Religious Nonprofit Organizations And Churches

What is the difference between a nonprofit organization and a religious nonprofit organization?

In acknowledgment of the distinctive role that churches and religious organizations occupy within American society, as well as their rights as protected by the First Amendment of the United States Constitution, Congress has enacted specific tax legislation applicable to these entities.  Generally, churches and religious organizations are exempt from paying income taxes and enjoy other beneficial treatments under tax law.  However, it is important to note that certain types of income, particularly those derived from unrelated business activities, may still be subject to taxation.

Religious nonprofit organizations encompass a broad range of entities, including individual churches, conventions, and associations of churches.  Additionally, this category includes integrated auxiliaries of churches and religious organizations that are not churches themselves.  Examples of such organizations are nondenominational ministries, interdenominational and ecumenical groups, and other entities whose primary objective is the study or promotion of religious beliefs.

What is a church, exactly?

A bona fide church, encompassing institutions such as synagogues, temples, and mosques, is inherently recognized as a religious entity.  However, similar to the term “religious,” there exists no explicit definition within the Internal Revenue Code or any currently applicable tax regulation for the term “church.” Section 7611 of the Internal Revenue Code offers a somewhat vague and redundant definition, stating that the term “church” includes any organization claiming to be a church as well as a convention or association of churches.  A rigid regulatory definition of a church would likely be deemed unconstitutional.

The Internal Revenue Service (IRS) has established specific criteria to determine whether an organization qualifies as a church for tax purposes.  According to the IRS, an organization must satisfy at least some of the following criteria to be considered a church:

• Distinct legal existence
• Recognized creed and form of worship
• Definite and distinct ecclesiastical government
• Formal code of doctrine and discipline
• Distinct religious history
• Membership not associated with any other church or denomination
• Organization of ordained ministers
• Ordained ministers selected after completing prescribed courses of study
• Literature of its own
• Established places of worship
• Regular conventions
• Regular religious services
• Sunday schools for the religious instruction of the young
• Schools for the preparation of its ministers

These characteristics, commonly referred to as the “Fourteen Factors Test,” were first publicly outlined by the Commissioner of Internal Revenue in 1977.  The Commissioner acknowledged that few, if any, religious organizations, whether conventional or unconventional, could meet all of these criteria.  Furthermore, the IRS does not assign controlling weight to any single factor.  The Commissioner emphasized that this is the stage in the decisional process that requires the most sensitive and discriminating judgment.  Despite criticisms regarding the scope and breadth of these criteria, the Commissioner assured that the IRS is not attempting to discourage new religions and new churches.

In determining whether an organization qualifies as a church for federal tax purposes, the courts and the IRS utilize a combination of these fourteen criteria along with other relevant facts and circumstances.  The IRS and the courts are not to evaluate the content of the organization’s doctrine, provided that the beliefs are sincerely held by those professing them and the associated practices and rites are not illegal or contrary to clearly defined public policy.

In recent private letter rulings, the IRS has adopted a stringent approach to applying these criteria.  An organization may satisfy several criteria, only for the IRS to dismiss them on the grounds that they are not distinctive characteristics of a church but are common to both churches and non-church religious organizations.  The IRS insists that to be classified as a church, an organization must have a regular congregation, engage in regular worship services, and maintain an established place of worship.  Additionally, the IRS has introduced a fifteenth criterion, requiring that the organization must “hold itself out” as a church, such as being listed as a church in the telephone book yellow pages.

Therefore, just as the law is unable to formulate a precise tax definition for the term “religion,” it similarly struggles to define the term “church.” This difficulty is unsurprising, given that the religion clauses preclude the strict application of such definitions.

What is a non-church religious organization?

Although every church is considered a religious organization, not every religious organization qualifies as a church.  Organizations that engage in one or several aspects of traditional church activities, without predominantly fulfilling the role of a church, are typically categorized as non-church religious organizations or ministries.  A non-church religious organization is one that undertakes specific religious functions, such as irregularly scheduled religious meetings, crusade events, distribution of religious literature, and mission activities.

Organizations dedicated to the advancement of religion may qualify for tax-exempt status if they adhere to certain regulatory requirements.  The promotion of religious beliefs can be accomplished through various means, including, but not limited to, the following:

• A church
• A non-church religious organization or ministry
• A religious order
• A church auxiliary
• A mission
• Missionary activities
• Evangelism
• Religious publishing activities
• A religious bookstore

By meeting these criteria, organizations involved in religious activities can obtain tax-exempt status, thereby facilitating their efforts to advance religious faith and practices.

Are there special rules limiting or restricting IRS authority to conduct an audit of a church?

Yes.  Congress has instituted specific limitations, delineated in the Church Tax Inquiries and Examinations Rules under IRC § 7611, governing the manner and timing of how the IRS may conduct civil tax inquiries and examinations of churches.  According to these regulations, the IRS may only commence a church tax inquiry if the Director of Exempt Organizations, Examinations, possesses a reasonable belief, supported by a written statement of facts and circumstances, that the organization:

• May not qualify for tax exemption, or
• May not be paying tax on an unrelated business or other taxable activity.

These restrictions on church inquiries and examinations are exclusively applicable to churches, including organizations claiming to be churches if such status has not yet been recognized by the IRS, as well as conventions or associations of churches.  They do not extend to related individuals or entities.  For instance, these rules do not apply to schools that, despite being operated by a church, are organized as separate legal entities.  Similarly, the rules are not applicable to integrated auxiliaries of a church.

Furthermore, these restrictions do not encompass all types of church inquiries conducted by the IRS.  A common exception pertains to routine requests for information.  For example, the IRS may seek information from churches regarding the filing of returns, adherence to income tax or Social Security and Medicare tax withholding requirements, supplementary information necessary for processing returns or applications, and other similar inquiries that are not subject to the IRC § 7611 audit rules.

Additionally, the restrictions on church inquiries and examinations do not apply to criminal investigations or to investigations concerning the tax liability of any individual associated with the church, such as a church contributor or minister.

Middlebrook | Group is committed to providing comprehensive support and tailored solutions to your organization’s unique needs.  We are prepared to assist your organization in achieving your mission while maintaining compliance with all applicable regulations.