Tax Issues of Religious Organizations (Portfolio 484)

Tax Management Portfolio, Tax Issues of Religious Organizations, No. 484, focuses primarily on the federal income tax issues affecting religious organizations, their donors, and members.

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Tax Management Portfolio, Tax Issues of Religious Organizations, No. 484, focuses primarily on the federal income tax issues affecting religious organizations, their donors, and members. Where appropriate, it briefly discusses other federal tax areas, such as the estate tax, social security tax, and the unemployment tax.
Because the religion clauses — the Establishment Clause and the Free Exercise Clause — of the First Amendment of the United States Constitution affect the government's interactions with religious organizations, the Portfolio discusses the intersection of the First Amendment protections for religious organizations and governmental aid and taxing interventions.
The Portfolio includes discussions of a range of relevant definitions for federal tax purposes, including the definitions of “religious organization,” “church,” and “integrated auxiliary of a church.” It explains how a religious organization may seek tax-exempt status and discusses the requirements that must be satisfied to obtain and retain tax-exempt status. It sets out the rules for taxing unrelated business taxable income of religious organizations. It explains the intermediate sanction rules and their potential application. It addresses the disclosure rules and audit rules applicable to religious organizations.
Compensation issues and benefits for employees and members of religious orders are addressed. Donors' entitlement to charitable contribution deductions are analyzed.
This Portfolio may be cited as Crimm, 484 T.M., Tax Issues of Religious Organizations.


Nina J. Crimm, Esq.

Nina J. Crimm, Professor of Law, St. John's University School of Law (New York). A.B., Washington University (1972); J.D. and M.B.A., Tulane University (1979); LL.M. in Taxation, Georgetown University Law Center (1982); previously Tax Attorney with former Washington, D.C. firm of Ginsburg, Feldman and Bress; Attorney/Advisor at the United States Tax Court for Judge Irene F. Scott and Chief Judge Arthur L. Nims; author of Tax Court Litigation: Practice and Procedure (Little, Brown and Co., 1992 and supplements) and of numerous published law review and journal articles.

Table of Contents


 Detailed Analysis

 I. Introduction

 A. Historical Background

 B. Scope of Portfolio

 II. First Amendment's Religion Clauses

 Introductory Material

 A. Federal Aid to Sectarian Schools

 B. State Aid to Sectarian Schools

 C. State Tax Exemptions

 1. State Property Taxes

 2. State Sales and Use Taxes

 D. Charitable Contribution Deduction

 E. Revocation of § 501(c)(3) Status ofReligiously Affiliated Schools

 F. Revocation of § 501(c)(3) Tax-Exempt Statusof a Church

 III. Defining “Religious Organization” and“Church”

 A. General Background

 B. Federal Tax Statutes

 1. Religious Organization

 2. Churches and Religious Orders

 3. Integrated Auxiliary of a Church

 C. State Tax Exemption for Religious or ChurchProperty

 D. Summary

 IV. Seeking Recognition of Tax-Exempt Status

 Introductory Material

 A. Public Disclosure Rules

 B. Annual Information Tax Returns

 C. Social Security Tax

 D. Unemployment Tax

 E. Church Audits

 1. Organizations to Which § 7611 Applies

 2. Section 7611 Tax Inquiries and Examinations

 V. The Federal Income Tax Exemption forReligious Organizations — § 501(c)(3)

 Introductory Material

 A. The Organizational and Operational Tests of§ 501(c)(3)

 1. The Organizational Test

 2. The Operational Test

 B. The Private Inurement and Private BenefitDoctrines

 1. The Private Inurement Prohibition

 a. Special Relationship

 b. Categories of Private Inurement

 c. Transactional Forms

 (1) Unreasonable Compensation Payments forServices

 (2) Loans and Extensions of Credit

 (3) Rentals of Assets

 (4) Sales or Exchanges of Property

 d. Violation of Private Inurement Prohibition;§ 4958 — Taxes on Excess Benefit Transactions

 2. The Private Benefit Prohibition

 VI. Political Activities Prohibitions

 Introductory Material

 A. History of the Political ActivityProhibitions

 1. Constitutionality of Proscriptions

 2. Unconstitutional Conditions Argument

 3. Third-Party Standing to ChallengeTax-Exempt Status Based on Violations of Political Activity Prohibitions

 B. Rules Governing Lobbying ActivityProhibition

 1. Organization's Action Component

 2. Lobbying Activities Directed at SpecificLegislation Component

 a. What Is Lobbying?

