The Tax Exemption and the Church’s Political Leanings

July 18, 2011 | 28 comments
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In light of the Church’s recent policy statement banning some Church authorities from endorsing candidates, and the speculation that the Church’s political neutrality derives from its desire to stay tax-exempt,[fn1] I thought I’d present a brief primer on the tax exemption.[fn2]

The Revenue Act of 1894 probably represents the birth of the modern federal income tax. An inauspicious birth, to be sure–it was struck down as unconstitutional in 1895–but the birth, nonetheless.

True, it was enacted 19 years before the 16th Amendment permitted direct taxation (whatever that is), but it set the stage for the income tax to come. Including, it turns out, in the world of exempting public charities from tax. It provided that the income tax would not apply to “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.” [fn3] Although the list of entities that aren’t taxed has expanded (among other things, the exemption now includes groups that foster amateur sports competition–read the NCAA–and that are organized to prevent cruelty to children or animals), the current law reads almost identically to the 1894 version.

Why do we exempt some groups, including religious groups, from tax? Theories range from the historical to the idea that they relieve the government from providing some services to the idea that this subsidy for public charities permits tax payers to directly control some portion of government spending to the idea that they (specifically, in this case, religions) are co-sovereigns and therefore not subject to the government’s taxing jurisdiction. The tax exemption (for all tax-exempts, not just churches) is controversial. But it doesn’t appear to be going away.

Most public charities[fn4] have to file a (long and relatively complicated) application with the IRS in order to get their tax exemption; churches are unique in this regard. A church is automatically exempt, even with no filing. But even for churches, the exemption isn’t free. A public charity can lose its exemption if it acts badly. The two most prominent ways it can act badly are by campaigning for or against a candidate for office and by engaging in too much lobbying.

In general, the first proscription is pretty straight-forward. If a public charity, including a church, supports or opposes a candidate, it loses its exemption.[fn5]

The lobbying is a tougher question. Basically, “no substantial part” of a public charity’s activities can involve attempting to influence legislation. But how much lobbying constitutes “no substantial part” is a tricky line to draw. One court found that where less than 5% of a public charity’s actions were devoted to influencing politics, the public charity didn’t cross the “no substantial part” line. On the other hand, a couple of courts have found that ~16% crossed the line.

And if a church were to lose its exemption, two things would happen. First, it would be taxable on its taxable income. Second, donors (in our case, those paying tithing, fast offerings, and other offerings that go in the tithing envelope) would no longer be able to deduct their donations in determining their taxable income.

As a policy matter, it’s certainly fair to ask whether public charities should be permitted to engage in politics at all, given their subsidy, or should be prevented from campaigning, given the First Amendment. It’s fair to ask whether churches, charities, or the NCAA should be exempt from tax in the first place, and whether donations to such organizations should be deductible. It’s even fair to argue about whether this church or that one crossed a line in its political participation. But, as a baseline, there’s probably some value in knowing what the current rules are, where they came from, and how they’re applied.

[fn1] I should point out that I’m only aware of one church ever losing its tax exemption over politicking.

[fn2] To international readers, I’m sorry. This is a US-centric post, mostly because I’m familiar with the US tax law applicable to public charities, but not to any other country’s laws. Of course, if you are non-US and you know how your country’s tax law treats churches/charities, I’d love to hear about it in the comments.

[fn3] Revenue Act of 1894, 36 Stat. 11 sec. 38.

[fn4] I’ll use “public charity” rather than “tax-exempt organization,” mostly because the rules for 501(c)(3) organizations are different from the rules for other entities that don’t have to pay taxes.

[fn5] It is not, of course, quite that straight-forward. On the margins, there is always the question of whose actions will be imputed to the tax-exempt. And what constitutes supporting or opposing a candidate. And, even if the entity clearly supports a candidate, the IRS has to discover the support and act on it. Nonetheless, this rule is about as bright-line as they come.

28 Responses to The Tax Exemption and the Church’s Political Leanings

  1. Brad on July 18, 2011 at 8:56 am

    Interesting article. Thanks for posting that. Couple of questions. Does a church have to report its earnings from tithing and other donations? When you write 5% of a “public charity’s actions”, how is that measured? Monetarily or some other way? Would have the discovery of LDS church finance in Prop 8 over a certain limit have potentially disqualified it from its tax exempt status? At what point does it stop becoming church financed? Because some claim that the LDS church gave money with strings attached to other organizations or individuals, thus attempting to skirt around the issue of having to claim increased financial involvement, who then could involve themselves in the campaign. What do you make of all of this?

