THE TAXATION OF RELIGIOUS ORGANIZATIONS IN

AMERICA
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 it-
self in the internal affairs of religious organizations.2 Neverthe-
less, the extent to which religious organizations remain vulner-
able 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 organiza-
tions are vulnerable to such involvement. A prime example of
such involvement is Congress’ ability to use the Internal Reve-
nue Code to the detriment of religious organizations. As it en-
sures 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

1. Mark 12:17 (KJV).

2. See, e.g., Hosanna-Tabor Evangelical Lutheran Church & Sch. v. EEOC, 565
U.S. 171, 184 (2012) (“The Establishment Clause prevents the Government from
appointing ministers, and the Free Exercise Clause prevents it from interfering
with the freedom of religious groups to select their own.”); Corp. of the Presiding
Bishop of the Church of Jesus Christ of Latter-Day Saints v. Amos, 483 U.S. 327,
334 (1987) (“This Court has long recognized that the government may (and some-
times must) accommodate religious practices and that it may do so without violat-
ing the Establishment Clause.”); Kedroff v. St. Nicholas Cathedral of Russian Or-
thodox Church in N. Am., 344 U.S. 94, 120–21 (1952) (“Even in those cases when
the property right follows as an incident from decisions of the church custom or
law on ecclesiastical issues, the church rule controls.”).
3. Article I of the U.S. Constitution grants Congress the “Power To lay and col-
lect Taxes . . . to pay the Debts and provide for the common Defence and general
Welfare of the United States.” U.S. CONST. art. I, § 8, cl. 1. However, it was not
until the passage of the Sixteenth Amendment that Congress received the power
to directly tax income “without apportionment among the several states.” Id.
amend. XVI.
No. 2] Taxation of Religious Organizations 682

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 nei-
ther a right that was found to be in existence prior to the for-
mation of the United States and therefore enshrined in the
Constitution, nor is it a right created by the Constitution.6 Ra-
ther 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.

I. 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 under-
stand the provisions in the Internal Revenue Code on which

4. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 431 (1819).

5. See, e.g., Dylan Matthews, You Give Religions More Than $82.5 Billion a Year,
WASH. POST (August 22, 2013), https://www.washingtonpost.com/news/wonk/
wp/2013/08/22/you-give-religions-more-than-82-5-billion-a-year/
?utm_term=.a7f0f667a612 [https://perma.cc/Z5BB-FPP8] (approximating the an-
nual benefits of the tax-exempt status to religious organizations at $82.5 billion
dollars). Indeed, those who benefit the most from the tax-exempt status of reli-
gious organizations—and who would likely be negatively affected the most by a
repeal of the tax-exempt status—are perhaps the poor and the needy whom many
religious organizations work so hard to serve temporally. Each dollar that a reli-
gious organization pays to the government in taxes is one less dollar that the reli-
gious organization has to spend on serving the “least of these.” Matthew 25:40
(KJV) (“Inasmuch as ye have done it unto one of the least of these my brethren, ye
have done it unto me.”).
6. See United States v. Cruikshank, 92 U.S. 542, 551 (1875) (discussing rights that
are commonly found wherever civilization exists, and those that were created by
the United States Constitution).
No. 2] Taxation of Religious Organizations 683

religious organizations are granted tax-exempt status,7 as well

as the legislative history behind these sections of the Tax Code.

A. Tax-Exempt Status for Religious Organizations Codified

At the federal level, all income to a person, be it to a corpora-
tion 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 ac-
counting 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
§ 501(a) and § 501(c), religious organizations would be consid-
ered ordinary corporations for tax purposes,12 and thus would
be subject to taxation on all received tithes, offerings, and dona-
tions at the corporate tax rate.13 In other words, assuming simi-

7. This Note does not explicitly address state taxation of religious organizations,
although all fifty states provide for the tax exemption of places of worship. See
Walz v. Tax Comm’n, 397 U.S. 664, 676 (1970).
8. See 26 U.S.C. § 61(a) (2012) (“Gross income means all income from whatever
source derived.”).
9. Cf. Matthew 22:40 (KJV) (“On these two commandments hang all the law and
the prophets.”).
10. Popular deductions include the standard deduction for individuals, see 26
U.S.C. § 63(c), the mortgage interest deduction for individuals, see id. § 163(h), and
wage and salary deductions for corporations, see id. § 162(a)(1). It will be useful
here to briefly distinguish between the standard deduction and itemized deduc-
tions for individuals. Individuals have the option of listing each deduction for
which they qualify, adding these up, and deducting this sum from their taxable
income. This process is known as itemization. The alternative is to take the stand-
ard deduction, which is a default sum that any individual taxpayer can deduct
from his or her taxable income. See id. § 63(c). If an individual’s itemized deduc-
tions surpass the standard deduction, and assuming that this individual desires to
minimize his or her tax burden, then it is in the taxpayer’s interest to forego the
standard deduction and take the aggregate itemized deductions. Typically speak-
ing, wealthier taxpayers will elect to itemize deductions, while other taxpayers
will elect to take the standard deduction. For a discussion on the effect that raising
the standard deduction might have on the amount people donate to religious
organizations, see infra Part III.
11. Corporations, among which religious organizations are normally included,
see 26 U.S.C. § 7701(a)(3), are taxed according to the rates found in 26 U.S.C.
§ 11(b), while all other taxpayers are taxed according to the rates found in 26
U.S.C. § 1.
12. See id. § 7701(a)(3) (“The term ‘corporation’ includes associations, joint-stock
companies, and insurance companies.”).
13. See id. § 11(a) (“A tax is hereby imposed for each taxable year on the taxable
income of every corporation.”).
No. 2] Taxation of Religious Organizations 684

lar 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 “orga-
nized 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 contribu-
tions 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. § 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 leg-
islation; 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 provi-
sions can result in the religious organization losing its tax-
exempt status.17

B. The History and Justification for the Tax-Exempt Status of

Religious Organizations
Religious organizations were first exempt from taxation un-
der the Wilson-Gorman Tariff Act of 1894, which Congress

14. See id. § 501(a).

15. Id. § 501(c)(3).
16. See id. § 501(c)(3). The third provision of 26 U.S.C. § 501(c)(3) is known as the
Johnson Amendment after then-Senator Lyndon B. Johnson, who proposed this
amendment in 1954 as part of the Internal Revenue Code of 1954. For a critique of
the Johnson Amendment and a discussion of its constitutionality, see generally,
Erik W. Stanley, LBJ, the IRS, and Churches: The Unconstitutionality of the Johnson
Amendment in Light of Recent Supreme Court Precedent, 24 REGENT U. L. REV. 237
(2012).
17. For an explanation of the codified process by which religious organizations
may have their tax-exempt status revoked, see infra Part IV.A.
No. 2] Taxation of Religious Organizations 685

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 Con-
gress adopted the first iteration of the modern Tax Code, in
which it maintained a similar wording to grant tax-exempt sta-
tus 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 ex-
empt from tax;
(4) Charitable and religious organizations promote plural-
ism;
(5) Charitable and religious organizations are efficient pro-
viders 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,

18. For a more comprehensive history of the tax-exempt sector, see generally,
Paul Arnsberger et al., A History of the Tax-Exempt Sector: An SOI Perspective, STAT.
INCOME BULL., Winter 2008, at 105; see also Intervenor-Defendants’ Reply Brief in
Support of Their Motion for Summary Judgement at 9–16, Gaylor v. Mnuchin, 278
F. Supp. 3d 1081 (W.D. Wis. 2017) (No. 16-CV-215), 2017 WL 3251871, rev’d, Nos.
18-1277, 18-1280, 2019 WL 1217647 (7th Cir. Mar. 15, 2019).
19. Wilson-Gorman Tariff Act, ch. 349, § 32, 28 Stat. 509, 556 (1894).
20. See I.R.C. § 501(c)(3) (1954) (“Corporations, and any community chest, fund,
or foundation, organized and operated exclusively for religious, charitable, scien-
tific, testing for public safety, literary, or educational purposes.”).
No. 2] Taxation of Religious Organizations 686

(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 dis-
tinguishes religious organizations from charitable organiza-
tions. This does not mean that religious organizations are not
charitable; while religious organizations might have charitable
functions, they nevertheless differ from charitable organiza-
tions 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. § 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 men-
tioning in the Tax Code.23 Additionally, religious organizations
play a key role in integrating persons from a variety of back-
grounds 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 “re-