 b. The Legislative Process

 c. Nonpartisan Study, Research, Analysis andBroad Education of Public on Issues of General Concern Are Not ConsideredLobbying

 d. What Is Advocacy?

 e. Technical Advice Rendered to Governing Bodiesupon Written Request Is Not Lobbying

 f. Advocacy in Organization's Self-Defense IsNot Lobbying

 3. Substantiality Component

 4. Section 501(h) Expenditure Test — A SafeHarbor?

 5. Bottom Line for Churches, IntegratedAuxiliaries, Conventions and Associations of Churches, and Their Affiliates

 C. Campaign Activity Prohibition

 1. Candidate for Public Office

 2. “Participation In, or Intervention In”

 a. Activities of Organization's Officials

 b. Conduct Considered Political Campaigning

 3. Neutrality of Action as Key

 4. Scope of Prohibition

 a. Permissible Voter Education

 b. When Are Ratings of Candidates, VotingRecords, and Voter Guides Educational and Thus Permissible?

 c. Presentation of Materials on Candidates,Whether Publications or Web Sites

 d. Business Activities — E.g., Mailing Lists,Office Space, and Advertisements

 e. Issue Advocacy

 f. Provision of Facilities and CandidateAppearances

 (1) Appearances in a Candidate's Capacity as aCandidate — In General

 (2) Appearance as a Candidate at a PublicForum

 (3) Appearances in a Non-Candidate Capacity ina Public Forum

 5. Creating a § 501(c)(4) Organization

 6. Enforcement by the IRS

 7. Sanctions for Violation of the CampaignActivity Prohibition

 D. Other Statutes Related to Political Activities

 1. Section 527 and “Political Organizations”

 a. In General

 b. Definitions and Details

 c. Disclosures in Information Return

 2. Federal Election Laws

 3. State Lobbying Registration Requirements

 VII. Public Policy Doctrine

 VIII. Section 4958 — Intermediate Sanctions

 A. Background

 B. Disqualified Persons

 1. Substantial Influence

 2. Family Members

 3. 35% Controlled Entities

 C. Organization Managers

 D. Excess Benefit Transactions

 1. Indirect Economic Benefit

 2. Disregarded Categories of Economic Benefit

 a. Fair Market Value Standard

 b. Reasonableness Determination for ValuationPurposes

 E. Revenue-Sharing Compensation Arrangements

 F. Date of Occurrence

 G. Rebuttable Presumption

 1. No Conflicts of Interest Condition

 2. Comparability Data Condition and the SmallOrganization Safe Harbor

 3. Documentation Condition

 H. Three Excise Taxes

 1. Correction by Disqualified Person

 2. Miscellaneous Correction Rules

 I. Miscellaneous Special Rules

 J. Reporting of an Excess Benefit Transaction

 K. Special Rules for Church Examinations

 L. Statute of Limitations

 IX. Unrelated Business Income Tax

 A. Background

 B. Revenue Act of 1939

 C. Revenue Act of 1950

 D. Tax Reform Act of 1969

 E. Post-Tax Reform Act of 1969

 F. Limitation of Discussion

 G. Religious Organizations Subject toUnrelated Business Income Tax

 1. Trade or Business Test

 2. Activity Unrelated to Exempt Purpose

 3. Statutory Exclusions from Unrelated Tradeor Business

 a. Volunteer Activities Exception

 b. Convenience of Members and PatronsExclusion

 c. Sales of Donated Merchandise

 d. Bingo Games

 e. Low-Cost Articles Distributed

 f. Mailing List Exclusion

 4. Unrelated Trade or Business Income

 a. Exclusions

 (1) Section 512(b)(15)

 (2) Passive Income

 (3) Rents from Real Property and from CertainPersonal Property

 (4) Dividends and Interest

 (5) Royalties

 (6) Qualified Sponsorship Payments

 (7) Gains from Disposition of Property

 b. Church-Operated Cemeteries

 c. Church-Provided Insurance

 5. Debt-Financed Property

 a. “Substantially All Use” Exception

 b. Neighborhood Land Exception Applicable toTax-Exempt Organizations Other Than Churches

 c. Land Exception Applicable to Churches, andConventions or Associations of Churches