  2. Jax on July 18, 2011 at 9:01 am

    So how does anyone judge the percentage of activity by a church that is politically based? By percentage of money used for politics? By time spent by members? Time spent by officers? Other? Is there a formula or does someone just pull numbers out of the air depending on their approval/disapproval of the organization?

  3. Last Lemming on July 18, 2011 at 9:15 am

    It’s fair to ask whether…the NCAA should be exempt from tax in the first place

    Ya think?

  4. Dave on July 18, 2011 at 9:18 am

    Personally, I think the updated policy that now prohibits public political statements by GAs is intended to prevent political divisions with the LDS membership. I don’t retaining the tax exemption is their real concern — it is not threatened.

  5. clark on July 18, 2011 at 10:27 am

    Out of curiosity do you think the American treatment has something to do with how Churches are treated in Europe? Especially state churches?

  6. DCL on July 18, 2011 at 11:55 am

    Brad, religious organizations are also exempt from filing the annual information return, Form 990, required for other public charities, which is where information on revenues and expenditures would be disclosed.

  7. Sam Brunson on July 18, 2011 at 12:15 pm

    Thanks, DCL.

    Other details: it’s not completely clear if the 5%-15% should be measured by expenditures or by percentage of time or what. A conservative tax-exempt should probably be aware of all of those things, although I never advised tax-exempts, so maybe practitioners in the area would have a different view of things.

    And clark, I don’t think our tax treatment of churches has much to do with Europe. Churches are just one of the list of tax-exempt organizations and, for the most part, are treated the same as the others. (Major exceptions: they don’t have to apply to be tax-exempt and they don’t have to file financial disclosures. There’s also some suggestion that if a church loses its exemption because it supports a candidate, it automatically become exempt again as soon as it stops, although that’s not completely clear.)

    However, the fact that “public charities” aren’t subject to tax may well derive from English notions of how charities should be treated and taxed.

  8. Raymond Takashi Swenson on July 18, 2011 at 12:19 pm

    If the Church lost its 501(c)(3) status, it would definitely be at a direct cost to members who get tax deductions for their contributions. On the other hand, what would qualify as “income” for the Church? It does not have stockholders and does not issue dividends. All of the money the Church receives is either used for active operating expenses (building utilities, travel for missionaries and leaders, salaries for full time employees, printing and distribution of literature, operation of Church schools, missionary stipends, humanitarian aid), or retained for capital expenditures (building churches and temples, missionary training centers, seminaries and institutes, and welfare program facilities). It is not clear to me that there is even a category of funds that would even qualify as “net income” of the Church.

    It is also my understanding that the various businesses in which the Church has ownership (KSL and broadcasting copanies, Deseret News and Deseret Book, etc.) pay taxes on their own income before distributing income to the Church.

    Obviously a major hit with loss of tax exemption would be real property taxes. A lot of the Church’s assets are land, with and without buildings. If the average ward house has six times the property tax as a family dwelling, in my neighborhood that would run about $20,000 a year in property taxes. That has to be comparable to annual utility costs, doubling the cost of operation.

    While Church purchasing is not too significant at the local level, at some point of accumulation the sales taxes would also be significant.

    So it would seem to me that the biggest hits with loss of tax exempt status for the Church would be (a) loss of donations due to loss of taxpayer deductions, and (b) property taxes on real property.

    Would taxation of churches result in lower rates of taxation for an individual’s income, property, or purchases? Fat chance.

    Incidentally, I was just reading an article in First Things that stated that a survey of research over several decades affirms a significant public financial benefit from religious activities in terms of reduced criminal behavior in society. That is in addition to the benefit of charitable works. In other words, like other ideas for raising taxes, removing tax exemptions from churches would seem to result in no net financial gain for cities, states, and nations.

    It seems to me that the people I read in the blogosphere who want to tax churches are people who are hostile to organized religion and actually anticipate that many churches would become insolvent as a result, which would, of course, dry up much of the expected new tax revenue. That seems to be a result that they find generally desirable. Of course, they don’t seem to be equally enthusiastic about taxing universities.

    And then there is the fact that the largest category of tax exempt institutions and property are governments at the local, state and Federal level. Large Federal facilities like military bases, and even some Federal wildlands like wildlife refuges, are the subject of Federal Payments In Lieu of Taxes (PILT) by the Federal government, made as a political sop to property-tax collecting local governments. A special category of such payments is to school districts for children who live on military bases but attend public schools. But the recipients of these grants always complain that they do not make up for the burdens of hosting the Federal facilities.

