Can Charitable Status Be Removed From Religion?

[AgingYoung]

I'm thinking I should start a tax exempt educational foundation. People could send me donations and I could teach them something. For instance I could teach them to send me money! I'm liking it.

Gene

 

[Dark Jaguar]

I disagree with not allowing tax free status to any charity associated with a religion. I see that as discrimination, at least when I put it that way.

It seems to me it would be pretty simple to discern between charitable functions in a church and purely religious things. All it requires is some extra book keeping, on the church/charity's end of course, but nothing prohibitive.

More realistically though, I doubt that such a thing will happen any time soon. By "soon" I mean within my life time.

 

[Meadmaker]

What exactly is tax free about religious groups? If a person gets a salary from a chuch, the salary is taxed. If the clergy of the church live in the community, they pay property taxes.


Generally, buildings are considered either commercial, residential, or other. Only the former two sorts pay taxes, and churches are neither. (I don't know if such buildings as convents pay residential property taxes. I suppose they ought to.)


What taxes would you have them pay? Who's getting away with not paying taxes?

 

[Meadmaker]

My brother-in-law’s brother is a preacher. He works for the church, it’s not even one of those mega-churches, and his entire salary is paid for by the church. He isn’t even the main preacher but the secondary and they also have a third titled ‘youth minister’. He makes approximately 65,000 a year. Of that amount he is only required claim 45% as taxable income.

I have a couple of friends who are preachers. Your brother in law's brother is doing pretty good. You're sure that he only pays 45% of his income taxable? I can't say you're wrong, but that isn't my understanding from my friends. If you're right, I think that it ought to be changed. I don't see why preachers ought to be taxed differently from anyone else.

 

[Huntster]

......I fail to see why religion should be tax exempt when political activities are (typically) not, religion is in many ways analogous to politics, except that it relies on supernatural authorities whereas (most) political philosophies do not.

Why does anybody have tax exempt status?

Maybe if everybody paid more equally, tax reform might come more rapidly.

But, then again, maybe not.........................

To their credit, churches don't have the power to take assets, and the most they ask is 10%.

I wish taxes were 10% universally.

 

[Meadmaker]

Here's the IRS guide for churches:

http://www.irs.gov/pub/irs-pdf/p1828.pdf

There's nothing in it about ministers being allowed to only claim a portion of their income. I haven't read it cover to cover, but the only thing I saw in it of any significance is that ministers can be paid a "housing allowance", and the housing allowance is tax free. In other words, if part of their salary is designated as a "housing allowance", they don't pay taxes on that part of their salary. As with most IRS rules, the exact circumstances are pretty complicated, but basically the preacher doesn't pay taxes on his rent, while the rest of us do. That doesn't seem right to me, but it isn't something I'd get up in arms about. (Come to think of it, I don't pay taxes on my mortgage or home equity line, which is another stupid rule, but not something I'd get up in arms about.)

 

[Ossai]

Meadmaker

If you're right, I think that it ought to be changed. I don't see why preachers ought to be taxed differently from anyone else.

I agree, I don’t think he should be taxed differently. But he is because of his profession and since he works directly for a church part of what he is paid is charitable and he doesn’t have to claim it as normal income nor pay taxes on it.

There's nothing in it about ministers being allowed to only claim a portion of their income. I haven't read it cover to cover, but the only thing I saw in it of any significance is that ministers can be paid a "housing allowance", and the housing allowance is tax free.

I know the housing allowance is part of it but not the sole reason.

Ossai

 

[brodski]

Why does anybody have tax exempt status?

Usually because society has deemed that the body which has tax exempt status is delivering a "social good" which benefits society to a greater extent than the lost tax revenue would do. In a society where religion is a complete irrelevance to the vast majority of the population, it seems hard to argue that (monotheistic) religions should have special tax exempt status, as well as privileged access to government, and in some cases are granted seats in the upper house and the ability to make, amend or reject legislation. Most people fail to see what society good relligious, as opposed to charitable, works provide.

Maybe if everybody paid more equally, tax reform might come more rapidly.

But, then again, maybe not.........................

I'm not sure I understand you, in order for everyone to "pay more equally" you would need sweeping tax reform, so what you seem to be saying is that if we had sweeping tax reforms, tax reform might come more rapidly.
Or have I missed something?

To their credit, churches don't have the power to take assets, and the most they ask is 10%.

I wish taxes were 10% universally.

To give the mob credit, they don't have the power to take assets legally, and the most they ask in "protection" money is typically less than 10%. And at least they only threaten to break your legs and burn your home and business down, not torture you for eternity.

 

[Antiquehunter]

I'm not a US Tax expert, but I am working in Tax policy, and have 17 years of experience in Tax administration, 6 of which is in the developing country context.

Lets look at a completely hypothetical example.

