INTRODUCTION TO SECTION 508 (not tax advice)
The current understanding of not for profit organizations is, for the most part, limited to IRC Sec. 501. Little known is the law for religious organizations under Sec 508. These entities may be referred to herein as Faith Based Organizations (FBO). There is little written about the availability of this law as it applies to religious entities. The purpose of this summary is to provide a brief introduction to IRC Sec 508, in lay terms, for leaders of religious organizations who are not tax professionals. [1]
Sec. 508 was codified in the Internal Revenue Code (IRC) in order to formally establish the doctrine of freedom of religion which had been a tacit standard upon which America was founded and governed since before it gained its independence in 1776.[2] An FBO is, by the very nature of its creation, a religious, non-profit, tax-exempt organization.[3]
Throughout this summary you will find links to further information, including technical references for your professional advisor to research and for you to refer to as needed. We wish to educate both religious leaders and tax professionals on this widely underutilized tax law. It is generally unknown to tax practitioners simply because law schools and accounting schools do not teach it.
Section 508 refers specifically to “churches” “their integrated auxiliaries” and “conventions or associations of churches.”[4] The tax code however does not define these terms. It also does not define the term “religion.” These terms have developed meaning through practical application as affirmed by IRS rulings and case law (i.e. law suits between the IRS and not for profit entities).[5] The result is a very broad based meaning for qualifying organizations. For instance, two FBO’s that received “Church” status include “The Salvation Army”[6] and “Young Life”.
There are several benefits that Sec 508 holds over Sec 501. The following is a listing of benefits.
Filing an application for 501c non-profit status with the IRS is generally not required.[7] This avoids the burdensome Form 1023 with its $850 filing fee as well as the scrutiny of the IRS upon application. You may recall the 2013 scandal where the IRS attacked conservative groups with long and burdensome approval periods and requirements. (One organization was required to provide 26,000 pages of documents for scrutiny).
There appears to be no annual income tax filing requirement such as the Form 990.[8]
There is no proscription against political speech from the pulpit as there is when an organization agrees in writing to be subject to such limitations as a result of obtaining certification under Sec 501.[9] Our political and legal system are seguing toward restrictions of any sort of “hate speech” (read: preaching against any sin specified in scripture such as homosexuality)[10] rendered from the pulpit.
Sec 508 entities, since they are not of record with the IRS, are not exposed to public scrutiny. In the case of Sec 501, all applications and subsequent correspondence is available to any who request it.[11]
The problem for practitioners and churches is that the federal income tax laws use the word ‘‘church’’ in many different provisions without defining it.[12] The IRS and various courts have used different approaches to determine whether an organization is a church, but these approaches have been inconsistent.[13] The dilemma was described several years ago as one that has ‘‘puzzled the Service, courts and scholars.’’[14] The outcome of FBO’s relying solely on IRS determination on their tax exempt status has been restrictions and waiving of First Amendment rights.
References
[1]See also reg. section First Amendment of US Constitution. “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.” See also reg. section 42 U.S.C. § 2000bb, Religious Freedom Restoration Act. “The Congress finds that—
(1) the framers of the Constitution, recognizing free exercise of religion as an unalienable right, secured its protection in the First Amendment to the Constitution; (in other words you never needed a license or permission from them)
(2) laws “neutral” toward religion may burden religious exercise as surely as laws intended to interfere with religious exercise;
(3) governments should not substantially burden religious exercise without compelling justification;
(4) in Employment Division v. Smith, 494 U.S. 872 (1990) the Supreme Court virtually eliminated the requirement that the government justify burdens on religious exercise imposed by laws neutral toward religion; and
(5) the compelling interest test as set forth in prior Federal court rulings is a workable test for striking sensible balances between religious liberty and competing prior governmental interests.”
[2]All other section references are to the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated thereunder.
