Transcript Document

Valuing Religion: Historical Tax
Privileges of Churches in a Modern
Secular Age
Robert T. Smith
Managing Director
International Center for Law and Religion Studies
J. Reuben Clark Law School
Overview
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
Size and Growth of the TaxExempt Sector in the US
Early Americans Created
Philanthropic Endeavors of All Kinds
“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…
(continued)
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
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
American Culture of Giving
“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-ahalf 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. Brooks
President 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. Brooks
President of the American Enterprise Institute
History of Tax Privileges to
Churches in the US
Early Legislation, 1894-1936
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
Revenue Acts of 1950 & 1969
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
Principles Underlying Tax-Exemption
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 giving
 Religious, Educational, and charitable
organizations contribute importantly to
society and therefore need not contribute to
the public fisc
 First Amendment discourages excessive
government entanglement that taxation
would cause
Current Tax Privileges to
Churches
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
exemption
 No 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 termination
 No 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 UBI
 Relaxed employment tax requirements and
retirement plan for ministers
 Income 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.
Income Tax Exemptions for
Churches under I.R.C. § 501(c)(3)
I.R.C. § 501(c)(3) Organizations
Defined
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:
1. The organizational test
2. The operational test
3. The private inurement test
4. The political activities test
5. A public policy test has been added by judicial
decision
1. The Organizational Test
 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
2. The Operational 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
3. The Private Inurement 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).
4. The Political Activities Test
The political activities test consists of two parts:
 Substantial lobbying restrictions
 Political campaign prohibitions
4. The Political Activities Test
Lobbying Restriction
 The 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 exception
 Political campaign prohibition has been upheld by the
Supreme Court for non-religious organizations
4. The Political Activities Test
Possible challenges to Political Activities Test
 Restriction on political speech may be an “unconstitutional condition”.
 Sherbert v. Verner
 Challenge possible due to Citizens United v. Federal Election Commission
 Current restrictions of political activities have chilling effects on
religious speech in the public square
5. The Public Policy 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 exemption
 Supreme Court concurred, citing strong public policy against racial
discrimination by all three branches of government over an extended
period of time
 Rejected 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 Test
 Same 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
Potential Threats to Historical
Tax Privileges
Potential Threats to Historical Tax
Privilege
 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
Elder Oaks’ Religious Freedom
Address
“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….
(continued)
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
Potential Threats to Historical Tax
Privilege
 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 special
 If religion is depreciated, then the doctrine of equality
could mandate that churches forfeit those privileges
What Can Be Done to Protect
Church Tax Privileges?
Elder Oaks’ Suggestions to Promote
Your Beliefs in the Public Square
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 Bolster
Religious Freedom
“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…
(Continued)
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