21. JOINT COMM. ON TAX’N, HISTORICAL DEVELOPMENT AND PRESENT LAW OF

THE FEDERAL TAX EXEMPTION FOR CHARITIES AND OTHER TAX-EXEMPT ORGANIZA-
TIONS 8 (2005); see also Walz v. Tax Comm’n, 397 U.S. 664, 674 (1970) (“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 counsel-
ling, aid to the elderly and the infirm, and to children.”).
22. See Ross Douthat, Editorial, Do Churches Fail the Poor?, N.Y. TIMES (May 16,
2015), https://www.nytimes.com/2015/05/17/opinion/sunday/ross-douthat-do-
churches-fail-the-poor.html [https://nyti.ms/2qnIs5F] (“A church that pays out to
help the poor, but doesn’t pray with them, looks less like a church than what Pope
Francis has described, unfavorably, as merely another N.G.O.”).
23. See, e.g., Editorial, Charitable Giving to Churches Provides a Great Benefit to Soci-
ety, DESERET NEWS (Nov. 8, 2013), https://www.deseretnews.com/article/
865590058/Charitable-giving-to-churches-provides-a-great-benefit-to-society.html
[https://perma.cc/W8WW-M4HN] (“[R]egions of the United States in which a high
percentage of people are devoutly religious tend to give far more than people in
other areas.”).
24. See, e.g., Hamil R. Harris, Churches Become Area’s Melting Pot, WASH. POST,
(Oct. 22, 1998), https://www.washingtonpost.com/archive/local/1998/10/22/
churches-become-areas-melting-pot/982bed07-7733-4639-a7e9-782759a1dba4/
?utm_term=.9e7fd6c71ed3 [https://perma.cc/3K77-EJB8] (describing how churches
in the Washington, D.C. area have integrated religious individuals from different
backgrounds).
 No. 2] Taxation of Religious Organizations 687

stricts the fiscal relationship between church and state, and

tends to complement and reinforce the desired separation insu-
lating each from the other.”25

II. 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 re-
cent 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.

A. Increase to the Standard Deduction

Religious organizations are vulnerable not just to hostile
changes to the Tax Code, but also to the unforeseen and unin-
tended 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, in-
creased 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 organiza-
tions by weakening the incentive to make donations and there-
fore decreasing the amount of donations made to religious or-
ganizations 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 in-
dividuals to deduct donations to religious organizations from
their taxable income incentivizes them to make donations to
religious organizations by reducing the economic cost of mak-

25. Walz, 397 U.S. at 676.

26. Compare Rev. Proc. 2016-55 § 3.14, 2016-2 C.B. 707 (listing the standard de-
duction amounts for fiscal year 2017), with 26 U.S.C. § 63(c)(7) (Supp. V 2018) (list-
ing the standard deduction amounts for fiscal years 2018 through 2025).
27. See Mass Deduction: Recent tax reforms in America will hurt some non-profits
more than others, ECONOMIST, Feb. 15, 2018, at 72.
28. See 26 U.S.C. § 170(c)(2)(B) (2012).
No. 2] Taxation of Religious Organizations 688

ing a donation. The logic is as follows: if an individual is re-

quired 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 to his local
religious organization, rather than simply to pay the full re-
quired amount to the federal government. Thus, given the op-
portunity to do so, the taxpayer will make donations to his lo-
cal religious organization and deduct these donations from
taxable income, thereby decreasing his tax bill. This system is
effectively a redirect of funds, as money that would have gone
to government coffers instead goes to the individual’s religious
organization or charity of choice.29

B. The greater the standard deduction, the smaller the incentive to

make donations to religious organizations
The incentive, however, exists only for individuals that elect
to take the itemized deduction.30 Such individuals are incentiv-
ized to increase donations to charities in order to increase their
itemized deductions and thus decrease their tax bill. The incen-
tive does not exist for individuals taking the standard deduc-
tion because no donation is actually required to take the stand-
ard deduction.31 If an individual can claim the standard
deduction in any event, then there is no fiscal benefit to making
a donation to any organization. Hence, people taking the
standard deduction are less incentivized by the Tax Code to
make charitable donations to religious organizations. If more
people take the standard deduction, then fewer people are in-
centivized to make donations to religious organizations and, as
a result, religious organizations will receive fewer donations.
Increasing the standard deduction for federal personal in-
come tax does just that: it invites more individuals to elect to

29. See Mass Deduction, supra note 27, at 72–73.

30. Individuals who take the standard deduction are not eligible to itemize any
deductions. See 26 U.S.C. § 63(c)(6) (2012) (declaring that if an individual itemizes
any deductions then the standard deduction for this individual shall be zero).
31. Compare 26 U.S.C. § 63(b) (2012) (enumerating that taxable income for indi-
viduals not itemizing deductions is equal to adjusted gross income minus the
standard deduction), with 26 U.S.C. § 63(d), (e) (2012 & Supp. V 2018) (outlining
the process of itemizing deductions).
No. 2] Taxation of Religious Organizations 689

take the standard deduction, and thereby completely removes

the incentive for these individuals to itemize deductions, which
in turn reduces the incentive to make donations to religious
organizations.32 Therefore, by increasing the standard deduc-
tion, which the Tax Cuts and Jobs Act did, Congress has en-
couraged more individuals to elect to take the standard deduc-
tion and removed the incentive for these individuals to itemize
deductions and make donations to religious organizations.
Wealthier individuals who have traditionally itemized deduc-
tions are anticipated to continue to make donations to religious
organizations as they did before, and poorer individuals who
have traditionally elected to take the standard deduction will
also continue to make donations to religious organizations in
the same amounts as they did before the change to the stand-
ard deduction amount. The decrease in donations is likely to
come from individuals who previously itemized their deduc-
tions, but who in light of the increase in the standard deduction
will now elect to take the standard deduction. Indeed, the
greatest temptation to decrease donations to religious organiza-
tions will be presented to those individuals for whom the new-
ly increased standard deduction surpasses their itemized de-
ductions. These individuals tend to be in middle-class families,
who traditionally give the most to religious organizations.33
To be sure, devoutly religious individuals of all economic
classes will likely continue to make donations to religious or-
ganizations as they would in any economic situation. But in the
aggregate, donations are expected to drop as the marginal eco-
nomic tax benefit of donating to religious organizations also
drops. The lesson to be learned here is that religious organiza-
tions are vulnerable not just to hostile changes to those Tax
Code provisions that directly implicate them, but also to the
unforeseen and unintended consequences of non-hostile
changes to Tax Code provisions that are seemingly peripheral
to religious organizations.

32. See Mass Deduction, supra note 27, at 72.

33. See id. The rich tend to donate more to universities. See id. at 73.
 No. 2] Taxation of Religious Organizations 690

III. HOW A RELIGIOUS ORGANIZATION CAN LOSE ITS TAX-EXEMPT

STATUS

There are many ways in which a religious organization can

lose its tax-exempt status. The threats range from case-by-case
revocations of individual religious organizations, which only
require the initiative of the Secretary of the Treasury, to out-
right removal from the Tax Code of the exemption for religious
organizations, which would require an act of Congress, pre-
sentment to the President,34 and, in the likely event that the act
is challenged in the courts, support from a majority of justices
of the Supreme Court. Thus, each level of threat must over-
come a corresponding level of constitutional hurdles in order
to come into force.

A. Case-By-Case Revocation
Religious organizations that meet the requirements of 26
U.S.C. § 501(c)(3) are by default assumed to be operating as re-
ligious organizations in good faith and are normally exempt
from I.R.S. audits meant to determine the sincerity of their reli-
gious activity and thus whether they should be considered tax-
exempt under 26 U.S.C. § 501(c)(3).35 The Secretary of the
Treasury may initiate a church tax inquiry only if the Secretary
has (1) met the requirement of reasonable belief that an inquiry
is justified and (2) provided appropriate notice to the religious
organization that is the subject of the inquiry.36 In turn, the rea-
sonable belief requirement is met if the Secretary “reasonably
believes,” based on written facts and circumstances, that (1) a
religious organization is not actually a religious organization or
(2) the religious organization is carrying on an unrelated busi-
ness or other activity that is subject to taxation.37 Inquiries