    As long as Churches are perceived to be in the category of public services to society, like schools, charitable institutions, and even governmental entities, the case can be made for keeping them in a tax exempt status as a matter of equity with other such service providers.

  9. Jax on July 18, 2011 at 12:47 pm

    As long as Churches are perceived to be in the category of public services to society, like schools, charitable institutions, and even governmental entities, the case can be made for keeping them in a tax exempt status as a matter of equity with other such service providers.

    Well let’s hope that they continue to see the public service that churches provide! I for one don’t want any churches, including ours, taxed. I’d rather see them with extra funds to distribute to people in need rather than distributing them to politicians.

  10. Al on July 18, 2011 at 2:14 pm

    Loss of tax exempt status is only a problem for conservative organizations. In many black communities the pastor of the church is a regular political operative, with access to grant money, pork etc. for which he delivers the vote and opens the church to campaigning.

  11. Al on July 18, 2011 at 2:15 pm

    I meant only a risk for conservative organizations.

  12. Paul 2 on July 18, 2011 at 2:41 pm

    In the international space, the tax exemptions for churches and donors to churches come with much more regulatory oversight. For example, Canada and the UK require that financial reports become public. Here in France, the rules include seemingly arbitrary things such as keeping expenses and receipts in different binders. We also need MLS user names that include both our name and calling.

    In the international space the interesting question is how much oversight the church is willing to accept in order to be an “official” religion.

  13. Stephen Hardy on July 18, 2011 at 2:59 pm

    Re your opening statement:

    “… and the speculation that the Church’s political neutrality derives from its desire to stay tax-exempt.”

    I am discouraged at such a statement. Our leaders encourage political neutrality because it allows us to be a tax exempt organization? Or could there be other better reasons. Are you suggesting that if it weren’t for tax reasons, that the church would not be politically neutral?

  14. Sam Brunson on July 18, 2011 at 3:03 pm

    Stephen,
    No. I actually don’t think we’re politically neutral because of tax considerations. But I have heard and read rampant speculation that the protecting the Church’s tax-exempt status caused it to release the statement. And I’ve heard rampant, ill-informed attacks on and defenses of the Church’s tax-exempt status, frankly, all the time. And, tax guy that I am, it seemed like the perfect moment to try to write a concise description of what the tax law’s political neutrality requirements are.

  15. Crick on July 18, 2011 at 4:13 pm

    Sam,

    Could you answer Raymond’s question…what would constitute “taxable income” if the Church were to be taxed?

  16. DCL on July 18, 2011 at 4:18 pm

    Also, I think its worth emphasizing that the two classes of prohibited activities, lobbying and campaigning for candidates, leaves a lot of room for political activity such as issue advocacy among the general public, which is perfectly legal and within the rights of a public charity. The concern reflected in that tax code is not that politics is per se bad for charitable organizations, but that through lobbying and supporting individual candidates, charitable funds will too easily flow into the hands of private individuals for their personal enrichment.

  17. chris on July 18, 2011 at 4:27 pm

    Crick,
    The same taxable income for a corporation. If it’s not spent, then it’s either retained or distributed via dividend. If it’s retained, then it’s taxed.

  18. Stan Beale on July 18, 2011 at 6:46 pm

    Al, Please do not think only conservative organizations are having their tax exempt status challenged. Currwently Fox News and other right wing groups and individuals are launching an attempt to take Media Matters tax exempt status away. In the past there was an attempt by Republicans to take AARP’s tax exempt status because of its postions on health care reform and Social Security. In the 1980′s the Heritage Foundation attempted to defund the the left in part by banning any group getting federal grants if it claimed tax emempt status that even attempted to influence a government policy, even if it did the lobbying from separate funding. There have three or four similar attempts in the last 15 years.

  19. Jax on July 18, 2011 at 7:39 pm

    I am discouraged at such a statement. Our leaders encourage political neutrality because it allows us to be a tax exempt organization? Or could there be other better reasons. Are you suggesting that if it weren’t for tax reasons, that the church would not be politically neutral?

    Agreed that it would be very sad if that were the only reason for neutrality between political parties and candidates. Personally, I hope they are neutral because neither party tries to achieve the same ends as the church. If there were a political party that stood for all the same moral principles as the gospel demands, had as it’s platform the establishment of a latter-day Zion, recognized the presence of divine authority and prophets/apostles, …, then I’d see no problem with the church giving it’s support.

    But short of the church starting it own political party, there is no way that is going to happen. And since BOTH parties work towards ends that are destructive to the gospel and the celestial law, then neutrality is the only option. Far from neutrality though, I’d like to see a statement AGAINST both parties. C’est la vie.

