For nonbelievers like me, one of the most irritating aspects of the US tax system is the tax-exemption given to churches under the section of the code known as 501(c)(3) that is meant to provide tax relief for organizations that improve the general welfare. This topic has been discussed before in the context of whether churches that overtly take political stands should continue to receive that benefit and I concluded that it was unlikely that the IRS or the courts would eliminate it.

I for one think that the tax exemptions given to charities has been abused so much that we would do well to consider eliminating it altogether for all groups, religious and non-religious.

But there is one form of special treatment for churches that seems to me to be completely unjustified even under current law. As Jonathan Turley says, “While tax-exempt 501(c)(3) nonprofit organizations must file a detailed application form, fee and annual information to obtain and maintain their tax-exempt status, churches and other religious organizations are exempted from the requirement to file the reports and fees.”

I am glad to see that the Freedom From Religion Foundation (FFRF) has challenged this practice and filed a suit against the IRS, saying that this unequal treatment imposes an unfair burden on those groups that are not churches, since these requirements are “detailed, intrusive, and expensive”. The lawsuit against the IRS was filed in Wisconsin where FFRF is based and the plaint can be read here.

In reading it, I found the answer to something that had puzzled me for a long time. The plaint says that all 501(c)(3) organizations other than churches have to annually file IRS Form 990 that requires them to provide detailed information on things such as:

• governance
• composition of governing body
• management policies
• lists of officers, directors, trustees, and key employees,
• compensation paid by the organization to such persons
• the organization’s mission, activities, and current and prior years’ financial results
• reports of revenue and expenses
• financial schedules, including information about donations and whether donations are spent on programs or management and fundraising
• statements of revenue and functional expenses, as well as organizational balance sheets, comprising the financial statements of the organization

The puzzle this solved was that we all know that many so-called church leaders seem to live high on the hog from the money they get from their often poor parishioners, having a luxurious lifestyle that seemingly depends on them being able to easily divert money given to the church for their own personal use, effectively treating the church’s funds as if it were their personal account. How could they get away with this if they were a charity and thus eligible to get a tax benefit? Other charities face scrutiny from outsiders and indeed there are organizations that monitor charities and rank them according to what percent of donations actually go towards the mission of the charity and how much goes for fundraising and administrative costs. This is because Form 990 is required to be made publicly available.

It is now clear why churches seem to abuse the system with impunity. Because they do not have to file the annual Form 990, their financial books are opaque to outsiders and thus create opportunities for easy abuse and fraud. This is an absolute scandal and there is absolutely no justification for this kind of differential treatment of organizations that are under the same 501(c)(3) umbrella. I hope the lawsuit brought by the FFRF exposes this. As they say in their plaint, these “church exemptions from the application and annual information filing requirements of §501(c)(3) violate the Establishment Clause and the equal protection rights mandated by the Due Process Clause of the Fifth Amendment to the United States Constitution.”

You can be sure that churches, even those that do not have such flagrant abuses and think that some other churches are nothing more than scams to separate the pious from their money, will fight this all the way to the US Supreme Court because they would not want to have their traditional privileges taken away. The question is whether the courts will rule that requiring churches to file Form 990 violates the ‘entanglement prong’ of the Lemon test that is frequently used by them in adjudicating Establishment Clause cases (especially with respect to financial matters) and thus rule that it is unconstitutional. The entanglement prong says that the government is prohibited from taking any action that might result in it getting excessively entangled with religion, similar to the argument the US Supreme Court made in 1970 in Walz v. Tax Commission of the City of New York, when they ruled that granting property tax exemptions to churches did not violate the establishment clause.

This will be a very interesting case to watch and one that, on the merits, FFRF should win in my opinion. It does not seem to be an entanglement problem since all it would require is that churches file a form that is made publicly available. However due to the traditional reluctance of courts to interfere with the long-standing financial privileges that churches enjoy, they may find a way to punt and leave things as they are, while making vague disapproving noises.