An NGO shows up in country X which is reeling from a natural disaster. X needs to have significant reconstruction, significant direct aid (food, water, medicine) to the people impacted / displaced by the disaster.

NGO shows up and hires 20 nationals and pays them a fair salary to assist with the project (estimated to last three years.) They all do good work, hand out a bunch of food, medicine and water, and the NGO channels money to local contractors to help rebuild some arterial roads, a few schools and a few hospitals.

Questions germane to taxation:

1) The international employee of the organization makes $x annually, but works for a 'not for profit' company. They live and work in country X for a period of about 3 years. Salary taxable in country? Allowances they receive for cost of living taxable in country? Payments made to pension / insurance schemes taxable in country? Or should the person be able to live taxfree in the country in question, and face whatever tax laws may apply in their 'home' country (assuming they have not completely dropped out of the tax system altogether.)

2) The national staff who are hired to work on the project? Salaries taxable? Or are you 'taxing aid money'? If you DON'T tax them, then how do you justify creating a two-tiered economy in an environment where trained, capable national staff are scarce and are often raided between NGO's / firms. What about allowances paid to these workers for cost of living, relocation, bonuses etc...?

3) The assets of the company coming into the country (computers etc...) taxable (dutiable) at time of import? Taxable (dutiable) at the depreciated value if left behind? Taxable only if sold, but exempt if donated to the government? What if they're just given away to people?

4) The consumable items used for the projects? Duty free upon import?

5) The sub-contractor's compensation and taxability of the sub-contractor. If there is a full or partial exemption from taxation granted to the NGO because of their non-profit work, does this extend to the sub-contractors they use for program delivery? What about the direct employees of the sub-contractor?

Now lets say the NGO also opens up a little bar/restaurant, which they use to provide training for national staff in tourist skills. The NGO alleges any profit from the bar/restaurant is applied to their other projects. The country has a VAT-style consumption tax. Are the receipts of the bar/restaurant taxable under VAT rules? What about profit from the business?

Now confuse the issue even further - the NGO in question further supplements its activity by running schools, wherein they provide basic education, however also teaches children about a religion that has no prior history in the geographic region. Running the school(s) is 'free' to the local government. The NGO receives all its money from a religious organization (ie a church) which has no prior existence in the country.

Who is being altruistic in this example, and how should (if at all) should this organization be taxed?

Coming back to reality - the picture I paint of how 'charities' operate in developing countries IS VERY REALISTIC and I could cite examples that look and feel like this little anecdote. 'Charities' - indeed, 'Christian' charities, 'mainstream' charities operate in complex environments such as the one described, leaving them open to a variety of (potentially fair or unfair) allegations and issues.

The religious aspect is but one further complication of the mysterious world of 'charity'...

 

[drkitten]

That doesn't seem right to me, but it isn't something I'd get up in arms about. (Come to think of it, I don't pay taxes on my mortgage or home equity line, which is another stupid rule, but not something I'd get up in arms about.)

I'm not sure what you mean "I don't pay taxes on my mortgage"; loans that you take out aren't usually taxable.

But the mortgage point is quite relevant. US Government policy, for a number of years, has been to encourage homeownership (as opposed to merely renting), and they give tax breaks on mortgages (basically, mortgage interest counts as a tax deduction, while interest on VISA cards and such isn't) specifically to encourage homeownership.

Because homeownership is seen as a public good. (And there's lots of sociological data to back that up; for example, crime rates drop as more and more people own their own homes.)

What's the "public good" that tax-free housing allowances for clergy encourages?

 

[Jon.]

What exactly is tax free about religious groups? If a person gets a salary from a chuch, the salary is taxed. If the clergy of the church live in the community, they pay property taxes.

The income of the church (ie. donations) is generally not taxed, whereas the income of other businesses is. As mentioned above, some clergy in some jurisdictions have favourable tax treatment of their salaries.

In addition, taxpayers can usually claim a tax deduction for money they give to churches.

Generally, buildings are considered either commercial, residential, or other. Only the former two sorts pay taxes, and churches are neither. (I don't know if such buildings as convents pay residential property taxes. I suppose they ought to.)

There are usually more classifications than commercial, residential and other (eg. industrial, institutional, etc.) In many places, churches don't pay property taxes on church buildings, or get preferential treatment.

What taxes would you have them pay? Who's getting away with not paying taxes?

Personally, I would remove favourable tax treatment for clergy salaries (which would include disallowing such things as "housing allowances"). I would also tax church property less favourably. In terms of the income of the church (ie. donations), I would not make the church pay income tax on its donations, and I would keep the tax-deduction for the donors, but I would put in place a requirement that the church use a certain portion of its donations for the general good, not for proselytizing or for the benefit only of members.

 

[drkitten]

To their credit, churches don't have the power to take assets, and the most they ask is 10%.

