PREACHING POLITICS:
WHEN SHOULD GOVERNMENT STEP IN AND REVOKE CHURCHES’
TAX EXEMPTIONS?
Prepared for
Non-Profit Organizations Seminar
University of Oklahoma
December 5, 2008
Raegan K. Rogers
ID Number: 112.173.670
Professor Jon Forman
Draft dated: December 5, 2008
Table of Contents
Abstract...... i
I.Introduction......
II.A General Overview of the Background of the Political Activities Test......
A.PURPOSE......
B. BACKGROUND......
1.Lobbying Activities
2.Electioneering Activities......
III.Issues and Problems Facing the Political Activities Test......
A. ALL BITE, NO BARK......
B. TOO BROAD, NO BRIGHT LINE RULES......
C. NO WAY TO REGULATE......
D. CONSTITUTIONAL VIOLATIONS......
1.Selective Prosecution......
2.Freedom of Speech......
3.Freedom of Religion......
IV.Recommendations and Remedies......
A. BRIGHT LINE RULES......
B. ELIMINATE THE POLITICAL ACTIVITES TEST ALTOGETHER......
C. CREATE A “POLITICAL WING”......
D. DO WITHOUT THE EXEMPTION......
V.Conclusion......
Preaching Politics:
When Should Government Step In and Revoke Churches’ Tax Exemptions?
i
Raegan K Rogers
Draft Dated: December 5, 2008
Abstract
After the September 28, 2008, Pulpit Initiative, a blatant violation of § 501(c)(3), many across the country will wait and watch to see how, if at all, the IRS will respond. This paper looks at the Internal Revenue Code’s political activity test and how it is used to regulate church activity in order to retain the church’s tax-exempt status. The history and purpose of the test are summarized, as well as how the test has been applied in previous cases. The holes and problems that are a result of the vagueness of the statute will additionally be discussed, along with potential recommendations and remedies for the test’s shortcomings in hopes of creating a more clear, concrete and effective way to analyze churches’ political activism.
i
Preaching Politics:
When Should Government Step In and Revoke Churches’ Tax Exemptions?
RAEGAN K ROGERS
I.Introduction
On Sunday, September 28, 2008, thirty-five pastors in twenty-two states participated in the Pulpit Initiative by preaching politics from the pulpit, a blatant violation of the tax-exempt status rules under Internal Revenue Code § 501(c)(3).[*] Many across the country will wait and watch to see how, if at all, the Internal Revenue Code will respond.
In order to be utilized in determining whether churches should receive tax exemptionsCongress’s political activities test, in its current form, must be changed.[†] The IRS uses four tests – Organization, Operational, Private Inurement and Political Activities – to decide which organizations are eligible to receive tax-exempt status.[‡] According to the political activities test found in § 501(c)(3), a church’s tax exempt status will be revoked if a substantial part of its activities are used for lobbying purposes or it is involved in any form of electioneering.[§]
This paper looks at the Internal Revenue Code’s political activities test and discusses how it is used to regulate church activity. The history and purpose of the test are summarized, as well as how the test has been applied in previous cases. The holes and problems that are a result of the vagueness of the statute will additionally be discussed, along with potential recommendations and remedies for the test’s shortcomings. The purpose of this paper is to encourage Congress to create a more clear, concrete and effective way to determine the permissibility of churches’ political activism.
II. A General Overview of the Background of the Political Activities Test
In 1954, with no official debate or analysis, the United States Congress amended what is now Internal Revenue Code § 501(c)(3) to limit the preaching of politics by churches and religious organizations.[**] This amendment, proposed by then-Senator Lyndon Johnson after he was ridiculed from the pulpit prior to an election, imposed a new political activity test designed to prevent religious organizations from abusing tax exemptions. Before this amendment was passed, churches had played a significant role in the implementation of major societal and governmental changes such as working to end segregation and child labor abuse.[††] Despite the amendment, passed over fifty years ago, the Internal Revenue Service has never revoked a church’s tax-exempt status based on statements given from the pulpit that concerned candidates eligible for election and their relation to Biblical principles; however, the amendment does continue to hinder churches from engaging in the kind of positive activities they previously had supported.[‡‡] I believe the political activities test itself is in no way furthers its purpose beyond what is already being accomplished by the other three tests and comes dangerously close to infringing on freedom of speech, as well as, breaching the separation between church and state.
A.PURPOSE
According to Lois G. Lerner, the director of the Exempt Organizations Division of the IRS:
Education has been and remains the first goal of the IRS’ program on political activity by tax-exempt organizations.[§§]
The IRS grants tax exemptions to churches and religious organizations as a way of encouraging their continued involvement with work that will benefit the general public. “The Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.”[***] In other words, while the tax exemption is a matter of legislative grace, the churches and organizations are paying for the benefit, just in ways other than simply giving money through taxes. Churches perform a variety of services that benefit their communities and the public as a whole. For example, they feed the hungry, sponsor food and clothing drives, visit the sick or elderly, assist communities within, as well as outside of the United States, through mission work and aid in funding other positive changes by placing large sums of money into backing other non-profit organizations, all of which might otherwise have to be funded by the government.
