IRS Must Enforce 501(c)(3) Limits for Religious Groups, Charities

A Las Vegas pastor came under fire from critics earlier this month when he hosted a campaign rally for Donald Trump, calling it “the most amazing thing that has ever happened at this church.” Under the tax code, charities and religious organizations are prohibited from engaging in political campaign activity in exchange for benefits that accrue to them as 501(c)(3) organizations.

The Trump rally at Las Vegas’ Fervent Calvary is low-hanging fruit for its clear politicking by a political actor. But the line between advocacy for a cause and political involvement has gotten increasingly blurry.

Last year, the Family Research Council, a policy think tank, received “church” classification by the IRS, and calls for increased scrutiny by House Democrats quickly followed owing to their perceived involvement in campaigning. Planned Parenthood has been a frequent target of calls for the revocation of tax-exempt status for its 501(c)(3) wing, stemming from the organization’s position on a divisive political issue.

Vigorous enforcement and revocation of tax-exempt status for political intervention would create a new market for non-tax-exempt charitable and religious organizations. They’d be free to politic as they see fit and 501(c)(3) status would cease to be the gold standard.

Alas, the status quo favors the bold—and without clarifying enforcement, the boundary between campaign activity and speech will advance and retreat with the shifting political winds.

Fuzzy From the Outset

In the quid pro quo between the state and the charity or religious organization, the state effectively compels organizations—that believe intervening in politics is part of their charity or faith—to risk a benefit that they have grown to depend on. They can’t compete as taxable entities in a market dominated by tax-exempt organizations.

The IRS should spend some of its additional enforcement funds cracking down on politicking from the tax-exempt podium or pulpit, and the Fervent example seems like an excellent place to start.

The quid pro quo of tax-exempt status for a restriction on political campaign involvement requires vigilant and active enforcement. The restriction, which requires revenue procedures that lay out hypothetical scenarios for clarity, merely creates a cottage industry for organizations that can engage in semantics.

Most tax-exempt organizations seeking to test the boundaries on political involvement aren’t as brazen as Fervent Calvary’s Pastor Jimmy Morales. They don’t campaign for a given candidate, and they certainly don’t hold a rally in their building. They merely take a side on an issue that’s only in the public discussion owing to a given candidate’s position, and they espouse a position on a given issue that eliminates all candidates or parties save for one. The intervention and participation is attenuated, and their politicking more subtle.

In the organizations’ view, it seems clear that modern nonprofit and religious values very much involve political issues. Organizations that walk right up to the line—as well as those such as Fervent Calvary, which seem to pretend the line doesn’t exist—make it clear through what they are risking that political matters are extremely important to them in their work. They will risk their very existence to make their point.

Examples of non-religious tax-exempt organizations risking status to further their policy work are just as common. Take the think tank Texas Public Policy Foundation of Austin, which last year held a “victory summit” and purportedly invited only Republican candidates to speak. This resulted in calls from watchdog groups for an IRS investigation into the summit—there’s been no word of action taken by the IRS.

The summit, if it was indeed party-limited and opposing candidates weren’t given an opportunity to speak, would be a clear and brazen violation of 501(c)(3) restrictions. It seems that for the think tank, the risk was worth hearing what now-failed Arizona gubernatorial candidate Kari Lake had to say to Texans.

Maquettes of donkeys and elephants, symbols of the Democratic and Republican Party, from the Party Animals Project are displayed March 22, 2002, in Washington, D.C.

Photographer: Alex Wong/Getty Images

Policy Argument for Tax-Exemption

The policy rationale behind not taxing religious organizations is the avoidance of government entanglement in religion. Religious organizations are categorized with charitable organizations stemming from the perception that they both provide secular benefits to their communities. The exemption from tax, then, is a kind of end-around for the government to encourage their works without overt sponsorship.

The US doesn’t have a “church tax,” wherein a percentage of collected tax revenue is remitted to the official church of the state—and it similarly doesn’t directly support charitable organizations.

That said, their indirect “encouragement” is valuable. Tax-exempt status provides charities and religious organizations with, among other benefits, exemption from income tax and the ability to accept contributions that are tax-deductible to the donor. On both fronts, there’s underlying policy logic to exempting an organization that doesn’t operate for a profit but instead provides services to the community.

That logic breaks down when the organization gets involved in politics. It isn’t hard to imagine an unchecked charitable or religious organization, politicking on behalf of a candidate and free to accept tax-deductible donations, wielding an outsize influence on the political process.

All the while, the exempt organization makes use of the same public services any other taxable organization does, except they don’t pay the cost of admission. Their speech is effectively subsidized by all those individuals and organizations that do pay taxes.

When to Report

The clearest recitation of what does and doesn’t consist of participation or intervention in a political campaign or on behalf of a candidate comes from Revenue Ruling 2007-41, which lays out 21 situations and provides commentary.

For our example purposes, Situation 9 is most instructive, wherein a minister of a 501(c)(3) church invites a candidate to speak to their congregation, the contents of the speech including a call to vote for said candidate. No other candidates speak and, owing to the totality of the circumstances, the church is said to be engaged in political campaign intervention. It seems clear that Trump’s rally at Fervent Calvary would similarly be found violative of the organization’s tax-exempt status.

It’s worth noting there’s one point of separation between charitable organizations and some religious organizations. Religious organizations that are deemed “churches” get an additional benefit that even charities don’t enjoy: They don’t need to file a yearly information return, known as Form 990. For instance, the Muslim Public Affairs Council is a religious organization, tax-exempt under 501(c)(3), but it’s not designated as a church. It must file yearly financial reports detailing revenue, assets, expenses, and liabilities, among other things.

Church status removes the public reporting requirement and obfuscates what sorts of revenue the organization is raising and where that revenue is being spent. In conjunction with unchecked involvement in the political process, this provides a uniquely dangerous inroad for dark money into politics.

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.