* Faith Seeking Understanding” – Saint Anselm
The First Amendment to the Constitution of he United States adopted in 1791 provides as follows:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.
In a recent law review article titled Churches and Their Enviable Tax Status Professor Wendy Gerzog Shaller who teaches law at the University of Baltimore, discusses the tension in the law between the historic policies of the Federal, State and Local Governments to grant preferential tax treatment to Churches and other religious institutions on the one hand and the case law of the Supreme Court of the United States , hereinafter referred to as the Court, which questions the constitutionality of singling out churches among all exempt organizations for preferential treatment on the other. The Supreme Court sees such preferential treatment as a violation of the “Establishment” clause of the Constitution which prohibits any law respecting the establishment of religion.
In the course of discussing this tension Professor Shaller examines the criteria used by the courts to determine what constitutes a “church” which church men and women should find interesting.
What is a Church?
To determine whether a particular body or organization can be granted the very favorable tax status as “church” governmental authorities and the courts use differing criteria. Professor Shaller points out that Congress has never provided a very helpful definition of the term “church “despite the fact that the term has significant consequences.” The Supreme Court similarly has consistently refused to define “church” as it is used in the Internal Revenue Code. However, as Professor Shaller points out, the lower courts and the Department of the Treasury have been more “intrepid”. This calls to mind the phrase rushing in where angels fear to tread.
In an early provision of the Internal Revenue Code which exempted churches from the tax on unelated business income “church” was defined as “an organization established to carry out “church” functions, under the general understanding of the term, is a “church.” This is circular reasoning with a vengeance. Unrelated business income is income derived by a charitable or religious organization from activities not related to its purposes as a charity or religious organization. This has been an area of much litigation in determining when an activity falls outside of the scope of the organization’s purpose. For example in one case the Supreme Court held that parochial schools, homes for the Christian Brothers order (including a retirement home), a novitiate to train the Christian Brother’s order, and a winery were not churches within the commonly understood definition of a “church” and therefore income derived from these sources would be counted a unrelated business income.
In construing the definition of a “church” as an organization carrying out “church functions” the United States District Court for the Northern District of California acknowledged that the definition in the Code “might unconstitutionally favor traditional churches by drawing on them as prototypes” but even so it refused to find the statute to be unconstitutional on the basis that to do so would eliminate the tax benefit for all churches.
Building on this initial definition courts in later cases began to stress the “associational” aspect of a “church”. Other courts have endorsed the definition of a church found in the Treasury Regulations which require an organization to engage in “sacerdotal functions” and to perform “religious worship” of a “specific” religious group. And the requirement that the religion be distinct and separate has been the beginning of the analysis in some cases and ignored in others as Professor Shaller has pointed out.
In 1978 the Internal Revenue Service through an address by then Commissioner Jerome Kurtz to the Seventh Biennial Conference on Tax Planning of the Practicing Law Institute announced that it would apply a fourteen criteria test to decide whether an organization qualified as a “church”. They are:
- A distinct legal organization;
- A recognized creed and form of worship;
- A definite and distinct ecclesiastical government;
- A formal code of doctrine and discipline;
- A distinct religious history;
- A membership not associated with any other church or denomination;
- An organization of ordained ministers;
- Ordained ministers selected after completing prescribed studies;
- A literature of its own;
- Established places of worship;
- Regular congregations;
- Regular religious services;
- Sunday schools for religious instruction of the young;
- Schools for the preparation of its ministers.
As Professor Shaller points out courts have taken a varied approach in applying these criteria. Different weights are assigned to different criteria in an effort to be fair and equitable. Some courts do not require that the organization have “a distinct religious history” as such would be unfair to new churches.
And, the Internal Revenue Service has now adopted a fifteenth “catchall” criteria which takes into account all relevant facts and circumstances. In making determinations under this criterion the Internal Revenue Service looks to whether the organization allows for private inurement or private benefit. An example of private inurement is a situation in which say the pastor is being paid a salary resembling that of a CEO of a fortune 500 company and drives a luxury car furnished by the “church”. IRS takes a very dim view of organizations calling themselves churches which funnel large sums of money and perks to their employees.
What Is the Benefit of Being Classified as a Church for Tax Purposes?
As Professor Shaller points out Congress has “historically” given “churches” preferential treatment over other tax exempt organizations. This bias is the result of concern that too much government regulation of religious bodies would endanger the constitutional principle of the separation of church and state. This preferential treatment has taken the form of (1) relief from disclosure and filing requirements in certain matters (2) exemption of churches and their employees from certain retirement plan requirements and (3) exemption from certain taxes. For example churches are not required to notify the Internal Revenue Service that they qualify for tax exempt status because it is presumed that they qualify as private foundations. And, churches need not file annual information returns with the Service and the Service is restricted as to the scope of its examinations and investigations of churches.
Due to some cases of abuse in the late 1960s Congress retreated from its restrictions on IRS examination activities and made churches subject to the tax on unrelated business income. In a House of Representatives report it was noted that “some churches are involved in operating chains of religious bookstores, hotels, factories, companies leasing business property, radio and TV stations, newspapers, parking lots, record companies, groceries, bakeries, cleaners, candy sales businesses, restaurants, etc.” Mainline churches may have been tempted to lament that with friends like these who “needs enemies” In addition to lifting audit restrictions and imposing the UBI tax Congress imposed the social security tax on church employees unless the church makes a special election to exempt its employees on religious grounds and also lowered the ceiling for contributions to tax sheltered annuity plans.
Despite the retrenchment to alleviate abuse Congress continues to place churches on a higher rung than ordinary charitable or tax exempt organizations. In a future segment we will consider the reaction of the Supreme Court of the United States to this “preferential treatment”.