34. See U.S. CONST. art. I, § 7, cls. 2–3.

35. See I.R.S., PUB. NO. 1828 (REV. 8-2015), TAX GUIDE FOR CHURCHES & RELI-
GIOUS ORGANIZATIONS 2 (2015) (“Churches that meet the requirements of [26
U.S.C.] § 501(c)(3) are automatically considered tax exempt and are not required
to apply for and obtain recognition of tax-exempt status from the I.R.S.”).
36. See 26 U.S.C. § 7611(a)(1) (2012).
37. See id. § 7611(a)(2) (2018). An “unrelated trade or business” refers to any
trade or business that is not substantially related to an organization’s fulfilling of
its charitable or educational purpose, or other purpose that grants it tax-exempt
status under 26 U.S.C. § 501(c)(3), which would include religious purposes. See id.
§ 513(a). For organizations receiving tax-exempt status under 26 U.S.C. § 501(c)(3),
No. 2] Taxation of Religious Organizations 691

opened by the Secretary ultimately turn on either or both of

these two issues, and a religious organization can have its tax-
exempt status revoked on the grounds of failing to comply
with either of these issues. As part of an inquiry, the Secretary
may request corporate documents, financial statements, lists of
members and contributors,38 and may observe the activities of
the religious organization.39 If the religious organization be-
lieves that the Secretary is noncompliant with the requirements
of 26 U.S.C. § 7611, then the religious organization may file suit
in court to have the church tax inquiry stayed until all issues of
noncompliance have been corrected.40 Based on the results of
the inquiry, the Secretary may decide to revoke a religious or-
ganization’s tax-exempt status.41 Such a revocation must be ap-
proved by the regional counsel of the I.R.S., who will deter-
mine that the Secretary has substantially complied with the
requirements of reasonable belief and appropriate notice.42
Thereafter, a religious organization is left to appeal to the court
to reinstate its tax-exempt status.43

including religious organizations, an unrelated trade or business does not include

any trade or business that is carried on by the organization for the convenience of
the organization’s members, such as businesses that sell particular types of cloth-
ing and equipment to members or that sell food through vending machines or
snack bars located on the organization’s functional premises. See id. § 513(a)(2).
Additionally, the term “unrelated trade or business,” thankfully for some faiths,
does not include conducting regular bingo games. See id. § 513(f)(1).
38. See id. § 7611(h)(4)(A).
39. See id. § 7611(h)(3).
40. See id. § 7611(e)(1). For a contemporary example of a taxpayer filing suit to
have a church tax inquiry stayed, see Rowe v. United States, No. 18-75, 2018 WL
2234810 (E.D. La. May 16, 2018) (dismissing church minister’s petition to quash
church tax inquiry).
41. See 26 U.S.C. § 7611(d)(1)(A). The revocation can be retroactive to all prior
years that an organization is found to not be a religious organization under 26
U.S.C. § 501(c)(3) up to six years, meaning that an organization would be liable for
unpaid taxes for at most the past six years. See id. § 7611(d)(2)(A) (2018). If an or-
ganization is found to be a religious organization in previous years, then it is not
considered to have its tax-exempt status revoked for that year and thus is not
liable for any taxes in that year. See id.
42. See id. § 7611(d)(1).
43. In theory, a religious organization could lose its tax-exempt status under 26
U.S.C. § 501(c)(3), while its members could continue to deduct donations from
taxable income. This is due to the fact that 26 U.S.C. § 170(c) does not require that
a recipient organization qualify under 26 U.S.C. § 501(c)(3). Indeed, 26 U.S.C.
§ 170(c)(2)(D) merely requires that an organization not be disqualified for at-
tempting to influence legislation or for participating in political campaigns of
candidates for public office. Thus, assuming that a religious organization does not
No. 2] Taxation of Religious Organizations 692

The Secretary thus has immense power to add a level of mis-

ery to the lives of religious organizations. While there is an as-
sumption that an organization presenting itself as a religious
organization is in fact a religious organization, the require-
ments for initiating an audit have low hurdles that can be easi-
ly overcome by a motivated Secretary. Even if a religious or-
ganization does not ultimately have its tax-exempt status
revoked, a church tax inquiry can be burdensome and intru-
sive. The religious organization will have had its legal and fi-
nancial documents searched and its member lists perused. Sa-
cred activities will likely have been observed in an effort to
determine whether a third-party observer would consider them
to be sufficiently religious. If the case goes to court, then the
religious organization will have to cover the costs of litigation.
As such, the office of the Secretary of the Treasury can be used
as a means to hinder the activities of religious organizations.
For supporters of tax-exempt religious organizations who are
preparing to vote in general elections, it is valuable to know (1)
whom a presidential candidate would likely nominate as Secre-
tary of the Treasury, and (2) what that individual’s attitude is
towards religious organizations in general, and on the tax-
exempt status of religious organizations in particular.44 Insofar
as the Senate must approve of a President’s nominee for Secre-
tary of the Treasury, voters would also do well to question
candidates for Senate regarding their willingness to reject nom-
inees for the Secretary of the Treasury that are not fully sup-
portive of the tax-exempt status for religious organizations.

lose its tax-exempt status for its political activity, donations to the organization
should still be deductible from the taxable income of the donor. However, inas-
much as a religious organization is most likely to lose its tax-exempt status for
failing to be a bona fide religious organization, it is difficult to see in practice how
a religious organization’s members would be able to continue to deduct donations
to the organization from their taxable income even after the organization has lost
its tax-exempt status; if the organization is no longer tax-exempt because it is
deemed to no longer have a religious purpose, then donations to the organization
would likewise not be deductible from taxable income.
44. See U.S. CONST. art. II, § 2, cl. 2 (establishing that the President of the United
States has the power to nominate and, with the advice and consent of the Senate,
appoint officials).
 No. 2] Taxation of Religious Organizations 693

1. The Secretary has discretion to determine what is and what is not

a religious organization for tax purposes.
Having opened a church tax inquiry, the Secretary has the
discretion to rule on that most sensitive of topics, namely what
is and what is not a religious organization. The I.R.S. has issued
guidelines according to which the Secretary will assess the ex-
tent to which a religious organization is indeed a religious or-
ganization that is acting in good faith.45 These include, but are
not limited to, the following:
(1) Distinct legal existence;
(2) Recognized creed and form of worship;
(3) Definite and distinct ecclesiastical government;
(4) Formal code of doctrine and discipline;
(5) Distinct religious history;
(6) Membership not associated with any other church or de-
nomination;
(7) Organization of ordained ministers;
(8) Ordained ministers selected after completing prescribed
courses of study;
(9) Literature of its own;
(10) Established places of worship;
(11) Regular congregations;
(12) Regular religious services;

45. It is unlikely that these guidelines will receive Chevron deference in court to
the extent that these guidelines were published without procedures for notice and
comment. In Mayo Foundation for Medical Education & Research v. United States, 562
U.S. 44 (2011), the Supreme Court ruled that Chevron provided the appropriate
standard for evaluating a Treasury Regulation because, inter alia, the Treasury
issued the rule only after notice-and-comment procedures. Chevron does not apply
unless a regulation has gone through notice and comment. See CARTER BISHOP &
DANIEL KLEINBERGER, LIMITED LIABILITY COMPANIES: TAX AND BUSINESS LAW ¶
1.11[3] (Thompson Reuters 1994 & Supp. 2018). As such, lesser regulatory inter-
pretations that do not go through notice and comment, such as revenue rulings,
revenue procedures, and announcements, will likely not receive Chevron defer-
ence, but will instead receive a more exacting standard, such as Skidmore. See id.
For a history of how courts apply Chevron in tax cases, see Steve R. Johnson, The
Rise and Fall of Chevron in Tax: From the Early Days to King and Beyond, 2015 PEPP.
L. REV. 14 (2015). For insight into how courts use Auer and Seminole Rock deference
in tax cases, see Steve R. Johnson, Auer/Seminole Rock Deference in the Tax Court,
11 PITT. TAX REV. 1 (2013).
No. 2] Taxation of Religious Organizations 694

(13) Sunday schools for the religious instruction of the

young; and,
(14) Schools for the preparation of its ministers.46
The I.R.S. posits that these fourteen attributes have been de-
veloped by both the I.R.S. and the courts.47 But it also posits
that other facts and circumstances could be used to determine
whether a religious organization is indeed a religious organiza-
tion for tax purposes.48 Furthermore, while the I.R.S. “makes no
attempt to evaluate the content of whatever doctrine a particu-
lar organization claims is religious,” it does require that the or-
ganization’s beliefs be sincerely held and that the practices and
rites associated with the organization’s beliefs be neither illegal
nor contrary to “clearly defined public policy.”49
It is the requirement that beliefs, practices, and rites of an or-
ganization not be contrary to “clearly defined public policy”
that should give rise to concern. It is possible that the Secretary
could use this phrase to require religious organizations to ad-
here to public accommodations standards in order to be con-
sidered a religious organization for tax purposes. In this way,
the Tax Code could become a tool for the Secretary of the
Treasury to use in order to nudge society in a specific and de-
sired direction. Such was the case in Bob Jones University v.
United States,50 in which the Supreme Court upheld the Treas-
ury Secretary’s decision to revoke the tax-exempt status of a
religious university due to the fact that the university’s policies
ran contrary to desired public policy.51 The Court held that, be-
cause the university refused to admit particular individuals
due to specific immutable conditions of those individuals, the
university could not be viewed as “conferring a public benefit
within the ‘charitable’ concept . . . or within the congressional
intent underlying [26 U.S.C.] § 170 and § 501(c)(3),”52 and thus