 d. Actual Exempt Use Rule Exception

 e. Exception for Mortgaged Property Acquiredby Gift, Bequest or Devise

 6. Consequences of Unrelated Business TaxableIncome

 7. Tax on Unrelated Business Taxable Income

 X. Tax Benefits of Clergy

 A. Housing Allowance and Limitations

 B. Mortgage Interest and Real Property TaxDeduction

 C. Employment Taxes

 XI. Tax Benefits to Members of ReligiousOrders

 A. Determination of Reportable Income Pursuantto Agency Tests

 B. Apostolic Communities

 C. Church Benefit Plans

 1. Requirements and Rules

 2. Separate Organization Administering Plan

 3. Church Plans, Supporting Organizations, andCommercial-Type Insurance

 4. Failure to Satisfy Church Benefits PlanRequirements

 5. Church Benefit Plans ERISA Exemption

 6. Church Group Health Plans

 XII. Charitable Contribution Deduction

 A. Background

 B. Basic Principles of Income Tax CharitableDeduction

 1. What Is a “Contribution” for § 170Purposes?

 2. The 50% and 30% Limitations Applicable toIndividuals' Contributions to Public Charities

 3. 30% and 20% Limitations Applicable toIndividuals' Contributions to Private Foundations

 4. Partial Interests and Interests in Trust

 5. Bargain Sales to Public Charities

 6. Contributions by Corporations to PublicCharities

 7. Contributor's Accountability: Appraisal andReporting Requirements

 C. Quid Pro Quo Payments — Hernandez and § §6115(a), 170(f)(8) and 6113

 1. Section 6115(a) Good Faith Estimate

 2. Section 170(f)(8) SubstantiationRequirement

 3. Section 6113 Fundraising DisclosureRequirements

 D. Planned Giving Devices Utilized byContributors

 E. Qualified Remainder Trusts

 1. Benefits of Charitable Remainder Trusts

 2. Income Tax Consequences of CharitableRemainder Trusts

 3. Donor's Income Tax Charitable ContributionDeduction

 4. Donor's Gift Tax Charitable ContributionDeduction

 5. Donor's Estate Tax Charitable ContributionDeduction

 a. Inter Vivos Charitable Remainder Trusts

 b. Testamentary Charitable Remainder Trusts

 6. Types of Charitable Remainder Trusts

 a. Charitable Remainder Annuity Trusts (CRATs)

 b. Charitable Remainder Unitrusts (CRUTs)

 7. Pooled Income or Common Fund

 8. Summary

 F. Charitable Lead Trusts

 1. Grantor Charitable Lead Trust (GCLT)

 2. Nongrantor Charitable Lead Trusts (NGCLTs)

 G. Donor-Advised Funds (DAFs)

 H. Cross-Border Charitable Giving

 1. Individuals' Charitable Giving

 a. Income Tax Charitable Deduction

 b. Gift and Estate Tax Charitable Deductions

 2. Charitable Giving by Corporations

 3. Cross-Border Grants by Domestic PublicCharities

 4. Cross-Border Grants by Domestic PrivateFoundations

 XIII. Tax-Exempt Bond Issuance for the Benefitof Sectarian Institutions

 A. Background

 B. Statutory Considerations

 C. Cases Involving Religiously AffiliatedEducational Institutions

 D. Cases Involving Religiously AffiliatedHospitals

 XIV. The Internet and Tax-Exempt ReligiousOrganizations

 A. Background

 B. The Internet and § 501(c)(3) Tax-ExemptStatus

 1. Potential for Sham Fundraising Web Sites

 2. Potential for “Mail Order Churches”

 3. Political Activity Prohibitions

 4. IRS Reaction

 C. Corporate Sponsorship of Tax-ExemptReligious Organizations on the Internet

 1. Background

 2. Advertisements

 3. Acknowledgments

 4. Logos vs. Banners & Hyperlinks

 5. Web Site as a Periodical

 6. Effect to Sponsoring Entity

 D. Solicitation of Funds

 1. Background

 2. Solicitation Conducted ThroughOrganization's Own Web Site

 3. Third-Party-Operated Fundraising Web Sites

 4. Internet Charity Malls

 5. Online Charity Auctions

 6. Sales of Religious Items on ReligiousOrganizations' Web Sites

 E. Disclosure Obligations

Working Papers

 Working Papers

 Table of Worksheets

 Worksheet 1 Steps for—and ConsiderationsRelating to—Creation and Operation of Nonprofit Religious Corporation

 Worksheet 2 Sample Purposes and ReservedPowers

 Worksheet 3 Right From the Start,Responsibilities of Directors and Officers of Not-for-Profit Corporations

 Worksheet 4 State Church IncorporationStatutes as of February 1, 2008

 Worksheet 5 Principles for Good Governance andEthical Practice




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