This statement is simply untrue. For example, The Way International asks for at least 20%, and prefers that you give them everything above the bare minimum you need to live:

Wayers are told to "get their needs and wants parallel" (note Martindale's article by this title in The Way Magazine, July-Aug 1995). Wayers are required to submit their personal budget to leadership, which then tells followers what expenditures to eliminate. In this way they eliminate their "wants" and live on the bare minimum to meet their "needs." Second, Wayers are commanded not just to tithe (give 10% of their income, which is spurned as miserly), nor just to "abundant share" (give 15-20% of their income to TWI), but to practice "plurality giving." "Plurality giving" is to live on the barest minimum one can, and give all the rest (preferably a majority) of their income to the national office of TWI.

Twig Coordinators (who lead the home-based small groups which compose much of TWI) and Limb Coordinators (who oversee regions about the size of a state) keep track of what followers give, and confront everyone they feel are giving too little (especially those giving less than they tithe payment).

This is atypical, but not unheard-of. The idea that 10% is "the most" the Church can ask for is simply ridiculous.

 

[AgingYoung]

There seems to be some blurring between workers of religious organizations and the taxing of assets of those organizations. Tax issues do get complicated. But back to the original question...

• Can Charitable Status Be Removed From Religion?

That has a lot to do with how you want to define charity. It also totally ignores they idea of why you would want to change the cash flow of churches without even considering parity across the entire tax spectrum. In short it reeks of bias. If the tax exempt status of religious organizations were to be removed I'd like to see tax exempt status totally removed from IRS regulation. I don't really see it happening anytime soon.

Gene

 

[AgingYoung]

Personally, I would remove favourable tax treatment for clergy salaries (which would include disallowing such things as "housing allowances").

Additionally, I would take it further to remove favorable tax treatment of congressmen, maybe even teachers. What the heck, teachers too.

Gene

 

[Meadmaker]

The income of the church (ie. donations) is generally not taxed, whereas the income of other businesses is. As mentioned above, some clergy in some jurisdictions have favourable tax treatment of their salaries.

The income of "other businesses" is usually provided in exchange for a service. i.e. I sell you soap, or mow your lawn, and you give me money. Churches don't operate that way. If they do, then they are taxed. i.e. if a church operates a coffee shop, the coffee shop is taxed.

In general, if an organization subsists on donations, it isn't taxed, and the donor gets to take a tax deduction for it. There are some guidelines that have to be followed, but, as the IRS guidelines state, these aren't any different for churches than they are for other not for profit 501 C(3) organizations. So, they get "preferential" treatment compared to businesses, but not compared to other non-profits.

There are usually more classifications than commercial, residential and other (eg. industrial, institutional, etc.) In many places, churches don't pay property taxes on church buildings, or get preferential treatment.

Well, yes, a factory is classed differently than a retail store so calling both "commercial" isn't correct. However, most buildings consist of either
1. Places where residents live or
2. Places where people operate money-making ventures.

Residents pay taxes to support their city of residence, and when you make money, the government takes some of it. That's pretty well understood.

If a building is neither someplace where someone lives, or someplace used by someone to make money, it generally isn't taxed. Examples include charitable organizations, which are generally exempt from tax. I don't know how non-profit hospitals are treated. I suspect they are taxed, because they charge fees for their services, generally.

Personally, I would remove favourable tax treatment for clergy salaries (which would include disallowing such things as "housing allowances").

I would suspect that the housing allowances have an interesting legislative history, that probably started with a question of how to tax church-owned property where people, such as nuns and priests, happened to live. This raised the question about whether to tax them as residents, or leave them untaxed as part of a non-profit organization. Because the US was favorably disposed toward ministers at the time, they probably erred on the side of the church. Then, some congressman somewhere probably decided it was "unfair" to give a tax break to a minister who lived in a church owned parsonage, but not to one who paid his own rent, and so introduced a "housing allowance".

Whatever the history, it does seem inappropriate to me to give a tax exemption for a minister's "housing allowance". I would favor ending it, but again, it's not something I would get up in arms about.

I would also tax church property less favourably. In terms of the income of the church (ie. donations), I would not make the church pay income tax on its donations, and I would keep the tax-deduction for the donors, but I would put in place a requirement that the church use a certain portion of its donations for the general good, not for proselytizing or for the benefit only of members.

As Jim and Tammy Bakker found out, there are restrictions on how churches can use their money, and if they violate those rules, people can, and do, go to jail. (That's a good thing.) If you try to create a private club, and call it a church to avoid paying taxes on the clubhouse, you will be in trouble with the law. As for proselytizing, the IRS treats it as any other activity which provides no particular benefit. If I start a not for profit organization whose purpose is to play tiddlywinks, I can probably manage to get a tax exemption as long as I can convince the IRS that it isn't just the members playing tiddlywinks. (i.e. if I make tiddlywinks games open to the public on at least some occasions.)

