Valuing Religion: Historical Tax Privileges of Churches in

a Modern Secular AgeRobert T. SmithManaging Director

International Center for Law and Religion Studies

J. Reuben Clark Law School

1. Size and growth of the tax-exempt sector in the US

2. History of tax privileges to churches in the US

3. Current tax privileges to churches

4. Income tax exemptions under I.R.C. § 501(c)(3)

5. Potential threats to historical tax privileges

6. What can be done to protect church tax privileges

Overview

Size and Growth of the Tax-Exempt Sector in the

US

“Americans of all ages, all conditions, and all dispositions, constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds, -- religious, moral, serious, futile, general or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the…

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Early Americans Created Philanthropic Endeavors of All

Kinds

antipodes; If it be proposed to inculcate some truth, or to foster some feeling, by the encouragement of a great example, they form a society. Wherever, at the head of some new undertaking, you see the government in France, or a man of rank in England, in the United States you will be sure to find and association.”

~Alexis De Tocqueville

Early Americans Created Philanthropic Endeavors of All

Kinds

Total assets increased 222% between 1985 and 2004, while revenue increased 171%

Assets and revenues had a cumulative growth rate of 107% for charitable expenditures during the Tax

Years 1985-2004. This is contrasted with a cumulative growth rate of Gross Domestic Product of

58% for those same years

The total number of tax-exempt organizations in the United States has grown significantly from slightly

more than 300,000 in 1984 to nearly 900,000 in 2004

“In 2006 American citizens privately gave about $300 billion away to charity. . . Seventy-five percent of America’s families give every year. Fifty percent volunteer their time, and many Americans give in myriad other ways that are not captured in data.”

~ Arthur C. Brooks President of the American Enterprise

Institute

American Culture of Giving

“The average American citizen gives away three-and-a-half times as much money each year as the average French citizen, seven times as much as the average German, and 14 times as much as the average Italian.”

~ Arthur C. BrooksPresident of the American Enterprise Institute

American Culture of Giving

“The most charitable state in the United States…is Utah, where people give approximately twice as much as the second leading state in charitable giving.”

~ Arthur C. BrooksPresident of the American Enterprise Institute

American Culture of Giving

History of Tax Privileges to Churches in the US

Wilson-Gorman Tariff Act of 1894 “Nothing herein contained shall apply to...

corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes”

This is the cornerstone of tax exemption under I.R.C. § 501(c)(3) today

Early Legislation, 1894-1936

The Revenue Act of 1909 “No part of the net income of which inures to the

benefit of any private stockholder or individual” The prohibition against private inurement

continues today

The Revenue Act of 1917 Established, for the first time, an individual

income tax deduction for contributions made to tax-exempt charitable organizations

Early Legislation, 1894-1936

The Revenue Act of 1950 Limited tax on “unrelated business income”

(UBI) UBI defined as a “trade or business” that is

“regularly carried on” and is not “substantially related” to the organization’s exempt purpose(s)

The Revenue Act of 1969 Unrelated business income tax extended to all

I.R.C. § 501(c) organizations including churches

Revenue Acts of 1950 & 1969

1. The privileged tax treatment granted to religious and other charitable organizations can be traced to the earliest versions of United States tax law

2. Tax exemption prohibits private inurement—that is, only non-profit organizations qualify

3. Charitable contribution deduction, designed to encourage charitable giving, was developed early

Principles Underlying Tax-Exemption

4. The income tax exemption has remained remarkably consistent. IRC § 501(c)(3) uses nearly the same terms as when it was originally enacted in 1916

5. There has been relatively little controversy about providing tax exemption to religious, educational and other charitable organizations

Principles Underlying Tax-Exemption

Possible reasons for a lack of controversy:American Culture of givingReligious, Educational, and charitable organizations contribute importantly to society and therefore need not contribute to the public fiscFirst Amendment discourages excessive government entanglement that taxation would cause

Principles Underlying Tax-Exemption

Current Tax Privileges to Churches

Income tax exemptions from contributions and earnings

Tax-exempt earnings include Interest Royalties Dividends Capital gains

Current Tax Privileges to Churches

Churches may maintain an unlimited reserve Other countries may limit the size of the

reserve Property tax exemptions Sales tax exemptions

Current Tax Privileges to Churches

Other valuable tax privileges include:No requirement to apply with IRS for tax exemptionNo requirement to file annual information return (Form 990)

Current Tax Privileges to Churches

Current Tax Privileges to Churches

Other valuable tax privileges include:No requirement to provide public inspection of information returns No requirement to file tax returns upon liquidation, dissolution, or terminationNo presumption of private foundation status (special tax)

Current Tax Privileges to Churches

Other valuable tax privileges include:Audit protection, absent specific facts regarding exemption qualification or UBIRelaxed employment tax requirements and retirement plan for ministersIncome tax exclusion for costs of ministers’ “parsonage”

Cost of homes including costs for furnishings, insurance, property taxes, utilities and maintenance

Current Tax Privileges to Churches

I.R.C. § 107 In the case of a minister of the gospel, gross income does not include – (1)the rental value of a home furnished to him as part of his compensation; or (2)the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.

