The Church, Nonprofits, and Taxes

Every so often, there are calls for the federal government to revoke the tax-exempt status of churches. The most common arguments made for taxing churches are that exemptions deny the government important sources of revenue to pay its bills, and that many churches (usually the ones that continue to teach traditional sexuality morality such as the Catholic, Evangelical, and Mormon churches) often abuse their tax-exempt status by violating IRS guidelines that prohibit them from engaging in political activity. The chronic obsession with the activities of the churches in the public square has obscured the fact that they are only a part of the overall nonprofit sector. According to data collected by the National Center for Charitable Statistics (NCCS), there are over 1.5 million registered nonprofit organizations (with combined total assets of nearly $5.7 trillion as of August 2012) in the United States today—many of which are nonreligious institutions and organizations that, like churches, seek to influence public policy despite being tax-exempt.

Houses of worship and charities are registered with the IRS as 501 (c) (3) nonprofit organizations. Since financial contributions to 501 (c) (3) nonprofits are tax-deductible, donors have the incentive to open their wallets.

IRS guidelines for nonprofits—which are available on the agency’s Web site—are often misunderstood. While many people use these terms interchangeably, the IRS specifically defines “politics” as seeking to influence the election of candidates and “lobbying” as seeking to influence legislation. 

According to the IRS, all 501 (c) (3) nonprofits cannot endorse or oppose candidates for elected office and make financial contributions to political campaigns. In 1964, the liberal Protestant magazine Christian Century lost its tax-exempt status for one year after it endorsed President Lyndon Johnson for re-election.

Nonprofit organizations, however, can certainly 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. This is what many nonprofits have been doing since the passage of the 1954 Internal Revenue Act, which added section 501 (c) to the federal tax code that specified the types of organizations that qualified for tax-exemption.

The IRS recognizes that the heads of nonprofits, including churches, can exercise their individual rights as private citizens without jeopardizing the tax-exempt status of their organizations. For example, in January 2008, the Rev. Calvin O. Butts, the influential pastor of the Abyssinian Baptist Church in New York City, endorsed then-Senator Hillary Clinton for president. The Rev. Butts made the endorsement at a press conference held on a public sidewalk. Had the Rev. Butts endorsed Senator Clinton from his church’s pulpit, it would have violated the IRS’ guidelines because he would have involved his tax-exempt organization. If any Catholic cardinal or bishop wished to make an endorsement in the 2012 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.

The IRS affirms that 501 (c) (3) nonprofits can engage in some lobbying just as long as lobbying is not a “substantial” part of the organization’s 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.

Angered that the bishops helped frustrate her side’s legislative goals, Democratic Congresswoman Lynn Woolsey of California, in an op-ed piece for Politco (Nov. 9, 2009), called on the IRS to investigate the “political behavior” of the United States Conference of Catholic Bishops (USCCB). Strangely, Rep. Woolsey didn’t object when the bishops lobbied for immigration reform and the ratification of the New START Treaty (signed in 2010 by the United States and Russia). No one, including Rep. Woolsey and even the Catholic bishops, ever questioned the legal right of the progressive religions denominations, who often lobby against any legal restrictions on abortion and supported the inclusion of abortion coverage in ObamaCare. Since the USCCB remains tax-exempt, it seems that the IRS found Rep. Woolsey’s complaint without any merit.

The Catholic Church in the United States does not have a single tax-exemption; it has many. The IRS treats every Catholic-affiliated institution, such as churches, schools, hospitals, diocesan offices, and other organizations, as separate, individual entities. If the IRS were to rule that one Catholic church violated nonprofit guidelines the ruling would not apply or legally affect other Catholic-affiliated nonprofits such as the USCCB, the Archdiocese of New York, or Catholic charities.

When most people hear the term “tax-exempt,” they usually think of churches and charities. In fact, the IRS exempts many different types of organizations from paying taxes, including 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. (The type of nonprofit status that an organization may have can be checked online at the GuideStar database. Registration is free and provides access in PDF to the 990 disclosure forms that nonprofit organizations must file every year with the IRS.)

As fraternal organizations, individual chapters of the Knights of Columbus, Elks Lodge, and the Freemasons do not pay federal taxes. Since they qualify as educational organizations, most private colleges and universities in the United States, including those that have generous endowments and cash-producing sports programs, are also tax-exempt.