B. BACKGROUND
Churches and other religious organizations are granted a tax-exemption under § 501(c)(3) if the entity adheres to certain limitations and requirements.[†††] Section 501(c)(3) grants a tax exemption for non-profit organizations if four basic tests – Organizational, Operational, Private Inurement and Political Activities – are satisfied. Special rules also apply to churches specifically in order to allow them to be deemed non-profit foundations automatically so that they are not required to fulfill the notification requirement; however, other religious organizations are still required to provide notification.[‡‡‡] Churches receive additional tax perks because they are considered non-private foundations. All other non-profit organizations must go through the steps of proving they are a tax-exempt organization and then a charitable organization before even reaching the threshold of the private versus non-private foundation category. Churches, on the other hand, are automatically deemed non-private foundations. This classification allows for a higher deductibility, 50% of the donor’s gross income, for gifts instead of the 30% cap placed on private foundations.[§§§]
The IRS uses all four tests to determine the eligibility of the church. Each test is designed to ensure that the non-profit organization is not abusing its tax-exemption. The organizational test examines only the founding document in order to prove that the organization is truly working in furtherance of its claimed exempt purpose.[****] The operational test evaluates the primary activities of the organization to determine if it is actually working to accomplish its designated purposes.[††††] If more than an insubstantial part of its activities is not working towards the exempt purpose then the organization fails the test.[‡‡‡‡] The private inurement test monitors the distribution of the organization’s earnings to make sure that private shareholders or individuals are not unlawfully benefiting from the organization’s earnings.[§§§§] Finally the political activities test is designed to prevent tax-exempt organizations from lobbying and electioneering.[*****]
This paper focuses mainly on the test at issue, the political activities test. The political activities test is used to determine if the organization is an “action” organization based upon how the organization deals with the test’s two components: (1) substantial lobbying; and (2) any electioneering activities.[†††††] Lobbying is allowed as long as it remains only an insubstantial part of the church’s activities; however, no electioneering is allowed whatsoever.[‡‡‡‡‡] The IRS has allowed the church to impart some education to the congregation as long as it covers a broad range of topics and does not in any way promote or criticize any specific candidate.[§§§§§]
It is vital to keep in mind that tax exemptions are a matter of legislative grace, not a right, and therefore Congress may revoke the status at any time based on the IRS’s discretion.
1.Lobbying Activities
The IRS considers any attempt to influence or change legislation by contacting members of the government directly or by encouraging others to visit with their legislators on moral issues with scriptural connections to be deemed an act of lobbying.[******] For example, many Oklahoma churches participate in Rose Day each February. Church members are urged to rally at the state’s Capitol and then present their own individual representatives with a living rose while encouraging them to support anti-abortion legislation. This is, in effect, lobbying, yet Oklahoma churches have never been sanctioned for these organized efforts, nor do they seem to fear the possibility of sanctioning. Many pastors urge their congregants to attend, the church sponsors advertisements in their church affiliation papers and church signs across the state openly urge parishioners to attend. Churches probably feel free to engage in this type of lobbying activity because of their reliance on the substantial lobbying test. While some lobbying is allowed, churches are prohibited from substantial lobbying on any issue.
The substantial lobbying test determines if a church is conducting substantial lobbying by evaluating each entity separately while considering factors such as time and expenditures devoted.[††††††] For example, Rose Day is a one-day lobbying event; therefore it would not be considered a substantial lobbying effort. The expenditure test allows religious organizations to engage in some lobbying efforts depending upon the organization’s size and so long as the religious organization does not expend greater than $1,000,000; however, churches have no specific spending limitation.[‡‡‡‡‡‡] Due to the lack of clear guidelines for churches to follow when it comes to lobbying, churches live in fear of inadvertently breaching the tax code, and the IRS struggles to determine when churches have crossed the line.
Congress continues to disregard attempts to make even small modifications to the lobbying restrictions.[§§§§§§] In 2001, two attempts to amend and clarify the guidelines for restrictions on lobbying were rejected by Congress.[*******] As a result of Congress’ inability to make any changes, churches are attempting to find ways around the vague statutes and take an entirely different route to legislation that lacks IRS regulationinstead of attempting to follow the guidelines. One way to get around the unclear legislation is to form “outside” groups like the Christian Coalition of America to lobby for the churches’ political desires.[†††††††] The Coalition is not a church; however it does work with many churches in order to reach their goals.[‡‡‡‡‡‡‡] The Coalition simply finds an issue it would like to work on, and it goes to work on influencing the legislators to take the Christian route. While currently this is working without the IRS becoming involved, it is probable that the IRS will begin to find a way to shut down the use of this loophole.
