It seems like every time there’s a church scandal—and especially one that concerns money—people start arguing that the scandal-ridden church (or even churches in general) should lose their tax exemptions. (If you want to see an example, search “mormon tax exemption” on Twitter.)
So how does tax exemption relate to churches, and especially churches that make a lot of money? I thought it might be worth a quick Explainer.
Why Are Churches Exempt, Anyway?
Fair questions. One reason is history—religious exemptions from taxation go back at least to the Bible. When Joseph imposed a 20% tax on Egyptian land, he exempted the priests from the tax.
Jump forward to the United States: while it hasn’t been a straight line, the exemption of at least some religious property from the property tax goes all the way back to Colonial days. And churches have been exempt from income taxation since the introduction of the modern federal income tax.
But My Church Isn’t Helping the Poor
Popularly, “charitable” corresponds to something like “aid to the poor.” But legally, the definition of charity is broader than that. Largely, U.S. law adopts the subjects of the preamble of 1601’s Statute of Charitable Uses in defining what is charitable; that preamble includes churches.
But beyond that, while the idea of charity suffuses the tax law, the Internal Revenue Code lays out eight (or, I guess, nine, depending on how you parse them) purposes that tax-exempt organizations can pursue:
religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals
Note that the first one is for religious organizations; whether or not you consider religion charitable (and, again, for legal purposes, it is, in fact, a subset of charitable), the Internal Revenue Code expressly allows for religious organizations to be exempt.
And that’s the case even if they do no poor relief. The Supreme Court considered the question of whether a religious organization that didn’t help the poor could qualify for (property) tax exemption. It’s conclusion?
We find it unnecessary to justify the tax exemption on the social welfare services or “good works” that some churches perform for parishioners and others — family counseling, aid to the elderly and the infirm, and to children. Churches vary substantially in the scope of such services; programs expand or contract according to resources and need. As public-sponsored programs enlarge, private aid from the church sector may diminish. The extent of social services may vary, depending on whether the church serves an urban or rural, a rich or poor constituency. To give emphasis to so variable an aspect of the work of religious bodies would introduce an element of governmental evaluation and standards as to the worth of particular social welfare programs, thus producing a kind of continuing day-to-day relationship which the policy of neutrality seeks to minimize. Hence, the use of a social welfare yardstick as a significant element to qualify for tax exemption could conceivably give rise to confrontations that could escalate to constitutional dimensions.
That is, while churches are welcome to do what we colloquially think of as charity, the Supreme Court declined to bring the idea of poor relief into the definition because different churches do different amounts of it. The government telling a church what its religious obligations are would implicate the First Amendment’s Religion Clauses.
Okay, Fine, But What About the Church’s Profitability?
The Mormon church has a lot of billions of dollars. And it makes money on its investments; how, then, could it possibly be a non-profit?
Well, largely it’s because nonprofits can make a profit. And stick with me here—this isn’t some kind of paradox. See, the idea underlying nonprofits (and tax-exempt organizations, for that matter) isn’t that they can’t earn a profit—it’s that they can’t distribute that profit to insiders or share it with identifiable individuals.
Two critical things to point out here: the first is, paying a salary is not the same as distributing profits. In fact, tax-exempt organizations can, under some circumstances, pay pretty nice salaries. Clemson, a nonprofit, tax-exempt university, paid Dabo Swinney, head coach of its football team, $10.54 million last year. (And yes, I get that Nick Saban made more but, given that Alabama is a state school, his salary comes from government, not a nonprofit.) At some point, a high enough salary because the equivalent of impermissible profit-sharing, but there’s no bright line. Instead, the IRS basically takes a comparative view.
Second, as long as they don’t share their profits, nonprofits can earn a lot of money. We can look at the church’s return on its investment fund, but we can also look at nonprofit hospitals, many of which do really, really well. (There is controversy over whether many of them should be tax-exempt, given that they operate almost identically with for-profit hospitals, but that’s an aside to this particular Explainer.)
So the fact that the Mormon church makes a lot of money on its investment return doesn’t cut against its status as a nonprofit or as a tax-exempt.
Something Something Politics
And what about the fact that the church sometimes lobbies? Yeah, not a problem. There’s a strict prohibition on tax-exempt organizations endorsing or opposing candidates for office. But they’re allowed to lobby and otherwise participate in the political process as long as that politicking is limited to an insubstantial part of their activities. And what constitutes “insubstantial”?
We don’t know. We know from judicial decisions that 5% (of expenditures or activities or something) is fine. We also know that 15-20% might be too high. But we don’t have a bright line.
Final Thoughts
So that’s the landscape that nonprofit, tax-exempt organizations, including religious organizations, inhabit. And one can certainly make the argument that the category “nonprofit” or “charitable” or “tax-exempt” should be narrowed. That’s fair as a normative matter. But this (plus a handful of other rules) is what the law as it currently stands looks like.
Photo by Cosmic Timetraveler on Unsplash