46. I.R.S., supra note 35, at 33.

47. See id.
48. See id.
49. Id.
50. 461 U.S. 574 (1983). For additional analysis of Bob Jones University, see
Charles O. Galvin & Neal Devins, A Tax Policy Analysis of Bob Jones University v.
United States, 36 VAND. L. REV. 1353 (1983).
51. See Bob Jones, 461 U.S. at 595.
52. Id. at 595–96. In his oral argument in Obergefell v. Hodges, 135 S. Ct. 2584
(2015), Solicitor General Donald Verrilli suggested that the same logic from Bob
No. 2] Taxation of Religious Organizations 695

is not worthy of tax-exempt status. Although religious organi-

zations are granted constitutional protections that religious
universities are not,53 similar logic to that seen in Bob Jones
could be applied to a religious organization that, for example,
does not permit individuals of particular sexual orientation to
fully participate in the religious organization’s worship.54 If a
religious organization denies such individuals the opportunity
to participate in a sacrament based on the belief that such indi-
viduals are not worthy of participating in that sacrament, and if
the Secretary deems this denial based on sexual orientation to
be against public policy, then the Secretary can move to revoke
the tax-exempt status of the religious organization, whatever
the rationale for denying the sacrament and however sincere
that rationale may be.55 Inasmuch as the Secretary of the Treas-
ury is endowed with the power to determine what is and what
is not a religious organization, and inasmuch as such a judg-
ment may be based on whether a religious organization’s prac-

Jones that applied to interracial marriage and dating would also apply to same-sex
marriage. Justice Alito asked General Verrilli, “Well, in the Bob Jones case, the
Court held that a college was not entitled to tax-exempt status if it opposed inter-
racial marriage or interracial dating. So would the same apply to a university or a
college if it opposed same-sex marriage?” General Verrilli responded, “You know,
. . . I don’t think I can answer that question without knowing more specifics, but
it’s certainly going to be an issue . . . I don’t deny that, Justice Alito. It is . . . going
to be an issue.” Transcript of Oral Argument at 38, Obergefell v. Hodges, 135 S.
Ct. 2584 (2015) (Nos. 14-556, 14-562, 14-571, 14-574).
53. See, e.g., Lemon v. Kurtzman, 403 U.S. 602 (1971) (establishing a three-prong
test to determine the constitutionality of legislation directed at religion). For fur-
ther discussion of the Lemon Test, see infra Part IV.B.ii.
54. See Michael A. Lehmann & Daniel Dunn, Obergefell and Tax-Exempt Status
for Religious Institutions, 7 COLUM. J. TAX L. TAX MATTERS 7 (2016) (arguing that an
organization that refuses to acknowledge the constitutional right of same-sex
marriage could be considered to not be promoting the “public good” and thus
could lose its tax-exempt status). But see Ray Wiacek, Noel Francisco & Vivek Suri,
Tax Exemptions and Same-Sex Marriage, 7 COLUM. J. TAX L. TAX MATTERS 14 (2016)
(arguing that public policy can justly deny a tax exemption only if Congress en-
acts a statute establishing such a public policy and that, because Congress has yet
to enact such a statute, the I.R.S. is obliged to conclude that private institutions
otherwise satisfying the requirements of 26 U.S.C. § 501(c)(3) shall remain eligible
for tax exemptions despite practices that reflect opposition to same-sex marriage).
55. See Bob Jones, 461 U.S. at 595 (“Whatever may be the rationale for such pri-
vate schools’ policies, and however sincere the rationale may be, racial discrimina-
tion in education is contrary to public policy.”); see also United States v. Lee, 455
U.S. 252, 257 (1982) (“Not all burdens on religion are unconstitutional . . . . The
state may justify a limitation on religious liberty by showing that it is essential to
accomplish an overriding governmental interest.”), quoted in Bob Jones, 461 U.S. at
603.
No. 2] Taxation of Religious Organizations 696

tices are sufficiently in harmony with current public policy,56

religious organizations are to an extent at the mercy of the Sec-
retary and could be forced to sacrifice either their timeless be-
liefs in order to follow the current trend in public policy or to
sacrifice their tax-exempt status.57 This provides all the more
reason for religiously minded voters to ensure a proper vetting
of candidates for President and the Senate regarding questions
of exempting religious organizations from paying taxes.

56. In the aftermath of the Supreme Court’s decision to legalize same-sex mar-
riage in Obergefell, the then-commissioner of the I.R.S., John Koskinen, promised
members of the Senate Judiciary Oversight Subcommittee that his agency would
not challenge the tax-exempt status of religious colleges and universities that op-
pose same-sex marriage. See Sarah Pulliam Bailey, IRS commissioner promises not to
revoke tax-exempt status of colleges that oppose gay marriage, WASH. POST (Aug. 3
2015), https://www.washingtonpost.com/news/acts-of-faith/wp/2015/08/03/irs-
commissioner-promises-not-to-revoke-tax-exempt-status-of-colleges-that-oppose-
gay-marriage/?utm_term=.9ea5117a857d [https://perma.cc/8W9T-NMMJ]. That
the Senate extracted such promise from the Commissioner of the I.R.S. suggests
(1) the extent to which appointed officials have power to challenge the tax-exempt
status of religious organizations and (2) the role that elected officials, in this case
U.S. senators, have in checking the power of appointed officials.
57. Such was the case in 2016 in the Commonwealth of Massachusetts, when the
Massachusetts Commission Against Discrimination and the Commonwealth’s
Attorney General interpreted the commonwealth’s public accommodations laws
as requiring religious organizations to allow individuals to use the restroom,
changing room, and other private areas of an organization’s worship premises in
accordance with the gender of their choice rather than their biological gender,
even if such an allowance violated a teaching or belief of the religious organiza-
tion. See News Release, Alliance Defending Freedom Massachusetts Churches
Free to Serve Their Communities Without Being Forced to Abandon Beliefs (Dec.
12, 2016), https://adflegal.org/detailspages/press-release-details/massachusetts-
churches-free-to-serve-their-communities-without-being-forced-to-abandon-
beliefs [https://perma.cc/JH7B-YMMD]. Although religious organizations were
able to convince the Commission and the Attorney General to allow religious
organizations an exception from this interpretation of the commonwealth’s public
accommodations laws, see id., this case demonstrates the extent to which religious
organizations are vulnerable to the policy interpretations of public officials. For
arguments on why the tax-exempt status of religious schools will not likely be
affected by recent trends in public accommodations laws following the Supreme
Court’s decision in Obergefell, see generally, Johnny Rex Buckles, The Sexual Integ-
rity of Religious Schools and Tax Exemption, 40 HARV. J.L. & PUB. POL’Y. 255 (2017).
For arguments on why religious organizations should not be allowed to abstain
from public accommodation laws, see generally, Louise Melling, Religious Refusals
to Public Accommodations Laws: Four Reasons to Say No, 38 HARV. J.L. & GENDER 177
(2015).
No. 2] Taxation of Religious Organizations 697

2. The courts have disallowed donors a deduction from taxable

income of donations made to religious organizations.
The Supreme Court has sided with the Commissioner for In-
ternal Revenue in disallowing donors from taking a deduction
from taxable income of donations made to religious organiza-
tions on a case-by-case basis. In Hernandez v. Commissioner,58 the
Court considered whether payments to the Church of Scientol-
ogy for auditing sessions could be deducted from the taxpay-
er’s taxable income under 26 U.S.C. § 170(c).59 The Court rea-
soned that, because “Congress has specified that a payment to
an organization operated exclusively for religious purposes is
deductible only if such a payment is a contribution or gift,” and
because the payments made by the petitioner for auditing ser-
vices were made with the intent to receive a religious benefit in
return, the payments did not count as donations to a religious
organization and thus were not deductible from the petitioner’s
taxable income under 26 U.S.C. § 170(c).60 In essence, the Court
found that the quid pro quo nature of the transaction between
the petitioner and the Church of Scientology ran contrary to 26
U.S.C. § 170(c).61
However, the Court’s decision that quid pro quo payments for
auditing services do not qualify under 26 U.S.C. § 170(c) is con-
cerning, because the Court’s decision to disallow the deducti-
bility of payments to the Church of Scientology seems arbi-
trary.62 The I.R.S. has in the past allowed—and, indeed,
continues to allow—quid pro quo payments to religious organi-
zations to be deductible under 26 U.S.C. § 170(c)(2)(B). For ex-
ample, some Christians pay pew rents in order to receive a par-

58. 490 U.S. 680 (1989).

