There is an idea gaining popularity in the church world today that churches should claim tax exempt status under Internal Revenue Code section 508(c)(1)(A) rather than section 501(c)(3) for greater protection of religious liberties and increased protection from IRS scrutiny. Plainly put, this is a misunderstanding and misinterpretation of the Internal Revenue Code.
The Internal Revenue Code specifies a list of tax-exempt organizations in Section 501(c). Corporations that are operated exclusively for religious purposes fall under Section 501(c)(3). This is not an optional classification. There is no method or mechanism to change which section of the code the IRS has designated for exclusively religious corporations.
Since 1969, nonprofit organizations seeking recognition of tax-exempt status have been required to notify the IRS of their plans and activities. This is done by submitting the IRS’ form 1023. Additionally, most nonprofits must file annual disclosures of their revenues and expenses.
Some organizations, including churches, their auxiliaries, some church-operated schools, and conventions or associations of churches are exempt from filing both the application for recognition of tax-exempt status as well as the annual disclosures. These exemptions are granted in Section 508(c)(1)(A) and Section 6033(a)(3)(A) respectively. These exemptions are granted to churches because they are a particular type of 501(c)(3) organization, not as an alternative classification to being a 501(c)(3) organization.
What Does Section 508(c)(1)(A) actually say?
Section 508 discusses special rules that apply to organizations recognized as tax-exempt under section 501(c)(3). It states that new organizations must notify the IRS of their intention to apply for recognition of tax-exempt status under section 501(c)(3) and that if they do not specifically disclaim being a private foundation, the Service will presume them to be a private foundation.
Section 508(c)(1)(A) is simply a list of mandatory exceptions to those special rules. It states that churches, their integrated auxiliaries, and conventions or associations of churches are exempt from filing the notice with the Service, meaning that churches and their integrated auxiliaries, etc. are not required to submit form 1023 in order to be recognized as tax exempt. They are exempt already.
Further Exemptions for Churches
The IRS grants an additional exemption to churches in Section 6033(a)(3)(A). This section grants churches, their integrated auxiliaries, and conventions or associations of churches, an exemption from filing an annual informational tax return that discloses gross income, receipts, and disbursements. This exemption is one of the biggest incentives for churches and their integrated auxiliaries, etc., as it provides a great degree of financial autonomy from the federal government.
Additional Benefits of 508(c)(1)(A)?
Those who promote the idea that churches should claim recognition of tax exemption under Section 508 assert that this classification grants churches additional benefits and protections that they would otherwise not receive as 501(c)(3) organizations. However, the desirable protections churches seek – tax deductible donations, religious liberties, financial autonomy from government oversight – are all protections that are granted to churches already. There are no additional benefits of Section 508(c)(1)(A) apart from the benefit of not being required to file the application for recognition of tax-exempt status.
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