Oct. 25, 2014

Cavalli: Separation of State and Nonprofits Is Valuable

Every so often there are calls for the federal government to revoke the tax-exempt status of churches. 

The most common arguments made for taxing churches are that exemptions deny the government important sources of revenue to pay its bills and that many churches often abuse their tax-exempt status by violating IRS guidelines that prohibit them from engaging in political activity.

In fact, churches are only part of the larger nonprofit sector in the United States. According to data collected by the National Center for Charitable Statistics, there are more than 1.5 million nonprofit organizations (with combined total assets of almost $5.7 trillion as of August 2012) registered with the IRS, and many of them are nonreligious institutions and organizations that also seek to influence public policy despite being tax-exempt.

Houses of worship and charities are registered with the IRS as 501(c)(3) nonprofit organizations. Because financial contributions to 501(c)(3) nonprofits are tax-deductible, donors have the incentive to open their wallets.

When most people hear the term “tax-exempt,” they usually think of churches and charities. In fact, the IRS exempts many types of organizations from paying taxes, including labor unions, chambers of commerce, social clubs, social welfare organizations (such as the National Organization for Women and the American Civil Liberties Union) and fraternal organizations (such as individual branches of the Freemasons and Elks lodges).

Along with churches and charities, the IRS provides the coveted 501(c)(3) nonprofit status to scientific, literary and educational organizations. Because they qualify as educational organizations, most colleges and universities in the United States, including those that have generous endowments and cash-producing sports programs, are also tax-exempt. Other 501(c)(3) nonprofits include: Americans United for Separation of Church and State, American Atheists, American Humanist Association, Freedom From Religion Foundation, Catholics for Choice, Feminist Majority Foundation, Center for Reproductive Rights, Ayn Rand Institute, the Gay & Lesbian Alliance Against Defamation and Mother Jones, the leftist magazine.

IRS guidelines for nonprofits, which are available on the agency’s website, are often misunderstood. While many people use these terms interchangeably, the IRS defines “politics” as seeking to influence the election of candidates and “lobbying” as seeking to influence legislation.

According to the IRS, all 501(c)(3) nonprofits cannot officially endorse or oppose candidates for elected office and make financial contributions to political campaigns. In 1964, the liberal Protestant magazine Christian Century lost its tax-exempt status for one year after it endorsed President Lyndon Johnson for re-election.

Nonprofits, however, can certainly praise or criticize candidates, elected officials, political parties and their stands on public policy issues and controversies without specifically telling people to vote for or against them. This is what many nonprofits have been doing since the passage of the 1954 Internal Revenue Act, which added section 501(c) regulating nonprofit organizations to the tax code.

The IRS recognizes that the heads of nonprofits, including churches, can exercise their rights as private citizens without jeopardizing the tax-exempt status of their organizations. The IRS also affirms that 501(c)(3) nonprofits can engage in some lobbying — if lobbying is not a “substantial” part of the organization’s regular activities. The IRS imposes no additional restrictions on churches; it requires all registered 501(c)(3) nonprofits, religious and nonreligious, to follow the same guidelines at the risk of losing their tax exemptions. 

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