THE TAXATION OF RELIGIOUS ORGANIZATIONS IN AMERICA.

• Author: Newman, Grant M.

INTRODUCTION

Christ taught his disciples to "[r]ender to Caesar the things that are Caesar's, and to God the things that are God's." (1) The Supreme Court has, to an extent, rendered to God what is God's by repeatedly acknowledging that it will not involve itself in the internal affairs of religious organizations. (2) Nevertheless, the extent to which religious organizations remain vulnerable to involvement from other branches of government remains a pertinent question, especially with regards to the government's power to tax. (3)

This Note investigates the extent to which religious organizations are vulnerable to such involvement. A prime example of such involvement is Congress' ability to use the Internal Revenue Code to the detriment of religious organizations. As it ensures that what is Caesar's (i.e., taxes) is rendered to Caesar (i.e., the federal government), any policy of Congress and the Internal Revenue Service (I.R.S.) that thwarts the faithful from rendering to God what is God's has the potential to impose a prohibitive burden on the operation of religious organizations. The potential to hinder the work of religious organizations through taxation is great. Indeed, "the power to tax involves the power to destroy." (4) Insofar as Congress retains the power to tax religious organizations, it likewise maintains the power to destroy.

In short, religious organizations benefit tremendously from their tax-exempt status. (5) However, this tax-exempt status is not a given; the tax-exempt status for religious organizations is neither a right that was found to be in existence prior to the formation of the United States and therefore enshrined in the Constitution, nor is it a right created by the Constitution. (6) Rather it is a status that is based on the consent of Congress and listed deep in the bowels of the United States Code. Therefore, religious organizations and their allies must remain vigilant in ensuring that their representatives in Congress and officials in the executive branch uphold those portions of the Tax Code that exempt religious organizations from tax obligations.

1. THE BASIS ON WHICH RELIGIOUS ORGANIZATIONS ARE GRANTED TAX-EXEMPT STATUS

   In order to understand the threat to religious organizations from adverse changes to tax law, it is important to first understand the provisions in the Internal Revenue Code on which religious organizations are granted tax-exempt status, (7) as well as the legislative history behind these sections of the Tax Code.

   1. Tax-Exempt Status for Religious Organizations Codified

      At the federal level, all income to a person, be it to a corporation or to a non-corporation individual, is taxable by default. (8) On this principle hang all the law and the profits of the Tax Code. (9) Thereafter, deriving a person's tax burden involves accounting for various deductions and exemptions provided for in the Tax Code, (10) and multiplying this calculated amount by the appropriate tax rate. (11) But for the exemptions allowed for in [section] 501(a) and [section] 501(c), religious organizations would be considered ordinary corporations for tax purposes, (12) and thus would be subject to taxation on all received tithes, offerings, and donations at the corporate tax rate. (13) In other words, assuming similar levels of income, the local church, mosque, or synagogue, which exists to connect believers to the divine in a non-profit manner, would be taxed in the same way as the local grocer or hardware store, which exists to maximize shareholder value.

      Congress, however, elected to exempt from taxation certain types of organizations. (14) Among these are corporations "organized and operated exclusively for religious, charitable, [and] scientific ... purposes." (15) This exemption releases a religious organization from the burden of paying taxes on any donations received, and thereby enables such an organization to devote more funds to its operations and efforts to fulfill its mission as a religious organization. Persons making charitable contributions to such an organization are also thus reassured that more of their contribution will go to the religious organization, as opposed to the government's coffers.

      However, a religious organization must conform to certain provisions contained in 26 U.S.C. [section] 501(c)(3) in order to qualify for tax-exempt status: (1) None of the religious organization's earnings may "inure[] to the benefit of any private shareholder or individual"; (2) the religious organization may not have a "substantial part of [its] activities" dedicated to influencing legislation; and (3) the religious organization may not participate in any political campaign in support of or in opposition to a candidate for public office. (16) Violation of any of these provisions can result in the religious organization losing its tax-exempt status. (17)

   2. The History and Justification for the Tax-Exempt Status of Religious Organizations

      Religious organizations were first exempt from taxation under the Wilson-Gorman Tariff Act of 1894, which Congress-billed as an act to reduce taxation and which President Grover Cleveland refused to sign but nevertheless allowed to become law by not vetoing the bill. (18) The act explicitly indicated that none of the enacted taxes "shall apply ... to corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes." (19) In 1954 Congress adopted the first iteration of the modern Tax Code, in which it maintained a similar wording to grant tax-exempt status to religious and charitable organizations. (20)

      Congress has offered several justifications for granting tax-exempt status to religious organizations and charities:

      (1) Charitable and religious organizations serve the public and therefore should be supported through provision of tax benefits;

      (2) Charitable and religious organizations provide goods and services that otherwise would have to be provided by the Government and therefore should be supported by the Government;

      (3) It is difficult to measure the net income of charitable and religious organizations, and therefore they should be exempt from tax;

      (4) Charitable and religious organizations promote pluralism;

      (5) Charitable and religious organizations are efficient providers of services but have inherent limits on their ability to raise capital compared to for-profit entities and therefore need government support in the form of tax exemption (and charitable contributions); and,

      (6) Exemption is afforded to those organizations that can prove their worth through sustained donations. (21)

      It is clear from Congress' wording of the Tax Code that it distinguishes religious organizations from charitable organizations. This does not mean that religious organizations are not charitable; while religious organizations might have charitable functions, they nevertheless differ from charitable organizations sufficiently in order to justify their separate enumeration in the Tax Code. Indeed, if religious organizations were merely a subset of charitable organizations, then they would not be explicitly mentioned separately from charitable organizations in 26 U.S.C. [section] 501(c)(3).

      Religious organizations provide a public good apart from what charitable organizations provide. (22) It has been suggested that religion itself is a factor that disproportionately motivates persons to make donations when compared to non-religious charitable organizations, which would justify separate mentioning in the Tax Code. (23) Additionally, religious organizations play a key role in integrating persons from a variety of backgrounds into a single community, thereby strengthening the fabric of society. (24) Furthermore, at a constitutional level, a tax exemption for religious organizations is beneficial in that it "restricts the fiscal relationship between church and state, and tends to complement and reinforce the desired separation insulating each from the other." (25)

2. NEGATIVE EXTERNALITIES OF NON-HOSTILE CHANGES TO THE TAX CODE

   Before discussing potential threats to the tax-exempt status of religious organizations, it is worth noting the effects that recent changes to the Tax Code could have on the financial health of religious organizations. There is no indication that Congress undertook these changes in order to hinder the operations of religious organizations. Rather, the negative effects are merely the consequences of independent changes to other provisions of the Tax Code.

   1. Increase to the Standard Deduction

      Religious organizations are vulnerable not just to hostile changes to the Tax Code, but also to the unforeseen and unintended consequences of non-hostile changes to Tax Code, such as an increase in the standard deduction. The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, increased the standard deduction from $12,700 to $24,000 for married couples filing jointly and from $6,350 to $12,000 for single filers for the years 2018 to 2025. (26) This is expected to have a negative impact on the financial health of religious organizations by weakening the incentive to make donations and therefore decreasing the amount of donations made to religious organizations by individual taxpayers. (27) As mentioned above, the Tax Code allows individuals to deduct from taxable income any donations made to religious organizations. (28) Allowing individuals to deduct donations to religious organizations from their taxable income incentivizes them to make donations to religious organizations by reducing the economic cost of making a donation. The logic is as follows: if an individual is required to part with a certain amount of his income in any event, and if an individual would rather that his money goes to a local religious organization than to the distant government in Washington, D.C., then such an individual is likely to pay as much of the required amount as possible directly...