  20. Tim on July 18, 2011 at 7:44 pm

    “I’d like to see a statement AGAINST both parties.”

    Problem is, a large number of church members in the U.S. would interpret that as meaning that the church is pro Tea Party or Federalist or some other far-right-position.

  21. Sam Brunson on July 18, 2011 at 8:10 pm

    Paul 2,
    Thanks for the international perspective.

    Crick (and Raymond),
    Tell you what: the answer I have in my head is probably a bit on the long side for a comment. So tomorrow I’ll try to write my What If post, based on the Marvel Comics of the same name, and imagine a universe where the Church lost its tax exemption.

  22. Mark D. on July 18, 2011 at 8:36 pm

    The right answer to this question is to eliminate the tax exemptions for all types of (quasi-)charitable organizations. There is nothing charitable about a subsidy from the federal government, and all sorts of perverse consequences result.

    Take property taxes for example. Everyone pays them, either directly or indirectly – they are used to subsidize road construction and maintenance, police and fire protection, and other things. Churches actually need all three, and asking for a property tax exemption is the same as asking for a check from the local government – the cost of the roads, police, and fire protection doesn’t go down, and the local denomination ends up with a windfall in its bank account.

    Granted, churches engage in many charitable activities, but some are much more charitable than others. And even if they were all first rate, do we really want to live in a world where churches depend on the government for handouts? It is a disgrace.

    As questionable as the practice is for churches, it is all the more so for the sort of quasi-charitable organizations like private universities and research organizations, or any number of other deep-pocketed organizations with gold plated facilities and administrators who earn hundreds of thousands of dollars a year.

    If a non-profit organization is truly subsidy worthy (like a homeless shelter perhaps), and welcomes the strings attached, it should apply for and obtain a government grant. Most non-profit activities, however, I don’t think come anywhere close – such special treatment inevitably entails public subsidy of private purpose and private excess.

  23. Jax on July 18, 2011 at 8:59 pm

    “I’d like to see a statement AGAINST both parties.”

    Problem is, a large number of church members in the U.S. would interpret that as meaning that the church is pro Tea Party or Federalist or some other far-right-position.

    I see no reason why people would assume that means support for the far-right as opposed to the far-left. I’d suspect just as many articles would be written saying that it means that the church is far-right as are written saying it opposes the democratic process and favors communism (far left) or anarchy (far both).

    Maybe more members would assume the far-right thing, but that is because more already think the church favors the right (not necessarily the ‘far’ right) anyway. IMO both of those are incorrect and the statement I say I would like to see would make it clear that both the left and the right are just different forks in Satan’s path and make it enmistakenly clear that the church supports neither. I know it won’t happen, but I think it’d be nice not to have the left/right discussions during my church meetings.

  24. Jax on July 18, 2011 at 10:23 pm

    **unmistakably clear** I guess I should proof read…lol

  25. J.Jacobs on July 18, 2011 at 10:25 pm

    “The Church does not…Attempt to direct or dictate to a government leader.”

    Don’t you think that the Church put out this policy statement because there are two LDS presidential candidates this season and the Church wants to make it clear that it would not influence a future president’s governing policies if one of them were to win? Just a thought.

  26. Stan Beale on July 18, 2011 at 11:45 pm

    Mark D

    Cities may not be able to tax the Church building or property, but there are other ways to get money. We were in a very large stake and for years it was assumed that the stake would split and a new Lincoln California Stake would be created. The Church bought property for a Stake Center and went to the city to rezone the area. The city placed a rather high price tag of very expensive infrastructure expenditures..

    The result, We are a Stake without a new Stake Center (or one in the foreseeable future). Three Wards, a Branch and the Stake share an old single chapel building with a paucity of rooms and offices.

  27. Geoff-A on July 19, 2011 at 4:32 am

    Churches in Australia are also tax exempt but until about 10 years ago tithing was not a tax deduction. There was an agreement between the Gov. and the church that a percentage of its income would be spent in Aus on building chapels etc.

    Since then the church has the members doing the maintanence and has not spent enough on new buildings so we no longer get a full deduction.

  28. Jhn on August 8, 2011 at 9:55 am

    The idea that there is any U.S. political party that is truly in line with church teachings across the board borders on the absurd. Suggesting that a policy statement based on a long standing first presidency message) really might mean other than what it says based on a fear of tax law? Really???

    This statement is just a reminder of the principle of agency as it relates to elected government.