Law on Associations

Case Notes: North America

The International Journal
of Not-for-Profit Law

Volume 2, Issue 4, June 2000

United States

Church’s Political Advertising Compromises Its Tax-Exempt Status

Case Note on Branch Ministries v. Rossotti, No. 99-5097, 2000 FindLaw 995097A (D.C. Cir. May 12, 2000)

The United States Court of Appeals for the District of Columbia Circuit recently held that a church may not operate as a § 501(c)(3) organization while also engaging in political activity. As in the Christian Echoes case, the Internal Revenue Service (“IRS”) revoked a church’s bona fide tax-exempt status because it was involved in politics. The court upheld the IRS’s decision. It found that the church’s political advertising violated statutory restrictions on tax-exempt organizations.

The church placed full-page advertisements in two newspapers four days before the 1992 presidential election. The advertisements in the newspapers urged Christians not to vote for then-presidential candidate Bill Clinton because of his position on certain moral issues. On revocation of the church’s tax-exempt status, Branch Ministries and its pastor, Dan Little, claimed that (1) the IRS acted beyond its statutory authority, (2) the revocation violated the church’s right to the free exercise of religion guaranteed by the First Amendment and the Religious Freedom Restoration Act (“RFRA”), and (3) the church was the victim of selective prosecution in violation of the Fifth Amendment.

I. Background

A. Taxation of Churches

The Internal Revenue Code (“Code”) exempts organizations organized and operated for religious purposes, provided that they do not engage in certain activities, including involvement in “any political campaign on behalf of (or in opposition to) any candidate for public office.” 26 U.S.C. § 501 (a), (c)(3) (1994). Contributions to such organizations are also deductible from the taxpayer’s taxable income. Churches may simply hold themselves out as tax exempt and receive the status’s benefit without applying for advance recognition from the IRS. 26 U.S.C. § 508 (c)(1)(A) (1994). By contrast, most organizations seeking tax-exempt status must apply to the IRS for an advance determination that they meet the requirements of § 501(c)(3).

The manner of dealing with tax-deductible contributions and the special restrictions placed on the IRS’s ability to investigate the tax status of a church show the unique treatment churches receive in the Code. For example, donors to a church that has not received an advance determination of its tax-exempt status may also deduct their contributions; though in the event of an audit, the taxpayer will bear the burden of establishing that the church meets the requirements of § 501(c)(3).

Additionally, the Church Audit Procedures Act (“CAPA”) describes the circumstances under which the IRS may investigate a church and the procedures it is required to follow in an investigation. 26 U.S.C. § 7611. The IRS may begin a “church tax inquiry” upon a high-level Treasury official’s “reasonable belief” that a church may not be tax-exempt under § 501. A church tax inquiry is any inquiry to a church (other than an examination) to serve as a basis for determining whether a church: (A) is exempt from tax under section 501(a) by reason of its status as a church, or (B) is… engaged in activities which may be subject to taxation… A “church tax examination” follows if the IRS is not able to resolve its concerns through a church tax inquiry. In an examination, the IRS may access and review the church’s records or examine its activities “to determine whether [the] organization claiming to be a church is a church for any period.” 26 U.S.C. § 7611(b)(1)(A), (B).

Excessive lobbying and political campaign activities are grounds for denying organizations § 501(c)(3) status. Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (1972). The Christian Echoes case was a result of the “ideological organizations” project initiated at the beginning of the Kennedy administration to scrutinize tax-exempt organizations’ political activities. The court in Christian Echoes found that the organization intervened in political campaigns in addition to influencing legislation, and therefore, was excluded from § 501(c)(3) status.

B. Factual and Procedural History

The advertisements drew hundreds of contributions to the Church at Pierce Creek (“Church”) operated by Branch Ministries. The Regional Commissioner of the IRS gave notice to the Church of a tax inquiry seeking to determine whether the organization may not “be tax-exempt or… may be liable for tax” due to political activities and expenditures. The Church denied engaging in any prohibited activity and declined to provide the IRS with certain information the Service had requested. The IRS revoked the Church’s tax exemption and the Church subsequently challenged the revocation.

II. Analysis of the Court

A. The Statutory Authority of the IRS

The court held that the IRS had the statutory authority to revoke the Church’s tax-exempt status. The Church is a religious organization as defined under § 501(c)(3) and therefore, may be disqualified for tax exemption when attempting to intervene in any political campaign. Responding to Branch Ministries’ argument distinguishing churches from religious organizations, the court clarified that not every religious organization is a church, but every church is a religious organization.

B. First Amendment Claims

The revocation did not threaten the Church’s existence, and so its free exercise right was not substantially burdened. Jimmy Swaggart Ministries v. Board of Equalization, 493 U.S. 378, 384-85 (1990). Also, a decrease in the amount of money available to the Church for religious practices would not be constitutionally significant, according to the court. In addition, the revocation does not necessarily make the Church liable for paying taxes, because any bona fide donation to the Church would continue to be tax-exempt.

The court held that the Church’s free exercise rights had not been substantially burdened nor did the viewpoint neutral restrictions imposed by § 501(c)(3) violate the Church’s First Amendment free speech rights. It noted that the Supreme Court has held consistently that, absent invidious discrimination, “Congress has not violated [an organization’s] First Amendment rights by declining to subsidize its First Amendment activities.” Regan v. Taxation With Representation, 461 U.S. 540, 552-53.

Furthermore, the court recognized alternate means by which the Church could communicate its sentiments about candidates for public office. The Church could form a related organization under § 501(c)(4) of the Code and such an organization would be tax-exempt though contributions to it would not be deductible. Under § 501(c)(4) the organization is still barred from intervening in political campaigns, but it may form a political action committee (“PAC”) which would be free to participate in political campaigns by maintaining a separate segregated fund to receive contributions and make expenditures. Regan.