59. As discussed supra in Part II.A, 26 U.S.C. § 170(a) (2012) allows for donations
to religious and charitable organizations to be deducted from the taxable income
of donors.
60. Hernandez, 490 U.S. at 692–93 (“The Code makes no special preference for
payments made in the expectation of gaining religious benefits or access to a reli-
gious service.”).
61. See id. at 701–02 (“The relevant inquiry in determining whether a payment is
a contribution or gift under [26 U.S.C.] § 170 is . . . whether the transaction in
which the payment is involved is structured as a quid pro quo exchange.”).
62. The court distinguished the practices of the Church of Scientology from
those of other religious organizations by noting the Church’s usage of price
schedules for auditing sessions and its policies for granting discounts for advance
payments for auditing sessions for granting refunds for unused auditing sessions.
See id. at 685–86.
No. 2] Taxation of Religious Organizations 698

ticular seat during worship services, some synagogues require

general admissions tickets for attending High Holy Days, and
some churches require payment of tithing as a necessary condi-
tion for entering particular houses of worship—and all these
payments are deductible under 26 U.S.C. § 170(a).63 As Justice
O’Connor, writing in dissent in Hernandez, explains, “Accord-
ing to some Catholic theologians, the nature of the pact be-
tween a priest and a donor who pays a Mass stipend is a bilat-
eral contract known as do ut facias . . . A finer example of a quid
pro quo exchange would be hard to formulate.”64 Yet, Mass sti-
pends are deductible under 26 U.S.C. § 170(c).65 That the I.R.S.
and the Court singled out the Church of Scientology for unfa-
vorable tax treatment points to the arbitrary nature in which
the I.R.S. and the Court can treat religious organizations. Jus-
tice O’Connor continues, stating, “[the Government’s regula-
tion] involves the differential application of a standard based
on constitutionally impermissible differences drawn by the
Government among religions.”66 Inasmuch as the First
Amendment imposes equality of treatment among religions,
the Government should have either allowed all quid pro quo
transactions or disallowed all such transactions, and the Court
should have required that the Government do so.67 However,
this is not what the Government did, and this is not what the
Court required the Government to do. That the Commissioner
may apparently treat certain religions differently for the pur-
poses of 26 U.S.C. § 170(c) highlights the extent to which reli-
gious organizations are vulnerable to the hostile and arbitrary
application of the Tax Code.68 Indeed, based on Hernandez, it
would seem that motivated tax officials could use the Tax Code
to single out and actively hinder a religious organization. It is

63. See id. at 708–09 (O’Connor, J., dissenting).

64. Id.
65. See id.
66. Id. at 712 (“[The Government’s regulation] is best characterized as a case of
the Government putting an imprimatur on all but one religion. That the Govern-
ment may not do.”).
67. See id. at 707.
68. For speculation on whether the current administration will seek to revoke
the tax-exempt status of the Church of Scientology, see, e.g., Yashar Ali, Trump
Thinks Scientology Should Have Tax Exemption Revoked, Longtime Aide Says, HUFF-
INGTON POST (Nov. 10, 2017) https://www.huffingtonpost.com/entry/trump-
scientology-tax-exemption_us_5a04dd35e4b05673aa584cab
[https://perma.cc/R2D3-M9H7].
No. 2] Taxation of Religious Organizations 699

therefore in the interest of religious organizations and their

members to ensure that elected officials appoint and confirm
tax officials that will protect the evenhanded application of tax-
exempt status for religious organizations.

B. Blanket Revocation of Tax-Exempt Status

If on one end of the spectrum of threats to the tax-exempt
status of religious organizations sits case-by-case revocation,
then on the other end of the spectrum sits a blanket revocation
of tax-exempt status for religious organizations, which would
require either an act of Congress and presentment to the Presi-
dent, or a court striking down provisions of the Tax Code bene-
fiting religious organizations. Specifically, Congress could alter
or altogether remove from the Tax Code 26 U.S.C. § 107,69
§ 170(c)(2)(B), or § 501(c)(3) in order to increase the tax burden
on religious organizations, or the courts could hold any of
these sections of the Tax Code to be unconstitutional. The most
significant increase to the tax burden of religious organizations
would come from alterations to 26 U.S.C. § 501(c)(3), while al-
terations to 26 U.S.C. § 107 and § 170(c)(2)(B) would have a di-
rect impact on the taxes of individual members of religious or-
ganizations and thus an indirect impact on the revenues of the
religious organizations themselves.70

1. Revocation by Congress through alterations to the Tax Code

Congress has the ability to alter the Tax Code to remove the
tax-exempt status for religious organizations and individuals
making donations to religious organizations. This can be ac-
complished by simply removing the word “religious” from 26
U.S.C. § 501(c)(3) and § 170(c)(2)(B), thereby removing organi-
zations operated for religious purposes from the list of organi-
zations receiving tax-exempt status.71 Thus, altering the Tax

69. 26 U.S.C. § 107 (2012) allows ministers of the gospel to deduct from gross
income the rental value of housing provided as part of compensation for their
ministerial work for a religious organization.
70. For a discussion of the impact of 26 U.S.C. 170(c) on individual taxpayers
and religious organizations, see supra Part II.A.
71. A similar dilemma as described supra in note 43 could arise here. If Congress
alters 26 U.S.C. § 501(c)(3) to exclude religious organizations from the list of or-
ganizations receiving tax-exempt status but fails to make a similar alteration to 26
U.S.C. § 170(c)(2)(B), then individuals would still be able to deduct donations
made to religious organizations from taxable income. The religious organizations
No. 2] Taxation of Religious Organizations 700

Code to the detriment of religious organizations is to a large

extent a political issue that would require the support of both
houses of Congress and the President. But such a revocation of
tax-exempt status would need to clear the hurdles established
by the Religious Freedom Restoration Act.72 In 1993, Congress
passed the Religious Freedom Restoration Act, which bars the
federal government from burdening an individual’s free exer-
cise of religion, unless the burden (1) furthers a “compelling
governmental interest,” and (2) “is the least restrictive means
for furthering that compelling governmental interest,”73 and
which provides standing to sue the government for redress to
those individuals whose ability to freely exercise their religion
has been unduly burdened by the government in violation of
the Act.74
Inasmuch as changes to the federal Tax Code would require
action from the federal government—namely from Congress
acting as legislator and the I.R.S. acting as executor—such a
change would need to overcome the hurdles imposed by the
Religious Freedom Restoration Act. Essentially, the govern-
ment would need to show that revoking the tax-exempt status
from religious organizations is (1) in furtherance of a compel-
ling government interest, and (2) is the least restrictive way to

would not cease to be religious because they were removed from the list of tax-
exempt organizations found in 26 U.S.C. § 501(c)(3), they would just no longer be
exempt from paying taxes. Therefore, because 26 U.S.C. § 170(c)(2)(B) only re-
quires that an organization be religious in nature and does not require that it qual-
ify under 26 U.S.C. § 501(c)(3), the deduction of donations to religious organiza-
tions granted under 26 U.S.C. § 170(a) would still be in force. However, it is likely
that any Congress that is willing to remove religious organizations from 26 U.S.C.
§ 501(c)(3) would also be willing to remove religious organizations from 26 U.S.C.
§ 170(c)(2)(B).
72. An act to revoke the tax-exempt status of religious organizations would
likely need to contain language showing congressional intent to revoke the Reli-
gious Freedom Restoration Act in order to satisfy the canon against implied re-
peals. Absent such plain and unambiguous intent, the courts will likely require
that the revocation of tax-exempt status overcome the hurdles of the Religious
Freedom Restoration Act. See Carcieri v. Salazar, 555 U.S. 379, 395 (2009) (“We
have repeatedly stated . . . that absent a clearly expressed congressional inten-
tion, . . . an implied repeal will only be found where provisions in two statutes are
in irreconcilable conflict, or where the latter Act covers the whole subject of the
earlier one and is clearly intended as a substitute.”).
73. 42 U.S.C. § 2000bb-1(b).
74. See id. § 2000bb-1(c).
No. 2] Taxation of Religious Organizations 701

further this compelling interest.75 On the one hand, the gov-

ernment could claim that such a revocation would further the
compelling government interest of increasing government rev-
enues, but on the other hand there are other ways that the gov-
ernment could increase revenues without placing such a bur-
den on religious organizations. A revocation of tax-exempt
status with such a stated intent should fail to clear the hurdles
imposed by the Religious Freedom Restoration Act and there-
fore be struck down by the courts. Thus, the Religious Freedom
Restoration Act should serve as a line of defense against new
laws and regulations that would impose a tax burden on reli-
gious organizations.76
Such a revocation of tax-exempt status would also be subject
to scrutiny under the Free Exercise Clause. In Church of Lukumi
Babalu Aye v. City of Hialeah,77 the Court explained that if a law
places a burden on religion in a way that is (1) not neutral and
(2) not of general application, then it must undergo “the most
rigorous of scrutiny,” meaning that it must advance a govern-