Other 501 (c) (3) nonprofits include: Americans United for the Separation of Church and State, American Atheists, American Humanist Association, Freedom from Religion Foundation, Richard Dawkins Foundation for Reason and Science, Project Reason, Planned Parenthood Federation of America, Anti-Defamation League, Secular Coalition for America Education Fund, Council for Secular Humanism, Catholics for Choice, Feminist Majority Foundation, Center for Reproductive Rights, Ayn Rand Institute, Southern Poverty Law Center, Clinton Global Initiative, the Gay and Lesbian Alliance Against Defamation (GLAAD), NAACP, PETA, well-known magazines such as Mother Jones, The Progressive, Commentary, Reason, and Commonweal (which published an article last August endorsing President Obama for re-election).

A check of these organizations’ Web sites and publications and the countless other 501 (c) (3) nonprofits on the left and right show that they all seek to influence public policy, engage in some lobbying, and often praise and criticize elected officials, political candidates, political parties, and their views. These activities are no different than those pursued by the United States Conference of Catholic Bishops and the many other religious denominations, traditional and progressive, that have long sought to influence public policy.

Does the IRS impose any additional restrictions on churches? Prof. John D. Colombo, the Albert E. Jenner, Jr. Professor at the University of Illinois’ College of Law in Champaign and a blogger at the Nonprofit Law Prof Blog, told this writer that “[IRS] rules regarding political activity are the same for all 501(c) (3) organizations.” In fact, a check of the IRS Web site shows that the agency’s guidelines for all registered 501 (c) (3) nonprofits make no distinction between religious and nonreligious organizations. All 501 (c) (3) nonprofits, religious and nonreligious, have to follow the same IRS guidelines at the risk of losing their tax-exempt status.

Many people do not realize that more than a few of the same organizations that seek to uphold the strict separation of church and state ironically have the same nonprofit status with the IRS as any church, synagogue, or mosque. Like houses of worship, nonreligious 501 (c) (3) nonprofits cannot make political endorsements and financial contributions to political campaigns and are limited in the amount of lobbying they can do. 

It is unreasonable and hypocritical to expect the IRS to selectively enforce its existing nonprofit guidelines. How can the IRS revoke the tax-exempt status of the Catholic, Evangelical, and Mormon churches—only because some of their teachings offend the sensibilities of a significant number of supposedly “tolerant” individuals—and, at the same time, allow the progressive religious denominations and the countless number of 501 (c) (3) nonprofit activist organizations to continue their efforts to influence public policy, which affects everyone? Prof. Colombo, who is often critical of houses of worship that violate IRS guidelines, said, “I absolutely agree that the IRS should enforce its guidelines evenly across all 501 (c) (3) organizations.”

At a time when the national debt is now over $16 trillion, it is certainly understandable for the federal government to seek out new sources of revenue. However, why should only houses of worship be expected to help the government pay its bills and not the many other nonprofits, including those with much larger assets? Since only Congress has the power to revise the tax code, which regulates the nonprofit sector, revoking the tax-exemptions for only religious institutions would likely have political consequences at the ballot box.

Without the limitations imposed by tax-exemption, what exactly would stop the churches from endorsing candidates from the pulpit, making financial contributions to campaigns, holding political rallies in church buildings, and engaging in nonstop lobbying? Congress could pass new laws banning such activities, but the courts will probably strike down such laws because they would openly violate the freedoms guaranteed to everyone, including members of the clergy, under the First Amendment.

Should Catholic, Evangelical, and Mormon churches be worried that they could lose their tax-exempt status if they refuse to give in to the demands of critics and scale back their activities in American public life? Since 1990, the IRS has revoked the tax-exempt status of exactly one church, which used its assets to purchase newspaper advertisements in 1992 urging Christians to vote against Bill Clinton. In fact, on November 4, 2012, the Associated Press reported that the IRS “hasn’t been investigating complaints of partisan political activity by churches [since 2009], leaving religious groups who make direct or thinly veiled endorsements of political candidates unchallenged.” In defending themselves against baseless attacks, church leaders should help educate the public what IRS guidelines for 501 (c) (3) nonprofits actually state—especially the important difference between politics and lobbying—and that their activities are no different than those pursued by the progressive religions, atheist and pro-secular organizations, and the many activist groups on the left and right that are all tax-exempt despite their continued efforts to influence public policy in the United States.