maybe and should Is your religious organization seeking church status with the IRS? A look at a few pros, cons and due diligence considerations.
In over 15 years of representing nonprofits, one thing is for certain – there are an endless number of exempt purposes that can be accomplished under Section 501(c)(3) of the Internal Revenue Code. No matter how similar they are for tax purposes, each tax-exempt or nonprofit organization has unique characteristics of governance, operations, and focus. The same is certainly true in the sphere of religious organizations. As my long-time religious law teacher once said, “God so loved us that there is a church, synagogue, mosque, temple, or other place of worship where everyone can pray and seek peace.”
Some of my non-profit clients exist primarily for religious purposes – religion is the core and fundamental focus of everything organizational and operational for these organizations. However, this focus does not make these organizations a “church” as the term is defined (or considered) by the Internal Revenue Service. As with any organizational structure, church status has its advantages and disadvantages.
This is Freeman’s law Insights the blog contains an overview some key considerations about whether an organization that exists primarily for religious purposes can (and should) apply for church status with the IRS.
Organized and operated solely for exempt purposes
The organization must be organized and operated exclusively as a tax-exempt organization as described in section 501(c)(3) of the Internal Revenue Code and related Treasury regulations. For more information on these federal tax law requirements, see The State Bar of Texas White Paper, linked here, Representation of Texas Nonprofit Corporations.
At the beginning – opinions about the status of the church
The organization must assess the process and requirements for obtaining church status, as well as the current state of the organization’s existence, management, and operations. Although perhaps not exclusive, the main disadvantages when applying for church status are essentially three:
(1) Whether the organization is willing to expend the time, energy, and expense to fully evaluate and, if appropriate or necessary, modify the organization’s current constitution, bylaws, and other basic policies and operations to best qualify the organization for ecclesiastical status.
(2) Whether the organization is committed to an operating model that complies with the amended governing documents and operational requirements to maintain church status.
(3) Whether church recognition may limit or exclude certain corporate sources of funding, which may have policies against grants or contributions to churches, but not necessarily to religious organizations.
Application for church status
The organization must assess whether the IRS currently recognizes the organization as a public charity under section 501(c)(3) of the Internal Revenue Code. See Tax Service Search for Information on Exempt Organization. If the organization already exists and has been granted the status of a public charity, the request for the status of the church is made with the help IRS Form 8940 – Request for different definitions; exemption from the filing requirements of Form 990. To support an application for church status, Form 8940 can be supplemented with a proforma Schedule A from IRS Form 1023 (link to Form 1023 instructions and IRS instructions regarding the characteristics of a “church” and the application for church status).
The application must be accompanied by the organization’s governing documents and other records and information that support the characteristics of a “church.” See IRS “Churches” defined
Current governance/operations and changes in church status
An organization should evaluate its current charter to see if its current charter will serve the organization’s qualification as a church at a high level. Many religious organizations (which are not necessarily churches) focus primarily on the promotion of religion, which is a characteristic of “charity” as that term is used in Section 501(c)(3) of the Code. The term “religious” as used in section 501(c)(3) is not defined in the Code or related Treasury regulations, primarily because of First Amendment considerations. See 26 CFR § 1.501(c)(3)-1(d)(1)(i)(a) (listing exempt purposes, including “charitable” and “religious” and defining “charitable” but not defining “religious”).
An organization may need to amend and reword its charter, bylaws, and other key governing documents to better match the operational characteristics of a “church,” according to the IRS. See IRS “Churches” defined. Ideally, these modifications should be supported by written policies, programs, and protocols related to church characteristics.
Exemption from property tax
One major benefit of church status is the increased likelihood that the organization will qualify as a “religious organization” for religious property tax exemption under Texas law and possibly other states where the organization owns real or personal property. Currently, given the current climate and attitudes in local appraisal districts, religious organizations are under intense scrutiny for property tax exemptions. Without reinventing the wheel, for an overview of Texas law on this issue, see Texas Religious Organizations Property Tax Exemption (April 23, 2022, Freeman’s Law Insights blog from me). The estate tax exemption regime in another applicable state may be assessed in a similar manner.