75. The Religious Freedom Restoration Act originally applied to both federal
and state governments. However, the Supreme Court ruled in City of Boerne v.
Flores, 521 U.S. 507 (1997), that applying the Act to states was beyond Congress’
authority under the Fourteenth Amendment. In Gonzales v. O Centro Espirita Benef-
icente Uniao do Vegetal, 546 U.S. 418 (2006), the Supreme Court affirmed the consti-
tutionality of the Act as it pertains to the federal government.
76. Of some concern is United States v. Lee, 455 U.S. 252 (1982), in which the
Court held that a member of the Amish faith was not exempt from paying social
security taxes, despite his assertion that doing so violated his belief, because the
state had an interest in providing a social security system and mandating all citi-
zens to participate was part of this interest. The Court stated, “[t}he state may
justify a limitation on religious liberty by showing that it is essential to accomplish
an overriding governmental interest.” Id. at 257. However, Lee is distinguishable
from a situation in which Congress revokes the tax-exempt status of religious
organizations. In Lee, the Court used the taxpayer’s choice to enter into commerce
as justification for imposition of the social security tax. See id. at 261 (“When fol-
lowers of a particular sect enter into commercial activity as a matter of choice, the
limits they accept on their own conduct as a matter of conscience and faith are not
to be superimposed on the statutory schemes which are binding on others in that
activity.”). But in the situation in which Congress revokes the tax-exempt status of
religious organizations, religious organizations (1) have not entered into commer-
cial activity in the way that the taxpayer in Lee did, and (2) because it is only reli-
gious organizations involved in the “activity” in which religious organizations are
involved, they are not superimposing anything on any statutory schemes that
binds others in that activity—indeed all who are involved in that “activity” of
religiosity are already treated equally under the statutory scheme that is 26 U.S.C.
§ 501(c)(3).
77. 508 U.S. 520 (1993).
No. 2] Taxation of Religious Organizations 702

ment interest that is of the highest order and it must be narrow-

ly tailored in pursuit of that interest.78 The Court reasoned that
because the laws in question prohibited certain actions when
they occurred in religious settings, but did not prohibit the
same actions when they occurred in secular settings,79 the laws
were not neutral and not of general application, and therefore
did not satisfy the demands of the Free Exercise Clause.80 The
Court also cited a pattern of animosity in the manner in which
the laws were enacted by the City of Hialeah as evidence that
the laws were not neutral.81 Applying this logic to the revoca-
tion of tax-exempt status, it is likely that a change in the Tax
Code that imposes an increased burden on religious organiza-
tions without imposing the same burden on analogously situ-
ated tax-exempt secular organizations will not pass scrutiny
under the Free Exercise Clause.82

2. Revocation by the courts

The federal courts have the ability to revoke the tax-exempt
status of religious organizations on grounds that laws allowing
for such a status are unconstitutional—most likely on the
grounds that they violate the Establishment Clause of the First
Amendment. If the Free Exercise Clause and the Religious
Freedom Restoration Act impose hurdles that new laws and
regulations affecting religious organizations must clear, then
the Establishment Clause imposes hurdles that currently exist-
ing laws and regulations—such as 26 U.S.C. § 501(c)(3)—must
clear in order to be deemed constitutional.83 If a court finds

78. See id. at 546.

79. See id. at 542 (“ . . . [T]he texts of the ordinances were gerrymandered with
care to proscribe religious killings of animals but to exclude almost all secular
killings; and the ordinances suppress much more religious conduct than is neces-
sary in order to achieve the legitimate ends asserted in their defense.”); see also id.
at 545 (“The ordinances ‘have every appearance of a prohibition that society is
prepared to impose upon [Santeria worshippers] but not upon itself.’” (quoting
Fla. Star v. B.J.F., 491 U.S. 524, 542 (1989) (Scalia, J., concurring))).
80. See id. at 545.
81. See id. at 542; see also Masterpiece Cakeshop, Ltd. v. Colo. Civil Rights
Comm’n, 138 S. Ct. 1719, 1731 (2018).
82. See Masterpiece Cakeshop, 138 S. Ct. at 1737 (“[T]he one thing [the Colorado
Civil Rights Commission] can’t do is apply a more generous legal test to secular
objections than religious ones.”).
83. See, e.g., Walz v. Tax Comm’n, 397 U.S. 664, 673 (1970) (holding that a New
York state law “sparing the exercise of religion from the burden of property taxa-
No. 2] Taxation of Religious Organizations 703

that, for example, 26 U.S.C. § 501(c)(3) violates the Establish-

ment Clause, then it can strike down this provision of the Tax
Code and thereby remove the tax-exempt status granted to re-
ligious organizations by this provision.
An example of the Establishment Clause being invoked to at-
tempt to render a provision of the Tax Code unconstitutional
can be seen in the recent case of Gaylor v. Mnuchin,84 which
deals with the constitutionality of the parsonage exemption for
ministers of the gospel.85 In Gaylor, the Co-Presidents of the

tion” does not establish a religion because the exemption extends to all houses of
worship and therefore does not violate the Establishment Clause).
84. Gaylor v. Mnuchin, 278 F.Supp.3d 1081 (W.D. Wis. 2017) (Crabb, J.), rev’d,
Gaylor v. Mnuchin, Nos. 18-1277, 18-1280, 2019 WL 1217647 (7th Cir. Mar. 15,
2019). The Freedom from Religion Foundation, Inc., filed suit in 2013 against then-
Secretary of the Treasury Jacob Lew asking to enjoin enforcement of 26 U.S.C.
§ 107(2) on the grounds that it was unconstitutional. However, although the dis-
trict court ruled in favor of the Foundation, see Freedom from Religion Found.,
Inc., v. Lew, 983 F. Supp.2d 1051 (W.D. Wis. 2013), the district court’s decision
was vacated by the Seventh Circuit Court of Appeals on the grounds that the
Foundation lacked standing to sue, see Freedom from Religion Found., Inc. v.
Lew, 773 F.3d 815, 825 (7th Cir. 2014). The Seventh Circuit explained that, in order
to have standing to sue, an individual would need to first apply for the parsonage
tax exemption under 26 U.S.C. § 107(2) and have it denied by the I.R.S. See id. at
824–25 (“Standing is absent here because the plaintiffs have not been personally
denied the parsonage exemption.”). This is not the first time that the Seventh Cir-
cuit vacated a district court decision from Judge Crabb in favor of the Freedom
from Religion Foundation on the grounds that the Foundation lacked standing.
See Freedom from Religion Found., Inc. v. Obama, 641 F.3d 803 (7th Cir. 2011)
(vacating the district court’s decision that the National Day of Prayer is unconsti-
tutional on the grounds that the Freedom from Religion Foundation lacked stand-
ing). After the Seventh Circuit issued its ruling, the following series of events en-
sued: (1) the Co-Presidents of the Foundation applied for the parsonage
exemption; (2) they were initially granted the exemption by the I.R.S.; (3) seem-
ingly unsatisfied with this result (or perhaps disgruntled that the I.R.S. actually
considered them to be ministers of the gospel, per their application), they notified
the I.R.S. that they were not ministers of the gospel and did not work for a church;
(4) the I.R.S. then denied the parsonage exemption on account of the Co-
Presidents not being ministers of the gospel within the context of 26 U.S.C. § 107
(which perhaps alleviated the disgruntled mood of the Co-Presidents); and (5) the
Co-Presidents filed suit against the Secretary of the Treasury, having been suffi-
ciently harmed by the I.R.S.’s application of 26 U.S.C. § 107 so as to have standing
to sue. See Gaylor, 278 F. Supp. 3d at 1085–86. The district court agreed with the
Foundation that 26 U.S.C. § 107 violated the First Amendment. See id. However,
on March 15, 2019, the Seventh Circuit unanimously reversed the decision of the
district court. See Gaylor v. Mnuchin, Nos. 18-1277, 18-1280, 2019 WL 1217647, at
*12 (7th Cir. Mar. 15, 2019).
85. The parsonage exemption permits ministers of the gospel to deduct from
their personal gross income (1) the rental value of a home that is furnished to
No. 2] Taxation of Religious Organizations 704

