It wasn’t exactly official, but the first basic tax code relating to religion may have been put forth by Jesus. In speaking to a group of Pharisees in the Gospel of Mark, he gives a memorable answer when asked if it was lawful to pay a poll tax to the Roman emperor: “Render to Caesar the things that are Caesar’s, and to God the things that are God’s.”
Today, the Church that Jesus founded—and nearly all the other churches of the many denominations and faiths in the United States—continues to pay taxes to the government. But, because of a long-standing provision in the federal tax code, the Church also enjoys exemptions from taxation that is usually applicable to profit-making businesses.
To keep that exemption, the Church and all its various entities, from charities to schools to individual parishes, must conform to a specific set of Internal Revenue Service code sections that apply not just to churches, but to all nonprofit organizations.
This has not prevented the Catholic Church, and other denominations in America, from becoming the focus of periodic calls for the government to repeal churches’ tax-exempt status. The most common arguments for this are that the exemptions prevent the federal government from collecting a large source of revenue, and that churches engage in political activity forbidden by the IRS code.
But, says Robert Redwitz, there have been no successful challenges to the exemption provisions of the tax code. “I know of none,” he says, “and I’ve been in practice for more than 40 years.”
Redwitz, the senior managing partner of Robert R. Redwitz and Co., an accounting and consulting firm with offices in Irvine, San Jose and La Jolla, says tax exemption is “a huge, huge issue, because it doesn’t only relate to churches. Churches are only one subpart of the whole tax exempt strata of entities that are at the very core of the United States.”
While churches and charities often are what many people think of when they hear the words “tax-exempt,” the IRS exempts “many different types of organizations from paying taxes,” writes Dimitri Cavalli on “The Catholic World Report” website. These include “labor unions, chambers of commerce, social clubs, and “social welfare” organizations such as the National Organization for Women (NOW), American Civil Liberties Union (ACLU), and the Human Rights Campaign (HRC). Along with churches and charities, the IRS provides the coveted 501 (c) (3) nonprofit status to scientific, literary and educational organizations.”
In fact, according to data collected by the National Center for Charitable Statistics, there are more than 1.5 million registered nonprofit organizations in the United States today, with combined total assets of nearly $5.7 trillion as of August 2012.
To remain a recognized tax-exempt organization, churches, like all nonprofits, must hew to a list of specific requirements. Nonprofits, says Redwitz, “must be organized and operate exclusively for religious , charitable, scientific, educational or literary purposes” and must pass three tests for validity:
- An organizational test, which requires that the entity’s articles of organization specifically limit its purpose to one or more exempt purposes. This, says Redwitz, means that a church cannot operate a side business for profit.
- An operational test, which requires that an entity must be operated exclusively for one or more exempt purposes. Again, no for-profit side businesses.
- A private benefit test. This means, says Redwitz, that a genuine nonprofit is an “organization that…serves a public rather than a private interest. That’s pretty important. If I set up a nonprofit exclusively for my own benefit, it’s not going to qualify as a nonprofit.”
It was that public nature of religion, says Redwitz, that was likely behind the original granting of nonprofit status to churches.
“I think what our federal legislators originally were trying to do was to exempt from taxation those activities that were for the general support and benefit of individuals, as opposed to private individuals or special interest groups,” he says. “Usually there’s language that says that if it’s providing a public benefit and/or a relief of services that government would otherwise be providing—in the area of hospitals and things of that nature where it’s relieving the federal government of public service obligations—that falls into the criteria of an exempt organization.”
And, says Redwitz, “tax-exempt” does not mean that churches pay no taxes at all. Sales taxes, use taxes and public assessments such as water bonds must be paid, even if a nonprofit is exempted from 100 percent of its core property taxes (to earn this exemption, a nonprofit must “show every year that the facilities that it owns are in fact being used for exempt purposes,” says Redwitz.)
Churches “are not totally exempt from every tax that’s in our system, for sure,” says Redwitz.
Still, periodic demands for repeal of churches’ exempt status occur, often propelled by perceptions that churches are engaging in political activities that are prohibited by the tax statutes—stumping for the election of candidates or lobbying for legislation. However, churches and other nonprofits may “praise or criticize candidates, elected officials, political parties and their stands on public policy issues and controversies without specifically telling people to vote for or against them,” writes Cavalli. Also, heads of nonprofits can exercise their individual rights as private citizens without putting their organizations’ tax-exempt status in jeopardy. “If any Catholic cardinal or bishop wished to make an endorsement in [an] election, he could have legally done so by writing an op-ed for a secular newspaper or appearing in studio on a television or cable news program,” writes Cavalli.
And nonprofits can lobby, as long as lobbying is not a “substantial” part of their regular activities. “The fact that a nonprofit’s lobbying on a piece of legislation may have generated considerable media attention and even criticism—such as the Catholic bishops’ lobbying in 2009 against the inclusion of abortion coverage in ObamaCare—does not mean that it violated the IRS’ limits,” writes Cavalli.
Fortunately for churches, the U.S. government has not behaved like modern-day Pharisees, actively seeking to negate nonprofits. Since 1990, only one church—which used its own assets to buy newspaper ads in 1992 calling for Christians to vote against Bill Clinton—has had its tax-exempt status revoked by the IRS.