What Is a “Church” for Federal Tax Purposes?

What Is a “Church” for Federal Tax Purposes?

October 25, 2023
What Is a “Church” for Federal Tax Purposes?
Entities that are “churches” under Internal Revenue Code
The disciplinary rule, carried out on the basis of the
(IRC) Section 170(b)(1)(A)(i) also qualify as “religious
university’s religious beliefs, called for students to be
organizations” under IRC Section 501(c)(3), and thus are
expelled if they dated outside their race, were in an
generally exempt from the federal income tax under IRC
interracial marriage, or encouraged others to violate the
Section 501(a). However, “churches” receive additional tax
disciplinary rule. The university also denied admission to
benefits that make it more advantageous for an organization
applicants in an interracial marriage or known to advocate
to qualify as a “church” under IRC Section 170(b)(1)(A)(i),
for interracial marriage or dating.
than merely as a “religious organization.” For example,
churches are generally subject to fewer filing obligations
The Court “analyzed and construed [IRC Section 501(c)(3)]
and receive special procedural protections during audits.
within the framework of the [IRC] and against the
Congress has not defined “church” in the IRC, and the
background of congressional purposes.” Its examination
Department of the Treasury and Internal Revenue Service
revealed that
(IRS) have not defined the term in regulations
corresponding to IRC Section 170. Courts have stated that
underlying all relevant parts of the [IRC], is the
the additional statutory allowances provided to churches
intent that entitlement to tax exemption depends on
indicate that Congress intended the term “church” to have a
meeting
certain
common-law
standards
of
more restrictive definition than “religious organization.”
charity—namely, that an institution seeking tax-
Over time, courts and the IRS have developed several tests
exempt status must serve a public purpose and not
and applied a number of factors to determine whether an
be contrary to established public policy.
organization qualifies for church status. In applying these
tests and factors, courts and the IRS have routinely avoided
The government’s compelling interest in eradicating racial
evaluating an organization’s beliefs. Accordingly, “church,”
discrimination in educational institutions substantially
as used in the IRC, is not limited to a particular faith,
outweighed “whatever burden denial of tax benefits” placed
denomination, sect, ritual, or practice, and can include
on the university’s exercise of its religious beliefs, which
several houses of worship.
were otherwise substantially protected by the First
Amendment’s Free Exercise Clause. The Court also noted
This In Focus reviews how courts and the IRS determine
that the IRS’s policy was founded on a neutral, secular
when a religious organization is a “church” for the purpose
basis, and did not violate the First Amendment’s
of federal income tax exemption.
Establishment Clause.
Qualification Under IRC Section
An organization that is organized and operated exclusively
501(c)(3)
for religious purposes and satisfies the rest of IRC Section
Churches must first qualify for federal income tax
501(c)(3)’s requirements is a “religious organization.”
exemption under IRC Section 501(c)(3). To so qualify, (1)
the organization must be organized and operated
The De La Salle Approach
exclusively for religious, educational, scientific, or other
In De La Salle Institute v. United States, 195 F. Supp. 891
charitable purposes; (2) the organization’s net earnings may
(N.D. Cal. 1961), a district court determined that in the
not inure to the benefit of any private shareholder or
absence of congressional guidance, the term “church” is to
individual; (3) no substantial part of an organization’s
be interpreted in light of its common usage and meaning.
activities may be attempting to influence legislation; and (4)
Applying this approach, the district court said “[a]n
the organization may not intervene in any political
organization established to carry out ‘church’ functions,
campaign on behalf of (or in opposition to) any candidate
under the general understanding of the term, is a ‘church.’”
for public office.
In decisions after De La Salle, courts have declined to adopt
this approach. Some courts have expressed doubt about the
Relying on the Supreme Court’s decision in Bob Jones
soundness of the De La Salle approach given the plurality
University v. United States, 461 U.S. 574 (1983), the IRS
of religious beliefs, the range of organized activities
asserts that there is another requirement for exemption from
undertaken, and the assortment of church structures in the
the federal income tax under IRC Section 501(c)(3)—an
United States.
organization’s purpose and activities must not be illegal or
violate fundamental public policy. In Bob Jones University,
The IRS’s 14 Criteria
the Supreme Court upheld the IRS’s revocation of a
In 1978, the IRS announced a list of 14 criteria to evaluate
university’s 501(c)(3) status because the university had a
whether a religious organization qualifies as a “church.”
disciplinary rule that prohibited interracial dating and
The 14 criteria are (1) a distinct legal existence; (2) a
marriage, which was in violation of federal public policy.
recognized creed and form of worship; (3) a definite and
distinct ecclesiastical government; (4) a formal code of
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What Is a “Church” for Federal Tax Purposes?
doctrine and discipline; (5) a distinct religious history; (6) a
organization, those limited activities are insufficient
membership not associated with any other church or
to label the entire organization a church.
denomination; (7) an organization of ordained ministers; (8)