Current Tax Privileges to Churches

Income Tax Exemptions for Churches under I.R.C. §

501(c)(3)

Under I.R.C. § 501(c)(3) defines tax-exempt organizations as follows:1.Corporations, and any community chest, fund, or foundation, 2.organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . 3.no part of the net earnings of which inures to the benefit of any private shareholder or individual, [and]4.no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . , 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.

I.R.C. § 501(c)(3) Organizations Defined

As set forth in Treas. Reg. § 1.501(c)(3)-1, this statutory definition sets up four-part tests for tax exemption: The organizational testThe operational testThe private inurement testThe political activities testA public policy test has been added by judicial decision

I.R.C. § 501(c)(3) Organizations Defined

The organizational test focuses on Articles of Incorporations or other founding documents

This test is straightforward in practice and rarely causes difficulties

Test met upon founding of the organization

1. The Organizational Test

Requires tax-exempt organizations to operate “exclusively” for one or more exempt purposes

“Exclusively” means “primarily” “Primarily” means that no “more than an

insubstantial part of its activities” are no exempt activities

Test must be met on an everyday basis

2. The Operational Test

No “net earnings inure in whole or in part to the benefit of private shareholders or individuals”

Test insures public, rather than private, benefits

Upon dissolution assets must be transferred to I.R.C. § 501(c)(3) organization(s).

3. The Private Inurement Test

The political activities test consists of two parts:

Substantial lobbying restrictions Political campaign prohibitions

4. The Political Activities Test

Lobbying RestrictionThe lobbying restriction prohibit

A substantial part of the organization’s activities consist of attempting to influence consists of attempting to influence legislation, or

An organization’s primary objective may be attained only by passing or defeating proposed legislation

The Lobbying restriction is the basis for complaints calling for the revocation of the LDS Church’s tax exemption following its participation in Proposition 8 in California“Substantiality” is measured not by the overall impact of the lobbying effort or even its total size or cost, but by comparing the lobbying effort to the overall activities of the religious organization

4. The Political Activities Test

Political Campaign Prohibitions Support for a political campaign on behalf of, or

in opposition to, any candidate for public office is absolutely barred.

There is no de minimus exceptionPolitical campaign prohibition has been upheld by the Supreme Court for non-religious organizations

4. The Political Activities Test

Possible challenges to Political Activities TestRestriction on political speech may be an “unconstitutional condition”.

Sherbert v. VernerChallenge possible due to Citizens United v. Federal Election CommissionCurrent restrictions of political activities have chilling effects on religious speech in the public square

4. The Political Activities Test

The Supreme Court announced public policy test in Bob Jones University v. US The university had a policy restricting interracial dating IRS revoked university tax exemptionSupreme Court concurred, citing strong public policy against racial discrimination by all three branches of government over an extended period of timeRejected First Amendment argument stating university could maintain its discriminatory policy at the cost of losing tax exemption

5. The Public Policy Test

Implications of Public Policy TestSame sex marriage

Would public policy favoring same sex marriage require religious organizations to comply?

Justice Department recently announced decision to no longer support Defense of Marriage Act

Obama Administration supporting legislation to appeal Defense of Marriage Act

5. The Public Policy Test

Potential Threats to Historical Tax Privileges

In sum, the tax privileges afforded to churches in the US are significant

Without these tax privileges, the LDS Church and other churches would be forced to disclose their assets and operations to the government and the public, subjecting them to much great scrutiny and potential regulation

Therefore, preserving these tax privileges is an essential and important aspect of preserving religious freedom

Potential Threats to Historical Tax Privilege

“If it’s true that we protect the things we value, and that we won’t protect things we don’t value, won’t religious freedom, the protection of religion, exist only so long as we value religion? In other words, when society stops valuing religion, what motivation is there for society to protect religious freedom?”

~ Garrett Gibson Alliance Defense Fund Blackstone

Fellow

Potential Threats to Historical Tax Privilege

“If the value that society allocates to religion could be measured on a sort of generational continuum, it would likely show the immediate past and current generation as apathetic towards religion; they are areligious. Not so for the rising generation where animosity is displacing apathy. It’s antireligious. The tone of the new intellectual religious critics, traditionally civil, has shifted to downright animosity, disrespect, and condescension. Thus, we face a difficult question: in the future how will we succeed in arguing for the protection of religious freedoms in a society that places no value in religion?”

~ Garrett Gibson Alliance Defense Fund Blackstone Fellow

Potential Threats to Historical Tax Privilege

“Religious freedom exists only as long we value religion. Why would society protect and fight for something deemed to have little or no value? After all, fighting takes effort, resolve, and sacrifice—things reserved for causes worthy of that sort of effort.”

~ Garrett Gibson Alliance Defense Fund Blackstone

Fellow

Potential Threats to Historical Tax Privilege

“Our society is not held together just by law and its enforcement, but most importantly by voluntary obedience to the unenforceable and by widespread adherence to unwritten norms of right or righteous behavior. Religious belief in right and wrong is a vital influence to advocate and persuade such voluntary compliance by a large proportion of our citizens.”