Freedom from Religion Foundation, Inc., sued Steve Mnuchin,

the current United States Secretary of the Treasury, to enjoin
enforcement of 26 U.S.C. § 107(2) on the grounds that the par-
sonage exemption for ministers of the gospel violates the Estab-
lishment Clause of the First Amendment and is therefore un-
constitutional. The district court judge, Judge Crabb, issued
summary judgement in favor of the Co-Presidents, deciding
that 26 U.S.C. § 107(2) “violates the Establishment Clause be-
cause it does not have a secular purpose or effect and because a
reasonable observer would view the statute as an endorsement
of religion.”86 The district court judge applied Lemon v. Kurtz-
man87 and Texas Monthly, Inc. v. Bullock88 to conclude that the
parsonage exemption was unconstitutional.89 In Lemon, the Su-
preme Court established a three-prong test to determine
whether a law or regulation violates the Establishment Clause.
According to the Lemon Test, a law must be invalidated if (1) it
lacks a secular legislative purpose, (2) its principal purpose or
primary effect either advances or inhibits religion, or (3) it fos-
ters an excessive entanglement with religion.90 The district
court judge held that, because it provides a tax benefit to minis-
ters of the gospel and to no one else,91 26 U.S.C. § 107(2) ad-

them as part of their compensation, or (2) the rental allowance paid to them as
part of their compensation. See 26 U.S.C. § 107.
86. Gaylor, 278 F.Supp.3d at 1085.
87. 403 U.S. 602 (1971).
88. 489 U.S. 1 (1989).
89. Gaylor, 278 F.Supp.3d at 1089–90.
90. See Lemon, 403 U.S. at 612–13. For analysis on how repealing 26 U.S.C. § 107
would potentially increase government entanglement with religion, see Amici
Curiae Brief of Tax Law Professors in Support of Appellants at 13–25, Gaylor v.
Mnuchin, Nos. 18-1277, 18-1280, 2019 WL 1217647 (7th Cir. Mar. 15, 2019), 2018
WL 2121089.
91. The I.R.S. interprets “ministers of the gospel” to incorporate ministers of all
religions. See 26 C.F.R. § 1.107-1(b) (2017) (identifying ministers of a church “or
other qualified organization” as qualifying for the parsonage exemption). Nar-
rowly interpreting “ministers of the gospel” either to identify a specific religion or
to exclude particular religions would likely run afoul of the Establishment Clause.
However, there is reason to believe that, even under the broadest definition of
“minister of the gospel,” the court would still consider 26 U.S.C. § 107(2) to be
unconstitutional because the statute would nevertheless be promoting religion in
general. See Freedom from Religion Found., Inc. v. Lew, 983 F.Supp.2d 1051, 1071
(W.D. Wis. 2013) (“[Even] if atheism were included under the umbrella of ‘reli-
gion,’ § 107(2) still would advance religion over secular interests, even if the pro-
vision applied to atheists, because secular taxpayers still would be excluded from
the benefit.”).
No. 2] Taxation of Religious Organizations 705

vances religion without a secular purpose and thus violates the

Establishment Clause under Lemon.92
The district court judge further honed her criticism of 26
U.S.C. § 107(2) by turning to Texas Monthly, in which the Su-
preme Court looked to Lemon to consider whether a state sales
tax exemption for religious periodicals that are published and
distributed by religious organizations violated the Establish-
ment Clause.93 While a majority of the Court found the sales tax
exemption to be unconstitutional, no single opinion garnered
sufficient support to be considered the majority opinion.94 The
plurality opinion in Texas Monthly held that (1) the state sales
tax exemption for religious periodicals lacked a secular pur-
pose or effect and communicated a message of religious en-
dorsement because it provided a benefit to religious publica-
tions only, without any showing that the sales tax exemption
was necessary to alleviate a burden to the free exercise of reli-
gion,95 and (2) that the sales tax exemption fostered an entan-
glement because it forced the government to evaluate the “rela-
tive merits of differing religious claims.”96 The concurring
opinion in Texas Monthly held that a sales tax exemption lim-
ited to religious literature sold by religious organizations vio-
lated the Establishment Clause because it leads to “preferential
support for the communication of religious messages.”97 Ap-
plying the plurality and concurring opinions from Texas Month-
ly to 26 U.S.C. § 107(2), the district court judge in Gaylor held
that the parsonage exemption violated the Establishment
Clause because it (1) “gives an exemption to religious persons
without a corresponding benefit to similarly situated secular
persons,” and (2) inasmuch as the purpose of a minister of the
gospel is to share a religious message, a tax benefit to ministers

92. See Gaylor, 278 F. Supp. 3d at 1091. Inasmuch as the same district court
judge, Judge Crabb, heard both the first round of this suit in Freedom from Religion
Foundation in 2013 and the second round in Gaylor in 2017, much of Judge Crabb’s
opinion in Gaylor repeats her opinion in Freedom from Religion Foundation.
93. See Tex. Monthly, 489 U.S. at 5 (plurality opinion).
94. See Gaylor, 278 F. Supp. 3d at 1090.
95. See Tex. Monthly, 489 U.S. at 15 (plurality opinion); see also Gaylor, 278 F.
Supp. 3d at 1090.
96. Tex. Monthly, 489 U.S. at 20 (plurality opinion).
97. Id. at 28 (Blackmun, J., concurring in the judgment).
No. 2] Taxation of Religious Organizations 706

of the gospel has the effect of preferring religious messages

over secular messages.98
The Seventh Circuit reversed the district court’s decision in a
unanimous decision.99 Applying the Lemon Test, the Seventh
Circuit concluded that the parsonage exemption for ministers
(1) had a secular purpose, (2) had a principal effect of neither
endorsing nor inhibiting religion, and (3) did not cause exces-
sive government entanglement with religion.100 Firstly, regard-
ing the secular purpose of 26 U.S.C. § 107(2), the Seventh Cir-
cuit noted that a statue is unconstitutional only when there is
no question that the statute was motivated “wholly by reli-
gious considerations.”101 Because the Treasury Department
pointed to three secular legislative purposes for 26 U.S.C. §
107(2),102 the Seventh Circuit concluded that the statute passed
the first prong of the Lemon Test.103
Secondly, on the question of whether the parsonage exemp-
tion either advanced nor inhibited religion, the Seventh Circuit
rejected the district court’s claim that Texas Monthly superseded
Walz and Amos. Applying Walz, the Seventh Circuit declared
that the parsonage exemption satisfies the second prong of the
Lemon Test because providing a tax exemption to ministers
does not “connote[] sponsorship, financial support, and active
involvement of the [government] in religious activity.”104
Therefore, the “primary effect of § 107(2) is not to advance reli-
gion on behalf of the government, but to ‘allow[] churches to
advance religion, which is their very purpose.’”105
Thirdly, regarding whether the parsonage exemption fos-
tered excessive government entanglement with religion, the
Seventh Circuit noted that, because some entanglement is inev-

98. Gaylor, 278 F. Supp. 3d at 1090.

99. Gaylor v. Mnuchin, Nos. 18-1277, 18-1280, 2019 WL 1217647 (7th Cir. Mar.
15, 2019).
100. Id. at *11.
101. Id. at *4 (quoting Lynch v. Donnelly, 465 U.S. 668, 680 (1984)).
102. The Treasury Department argued that 26 U.S.C. § 107(2) had the secular
purposes of eliminating discrimination against ministers, eliminating discrimina-
tion between ministers, and avoiding excessive entanglement with religion. Id.
103. Id. at *9.
104. Id. at *10 (alterations in original) (quoting Walz v. Tax Comm’n, 397 U.S.
664, 668 (1970)).
105. Id. (alteration in original) (quoting Corp. of the Presiding Bishop of the
Church of Jesus Christ of Latter-Day Saints v. Amos, 483 U.S. 327, 337 (1987)).
No. 2] Taxation of Religious Organizations 707

itable, the question of entanglement is one of “kind and de-

gree.”106 While 26 U.S.C. § 107(2) does involve some entangle-
ment with government, this entanglement is of a nature that is
approved by the Supreme Court in Hosanna-Tabor107 and the
alternative to 26 U.S.C. § 107(2), which is found in 26 U.S.C.
§ 119(a)(2),108 would involve even more entanglement with the
government.109 Because Congress decided that U.S.C. § 107(2) is
the less entangling option, and because legislative determina-
tions about the Establishment Clause110 and tax classifications
are entitled to deference,111 the Seventh Circuit elected to not
disturb this decision of Congress.112 Thus, the Seventh Circuit
determined that 26 U.S.C. § 107(2) satisfied all three prongs of
the Lemon Test.113
The Seventh Circuit then applied the historical significance
test under Town of Greece v. Galloway.114 Because the Freedom
from Religion Foundation offered no evidence that 26 U.S.C. §
107(2) was historically viewed as an establishment of religion,
and because the government provided “substantial evidence of
a lengthy tradition of tax exemptions for religion, particularly
for church-owned properties,”115 the Seventh Circuit concluded
that the parsonage exemption did not violate the Establishment
Clause under the historical significance test.116 Having found
that 26 U.S.C. § 107(2) passed both the Lemon Test and the his-
torical significance test, the Seventh Circuit held that it did not

