Why taxing churches is harder than you think – part 1

On Monday, August 27, President Trump met with Christian Evangelical leaders and openly urged them to get more political in this fall’s mid-term election, basically encouraging them to break the law. Indeed, he bragged (inaccurately) that he had “gotten rid of” the Johnson Amendment, a 1954 tax law provision of tax law allows the stripping of a church’s or not-for-profit organization’s tax-free status if they openly endorse political candidates. [1]

The Johnson Amendment still exists, although Trump has directed that the IRS not aggressively enforce this rule. This regulation has been so widely violated, and so poorly enforced, that the prospect of taxing churches has become a common rallying cry among the political left, with their counterparts on the political right increasingly demanding the elimination of these prohibitions altogether.

Even if you wanted to, accomplishing that taxable status is not so simple however, and this post is the first of two that will explore “why.” If you want to skip my brief “backgrounder” into the legal issue and its historical enforcement, you can skip to the section entitled “Problem #1 – Defining taxable income.”

What the regulations say

The regulation at issue is actually quite clear. Per the Internal Revenue Service:

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

Enforcing this provision has been problematic for much longer than the current debate has been raging. During the Civil Rights Era of the 1960s, and even to the present, the black churches have been fruitful organizing grounds in the fight against racial discrimination, and many black pastors have been more direct in advocating specific political positions and candidates than the Reverend Martin Luther King, Jr., was. King was a master at eloquently preaching “around the boundaries” of direct political speech, but we have to admit that this fight (a very just one, I might add) has often become very directly political coming from the pulpit.

Especially after the Roe v. Wade Supreme Court decision on abortion, and continuing through a relentless attack from conservative white churches for eight years directed at President Barack Obama, the overt political voice from the pulpit has become far more vocal from the right side of the spectrum. The (unexplainable to me) obsession from Evangelical churches with Donald Trump and against immigrants to the United States seems to be the most obvious current manifestation of this church-politics merger. [2]

A poorly-executed audit

An attempt to address the worst abuses of 501(c)(3) and (c)(4) not-for-profit status appears in hindsight to have actually started quite low in the Internal Revenue Service hierarchy in 2010. What numerous hours of Congressional hearings maintained was a high-level plot to silence conservative not-for-profits now appears to have begun with a simple text search of Form 990 filings for “red flags” of both political right and left buzzwords looking for high-probability candidates for audit. For instance, as well as looking for the term “Tea Party,” the search also looked for the terms “progressive” and “medical marijuana” in submitted Form 990 text and related documents. [3]

Regardless of intent, the resulting political firestorm shut down virtually all IRS audits for prohibited political activities as (ironically) politically toxic, even while there remain numerous blatant violations of these longstanding regulations. Since it is difficult to envision that the partisan “heat” will die down, it is likewise difficult to picture any political will in Congress or the IRS to police the worst offenders, let alone take away their untaxed status.

Problem #1 – Defining taxable income

Even if the country were to decide to tackle the problem of not-for-profit organizations using their tax-preferred status to inflame political speech and spend money in overtly political ways, we run into a very practical problem. The reality is that we currently tax corporate and proprietorship accounting profits, albeit modified by a host of politically-defined exceptions and adjustments. But, accounting-wise, a “not-for-profit organization” has no profits to tax.

There is no line labelled “net profit” on either a not-for-profit organization’s income statement or its IRS Form 990 filing. If revenue does exceed expenses for the period, then most not-for-profits would label this as “excess of revenue over expenses.” The IRS Form 990 simply calls it “revenue less expenses,” and churches, unlike other not-for-profits, are typically not even required to file a Form 990.

And even then, what happens to this “excess revenue”? Since there are no stockholders in a not-for-profit organization, this excess shows up on a Form 990 in a line called “total net assets or fund balances,” which is simply total asset balances minus total liability balances. [4] If you are looking for cash distributions to tax, they usually are just not there.

To be sure, there is a lot of “creative accounting” possible in not-for-profit management, and I wrote about this in an earlier post. Some “megachurches” have built up huge cash reserves, pay big salaries, and supply their pastors with expensive houses and automobiles (Joel Osteen apparently has a taste for Ferraris). I call these “quasi-profits,” basically profits, but buried in more acceptable language. There are a small number of churches that are run like big for-profit businesses, but this is an issue usually unrelated to political speech and more your garden-variety grifting.

Conservative Iowa Senator and noted tightwad Chuck Grassley launched a multi-year investigation of financial abuses by churches in 2007 and issued a scathing report, and then mysteriously dropped the issue, despite uncovering grievous financial abuses by several well-known “megachurch” leaders. [5]

But the reality is that probably 90% of churches, even if they did file Form 990s (and most are not required to file), would likely show very little in “excess revenue over expenses,” and it would be difficult to find any “quasi-profits” in their organizations. Indeed many, including most major “mainstream” denominations, would be showing steady, multi-year net losses. Except for some notorious “religious entrepreneurs,” the business of “church” is not one you would want to be in right now. In short, there are usually zero “profits” to tax, even if you wanted to.

Problem #2 – We aren’t taxing corporations much at all these days anyway

Just to add a short addendum to #1, the 2017 tax code revisions championed by Republicans have dropped the level of taxes paid by all corporations dramatically, and with a good accountant you can often get this legally down to zero. In other words, you might say that you want to tax churches “like a business.” But increasingly that means “not at all.” [6]

If a not-for-profit organization does have some kind of sideline that looks like a profit-making business, say the renting of real estate, then these earnings must already be accounted for separately with taxes paid. However, the line as to what constitutes a “business” and what is instead a business-like “related activity,” which is not taxed, can get a bit fuzzy, but again, audits can be politically perilous.

There is more to say on this topic that will have to wait for Part Two of this post, which is in the queue. Stay tuned or subscribe to this blog using the email box in the left column, or by clicking on the Facebook or Twitter icons. The subject hint is two words: property taxes.

Note: Part Two of this series is now posted.


Notes:

  1. Shear, Michael D. “If G.O.P. Loses Hold on Congress, Trump Warns, Democrats Will Enact Change ‘Quickly and Violently’.” The New York Times, 28 Aug. 2018.
  2. I tried a bit of an explanation for this in a recent post on “Constantine, Putin, Trump and the co-opting of religion”.
  3. Chittum, Ryan. “The IRS Scandal Unwinds.” Columbia Journalism Review, 25 June 2013.
  4. Some not-for-profits use an accounting method called “fund accounting,” which has its own mysteries that are beyond the scope of this post.
  5. Zoll, Rachel. “Televangelists Escape Penalty in Senate Inquiry.” NBCNews.com, 7 Jan. 2011.
  6. I have been quite critical of this trend, and wrote about it back in April in a post entitled, “How SHOULD you tax a corporation?”

 

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