines” specify that churches are not allowed to endorse a particular candidate, contribute either funds or in-kind services to a candidate’s campaign, or distribute literature for a particular candidate
“Issue advocacy, however, may not be limited by government and can be freely engaged in by churches,” the ADF pamphlet says. “As long as one does not use explicit words expressly advocating the election or defeat of a clearly identified candidate, one is free to praise or criticize officials and candidates — this is called issue advocacy.”
Although churches are often threatened with loss of their tax-exempt status — sometimes by anti-church activists, sometimes by the IRS itself — there is no law that restricts churches from defining moral positions and asking people to vote accordingly, according to the ADF.
Chilling the Church?
Churches were added to section 501(c)(3) of the tax code in 1954. Critics, such as Peter Kershaw, author of The Church and Caesar: A Look at Incorporation and 501(c)(3), charge then-Senate Majority Leader Lyndon Johnson with using 501(c)(3) status as a way to “eliminate the significant influence the church has always had on public policy” (http://hushmoney.org/articles.htm — radio interviews with Kershaw are available on this site).
“Since they’ve done this, the church has lost much of its ability to influence the culture,” Kershaw said.
This is a controversial claim. The Civil Rights movement of the 1960s — whose best-known leader, Martin Luther King, Jr., was an ordained minister with a church — enjoyed strong support from many churches. Today, evangelical Christians overwhelmingly vote Republican, thus influencing American culture and policy. Nor should we ignore the example of many Roman Catholic bishops in 2004 withholding Communion from politicians who have voted to support abortion and homosexual “marriage.” If the bishops were at all deterred by any potential threat from the IRS, they didn’t show it.
But Kershaw’s claim is not without merit. The churches’ political activity in the 19th century — most notably, the movement to abolish slavery — might not have been possible under today’s tax laws, Marcus Owens said.
“Preaching against slavery would not have been illegal per se,” he said, “but getting involved in the Lincoln-Douglas debates might have been a problem.”
Churches in the 19th century didn’t have to worry about tax exemption, Owens said, “because everybody was exempt — there was no income tax.” But in 1934, Congress enacted laws against “lobbying and propaganda” that applied to churches. The intent of this legislation, he said, was to stop organizations from paying off officials or candidates in return for future political favors.
Why Incorporate? Why Go 501(c)(3)?
When a church incorporates and applies for 501(c)(3) status, critics say, it invites government scrutiny into church finances, activities, and membership. “It lets the government into the church,” Kershaw said, “and gives the IRS access to all kinds of files.”
Why, then, do so many churches incorporate? Kershaw estimates that only 10% of America’s churches are “free” or unincorporated — a figure which is skewed, he added, because the state constitutions of Virginia and West Virginia do not allow churches to incorporate. (Since 2002, it has been legal for a church to Incorporate in Virginia.)
“The greatest benefit that being a 501(c)(3) organization brings to your church is the assurance to all your donors that their tithes, offerings, and gifts are fully tax deductible,” says a brochure for a book, How to Make Your Church a 501(c)(3) (www.startchurch.com).
Although this is true, Owens said, it’s not necessary for a church to have 501(c)(3) status in order for donations, tithes, or gifts to be tax deductible.
“It’s desirable because 501(c)(3) status helps major donors — especially in planning their estates, when they want to leave a major gift to the church in their wills,” he said. “Mostly it’s just a matter of extra reassurance.”
Many accountants and attorneys advise churches to incorporate and then seek 501(c)(3) status, Kershaw said. Churches also do it out of ignorance (“We didn’t know any better”) and because of a “bandwagon effect” (“Everybody is doing it”), he said.
In a radio interview, Kershaw said mainline churches didn’t begin to incorporate until early in the 20th century. The Methodist Church was the first denomination to do so, he said, on the advice of steel magnate and philanthropist Andrew Carnegie, who stressed the “efficiency benefits” of organizing the denomination like a business. Most of the major denominations followed suit shortly afterward, Kershaw said.
“The biggest reason not to do it is because it displeases the Lord,” he said. “It makes the church subordinate to the state, and that’s bad theology. Jesus Christ, not the state, is the head of the church.”