Should the Church create a PAC, the related 501(c)(4) organization must be separately incorporated, and it must maintain records that will demonstrate that tax-deductible contributions to the Church have not been used to support the political activities conducted by the 501(c)(4) organization’s political action arm. See 26 U.S.C. § 527(f)(3); 26 C.F.R. § 1.527-6(e), (f).

C. Selective Prosecution (Fifth Amendment)

The Church failed to establish selective prosecution, because it could not show that (1) “[it] was singled out for prosecution from among others similarly situated and (2) that [the] prosecution was improperly motivated, i.e., based on race, religion or another arbitrary classification.” United States v. Washington, 705 F.2d 489, 494 (D.C. Cir. 1983). Additionally, the Church faced a strong presumption in favor of government prosecutors having properly discharged their official duties. United States v. Armstrong, 517 U.S. 456, 464 (1996).

The Church failed to demonstrate that it was similarly situated to other churches involved in political campaigns. Unlike the other churches’ reported activities, it placed advertisements in newspapers with nationwide circulation opposing a political candidate and solicited tax-deductible contributions to defray their cost. The court distinguished this part of the Church’s activities from other churches’ political activity and concluded that the Church had no one to whom it could be compared for the purpose of finding unequal treatment.

III. Conclusion

The court affirmed the district court’s decision finding that the revocation of the Church’s tax-exempt status did not violate the Constitution nor exceed the IRS’s statutory authority.

Freedom of Association in Recent U.S. Supreme Court Decisions

By Karla W. Simon

In two recent decisions, California Democratic Party v. Jones (June 26, 2000), and Boy Scouts of America v. Dale (June 28, 2000), the Supreme Court of the United States has developed its interpretation of the freedom of association, which is protected by the First Amendment to the United States Constitution. These two decisions provide a murky picture of the extent to which limitations on the freedom of association may be valid in the US today.

The California Democratic Party case is the clearer of the two. It involved an interpretation of the election laws in the state of California, which permitted a “blanket primary,” listing all candidates and including their party affiliations. Thus, anyone could vote in the primary for any candidate to public office, regardless of the person’s party affiliation. The candidate with the highest number of votes in any party would then be the party’s nominee. This sort of primary voting was held to violate the rights of the party members of the California Democratic Party and the other party plaintiffs because it placed too severe a burden on each party’s freedom of association. Nevertheless, the Court pointed out that a state could hold a nonpartisan blanket primary, without infringing First Amendment rights. The distinction seems to be one of not allowing members of a different political party to expressly participate in choosing the candidates of that party. Although a person can easily switch party affiliation prior to a primary, this fact did not seem to bother the Court.

The Boy Scouts case is more troubling, and it has provoked a significant amount of comment throughout the country. The issue in the case was the right of the Boy Scouts of America (BSA) to exclude from membership an avowedly gay man who had excelled in the organization during a lifetime of scouting activity. The way in which the issues are framed is discussed in an article in the March issue by Jeremy Springhart. The resolution of the Court’s majority opinion (written by Chief Justice Rehnquist and joined by four other justices) was to hold that a requirement that BSA admit Mr. Dale to membership violates the organization’s right of “expressive association.” The principal dissenting opinion (written by Justice Stevens and joined by three other justices) takes serious issue with that conclusion.

The issues raised by the case have caused a stir in the US not-for-profit community. The Chronicle of Philanthropy reported that over three dozen amicus briefs were filed by not-for-profit organizations on both sides of the issue (see Chronicle of Philanthropy, July 13, 200, p. 46). Comments reported by the Chronicle show how divided the community remains after the resolution of the case. As might be expected, conservative commentators are pleased, while civil libertarians are not. (Id.)

From a legal standpoint the issue is a difficult one, as the five-four decision makes clear. The Court had previously held, in Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston, Inc. (515 US 557, 1995), that an organization’s First Amendment rights are infringed when state law forces the organization to permit marchers with whose aims the parade organizers disagree to be included in the parade. The majority opinion relies heavily on that decision, distinguishing other precedents that had permitted states to outlaw discrimination by private clubs. Giving deference to BSA’s statement that the inclusion of Mr. Dale within its ranks as an assistant scoutmaster would harm its right to expressive association, the majority opinion by-stepped the fact that the statement of BSA’s determination to reject homosexual members had never been made into a clearly stated policy. Justice Rehnquist held that the interests of New Jersey in eliminating discrimination “do not justify such a severe intrusion in “ BSA’s constitutional rights.

Justice Stevens, writing for the dissent, pointed to the factual problems faced by BSA in asserting that it has adopted a clear policy stating that homosexuals could not belong to the organization. And he went on to show how the BSA case differs from the Hurley case, on which the majority had relied. As he noted, in that case the organization seeking to march in the parade “was actually conveying a message by participating,” whereas all Mr. Dale was doing was seeking to continue membership in an organization with which he had been involved since boyhood. Justice Stevens noted that Dale’s “participation [in BSA] sends no cognizable message to the Scouts or the world.” By virtue of ignoring this and other distinctions made in the earlier cases, Justice Souter noted, in the other dissenting opinion, that all organizations wishing to discriminate will be able to use the BSA decision as “an easy trump of any antidiscrimination law.”

The current situation with respect to the First Amendment and what may be permissible restrictions on it requires further research and analysis. IJNL will follow up on this brief story in a later issue, where the two decisions will be analyzed in more detail.