Differential treatment of churches and other nonprofits

For nonbelievers like me, one of the most irritating aspects of the US tax system is the tax-exemption given to churches under the section of the code known as 501(c)(3) that is meant to provide tax relief for organizations that improve the general welfare. This topic has been discussed before in the context of whether churches that overtly take political stands should continue to receive that benefit and I concluded that it was unlikely that the IRS or the courts would eliminate it.

I for one think that the tax exemptions given to charities has been abused so much that we would do well to consider eliminating it altogether for all groups, religious and non-religious.

But there is one form of special treatment for churches that seems to me to be completely unjustified even under current law. As Jonathan Turley says, “While tax-exempt 501(c)(3) nonprofit organizations must file a detailed application form, fee and annual information to obtain and maintain their tax-exempt status, churches and other religious organizations are exempted from the requirement to file the reports and fees.”

I am glad to see that the Freedom From Religion Foundation (FFRF) has challenged this practice and filed a suit against the IRS, saying that this unequal treatment imposes an unfair burden on those groups that are not churches, since these requirements are “detailed, intrusive, and expensive”. The lawsuit against the IRS was filed in Wisconsin where FFRF is based and the plaint can be read here.

In reading it, I found the answer to something that had puzzled me for a long time. The plaint says that all 501(c)(3) organizations other than churches have to annually file IRS Form 990 that requires them to provide detailed information on things such as:

  • governance
  • composition of governing body
  • management policies
  • lists of officers, directors, trustees, and key employees,
  • compensation paid by the organization to such persons
  • the organization’s mission, activities, and current and prior years’ financial results
  • reports of revenue and expenses
  • financial schedules, including information about donations and whether donations are spent on programs or management and fundraising
  • statements of revenue and functional expenses, as well as organizational balance sheets, comprising the financial statements of the organization

The puzzle this solved was that we all know that many so-called church leaders seem to live high on the hog from the money they get from their often poor parishioners, having a luxurious lifestyle that seemingly depends on them being able to easily divert money given to the church for their own personal use, effectively treating the church’s funds as if it were their personal account. How could they get away with this if they were a charity and thus eligible to get a tax benefit? Other charities face scrutiny from outsiders and indeed there are organizations that monitor charities and rank them according to what percent of donations actually go towards the mission of the charity and how much goes for fundraising and administrative costs. This is because Form 990 is required to be made publicly available.

It is now clear why churches seem to abuse the system with impunity. Because they do not have to file the annual Form 990, their financial books are opaque to outsiders and thus create opportunities for easy abuse and fraud. This is an absolute scandal and there is absolutely no justification for this kind of differential treatment of organizations that are under the same 501(c)(3) umbrella. I hope the lawsuit brought by the FFRF exposes this. As they say in their plaint, these “church exemptions from the application and annual information filing requirements of §501(c)(3) violate the Establishment Clause and the equal protection rights mandated by the Due Process Clause of the Fifth Amendment to the United States Constitution.”

You can be sure that churches, even those that do not have such flagrant abuses and think that some other churches are nothing more than scams to separate the pious from their money, will fight this all the way to the US Supreme Court because they would not want to have their traditional privileges taken away. The question is whether the courts will rule that requiring churches to file Form 990 violates the ‘entanglement prong’ of the Lemon test that is frequently used by them in adjudicating Establishment Clause cases (especially with respect to financial matters) and thus rule that it is unconstitutional. The entanglement prong says that the government is prohibited from taking any action that might result in it getting excessively entangled with religion, similar to the argument the US Supreme Court made in 1970 in Walz v. Tax Commission of the City of New York, when they ruled that granting property tax exemptions to churches did not violate the establishment clause.

This will be a very interesting case to watch and one that, on the merits, FFRF should win in my opinion. It does not seem to be an entanglement problem since all it would require is that churches file a form that is made publicly available. However due to the traditional reluctance of courts to interfere with the long-standing financial privileges that churches enjoy, they may find a way to punt and leave things as they are, while making vague disapproving noises.


  1. flex says

    While I agree with you, I doubt that this suit will win.

    The amount of abuse which occurs in church accounts is unknown, but I know that my Aunt and Uncle are considering leaving their church because the church elders not only wouldn’t release the books to the pastor, but ended up firing the pastor because he was continuing to insist on seeing them.

    When some of the parishioners tried to back up the pastor, they were told it was none of their business.

    I expect that in many cases you would find that churches are simply incompetent at either knowing the non-profit laws or GAAP and there would be unexpected irregularities. Educate them, fine them, and move on.

    But I also expect that there is a lot of fraud going on, which should be criminally prosecuted.

  2. The Lorax says

    I doubt the suit will win too. But, I agree with the entanglement thing. How could the government entangle themselves more by having the churches fill out the paperwork that they’re already required to fill out? They have tax exempt status given to them by the government… isn’t that “entanglement”? It’s like giving someone a car and telling them they can drive it, but saying they don’t need a license, registration, or insurance.

  3. twosheds1 says

    I also doubt it will change, though I wonder about where the line between church and charity is drawn. For example, there is Catholic Charities. Is it a church, or is it just a non-profit? Making churches subject to same rules would eliminate this line.

  4. steve84 says

    Catholic Charities is a government subcontractor. About 80% of their budget is paid by state and the federal government. The rest is donations. The amount that comes directly from the church is negligible.

  5. says

    I agree: tax ’em all and let god fund his own. My sister used to work as an attorney for some great big hospitals that are “non profit” yet own large parts of downtown cities (they are “non profit” because they buy whole city blocks at a time to spend the money so they don’t show a profit!) There are too many loopholes. I am sure the republicans would approve totally of this because it’s a “small government” approach.

  6. Vincenzo says

    On a different tack, the regulations on churches seem prone to abuse. What if …

    I am going to start my own church and, for tax purposes, write off any consulting income as a donation to my church. Not to mention that my house will be donated to the church, written off as a charitable donation, and exempt from various forms of taxation. Amen.

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