ordained ministers selected after completing prescribed
In Foundation I, a large percentage of the religious
organization’s total receipts and ex
courses of study; (9) literature of its own; (10) established
penditures went toward
places of worship; (11) regular congregations; (12) regular
broadcast and publishing efforts that had the potential to
religious services; (13) Sunday schools for the religious
reach millions of people. Even so, the Tax Court ruled in
instruction of the young; and (14) schools for preparing
favor of the religious organization. The Tax Court found the
religious organization’s
ministers. Courts and the IRS generally use these 14 criteria
associational aspects were “more
as a guide along with any other facts and circumstances that
than incidental,” and thus satisfied the associational test,
may bear on an organization’s claim that it is entitled to
because there was an ordained ministry that conducted
church status.
regular religious services for congregations consisting of 50
to 350 persons at established places of worship.
Some courts have questioned the mechanical application of
the IRS’s 14 criteria to varied religious practices and a
A federal court of appeals upheld the IRS’s revocation of
the same organization’s church status in a later case,
diverse group of religious organizations. For example, in
Spiritual Outreach Society v. Commissioner, T.C. Memo
Foundation of Human Understanding v. United States, 614
1990-41, the Tax Court acknowledged that the 14 criteria
F.3d 1383 (Fed. Cir. 2010) (Foundation II). In Foundation
may be inapplicable to certain organizations, such as newly
II, the organization failed to establish that it held regular
created rural organizations. To address these concerns,
services with a regular congregation during the years at
some courts, including the Tax Court, have placed special
issue. The organization argued that it served an
emphasis on four of the IRS’s 14 criteria: (1) the existence
associational role through its “virtual congregation,” which
of an established congregation served by an organized
listened to sermons over broadcast and the internet at set
ministry; (2) the provision of regular religious services; (3)
times. The court held that the organization’s “electronic
ministry” did not satisfy the associational test. The
religious education for the young; and (4) the dissemination
court
of a doctrinal code. In Foundation of Human
concluded that the organization did not serve an
Understanding v. Commissioner, 88 T.C. 1341 (1987)
associational role when it disseminated religious
(Foundation I), the Tax Court explained it must take care
information through print or broadcast media or through its
when determining whether an organization is a “church”
call-in show, because these forums did not provide
because “all of us
“individual congregants with the opportunity to interact and
are burdened with the baggage of our
own unique beliefs and perspectives.” As a consequence,
associate with each other in worship.”
the Tax Court stated that it must “assiduously avoid”
inquiry into the merits of an organization’s
Considerations for Congress
beliefs, or risk
running afoul of First Amendment religious protections.
Congress has left the question of how to distinguish
“
The IRS, in Internal Revenue Manual 4.75.39.4(1), has
churches” from other religious organizations for tax
acknowledged that First Amendment concerns may limit its
purposes largely to the courts and the IRS. Some courts
ability to evaluate “the source and content of sincerely held
have suggested that First Amendment considerations have
religious beliefs” as well.
hindered legislation in this area. Over time, courts and the
IRS have seemed to settle on relying on the IRS’s 14
Associational Test
criteria and the associational test. Some tax commentators
have critiqued the IRS’s 14 criteria as being unpredictable,
While the IRS has stated no one factor has controlling
weight, some courts have ruled that a religious organization
outmoded, and of limited application to all but a few
must serve an associational role to qualify as a church. In
religious practices. While some of these commentators have
called for the abandonment of the IRS’s 14 criteria and for
the frequently cited case, American Guidance Foundation,
Inc. v. United States, 490 F. Supp. 304 (D.D.C. 1980), a
the adoption of the associational test, tax commentators also
district court articulated the associational test: “At a
have raised concerns about that test, as well. Tax
minimum, a church includes a body of believers or
commentators have questioned how the associational test
communicants that assembles regularly in order to
should apply today, given the rise in virtual religious
worship.” The district court explained,
services and changes in technology that allow for members
of religious organizations to interact and associate with
[u]nless the organization is reasonably available to
each other in new ways. Congress may continue to permit
courts and the IRS to refine the criteria by which “church”
the public in its conduct of worship, its educational
status is determined or it may attempt to clarify through
instruction, and its promulgation of doctrine, it
legislation the definitional standard that should be applied
cannot fulfill this associational role.
to assess whether an organization is a “church” for tax
Several courts have since adopted this threshold standard
purposes.
and fine-tuned it. When the Tax Court applied the
associational test in Foundation I, it clarified that,
Milan N. Ball, Legislative Attorney
[w]hen bringing people together for worship is only
IF12520
an incidental part of the activities of a religious

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What Is a “Church” for Federal Tax Purposes?

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