Another benefit of ecclesiastical status may be in the area of employment law, particularly with regard to those employees who qualify as “ministers” from an employment law perspective (of course from a tax perspective, which is another topic for discussion). If an organization is organized and operates as a church, the likelihood that the organization can benefit from the church exemption from employment laws is likely to increase for some employees. Whether the law will allow an organization to qualify any employee as a minister for labor law purposes is one area to be evaluated, but church status will increase the likelihood that the church exemption will apply to employees who may qualify as ministers for labor law purposes.
But religious organizations, including non-churches, already enjoy some level of exemption from religion-based employment actions.
Title VII makes it an unlawful employment practice for an employer to fail to hire or fire any person, or otherwise discriminate against any person, because of that person’s religion. See 42 USC §2000e-2(a)(1). However, Title VII contains exemptions that apply to religious organizations. See ID. in § 2000e-1(a). In particular, the statute states: “[Title VII] are not applicable. . . religious corporation. . . in relation to the employment of persons of a particular religion to perform work connected with the activities of such corporation. . . of its activities in relation to the employment of persons of a particular religion for the performance of work connected with the carrying on of its activities by such corporation. 42 USC § 2000e-1(a); see also 42 USC § 2000e-2(e)(2) (providing an exception to religious discrimination where the individual’s religion “is a bona fide occupational qualification reasonably necessary for the proper operation of that particular business or enterprise”).
The Fifth Circuit Court of Appeals offers no specific framework regarding the exceptions set forth in 42 USC § 2000e-1(a). See Aguillard v. La. Coll., 341 F.Supp. 3d 642 (WD La. 2018) (“Regarding Title VII’s exemptions, the Fifth Circuit offered no specific guidance.”) However, courts generally consider a nonexclusive set of factors to determine whether an employer is a religious organization that subject to the exception of 42 USC § 2000e-1(a): (1) whether the organization is supported and controlled by a religious corporation; (2) whether the organization was founded by sectarian individuals or organizations; (3) atmosphere of essence; (4) the nature of the entity; (5) whether the organization’s facilities are decorated with religious imagery; and (5) whether regular religious rites and practices are observed.
Form 990 Advantages and Disadvantages.
Church status can also exempt the organization from the Form 990 filing requirements, which is an advantage. The downside to this advantage is the lack of transparency for the contributing public. Some donors (large or otherwise) prefer or require the opportunity to examine a potential charity’s annual Form 990. But an organization can mitigate this deficiency by continuing to prepare and publish, if not file with the IRS, an annual Form 990. And, by filing Form 990, the organization allows the applicable statute of limitations to begin running for income tax liability purposes. If, like a church, the organization does not file Form 990, the statute of limitations on potential tax liabilities never expires for the applicable tax year for which Form 990 is not filed with the IRS.
The last benefit I’ll talk about here is that, as a church, the organization can take advantage of the IRS’s restrictions on participating in church audits. See 26 USC § 7611; IRS Church Tax Inquiries.
In conclusion, the main disadvantage of seeking church status is the expense and effort involved in conducting a comprehensive assessment and, if necessary, changing the current state of governance and operations of the organization to increase the likelihood of a successful application for church status. If an organization wishes to apply without any changes to the interface, this disadvantage is reduced, but the likelihood of receiving church status may be reduced.
Given the organization’s current and historical focus on religious development, perhaps the changes necessary to achieve church status are not too heavy. But, in my experience, this kind of evaluation and adjustment always takes more time, energy and expense than perhaps expected. And after these adjustments are made, the organization must comply with the amended governing documents and operational requirements to maintain church status.
The organization could assess the current state of governance and operations, draft Schedule A to the Form 1023 Tax Exemption Application, determine where gaps in the church’s status may exist or where baseline changes may be needed to increase the likelihood of a successful application for church status. , and then determine whether the time, energy, and expense associated with these changes is in the organization’s best long-term interest for the potential return of being a “church.” This initial assessment of the status of the church would be a valuable asset for the governing body of the organization to make an informed decision on the matter.