Valuing Religion: Historical Tax Privileges of Churches in a Modern Secular Age

1. Valuing Religion: Historical Tax Privileges of Churches in a Modern Secular Age Robert T. Smith Managing Director International Center for Law and Religion Studies J. Reuben Clark Law School

2. Overview Size and growth of the tax-exempt sector in the US History of tax privileges to churches in the US Current tax privileges to churches Income tax exemptions under I.R.C. § 501(c)(3) Potential threats to historical tax privileges What can be done to protect church tax privileges

3. Size and Growth of the Tax-Exempt Sector in the US

4. Early Americans Created Philanthropic Endeavors of All Kinds “Americans of all ages, all conditions, and all dispositions, constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds, -- religious, moral, serious, futile, general or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the… (continued)

5. Early Americans Created Philanthropic Endeavors of All Kinds antipodes; If it be proposed to inculcate some truth, or to foster some feeling, by the encouragement of a great example, they form a society. Wherever, at the head of some new undertaking, you see the government in France, or a man of rank in England, in the United States you will be sure to find and association.” ~Alexis De Tocqueville

6. Total assets increased 222% between 1985 and 2004, while revenue increased 171%

7. Assets and revenues had a cumulative growth rate of 107% for charitable expenditures during the Tax Years 1985-2004. This is contrasted with a cumulative growth rate of Gross Domestic Product of 58% for those same years

8. The total number of tax-exempt organizations in the United States has grown significantly from slightly more than 300,000 in 1984 to nearly 900,000 in 2004

9. American Culture of Giving “In 2006 American citizens privately gave about $300 billion away to charity. . . Seventy-five percent of America’s families give every year. Fifty percent volunteer their time, and many Americans give in myriad other ways that are not captured in data.” ~ Arthur C. Brooks President of the American Enterprise Institute

10. American Culture of Giving “The average American citizen gives away three-and-a-half times as much money each year as the average French citizen, seven times as much as the average German, and 14 times as much as the average Italian.” ~ Arthur C. Brooks President of the American Enterprise Institute

11. American Culture of Giving “The most charitable state in the United States…is Utah, where people give approximately twice as much as the second leading state in charitable giving.” ~ Arthur C. Brooks President of the American Enterprise Institute

12. History of Tax Privileges to Churches in the US

13. Early Legislation, 1894-1936 Wilson-Gorman Tariff Act of 1894 • “Nothing herein contained shall apply to... corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes” • This is the cornerstone of tax exemption under I.R.C. § 501(c)(3) today

14. Early Legislation, 1894-1936 The Revenue Act of 1909 • “No part of the net income of which inures to the benefit of any private stockholder or individual” • The prohibition against private inurement continues today The Revenue Act of 1917 • Established, for the first time, an individual income tax deduction for contributions made to tax-exempt charitable organizations

15. Revenue Acts of 1950 & 1969 The Revenue Act of 1950 • Limited tax on “unrelated business income” (UBI) • UBI defined as a “trade or business” that is “regularly carried on” and is not “substantially related” to the organization’s exempt purpose(s) The Revenue Act of 1969 • Unrelated business income tax extended to all I.R.C. § 501(c) organizations including churches

16. Principles Underlying Tax-Exemption The privileged tax treatment granted to religious and other charitable organizations can be traced to the earliest versions of United States tax law Tax exemption prohibits private inurement—that is, only non-profit organizations qualify Charitable contribution deduction, designed to encourage charitable giving, was developed early

17. Principles Underlying Tax-Exemption The income tax exemption has remained remarkably consistent. IRC § 501(c)(3) uses nearly the same terms as when it was originally enacted in 1916 There has been relatively little controversy about providing tax exemption to religious, educational and other charitable organizations

18. Principles Underlying Tax-Exemption Possible reasons for a lack of controversy: American Culture of giving Religious, Educational, and charitable organizations contribute importantly to society and therefore need not contribute to the public fisc First Amendment discourages excessive government entanglement that taxation would cause

19. Current Tax Privileges to Churches

20. Current Tax Privileges to Churches • Income tax exemptions from contributions and earnings • Tax-exempt earnings include • Interest • Royalties • Dividends • Capital gains

21. Current Tax Privileges to Churches • Churches may maintain an unlimited reserve • Other countries may limit the size of the reserve • Property tax exemptions • Sales tax exemptions