In other words, the preferetial tax treatment of churches is greatly exaggerated. For the most part, they are treated the same way as other organizations that subsist on donations.

 

[ceo_esq]

There seems to be some blurring between workers of religious organizations and the taxing of assets of those organizations. Tax issues do get complicated. But back to the original question...

• Can Charitable Status Be Removed From Religion?

That has a lot to do with how you want to define charity. It also totally ignores they idea of why you would want to change the cash flow of churches without even considering parity across the entire tax spectrum. In short it reeks of bias. If the tax exempt status of religious organizations were to be removed I'd like to see tax exempt status totally removed from IRS regulation. I don't really see it happening anytime soon.

A further wrinkle is that both the common law definition and the IRS definition of "charitable" activities include the advancement of religion. In other words, religious outfits by definition can avail themselves of more than one of the "exempt purposes" under Section 501(c)(3) of the Internal Revenue Code. The "exempt purposes", you'll recall, are as follows:

• charitable
• religious
• educational
• scientific
• literary
• testing for public safety
• fostering national or international amateur sports competition
• preventing cruelty to children or animals

When we examine the first item on the foregoing list ("charitable"), we find that the term "charitable" encompasses the following:

• relief of the poor, the distressed, or the underprivileged
• advancement of religion
• advancement of education or science
• erecting or maintaining public buildings, monuments or works
• lessening the burdens of government
• lessening neighborhood tensions
• eliminating prejudice and discrimination
• defending human and civil rights secured by law
• combating community deterioration and juvenile delinquency

Religion is very much tied to notions of charity in the common law tradition, and de-linking them is not what I'd call a simple proposition. [ETA: That said, I'm not one of those who think that religions get a great deal of preferential treatment in practice under the IRC.]

Why does anybody have tax exempt status?

Aside from the general reasons, some of which have been adduced by other posters, the reasons why religious entities specifically have tax exempt status include the fact that it tends to promote and facilitate separation of church and state. Accordingly, it's widely deemed good public policy by those who take that principle seriously.

 

[ceo_esq]

The income of "other businesses" is usually provided in exchange for a service. i.e. I sell you soap, or mow your lawn, and you give me money. Churches don't operate that way. If they do, then they are taxed. i.e. if a church operates a coffee shop, the coffee shop is taxed.

Well, really the difference is in how the income is used, not in how it's earned. There is quite a bit of latitude for nonprofits to raise money in otherwise commercial ways - museums can operate gift shops, the JREF can sell merchandise, the Girl Scouts can peddle cookies, and so forth. It won't be taxable as long as the profits do not inure to the private benefit of shareholders and are used for the exempt purposes served by the organization. [ETA: see clarification in next post]

 

[Meadmaker]

I know of organizations that an awful lot of people would consider downright useless that are 501 C(3) organizations and who get pretty much the same tax treatment as churches. (And a lot of people would consider churches downright useless, too.)

For me, it would be instructive if someone could provide an example of an organization that has some similar characteristics as churches, but isn't eligible for a tax deduction. Maybe someone knows of an organization that applied for a tax exemption, and was turned down?

The characteristics I'm thinking of are that no one gets any particular monetary benefit from being in the organization, and the organization doesn't engage in some sort of commercial activity to pay the cost of its existence, and the organization isn't a private club for benefit exclusively of its members. (e.g. a country club)

What I'm getting at is that I don't think churches get "special treatment". I think they are just the largest member in a class of non-commercial groups that all get the same treatment. Can someone cite an example of an organization that they feel is "unfairly" taxed, while churches are not?

 

[Meadmaker]

Well, really the difference is in how the income is used, not in how it's earned. There is quite a bit of latitude for nonprofits to raise money in otherwise commercial ways - museums can operate gift shops, the JREF can sell merchandise, the Girl Scouts can peddle cookies, and so forth. It won't be taxable as long as the profits do not inure to the private benefit of shareholders and are used for the exempt purposes served by the organization.

Wouldn't many of these activities fall under the UBIT clause?


(Ubit is unrelated business tax. If a church does something to raise money, and that thing isn't related to whatever it is that churches do, then those activities are taxed. Some exceptions apply.)

 

[ceo_esq]

Wouldn't many of these activities fall under the UBIT clause?

I think they'd meet the exceptions, at least in many cases. A museum gift shop and the JREF's sale of skeptical articles are arguably related to the respective exempt purposes, for example. Girl Scout cookies aren't sold on a regular, continual basis. A church coffee shop is probably operated for the convenience of the staff and parishioners. It's all very fact-specific, but on reflection I should have clarified my earlier post to point out why I thought they were exempt. In fact, I should have addressed UBIT explicitly.