Churches in the United States have been unofficially federally tax-exempt since the country’s founding until they received an official federal income tax exemption in 1894. Additionally, all 50 U.S. states and D.C. exempt churches from paying property tax. Donations to churches are also tax-deductible.
Origins of Tax Exemption for Churches
The tax exemption for churches can be traced back to the Roman Empire, when Constantine, Emperor of Rome from 306-337, granted the Christian church a complete exemption from all forms of taxation following his supposed conversion to Christianity circa 312. Church property used for religious purposes was tax-exempt in medieval England, based on the rationale that the church relieved the state of some governmental functions, and therefore deserved a benefit in return. The English Statute of Charitable Uses of 1601, which included churches along with all other charitable institutions, formed the basis of America’s modern tax exemption for charities.
Early American History of Tax Exemption for Churches
By the time of the American Revolution, nine of the 13 original colonies were giving some kind of tax relief to churches. In 1777, Virginia officially enacted an exemption from paying property tax to “houses for divine worship.” New York followed in 1799, and Congress exempted all churches in D.C. from paying property tax in 1870.
During the 19th Century, opposition to churches retaining property tax exemptions was expressed by at least three U.S. presidents: James Madison, James Garfield, and Ulysses S. Grant. Grant submitted a 900-foot long petition containing 35,000 signatures to Congress in 1875, demanding “that churches and other ecclesiastical property shall be no longer exempt from taxation.” Grant told Congress that “in 1850, the church properties in the U.S. which paid no taxes, municipal or state, amounted to about $83 million. In 1860, the amount had doubled; in 1875, it is about $1 billion. By 1900, without check, it is safe to say this property will reach a sum exceeding $3 billion….so vast a sum, receiving all the protection and benefits of government without bearing its portion of the burdens and expenses of the same, will not be looked upon acquiescently by those who have to pay the taxes.”
U.S. churches’ federal income tax exemption was not formerly enacted as legislation until the Tariff Act was passed by Congress in 1894, providing tax exemptions to “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.” This was the first time the federal government declared any group exempt from paying taxes, as opposed to its earlier practice of only listing entities subject to taxation. Although the Tariff Act was declared unconstitutional in 1896, the church tax exemption was reinstated by the Revenue Act of 1913, which defined the modern American income tax system. On Jan. 14, 1924, the U.S. Supreme Court interpreted the reason for the exemption in Trinidad v. Sagrada Orden: “Evidently the exemption is made in recognition of the benefit which the public derives” from churches’ “corporate activities.”
501(c)(3) Charitable Organizations & the Parsonage Exemption
The U.S. Internal Revenue Service (IRS) classifies churches as 501(c)(3) nonprofit charitable organizations, which are exempt from federal income tax and are able to accept tax-deductible donations. Unlike secular charities, however, churches are automatically considered to be 501(c)(3) organizations, and, while they may do so voluntarily, they are not required by law to submit an application for exemption or pay the application fee. According to the IRS, the fees are $275 for form 1023-EZ and $600 for Form 1023 as of Jan. 20, 2023.
In addition, using a benefit known as the “parsonage exemption” (or “parish exemption”), “licensed, commissioned, or ordained” ministers of religion may deduct most of the money they spend on housing from their federal income tax, and these properties are often exempt from state property taxes. The exemption has existed since 1921, and no equivalent tax break is available to leaders of secular nonprofit charities. A legal battle has ensued to determine whether the exemption can apply to multiple homes used by a single pastor. In Mar. 2011, a 7-6 U.S. Tax Court decision ruled that Phil Driscoll, an ordained minister and Grammy Award-winning trumpeter imprisoned for tax evasion, was exempt from federal income tax on $408,638 used to purchase a second home near Cleveland, TN. The court determined that the word “home” used in the tax code is equivalent to “homes.” However, on Feb. 8, 2012 the Eleventh Circuit Court of Appeals in Atlanta overturned the earlier decision in a 3-0 ruling, stating that “Congress intended for the parsonage allowance exclusion to apply to only one home.”
The Johnson Amendment & Political Campaigning
A ban on church intervention in political campaigns became law in 1954 with the passage of then-Senator Lyndon Johnson’s amendment to Internal Revenue Code (IRC) section 501(c)(3), which covers tax-exempt charitable organizations in general. The amendment was passed with no recorded input from churches or any other charitable groups. Under the amended IRC, churches and all other 501(c)(3) charities 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” if they are to remain tax-exempt. [IRC 8] Contributions to political campaign funds in support or opposition to candidates are also prohibited, but pastors may campaign as individuals without the imprimatur of the church, and churches may speak out on public issues so long as they don’t “devote a substantial part of their activities to attempting to influence legislation.”
