Advancing Religious Liberty
3/2/12 at 12:26 PM 0 Comments

Are Churches Subject to Section 501(c)(3) of the Tax Code?

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Author: ADF Senior Legal Counsel Erik Stanley

Every time I talk about Pulpit Freedom Sunday, I inevitably get a comment from an audience member that goes something like this, “You know, if churches just unincorporated, they wouldn’t be subject to the IRS,” or “Because churches aren’t required to apply for tax exemption, they aren’t subject to 501(c)(3) of the tax code.” People have told me that churches have willingly gagged themselves in exchange for tax exemption and that they should just unincorporate or give up their exemption letter from the IRS and they could then be free to do what they want. Behind these questions and statements lies an admirable heart for the independence of the church. But these also demonstrate a fundamental and potentially dangerous misunderstanding of the law.

This misunderstanding has been propagated in different ways through the years in movements, booklets, and websites. The basic argument is that churches are free and if they don’t incorporate or ask for tax exemption from the government, then the IRS can’t regulate them or force them to pay income taxes (or do anything else for that matter).

This view is wrong under the law as it exists today. But in order to understand this, we need to take a few steps back. Churches are unique in that they enjoy a special status under the tax code. Normally, to be considered exempt from income taxes, an organization must apply for an exemption from the IRS and demonstrate that it meets the requirements to be considered one of the exempt categories of section 501(c) of the tax code. Every organization that does not fall within one of the exempt categories of section 501(c) of the tax code is considered taxable.

But churches are different. Under section 508(c)(1)(A) of the tax code, churches are exempt from applying to the IRS for tax exempt status. Thus, churches are automatically exempt from income taxes under the federal tax code without first applying to the IRS for recognition of exempt status.

This is where the misunderstanding comes in. Some think that this unique status of churches under the tax code means that churches are not regulated by the tax code at all. This view is wrong. The bottom line is that whether or not a church applies to the IRS for recognition of tax exempt status or chooses not to do so, they are still subject to the tax code.

Cases have dealt with this issue. In Taylor v. Commissioner of Internal Revenue, the United States Tax Court agreed that, under section 508(c)(1) of the tax code churches do not have to apply for tax exempt status and are considered automatically exempt. But the court also stated, “Nothing in section 508(c)(1) relieves a church from having to meet the requirements of section 501(c)(3).” Basically what the Taylor court was saying is that churches are still subject to the restrictions in section 501(c)(3) of the tax code even if they never apply to the IRS for recognition of tax exempt status.

In a similar case called Universal Life Church v. Commissioner of Internal Revenue, the Tax Court stated:

Section 508(c) exempts various organizations, including churches from the notification requirements of section 508(a). Thus while most organizations claiming tax exempt status under section 501(c)(3) must inform the Commissioner of their application for exempt status… churches need not make such a notification.

Despite this, the Tax Court went on to hold that this unique status does not prevent the Commissioner of the IRS from auditing a church.

The upshot of these cases is that even though churches are not required to apply for a tax exemption from the IRS, churches are still subject to the restrictions in section 501(c)(3) of the tax code. That means all churches are required to abide by 501(c)(3). And if you think about this logically, it makes sense. The way the federal tax code works is to begin from the assumption that all organizations are taxable unless they meet an exemption from taxation specified in the tax code. Thus, for a church to be considered exempt from taxation, it must meet a specific exemption under section 501(c) of the tax code. The specific exemption that churches fall under is section 501(c)(3).

And this is where the problem arises because the restrictions on churches in 501(c)(3) are unconstitutional. The passage of the Johnson Amendment in 1954 added a restriction to 501(c)(3) that allows the IRS to censor a pastor’s sermon from the pulpit. That’s what Pulpit Freedom Sunday is intended to address. It doesn’t help for churches to hide their heads in the sand and pretend like the tax code doesn’t apply to them. Instead, churches should stand and boldly confront the unconstitutional restriction and regain the right of pastors to speak freely from their pulpits without any restriction. If you are a pastor, visit our website and sign up to participate in Pulpit Freedom Sunday.
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