2.Electioneering Activities
Churches are not allowed to have any political campaign activity for or against a specific candidate or party.[§§§§§§§] If the electioneering part of the political activities test is breached, the organization’s exemption may be revoked and an excise tax may be imposed. However, some activities, such as encouraging people to vote, are allowed so long as no candidate or party is promoted or opposed.[********]
During the height of the 1992 presidential election, the first, and what we now know to be the last to date, revocation of a church’s tax exemption was put into place.[††††††††] The Church at Pierce Creek was a church in Binghampton, New York under the corporation Branch Ministries, Inc.[‡‡‡‡‡‡‡‡] Four days before the election, the church placed blatantly political full-page advertisements in two prominent newspapers, USA Today and The Washington Times.[§§§§§§§§] The advertisements were centered on morally based issues, such as abortion and homosexuality, and their obvious purpose was to completely and openly slam Democratic Presidential Candidate Bill Clinton.[*********] He was mentioned by name and was accused of backing key issues that violated Biblical principles. President George H.W. Bush’s name was not specified,[†††††††††] but quite frankly, there was no need, as it was obvious whom the Church at Pierce Creek was supporting. As if the advertisements alone were not enough of an overt violation, Branch Ministries went on to add a financial statement encouraging readers to send in their tax-deductible donations in support of the advertisement.[‡‡‡‡‡‡‡‡‡] This statement was clearly a violation of the electioneering rules under § 501(c)(3).
The church argued that the IRS violated its rights to freedom of religion.[§§§§§§§§§]However, the district court did not accept the church’s argument and granted summary judgment.[**********] The Court of Appeals affirmed.[††††††††††] According to that Court emphasis should be placed on the plain language of the Internal Revenue Code granting the IRS commissioner the authority to revoke the tax-exempt status if a church is involved with unlawful political activity.[‡‡‡‡‡‡‡‡‡‡]
While the electioneering portion of § 501(c)(3) has thus been used by the IRS to revoke a church’s tax exemption, the fact that the statute has been used only once demonstrates the need for clarification. Surely, there has been more than one violationof the political activities test in the past fifty-four years, yet only one church has had its tax-exempt status revoked. This fact alone shows the enormity of the problems the statute faces and is evidence enough that the statute, as currently written, is ineffective.
III.Issues and Problems Facing the Political Activities Test
Because of the numerous issues and problems relating to the political activities test, it is apparent that changing to the statute is essential. While the IRS endlessly threatens regulation, it is evident from its failure to actually carry out many punishments that the IRS is more than hesitant to act. There are many reasonable factors for hesitation. While the IRS has provided some guidelines for regulation, the guidelines simply aren’t very helpful.[§§§§§§§§§§] As currently stated, the statute leaves too much room for interpretation. Rather, the IRS appears to be content to simply ignore the statute’s deficiencies altogether. Furthermore, even if it did provide guidelines to be followed, it would still be incapable of actually enforcing the statute based on the lack of resources – time, money and manpower to do the actual regulating – in relation to the enormous number of churches. Also, the regulation of what statements a church can and cannot make appears to run very close to major constitutional violations – in particular, freedom of speech and freedom of religion. With these issues hanging over the IRS’ head, it is no wonder that it is not quick to act and that the majority of the time it chooses to not take any action at all.
A.ALL BITE, NO BARK
In response to the Pulpit Initiative, the IRS claims to “take action as appropriate;” however, churches have very little reason to worry based on the IRS’s enforcement history. In the past sixteen years, no church has lost its tax-exemption.[***********] In the past fifty-four years, the IRS has only revoked one church’s exemption based on political activity.[†††††††††††] In 2006 alone, the IRS received 237 complaints and only chose to investigate 100 groups (44 churches and 56 non-churches.)[‡‡‡‡‡‡‡‡‡‡‡] Of those, more than half are still under investigation and only 26 were determined to have committed unlawful political activity, resulting in insubstantial punishments of merely written advisories.[§§§§§§§§§§§] Why should the IRS pull the churches’ tax-exemptions? Its incentive would be minimal at best, since a revocation would likely result in a very time-consuming, highly controversial issue and probably bring in very little actual tax revenue. In addition, there would most likely be outrageous negative publicity towards the IRS as a result of the revocation. The media would jump on the IRS-equals-bad-guy bandwagon and run with it. Headlines would read “The IRS Attempts to Take Down Churches!” As if the IRS needed a reason to make more people dislike it. This cost alone may be enough deterrence to make the IRS feel that the churches just weren’t worth investigating.
B.TOO BROAD, NO BRIGHT LINE RULES
Because the political activities test is based on the specific facts of each individual case, it is incredibly difficult to predict what will constitute a violation and what will be allowed, especially since the IRS is not known for laying down the law in this particular area. The regulations that currently apply to churches are in desperate need of clarification. In order to clear up confusion among church leaders and give the IRS some direction in its regulation the “insubstantial test” should be replaced with guidelines that are narrow interpretations of § 501(c)(3).[************] According to Jerome Prather, “While noble in aspiration, the structure of the current law is not fully workable and does not realistically reflect modern American political-religious life.”[††††††††††††]