In practice, however, the IRS rarely investigates churches for violating the political campaign ban. The IRS has successfully used the Johnson Amendment to revoke the tax-exempt status of only one church since the law was enacted in 1954: the Church at Pierce Creek in Binghamton, NY. The church placed a full-page advertisement in USA Today and the Washington Times four days prior to the 1992 presidential election, listing some of Bill Clinton’s views on abortion, homosexuality, and the distribution of condoms to teenagers in public schools, and compared the views unfavorably with the Ten Commandments. The ad went on to ask, “How then can we vote for Bill Clinton?” and specified, in fine print at the bottom of the page: “This advertisement was co-sponsored by The Church at Pierce Creek… Tax-deductible donations for this advertisement gladly accepted.”
Over the years, there have been several attempts to revoke the Johnson Amendment, though none have been successful.
President Trump signed an executive order on May 4, 2017 titled “Promoting Free Speech and Religious Liberty,” which he says “directs the IRS not to unfairly target churches and religious organizations for political speech.” Trump stated, “No one should be censoring sermons or targeting pastors.” The executive order limits enforcement of the 1954 Johnson Amendment, which prohibits churches from campaigning for or against political candidates, but it does not yet “totally destroy” it as Trump had promised during his presidential campaign. According to the National Law Review, “It has been widely reported that the Johnson Amendment is not currently being enforced. In this light, the executive order is unlikely to have any practical effect.”
U.S. Supreme Court Cases on Church Taxation
On May 4, 1970, the U.S. Supreme Court upheld property tax exemptions for churches, declaring them to be in accordance with the Establishment Clause of the First Amendment of the U.S. Constitution. In the majority 8-1 opinion written by Chief Justice Warren E. Burger in Walz v. Tax Commission of the City of New York, the Court stated that the exemptions did not equate with “the ‘establishment’ of a religion [that] connoted sponsorship, financial support, and active involvement of the sovereign in religious activity,” all of which are prohibited. The Court also defended the tax benefit on the basis that churches “foster [the community’s] ‘moral or mental improvement.'” Furthermore, the court warned that taxing churches would be a violation of the Free Exercise Clause of the First Amendment, which bars government interference in religious affairs.
The 1983 U.S. Supreme Court case Regan v. Taxation with Representation of Washington upheld the 1954 Johnson Amendment barring churches (and other nonprofit charities) from receiving tax exemptions if they intervene in political campaigns. Then-Associate Justice William H. Rehnquist, on behalf of the unanimous Court, argued that the IRS is under no obligation to grant a tax benefit to lobbying organizations, and that the freedoms guaranteed by the First Amendment do not have to be sponsored by the federal government in the form of a tax break.
Scientology, the Mormon Church, and Challenge to Tax Exemption
The Church of Scientology battled the IRS for 25 years to regain its tax exemption after the IRS withdrew it 1967, claiming the organization was a commercial enterprise rather than a church. The IRS decision was upheld by numerous courts, despite Scientology and its members bringing 2,200 lawsuits against the IRS and its officials over the course of the dispute. The New York Times revealed in Mar. 1997 that during Scientology’s campaign against the IRS, the organization’s lawyers had “hired private investigators to dig into the private lives of I.R.S. officials and to conduct surveillance operations to uncover potential vulnerabilities.”
In 1991, Scientology’s ecclesiastical leader David Miscavige met with then-IRS Commissioner Fred T. Goldberg Jr. and offered to call off the group’s lawsuits in exchange for regaining its tax-exempt status. The New York Times argued that in agreeing to Miscavige’s proposal, Goldberg “created a special committee to negotiate a settlement with Scientology outside normal agency procedures” and that IRS “tax analysts were ordered to ignore the substantive issues in reviewing the decision,” according to IRS files. In order to receive the exemption, Scientology agreed to pay the IRS $12.5 million and “agreed to more Federal Government intrusion than perhaps any religious organization has ever allowed.”
In Nov. 2008, the Church of Jesus Christ of Latter-day Saints (also called the Mormon Church) was accused of violating its tax-exempt status by supporting the passage of California’s Proposition 8, a ballot initiative outlawing civil marriages for same-sex couples. However, Americans United for Separation of Church and State (AU) Executive Director Barry W. Lynn explained that the Mormons “almost certainly have not violated their tax exemption. While the tax code has a zero tolerance for endorsements of candidates, the tax code gives wide latitude for churches to engage in discussions of policy matters and moral questions, including when posed as initiatives.”
On Oct. 12, 2011, Americans United for Separation of Church and State (AU) wrote to the IRS to report Pastor Robert Jeffress, who had posted a video of himself endorsing Texas Gov. Rick Perry on the First Baptist Church of Dallas website. The IRS did not respond.
John Oliver & Last Week Tonight Revive the Debate
In the Aug. 17, 2015 episode of Last Week Tonight, comedian John Oliver lampooned the ease with which one can obtain IRS tax-exempt status for a religious organization. Following stories in Time Magazine by Mark Oppenheimer and in The Federalist by Denny Burk, Oliver amped up the debate by establishing his own “church,” Our Lady of Perpetual Exemption, registering the church with the IRS, and receiving tax-exempt status. Oliver asked his viewers for donations to the church, which he then donated to Doctors without Borders. He shut down the church on Sep. 13, 2015.
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