The Intersection of the First Amendment and the Internal Revenue Code Raises Challenges
Courts have long recognized that the First Amendment raises sensitive questions regarding the government’s ability to tax religious institutions. Since colonial times, American churches have enjoyed exemption from taxes. This exemption was later carried over into Section 501(c)(3) of the Internal Revenue Code.
While both churches and religious organizations are exempt from Federal income taxes, only churches are presumptively exempt, without the need for applying for recognition of tax exemption or filing annual informational returns. This, along with a few other benefits, has created incentives for religious organizations to characterize themselves as “churches.”
The IRS generally treads cautiously in denying religious exemption to organizations that purport to be churches. The Internal Revenue Code and regulations make no attempt to define terms like “religion” and “church.” And the Supreme Court has warned fact-finders not to overstep their bounds in this area. In a case involving mail fraud prosecution of a religious leader that who claimed to have supernatural powers, the Court warned:
Man’s relation to his God was made no concern of the state. He was granted the right to worship as he pleased and to answer to no man for the verity of his religious views. The religious reviews espoused by [the sect that followed the religious leader] might seem incredible, if not preposterous, to most people. But if those doctrines are subject to trial before a jury charged with finding their truth or falsity, then the same can be done with the religious beliefs of any sect. When the tries of fact undertake that task, they enter a forbidden domain.
Because of these concerns, the courts and the IRS have avoided making value judgments about the truth or falsity of various religious beliefs. This has created opportunity for exploitation, with some claiming to be a tax exempt church because of a commonly-held belief in doing what is right and staying within the confines of the law.
Because of these abuses, the IRS and the courts have been forced to delineate some boundaries. Courts have concluded that, when Congress used the word “church,” it intended a more restrictive definition than it did when it used the phrase “religious organization.” While all churches are religious organizations, not all religious organizations are churches.
Over time, two analytical tests have emerged for determining whether an organization is a “church” within the meaning of the tax laws. The first test considers the following 14 criteria to determine whether an organization qualifies as a church:
- A distinct legal existence;
- Recognized creed and form of worship;
- A definite and distinct ecclesiastical government;
- A formal code of doctrine and discipline;
- A distinct religious history;
- A membership not associated with any other church or denomination;
- An organization of ordained ministers;
- Ordained ministers selected after completing prescribed studies;
- A literature of its own;
- Established places of worship;
- Regular congregations;
- Regular religious services;
- Sunday schools for religious instruction of the young;
- Schools for the preparation of its ministers.
It’s not hard to see that few organizations would meet all of these criteria. The IRS has traditionally applied these factors in the disjunctive, emphasizing some of the characteristics over others. Factors associated with the popular understanding of churches, including regular meetings and regular congregations, have been given greater weight than others.
Some courts have expressed concern that these factors tend to favor some forms of legitimate religious expression over others and declined to apply it, relying instead on the “associational test” for church status. Under the associational test, an organization is a church if it brings a body of believers together on a regular basis for communal worship. The associational element is crucial. Unless the congregants are associating with each other for shared worship, the organization is unlikely to qualify as a church.
Traditional churches that meet for regular worship have little to worry about under either of these definitions. And as more traditional churches begin to make use of the internet to conduct “virtual worship” services, it is likely that these tests will be further refined. Until then, we are left with a variation of the duck test (if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck). As far as the IRS is concerned, if it looks like a church and meets regularly like a church and has a regular congregation like a church, chances are that it’s a church.
 United States v. Ballard, 322 U.S. 78, 87, 64 S.Ct. 882, 886 (1944).