[3]See Blacks Law Dictionary 9th Edition for legal definition of “Free”….<1) Having legal and political rights…2) Not subject to the constraint or domination of another…3) Characterized by choice, rather than by compulsion or constraint…4) Unburdened…5) Not confined by force or restraint…6) Unrestricted and unregulated…7) Costing nothing…..>
[4]See also reg. section 508-(c)(i)(a). This exemption and many of the other exemptions discussed herein also apply to ‘‘a convention or association of churches’’ or an ‘‘integrated auxiliary’’ of a church.
[5]See www.t-tlaw.com “Because of First Amendment religious freedom concerns, Congress has never passed any statute anywhere which defines what a church is (beyond saying “a church or convention or association of churches”, which is like saying that the definition of a duck is “one or more ducks”). See also Fordham Law Review Volume 45 Issue 5 1977.
[6] See Rev. Rul. 59-129, 1959-1 C.B. 58, the IRS ruled that The Salvation Army was a church or a convention or association of churches within the meaning of section 170(b)(1)(A)(i). No explanation was provided for the ruling. In 2015 the IRS approved First Cannabis Church Of Indiana as an IRS recognized 501(c)(3) church even though marijuana is classified as an illegal drug by Federal and State law. Also in 2015 the IRS approved Our Lady Of Perpetual Exemption as a IRS recognized 501(c)(3) church to HBOs John Oliver of “Last Week Tonight With John Oliver” even though the entertainer meant it as a joke.
[7]See also reg section 508-(c)(1)(a), also IRS publications 4220, 1818, 557, 526 and Instructions For Form 990.
[8]See reg. section 1.6033-(a)(3)(a). This filing exemption includes the Form 990 as well as Form 990-N. Section 6033(i). For a discussion of the legislative history of section 6033, see GCM 37116 (1977).
[9]See also reg. section 501-(c)(3)… “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
[10]See www.christianpost.com/ “Tony Miano, currently a pastor and formerly a Los Angeles Deputy Sheriff, was fingerprinted, interrogated, and had DNA samples drawn after speaking on 1 Thessalonians, which mentions “sexual immorality” and cites homosexuality along with “fornication” as examples of what is against “God’s law.”(2013)
[11]See also reg. section 6104(a)(1)(a). “If an organization described in section 501 (c) or (d) is exempt from taxation under section 501 (a) for any taxable year or a political organization is exempt from taxation under section 527 for any taxable year, the application filed by the organization with respect to which the Secretary made his determination that such organization was entitled to exemption under section 501 (a) or notice of status filed by the organization under section 527 (i), together with any papers submitted in support of such application or notice, and any letter or other document issued by the Internal Revenue Service with respect to such application or notice shall be open to public inspection at the national office of the Internal Revenue Service.”
[12] See Whelan, Charles M., ‘‘‘Church’ in the Internal Revenue Code: The Definitional Problems,’’ 45 Fordham L. Rev. 885 (1976) (questioning consistency of use of the word ‘‘church’’ in the code); and Bruce R. Hopkins, The Law of Tax-Exempt Organizations, section 10.3, at 320 (9th ed. 2007) (discussing the inability to provide a formal definition of church).
[13] See, e.g., TAM 200437047 (‘‘both the courts and the Service agree that there is no bright-line test as to whether an organization is a . . . church); and Foundation II, 104 A.F.T.R. 2d 2009-5424, 5434 (Cl. Ct. 2009).
[14] Louthian, Robert and Thomas Miller, 1994 EO CPE Text: ‘‘A. Defining ‘Church’ — The Concept of a Congregation.’’
"I am not the only IRS employee who’s wondered why churches go to the government and seek permission to be exempted from a tax they didn’t owe to begin with, and to seek a tax deductible status that they’ve always had anyway. Many of us have marveled at how church leaders want to be regulated and controlled by an agency of government that most Americans have prayed would just get out of their lives. Churches are in an amazingly unique position, but they don’t seem to know or appreciate the implications of what it would mean to be free of government control."
Steve Nestor, Senior IRS Agent (Ret),
from the Forward of In Caesar's Grip, by Peter Kershaw