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Date:         Tue, 10 Nov 1992 08:46:54 -0400
From:         Rick George <RIGEORGE@VASSAR.BITNET>
Subject:      Re: Churches and Tax Exempt Status

Julie, Jamie, and others....

I did photocopy a whole bunch of tax code a year or so ago related to
non-profit organizations, but can't find it now so I don't have a lot
of meaty chunks of tax code to quote, but will try to provide some
information about non-profits and their tax treatment.  The tax codes
are quite lengthy when it comes to non-profits.  If your institution's
library has them, you should start with section 501(c)(3) and continue
through to section 501(c)(21).  Section 509 is also important.

When discussing taxes and non-profits, there are three primary tax
benefits to consider:

1)  Exemption from federal corporate (and trust) taxes (since many
    states make their tax code mirror the federal code, this usually
    means the same thing at the state level).

2)  Exemption from state and local property taxes (this has become a
    big issue in many localities--in the fire district in which I live
    more than 40% of the property is tax exempt, placing a large tax
    burden on those of us who do pay fire taxes).

3)  Tax deductability of gifts from individuals and corporations to the
    organization.

Not all non-profits enjoy each benefit in the same way.

We can group non-profits into four categories:

Noncharitable non-profits:  these are social clubs, veterans' organizations,
  labor unions, burial societies, chambers of commerce, marketing
  cooperatives, and other organizations which advance private interests
  but are still subject the contraints of being non-profit.  (Note that
  non-profit does not mean unprofitable--it merely means that private
  individuals cannot receive those profits).

  In most instances, gifts to noncharitable non-profits are not tax
  deductible (there are some exceptions for certain veterans' groups,
  types of cemetery companies, and fraternal organizations).


Public charities:  these are schools, churches, hospitals, and a whole
  bunch of groups that meet one of several alternative (and complicated)
  definitions of publicly supported organizations set forth in section 509.


The other two categories related to foundations and they are operating
foundations and non-operating foundations.  A simple distinction is that
an operating fondation spends the bulkmore of its income on the active
conduct of a charitable program, whereas non-operating foundations are
grant-makers (like the Ford Foundation).

Moving from top to bottom in these categories, there is more government
regulation on the bottom than the top.



The interest on the list seems to center around churches, which fall
into the public charity category, and their political activity.

To quote John G. Simon from his article "Tax Treatment of Non-profit
Organizations": (comments in [] are mine)

"...public charities operate under these constraints:

They are totally prohibited from engaging in electoral politics, although
educational programs may indirectly assist a candidate's cause.

[My interpretation of this is that Ogelthorpe University could not
endorse a candidate for political office but could have that candidate
speak on its campus.  Clever minds can think of a lot of gray areas, I
am sure.]

They are prevented from engaging in legislative activity beyond an
'insubstantial' degree unless they elect to come under an optional rule
imposing certain percentage ceilings on direct lobbying and lower
ceilings on grassroots legislative action (the right to elect these
percentage limitations is denied to church groups--at their own request).
These limitations do give way to fairly substantial exceptions; for
example, legislative activity does not include disseminating the results
of 'nonpartisan analysis, study, or research' or providing testimony
in response to a written request from a legislative committee.  Where
these exceptions do not apply, the lobbying charity must either (1)
navigate within the vague 'insubstantiality' rule in order to retain
exemption...or (2), if the charity elects the percentage option, face
special penalty taxes if the ceiling is breached.

[Again, many gray areas come to mind centering around 'non-partisan
analysis, study, or research' and that word 'insubstantial'.]

They are subject to special rules regulating the finance and control
of public interest litigation."

Many public charities attempt to gain their political ends through
public education rather than direct participation, and the IRS has
attempted to regulate that education (to try to make it "fair"), but
the courts haven't helped them (there was one case when the I.R.S.
required that organizations present a "full and fair exposition of
pertinent facts" that was held to be unconstitutionally vague).

Nonchariable non-profits have much more leeway in the political
arena, whereas both types of foundations are more restricted.

We're into a fairly complex topic here--with the volumes of tax code
and court cases that come into play when you discuss tax exemptions
and non-profits' invovlement with the political arena.  I would
suspect that many law schools offer full courses on this subject
and I certainly claim to be no expert on the topic.

The Yale University Press published a fine book a few years ago called
_The Nonprofit Sector:  A Research Handbook_ (edited by Walter W.
Powell).  It devotes three articles to this topic ("The Tax Treatment
of Nonprofit Organizations:  A Review of Federal and State policies"
by John G. Simon, "Partners in Public Service:  The Scope and Theory
of Government-Nonprofit Relations by Lester Salamon, and "Nonprofit
Orgainzations and the Market" by Richard Steinberg).  All three have
substantial bibliographies and would serve as excellent starting points
for those interested in this subject.

...Rick
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