22. Current Tax Privileges to Churches Other valuable tax privileges include: No requirement to apply with IRS for tax exemption No requirement to file annual information return (Form 990)

23. Current Tax Privileges to Churches

24. Current Tax Privileges to Churches Other valuable tax privileges include: No requirement to provide public inspection of information returns No requirement to file tax returns upon liquidation, dissolution, or termination No presumption of private foundation status (special tax)

25. Current Tax Privileges to Churches Other valuable tax privileges include: • Audit protection, absent specific facts regarding exemption qualification or UBI • Relaxed employment tax requirements and retirement plan for ministers • Income tax exclusion for costs of ministers’ “parsonage” • Cost of homes including costs for furnishings, insurance, property taxes, utilities and maintenance

26. Current Tax Privileges to Churches I.R.C. § 107 In the case of a minister of the gospel, gross income does not include – the rental value of a home furnished to him as part of his compensation; or the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.

27. Income Tax Exemptions for Churches under I.R.C. § 501(c)(3)

28. I.R.C. § 501(c)(3) Organizations Defined Under I.R.C. § 501(c)(3) defines tax-exempt organizations as follows: Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, [and] no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . , and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

29. I.R.C. § 501(c)(3) Organizations Defined As set forth in Treas. Reg. §1.501(c)(3)-1, this statutory definition sets up four-part tests for tax exemption: The organizational test The operational test The private inurement test The political activities test A public policy test has been added by judicial decision

30. 1. The Organizational Test The organizational test focuses on Articles of Incorporations or other founding documents This test is straightforward in practice and rarely causes difficulties Test met upon founding of the organization

31. 2. The Operational Test • Requires tax-exempt organizations to operate “exclusively” for one or more exempt purposes • “Exclusively” means “primarily” • “Primarily” means that no “more than an insubstantial part of its activities” are no exempt activities • Test must be met on an everyday basis

32. 3. The Private Inurement Test No “net earnings inure in whole or in part to the benefit of private shareholders or individuals” Test insures public, rather than private, benefits Upon dissolution assets must be transferred to I.R.C. § 501(c)(3) organization(s).

33. 4. The Political Activities Test The political activities test consists of two parts: • Substantial lobbying restrictions • Political campaign prohibitions

34. 4. The Political Activities Test Lobbying Restriction • The lobbying restriction prohibit • A substantial part of the organization’s activities consist of attempting to influence consists of attempting to influence legislation, or • An organization’s primary objective may be attained only by passing or defeating proposed legislation • The Lobbying restriction is the basis for complaints calling for the revocation of the LDS Church’s tax exemption following its participation in Proposition 8 in California • “Substantiality” is measured not by the overall impact of the lobbying effort or even its total size or cost, but by comparing the lobbying effort to the overall activities of the religious organization

35. 4. The Political Activities Test Political Campaign Prohibitions • Support for a political campaign on behalf of, or in opposition to, any candidate for public office is absolutely barred. • There is no de minimus exception • Political campaign prohibition has been upheld by the Supreme Court for non-religious organizations

36. 4. The Political Activities Test Possible challenges to Political Activities Test • Restriction on political speech may be an “unconstitutional condition”. • Sherbert v. Verner • Challenge possible due to Citizens United v. Federal Election Commission • Current restrictions of political activities have chilling effects on religious speech in the public square

37. 5. The Public Policy Test The Supreme Court announced public policy test in Bob Jones University v. US The university had a policy restricting interracial dating IRS revoked university tax exemption Supreme Court concurred, citing strong public policy against racial discrimination by all three branches of government over an extended period of time Rejected First Amendment argument stating university could maintain its discriminatory policy at the cost of losing tax exemption

38. 5. The Public Policy Test Implications of Public Policy Test • Same sex marriage • Would public policy favoring same sex marriage require religious organizations to comply? • Justice Department recently announced decision to no longer support Defense of Marriage Act • Obama Administration supporting legislation to appeal Defense of Marriage Act

39. Potential Threats to Historical Tax Privileges

40. Potential Threats to Historical Tax Privilege In sum, the tax privileges afforded to churches in the US are significant Without these tax privileges, the LDS Church and other churches would be forced to disclose their assets and operations to the government and the public, subjecting them to much great scrutiny and potential regulation Therefore, preserving these tax privileges is an essential and important aspect of preserving religious freedom

