Chapter 25 - § 25.2 • GENERAL RELIGIOUS TAX EXEMPTIONS

• Jurisdiction: Colorado

§ 25.2 • GENERAL RELIGIOUS TAX EXEMPTIONS

Both federal law and Colorado state law accommodate religious organizations by exempting them from certain taxes applicable to many other organizations. Although some of these tax exemptions are also generally available for charitable and educational organizations, the test used to determine whether an organization has a qualifying religious purpose differs in important respects from the tests used to determine whether an organization has a charitable or educational purpose. The U.S. Supreme Court has held that tax exemptions for religious organizations do not violate the Establishment Clause of the First Amendment if they accommodate religious exercise or are part of broader tax exemptions available to charities generally. Walz v. Tax Comm'r, 397 U.S. 664 (1970).

§ 25.2.1—Income Tax

A religious organization qualifies for exemption from federal and Colorado income tax if, among other things, it is organized and operated exclusively for "religious" purposes. See I.R.C. § 501(c)(3); C.R.S. § 39-22-112(1). Domestic religious organizations that qualify under Internal Revenue Code (I.R.C.) § 501(c)(3) may also receive tax-deductible charitable contributions under I.R.C. § 170(c). I.R.C. § 501(c)(3) organizations are, however, subject to federal and state tax on income derived from any unrelated trade or business activity. See I.R.C. § 511; C.R.S. § 39-22-112(2).

There is little guidance addressing whether the purposes of an organization qualify as "religious." Neither the I.R.C. nor the Treasury Regulations define "religion," "religious," "religious organization," or "religious purposes." In difficult situations, courts have generally held either that the religious assertions of the taxpayer were not bona fide or that the organization did not qualify for nonreligious reasons. See Riker v. Comm'r, 244 F.2d 220 (9th Cir. 1957); Alexander v. Americans United, Inc., 416 U.S. 752 (1974); First Libertarian Church v. Comm'r, 74 T.C. 396 (1980).

For example, a self-identified church called the Southern Church of Universal Brotherhood Assembled (SCUBA), which held religious services on a yacht, failed to qualify as a religious organization because the vast majority of its budget was expended for the benefit of its minister. See Southern Church of Universal Bhd. Assembled, Inc. v. Comm'r, 74 T.C. 1223 (1980). Also, personal or house churches have been classified as tax shelters where the facts indicated that the organization...