Chalcedon’s founder, R.J. Rushdoony, addressed this issue in Christianity and the State, pp. 116–119 (Ross House Books, Vallecito, CA: 1986). “[W]hat we know as a corporation is a Biblical doctrine,” he said, with “Israel” as the original corporation created by God, later supplanted by the church as the “new Israel.”
The early church, he said, was a corporation or “body” headed by Jesus Christ, an eternal and supernatural corporation. Later in history, European states co-opted the Biblical concept of the corporation and applied it to themselves in imitation of the church. By modern times, states like Frederick the Great’s Prussia were promoting religious toleration as a means of yoking religion to the service of the state. “The function of religion had returned to the pre-Christian Roman function, to provide social cement and support the state” (p. 119).
“In the United States,” he wrote, “the Internal Revenue Service began to grant or deny corporate status to churches. This status was given upon sufferance of the state and subject to its conditions. The church as a corporation now had only a limited existence, one conditional upon the grant and terms of the state. Limitations began to appear as to the extent of the property which could be held tax-exempt … The modern state has thus made of itself a new Christ and church” (p. 119).
Since the Middle Ages, there have been many changes in the relationship between church and state. Today in America, church construction is subject to local zoning laws, and parking regulations are sometimes invoked by municipalities when neighbors complain about believers meeting at a private home for worship or Bible study. All of these situations are subject to change, as local ordinances are debated and lawsuits are filed.
IRS: Churches Exempt from Tax
Several IRS publications are available from the agency (phone 1-800-TAX-FORM or www.irs.org) that state that churches are automatically tax-exempt, even without 501(c)(3) status.
- Package 1023, Application for Recognition of Exemption, lists churches, church auxiliaries, religious schools, mission societies, and youth groups as automatically exempt.
- Package 990, Return of Organization Exempt From Income Tax, p. 3, Section B of instruction booklet, includes churches, church-affiliated organizations, church schools, and mission societies on its tax-exempt list.
- Publication 557, Tax-Exempt Status for Your Organization, p. 17.
- Publication 1828, Tax Guide for Churches and Religious Organizations, p. 3, reiterates the tax-exempt status of churches, their auxiliaries, and associations of churches.
Although many church officials and members think a church must be 501(c)(3) to be exempt from taxation, this status is not necessary for a church to carry out any of its functions. There are also theological objections to it, as stated by Rushdoony and others.
The lack of a 501(c)(3) designation does not exempt a church from any legal prohibitions against “politicking,” but not being 501(c)(3) would make any politically motivated investigation of a church more difficult. (The IRS, then, would have to examine church members’ individual tax returns, financial statements, etc.)
A church’s right to speak out on controversial issues, which may cross the line into prohibited political activity, is protected by the First Amendment. No church has ever lost its tax-exempt status as a result of “political speech” by the pastor. Any survey of the national news will turn up many stories of churches and clergy speaking out.
How strictly can the IRS interpret the federal laws against a church “intervening in a political campaign”?
Marcus Owens, defending a church against just such a charge by the IRS, said he has not heard from the IRS since he sent the agency a letter in October rejecting the IRS’ contention that a sermon opposing tax cuts and the war in Iraq constituted “intervention.” “They’ve been quiet,” he said. “Perhaps they’re considering their position.”
It’s true that obtaining 501(c)(3) status unnecessarily gives the government a foot in the door of the church. It’s also true that incorporating a church simply isn’t necessary: churches in Virginia and West Virginia prosper without it.
Given the acknowledged potency of “the Christian vote” in recent elections, it’s doubtful that the IRS would find it politically prudent or practical to launch a campaign to muzzle America’s churches. If nothing else, it would touch off a political firestorm that would consume the IRS commissioner.
Meanwhile, church members and their legal representatives have the right to campaign for changes in the laws and IRS regulations, and lobby for greater independence for the church, not less.
- Lee Duigon
Lee is the author of the Bell Mountain Series of novels and a contributing editor for our Faith for All of Life magazine. Lee provides commentary on cultural trends and relevant issues to Christians, along with providing cogent book and media reviews.
Lee has his own blog at www.leeduigon.com.