41. Potential Threats to Historical Tax Privilege “If it’s true that we protect the things we value, and that we won’t protect things we don’t value, won’t religious freedom, the protection of religion, exist only so long as we value religion? In other words, when society stops valuing religion, what motivation is there for society to protect religious freedom?” ~ Garrett Gibson Alliance Defense Fund Blackstone Fellow

42. Potential Threats to Historical Tax Privilege “If the value that society allocates to religion could be measured on a sort of generational continuum, it would likely show the immediate past and current generation as apathetic towards religion; they are areligious. Not so for the rising generation where animosity is displacing apathy. It’s antireligious. The tone of the new intellectual religious critics, traditionally civil, has shifted to downright animosity, disrespect, and condescension. Thus, we face a difficult question: in the future how will we succeed in arguing for the protection of religious freedoms in a society that places no value in religion?” ~ Garrett Gibson Alliance Defense Fund Blackstone Fellow

43. Potential Threats to Historical Tax Privilege “Religious freedom exists only as long we value religion. Why would society protect and fight for something deemed to have little or no value? After all, fighting takes effort, resolve, and sacrifice—things reserved for causes worthy of that sort of effort.” ~ Garrett Gibson Alliance Defense Fund Blackstone Fellow

44. Elder Oaks’ Religious Freedom Address “Our society is not held together just by law and its enforcement, but most importantly by voluntary obedience to the unenforceable and by widespread adherence to unwritten norms of right or righteous behavior. Religious belief in right and wrong is a vital influence to advocate and persuade such voluntary compliance by a large proportion of our citizens.” ~ Elder Dallin H. Oaks Speech at Chapman University School of Law

45. Elder Oaks’ Religious Freedom Address “We have no government armed with power capable of contending with human passions unbridled by morality and religion. Avarice, ambition, revenge, or gallantry, would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution was made only for a moral and religious people.  It is wholly inadequate to the government of any other.” ~ John Adams

46. Elder Oaks’ Religious Freedom Address “Whatever the extent of formal religious affiliation, I believe that the tide of public opinion in favor of religion is receding. A writer for the Christian Science Monitor predicts that the coming century will be ‘very secular and religiously antagonistic,’ with intolerance of Christianity ‘ris[ing] to levels many of us have not believed possible in our lifetimes.’” ~ Elder Dallin H. Oaks Speech at Chapman University School of Law

47. Elder Oaks’ Religious Freedom Address “Some are contending that a religious message is just another message in a world full of messages, not something to be given unique or special protection. One author takes the extreme position that religious speech should have even less protection. In Freedom from Religion, published by the Oxford University Press, a law professor makes this three-step argument: 1. In many nations ‘society is at risk from religious extremism.’ 2. ‘A follower is far more likely to act on the words of a religious authority figure than other speakers.’ 3. Therefore, ‘in some cases, society and government should view religious speech as inherently less protected than secular political speech because of its extraordinary ability to influence the listener…. (continued)

48. Elder Oaks’ Religious Freedom Address The professor then offers this shocking conclusion: ‘[W]e must begin to consider the possibility that religious speech can no longer hide behind the shield of freedom of expression. . . . ‘Contemporary religious extremism leaves decision-makers and the public alike with no choice but to re-contour constitutionally granted rights as they pertain to religion and speech.’” ~ Elder Dallin H. Oaks Speech at Chapman University School of Law

49. Elder Oaks’ Religious Freedom Address “What has caused the current public and legal climate of mounting threats to religious freedom? I believe the cause is not legal but cultural and religious. I believe the diminished value being attached to religious freedom stems from the ascendency of moral relativism. More and more of our citizens support the idea that all authority and all rules of behavior are man-made and can be accepted or rejected as one chooses. Each person is free to decide for himself or herself what is right and wrong. Our children face the challenge of living in an increasingly godless and amoral society.” ~ Elder Dallin H. Oaks Speech at Chapman University School of Law

50. Potential Threats to Historical Tax Privilege In my view, one of the greatest threats to religious freedom is the currently prevailing ideal of equality While equality is an important and necessary ideal in most human relationships, its application to religion is problematic