~ Elder Dallin H. Oaks Speech at Chapman University School of Law

Elder Oaks’ Religious Freedom Address

“We have no government armed with power capable of contending with human passions unbridled by morality and religion. Avarice, ambition, revenge, or gallantry, would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution was made only for a moral and religious people.  It is wholly inadequate to the government of any other.”

~ John Adams

Elder Oaks’ Religious Freedom Address

“Whatever the extent of formal religious affiliation, I believe that the tide of public opinion in favor of religion is receding. A writer for the Christian Science Monitor predicts that the coming century will be ‘very secular and religiously antagonistic,’ with intolerance of Christianity ‘ris[ing] to levels many of us have not believed possible in our lifetimes.’”

~ Elder Dallin H. Oaks Speech at Chapman University School of Law

Elder Oaks’ Religious Freedom Address

“Some are contending that a religious message is just another message in a world full of messages, not something to be given unique or special protection. One author takes the extreme position that religious speech should have even less protection. In Freedom from Religion, published by the Oxford University Press, a law professor makes this three-step argument:1. In many nations ‘society is at risk from religious extremism.’2. ‘A follower is far more likely to act on the words of a religious authority figure than other speakers.’3. Therefore, ‘in some cases, society and government should view religious speech as inherently less protected than secular political speech because of its extraordinary ability to influence the listener….

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Elder Oaks’ Religious Freedom Address

The professor then offers this shocking conclusion:‘[W]e must begin to consider the possibility that religious speech can no longer hide behind the shield of freedom of expression. . . .‘Contemporary religious extremism leaves decision-makers and the public alike with no choice but to re-contour constitutionally granted rights as they pertain to religion and speech.’”

~ Elder Dallin H. Oaks Speech at Chapman University School of Law

Elder Oaks’ Religious Freedom Address

“What has caused the current public and legal climate of mounting threats to religious freedom? I believe the cause is not legal but cultural and religious. I believe the diminished value being attached to religious freedom stems from the ascendency of moral relativism. More and more of our citizens support the idea that all authority and all rules of behavior are man-made and can be accepted or rejected as one chooses. Each person is free to decide for himself or herself what is right and wrong. Our children face the challenge of living in an increasingly godless and amoral society.”

~ Elder Dallin H. Oaks Speech at Chapman University School of Law

Elder Oaks’ Religious Freedom Address

In my view, one of the greatest threats to religious freedom is the currently prevailing ideal of equality

While equality is an important and necessary ideal in most human relationships, its application to religion is problematic

Potential Threats to Historical Tax Privilege

Same sex marriage debate is premised on equality, which is incompatible with many religious views

Treating churches equally with other charities would eviscerate the tax privileges traditionally afforded to churches

Potential Threats to Historical Tax Privilege

Finally, churches have received special tax privileges because they were considered specialIf religion is depreciated, then the doctrine of equality could mandate that churches forfeit those privileges

Potential Threats to Historical Tax Privilege

What Can Be Done to Protect Church Tax

Privileges?

1. You must seek the inspiration of the Lord to be selective and wise in choosing which true principles you seek to promote by law or executive action

2. Your methods and your advocacy should always be tolerant of the opinions and positions of those who do not share your beliefs

Elder Oaks’ Suggestions to Promote Your Beliefs in the

Public Square

3. You should not be deterred by the familiar charge that you are trying to legislate morality

4. You should not shrink from seeking laws to maintain public conditions or policies that assist you in practicing the requirements of your faith where those conditions or policies are also favorable to the public health, safety or morals

~Elder Dallin H. Oaks CES Fireside, September 11, 2011

Elder Oaks’ Suggestions to Promote Your Beliefs in the

Public Square

“I invite you to march with me as I speak about religious freedom under the United States Constitution. There is a battle over the meaning of that freedom. The contest is of eternal importance, and it is your generation that must understand the issues and make the efforts to prevail.”

~Elder Dallin H. Oaks Speech given at BYU-Idaho, 2009

Elder Oaks’ Suggestions to Bolster Religious Freedom

“First, we must speak with love, always showing patience, understanding and compassion toward our adversaries…Second, we must not be deterred or coerced into silence by the kinds of intimidation I have described. We must insist on our constitutional right and duty to exercise our religion, to vote our consciences on public issues and to participate in elections and debates in the public square and the halls of justice…

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Elder Oaks’ Suggestions to Bolster Religious Freedom

Third, we must insist on our freedom to preach the doctrines of our faith…Fourth, as advocates of the obvious truth that persons with religious positions or motivations have the right to express their religious views in public, we must nevertheless be wise in our political participation. Fifth and finally, Latter-day Saints must be careful never to support or act upon the idea that a person must subscribe to some particular set of religious beliefs in order to qualify for a public office…”

~Elder Dallin H. Oaks Speech given at BYU-Idaho, 2009

Elder Oaks’ Suggestions to Bolster Religious Freedom