A.   EXEMPT STATUS.

1.   Unlike all other §501(c)(3) organizations, a church is mandatorily presumed (under IRC §508(c)(1)):

a.   To qualify for exemption under §501(c)(3); and

b.   Not to be a private foundation. See §509(a)(1) and also §170(b)(1)(a)(i) relating to deductibility of donations.

2.   Which means that an ecclesiastical organization does not need to apply for a recognition of exempt status on Form 1023. And many do not apply. When might a church want to apply anyway? If it is part of a lesser known denomination or is an independent church and/or needs to demonstrate proof of exemption for some other regulatory purpose.

3.   Also note that the special election under §501(h) relating to lobbying expenditures of §501(c)(3) organizations is expressly inapplicable to churches, their integrated auxiliaries and any member of an affiliated group of organizations which includes a church.   See §501(h)(5).

B.   REPORTING AND EXAMINATION.

1.   Churches are exempt from filing Form 990. See IRC §6033(a)(2)(A).

2.   However, churches are not exempt from either the unrelated business income tax (§511) or the reporting requirements relating to UBIT (Form 990-T).

3.   Church audits are subject to special rules of "reasonable belief" on the part of the IRS and advance notice requirements. See IRC §7611.

4.   Unlike other organizations exempt from tax under §501(a), churches, their integrated auxiliaries, conventions or associations of churches need not notify the IRS in the event of liquidation. See IRC §6043(b)(1).

C.   EMPLOYEE WELFARE PLANS.

1.   The nondiscrimination requirements relating to group term life insurance plans do not apply to a "church plan" maintained for church employees. IRC §79(d)(7).

2.   A church plan is also exempt from the continuation requirements applicable to a group health plan. IRC §4980B(d)(3).

D.   EMPLOYEE RETIREMENT PLANS

1.   Church plans are exempt from ERISA.

a.   Church plans are exempt from giving prescribed notices to employees, the preparation and distribution of a Summary Plan Description, certain filings with the federal Dept. of Labor, preparing annual reports to employees, and filing Form 5500.

b.   A church plan is subject to so-called "pre-ERISA" nondiscrimination standards, that is, standards in effect for retirement plans prior to September 2, 1974 (the "70% or 70/80% rule") as modified in 1996.

c.   Church plan status is determined by the status of the employer, not the plan participants. Thus, if a minister participates in a retirement plan sponsored by a non-church employer, the minister's participation will not make the plan a church plan. Similarly, a church plan may cover non-ministerial employees.

2.   Definition of a church plan.

a.   A church plan is defined at IRC §414(e), and includes plans maintained by organizations "controlled by or associated with" a church (church auxiliaries, etc.), as well as religious orders which carry out the functions of a church.

b.   A complicating factor is that the tax code uses two distinct definitions for church with respect to employment and retirement plans; one under IRC §414(e) defining a church plan, and the other under IRC §3121(w), which defines wages for employment tax purposes. As an example, a theological seminary is treated the same as a church for minister's housing allowance purposes under IRC §107 and is arguably a church under IRC §414(e). However, the definition of church under IRC §3121(w) includes only elementary and secondary schools, not colleges or seminaries, and this is the definition which controls for purposes of IRC §457 deferred compensation plans.

3.   Qualified plans under IRC §401(a).

a.   A church plan is exempt from normal minimum participation standards, minimum vesting standards, and minimum funding standards. See IRC §410(c)(2)(B), 411(e)(2)(B) and 412(h)(4).

b.   A church plan also has the benefit of limited exemptions with respect to other pension requirements, such as partial exemption from §401(a)(9), simplified rules for handling qualified domestic relations orders under IRC §414(p)(11), relaxed standards for defining a highly compensated employee under IRC §414(q)(9), etc. [This is not an exhaustive list of exemptions.]

c.   Also, the tax on prohibited transactions concerning qualified plans does not apply to a church plan. IRC §4975(g)(3).

4.   §403(b) Annuity Programs.

a.   §403(b) plans, which may be adopted by any §501(c)(3) organization, are very popular with churches. But even here, churches are exceptional. For example, the nondiscrimination provisions of §403(b)(12) do not apply.

b.   There are also a number of specialized or relaxed rules pertaining to churches in computing the limit on employee contributions and catch-up contributions. See IRC §402(g)(7) and §415(c)(7).

5.   Section 457 deferred compensation plans which can be maintained by other tax exempt organizations cannot be maintained by a church or church-controlled organization, See IRC §457(e)(13).

E.   CHURCH DEFINITION ISSUES.

1.   Because of First Amendment religious freedom concerns, Congress has never passed any statute anywhere which defines what a church is (beyond saying "a church or convention or association of churches", which is like saying that the definition of a duck is "one or more ducks").

2.   The IRS, which apparently is unconstrained by the First Amendment, has nonetheless ventured where angels fear to tread, and has established criteria which, in its view, define a church as follows:

a.   A distinct legal existence
b.   A recognized creed and form of worship
c.   A definite and distinct ecclesiastical government
d.   A formal code of doctrine and discipline
e.   A distinct religious history
f.   A membership not associated with any other church or denomination
g.   An organization of ordained ministers
h.   Ordained ministers selected after completing prescribed studies
i.   A literature of its own
j.   Established places of worship
k.   Regular congregations
l.   Regular religious services
m.   Sunday schools for religious instruction of the young
n.   Schools for the preparation of its ministers.


3.   The Tax Court, which is apparently unconstrained by the IRS administrative criteria, has adopted its own view, consisting of most of the same criteria compacted into 7 or 8 points. See, e.g., Pusch v. Commissioner, 39 T.C.M. 838 (1980) or Chapman v. Commissioner 48 T.C. 358 (1967).

4.   What it all means is this: there is plenty of room for argument. Unless you have a clear case of a sham church (members and ministers are one and the same; members and/or ministers are all related; members 'donate' all of their income to the church, etc.), all of the definitional criteria can be argued, and indeed, bent, in favor of the church.

a.   Take the "Sunday School" criterion, for example. Must the religious instruction of children occur on Sunday, as opposed to Friday or Saturday or Tuesday? Of course not. Must it occur at the same time every week? No. Must it be undertaken with formal structure? Not necessarily. Does the organization teach kids at all? If so, that's good enough.

b.   Or take the "schools for ministers" criterion. Does a church have to have its own seminary (try to satisfy that expectation for an independent church)? No. Does the church train its ministers (whether by one on one mentoring or by attending 3rd party seminars)? If so, that's good enough.

c.   The other criteria can all be approached similarly.

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