106. Id. (quoting Lynch, 465 U.S. at 684).

107. See Hosanna-Tabor Evangelical Lutheran Church & Sch. v. EEOC, 565 U.S.
171, 190–95 (2012).
108. 26 U.S.C. § 119(a)(2) allows an exemption for employee lodging only if the
employee is required to accept such lodging on the business premises of the em-
ployer as a condition of employment.
109. See Gaylor, 2019 WL 1217647 at *10.
110. See Tex. Monthly, Inc. v. Bullock, 489 U.S. 1, 28 (1989) (Blackmun, J., con-
curring) (“We in the Judiciary must be wary of interpreting [the Religion] Clauses
in a manner that negates the legislative role altogether.”).
111. Regan v. Taxation with Representation, 461 U.S. 540, 547 (1997) (“Legisla-
tures have especially broad latitude in creating classifications and distinctions in
tax statutes.”).
112. Gaylor, 2019 WL 1217647, at *10.
113. Id. at *11.
114. 572 U.S. 565, 577 (2014) (“Any test the Court adopts must acknowledge a
practice that was accepted by the Framers and has withstood the critical scrutiny
of time and political change.”).
115. Gaylor, 2019 WL 1217647, at *11
116. Id. at *12.
No. 2] Taxation of Religious Organizations 708

violate the First Amendment, thereby adding clarity to the con-

stitutionality of the parsonage exemption that some sought.117
Although this attempt to repeal the tax benefit for ministers
of the gospel is disconcerting,118 there is good reason to believe
that a repeal of 26 U.S.C. § 107(2) will not establish precedent
for any further repeal of 26 U.S.C. § 501(c)(3) or § 170(c). The
main criticism of 26 U.S.C. 107(2) is that it provides a benefit to
religious purposes without providing any symmetrical benefit
to secular purposes and thus promotes religion in violation of
the Establishment Clause.119 However, this apparent constitu-
tional weakness of 26 U.S.C. § 107(2) is absent in 26 U.S.C.
§ 501(c)(3) and § 170(c): while 26 U.S.C. § 107(2) provides a tax
benefit exclusively for persons working in a religious capacity
without providing a similar benefit to persons working in a
secular capacity, 26 U.S.C. § 501(c)(3) and § 170(c) provide a tax
benefit both to religious organizations as well as to secular or-
ganizations. In this way, 26 U.S.C. § 501(c)(3) and § 170(c) can-
not be seen to promote religious purposes over secular purpos-
es in the same way that 26 U.S.C. § 107(2) does.120 For this

117. See generally Adam Chodorow, Gaylor v. Mnuchin—A Step Toward Greater
Clarity on Clergy Tax Exemptions?, ABA TAX TIMES, Nov. 2017, at 7. Chodorow also
filed an Amicus Curiae brief in support of the Freedom from Religion Foundation.
See Amicus Curiae Brief of Tax Law Professors in Support of Appellees, Gaylor v.
Mnuchin, Nos. 18-1277, 18-1280, 2019 WL 1217647 (7th Cir. Mar. 15, 2019), 2018
WL 3311509.
118. For further arguments on why 26 U.S.C. § 107(2) should be declared uncon-
stitutional, see generally, Erwin Chemerinsky, The Parsonage Exemption Violates the
Establishment Clause and Should Be Declared Unconstitutional, 24 WHITTIER L. REV.
707 (2003); Adam Chodorow, The Parsonage Exemption, 51 U.C. DAVIS L. REV. 849
(2018).
119. But see Intervenor-Defendants’ Reply Brief in Support of Their Motion for
Summary Judgement at 21–30, Gaylor v. Mnuchin, 278 F. Supp. 3d 1081 (W.D.
Wis. 2017) (No. 16-CV-215), 2017 WL 3251871, rev’d, Nos. 18-1277, 18-1280, 2019
WL 1217647 (7th Cir. Mar. 15, 2019) (explaining that 26 U.S.C. § 107(2) is only one
part of a broader package of tax exemptions that equally benefits secular purpos-
es).
120. Indeed, 26 U.S.C. § 501(c)(3) provides the same tax benefit to both the Par-
ish of St. Paul in Harvard Square and the Freedom from Religion Foundation, Inc.
However, it is certainly ironic that the I.R.S. initially applied the parsonage ex-
emption of 26 U.S.C. § 107(2) to the Co-Presidents of the Freedom from Religion
Foundation, Inc., in the same way that it applies the parsonage exemption to min-
isters of the gospel, and only refused the exemption when the Co-Presidents
themselves notified the I.R.S. that (1) they were not clergy, (2) that their employer
was not a church, and (3) that they believed that it was “unfair that ministers can
exclude housing while [they] cannot.” Gaylor, 278 F. Supp. 3d at 1085. This sug-
gests that the purpose of the Co-Presidents of the Freedom from Religion Founda-
No. 2] Taxation of Religious Organizations 709

reason, the tax benefits to religious organizations granted in 26

U.S.C. § 501(c)(3) and § 170(c) are less vulnerable to being con-
sidered in violation of the Establishment Clause. The key les-
son from Gaylor will be that citizens can establish standing to
sue the Secretary of the Treasury in federal court to prevent the
Secretary from executing those parts of the Tax Code that grant
religious organizations tax benefits. Likewise, federal courts
can invalidate parts of the Tax Code, the result of which would
be to increase the tax burden of religious organizations. It is
therefore provident that members of religious organizations
properly vet Presidential candidates and candidates for the
Senate to establish whether these candidates will nominate and
confirm (1) Treasury Secretaries that will defend the tax-
exempt status of religious organizations in court and (2) judges
that will uphold the tax-exempt status of religious organiza-
tions.

C. Possible Ways for Religious Organizations to Mitigate the

Damaging Effects of Losing Their Tax-Exempt Status
In the event that a religious organization loses its tax-exempt
status in any way, it could mitigate the financial effect of this
event by spinning off its charitable activities into a separate
corporation that would qualify as having a charitable purpose
under 26 U.S.C. § 501(c)(3). Bifurcating a religious organization
into a services corporation and a charitable works organization
could mitigate the damaging effects of losing tax-exempt status
by allowing at least some received donations and activities to
remain tax-exempt on account of their having a charitable pur-
pose: while the religious organization would pay taxes on do-
nations received to finance non-charitable religious activities,
the religious organization’s sister charitable organization
would be able to avoid paying taxes on donations received to
finance non-religious charitable activities. A donor to the reli-
gious organization would then need to likewise bifurcate her
donations into (1) donations to the religious organization that
would likely not be deductible from the donor’s taxable in-
come, and (2) donations to the charitable organization that
would likely be deductible from the donor’s taxable income.

tion is not to obtain the parsonage tax benefit for themselves and others in their
same situation, but rather to have the parsonage benefit abolished entirely.
No. 2] Taxation of Religious Organizations 710

This system would at least allow for a religious organization’s

charitable activities to escape the grips of taxation and thereby
mitigate the financial damage it can expect from losing its tax-
exempt status.

IV. CONCLUSION

As mentioned previously, religious organizations benefit

greatly from being exempt from taxes. But this benefit is not a
given. On the contrary, this benefit can be revoked by Congress
working in tandem with the President and the Secretary of the
Treasury and receiving the blessing of the courts. Indeed, as
Gaylor suggests, the enemy of tax-exempt religious organiza-
tions stands at the gates. While defenses do exist, these defens-
es are only as strong as the willingness of the Secretary of the
Treasury and the courts to uphold these defenses. As such,
much depends on the Secretary of the Treasury and federal
judges. Religious organizations must therefore be vigilant with
regard to who holds those positions. In particular, proponents
of the tax-exempt status for religious organizations121 must
properly vet candidates for President and for Senate to ensure
that they will require nominees for Secretary of the Treasury
and federal judgeships to support the tax-exempt status of reli-
gious organizations. Only by ensuring that the Secretary of
Treasury and federal judges are firmly on the side of tax-
exempt religious organizations can proponents of such reli-
gious organizations be assured that the tax exemption will be
protected.

Grant M. Newman

121. As mentioned supra in note 16, religious organizations themselves must

take caution to not endorse candidates for public office, as doing so can lead to a
violation of the Johnson Amendment and revocation of tax-exempt status. See 26
U.S.C. § 501(c)(3) (2012).