University of Notre Dame

Is Tax Law Different? Unconstitutional Conditions, Religious Organizations, and Taxation

July 14, 2023

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Lloyd Hitoshi Mayer*


In common with other charities, religious organizations enjoy significant benefits under federal tax law, including exemptions from income tax and the ability of donors to deduct their contributions for income, gift, and estate tax purposes.1 A subset of religious organizations consisting of “churches,” which include houses of worship for all sects, and certain church-related entities also enjoy unique and significant procedural advantages.2  These include not having to apply to the Internal Revenue Service (IRS) for recognition of tax exemption, not having to file annual information returns with the IRS, and being subject to IRS inquiries and examinations only if the IRS satisfies certain procedural requirements.3

But these benefits are not costless.  Also in common with other charities, religious organizations are prohibited from providing private inurement and private benefit, engaging in a significant amount of lobbying, intervening in political campaigns, promoting illegality, or acting contrary to fundamental public policy.4  Private inurement refers to distributing assets or earnings for the benefit of private individuals or entities who exercise substantial influence over the organization, including if the organization pays more than fair market value for services or goods or allows rent-free use of the organization’s property; private benefit refers to more than incidentally serving the private interests of any individual or noncharitable entity.5  Lobbying means attempting to influence legislation, and political campaign intervention means supporting or opposing the election of a candidate to public office.6  The illegality and fundamental public policy limitations, both drawn from charitable trust law deemed incorporated by Congress into the applicable federal tax statutes, apply if an organization engages in substantial activities that violate federal, state, or local statutes (usually criminal ones), or substantial activities contrary to fundamental (federal) public policy that therefore demonstrate a substantial noncharitable purpose.7

The IRS takes the position that these limitations apply with equal force to all tax-exempt charities, including religious organizations.8  Some religious organizations have challenged the application of the lobbying, political campaign intervention, illegality, and fundamental public policy limitations on religious liberty grounds, invoking the Free Exercise of Religion Clause of the First Amendment and, more recently, the Federal Religious Freedom Restoration Act (RFRA).9  To date, however, federal courts have rejected these challenges, concluding that they are permissible conditions on the tax benefits enjoyed by religious organizations.10

This Essay reconsiders this conclusion and the arguments in support of it.  One such argument is that Congress intended these tax benefits to support a charitable “program” and therefore, under general unconstitutional conditions principles articulated by the Supreme Court, Congress is permitted to refuse to provide those benefits to any organization that engages in activities inconsistent with being charitable.11  The problems with this argument include that the tax benefits only partially and indirectly fund the activities of charitable organizations,12 it is questionable whether some of the limitations—particularly the lobbying and political campaign intervention limitations13—are inconsistent with being charitable, and it assumes, perhaps incorrectly as Michael A. Helfand argues in his contribution to this Symposium, that general unconstitutional conditions principles should apply in the free exercise of religion context.14  I therefore set aside this argument to consider a different argument drawn from the relevant caselaw.

This alternate argument is that tax law is somehow different from other legal contexts for purposes of applying the unconstitutional conditions doctrine to religious organizations.  The consistent refusal of the courts to allow free exercise of religion–based exemptions from generally applicable federal tax laws suggests this may be the case.15  This difference could be viewed as a strand of the increasingly disfavored view sometimes referred to as “tax exceptionalism.”16  But upon further consideration, I argue that this difference instead fits within the more traditional compelling governmental interest and least restrictive means analysis codified in RFRA and that arguably applied in the Free Exercise of Religion Clause context before the Supreme Court’s decision in Employment Division v. Smith.17

More specifically, tax law is different because of its complex rules applicable to all individuals and entities relating to expenditures for lobbying, political campaign intervention, and illegal activity.  The complexity of these rules, and the risk that granting exemptions from them for any reason would undermine their uniform and consistent application, support the conclusion that the government has a compelling interest in not allowing exemptions, and that the existing limitations imposed on tax-exempt charities, including religious organizations, are the least restrictive means to do so.  As a result, constitutional and RFRA free exercise of religion rights do not require exemptions for religious organizations from these existing limitations even when such organizations are motivated by their religious beliefs to engage in the limited activities.  Furthermore, while this argument does not apply to the contrary to a fundamental public policy limitation, the Supreme Court has correctly concluded that in the instances where there is a fundamental public policy, ensuring that tax-supported charities do not undermine that policy is also a compelling governmental interest and prohibiting them from doing so is the least restrictive means of furthering that interest.18

©2023 Lloyd Hitoshi Mayer.  Individuals and nonprofit institutions may reproduce and distribute copies of this Essay in any format at or below cost, for educational purposes, so long as each copy identifies the author, provides a citation to the Notre Dame Law Review
Reflection, and includes this provision in the copyright notice.

*Professor, Notre Dame Law School.

1See, e.g., I.R.C. §§ 170(c)(2) (2018) (income tax deduction), 501(a), (c) (income tax exemption), 2055(a)(2) (estate tax deduction), 2106(a)(2)(A)(ii) (nonresident, noncitizen estate tax deduction), 2522(a)(2), (b)(2) (gift tax deduction).

2For detailed discussions of the federal tax law definition of “church” and certain church-related entities, see generally Wendy Gerzog Shaller, Churches and Their Enviable Tax Status, 51 U. Pitt. L. Rev. 345, 350–55 (1990); Charles M. Whelan, “Church” in the Internal Revenue Code: The Definitional Problems, 45 Fordham L. Rev. 885 (1977).

3I.R.C. §§ 508(c)(1)(A) (2018) (application exception), 6033(a)(3)(A)(i) (annual return exception), 7611 (restrictions on church tax inquiries and examinations).

4Id. §§ 170(c)(2)(C), (D), 501(c)(3), 2055(a)(2), 2106(a)(2)(ii), 2522(a)(2), (b)(2) (all prohibiting private inurement, significant lobbying, and political campaign intervention); Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) (1990) (prohibiting private benefit); Rev. Rul. 75-384, 1975-2 C.B. 204 (prohibiting promoting illegality); Rev. Rul. 80-278, 1980-2 C.B. 175 (prohibiting activities contrary to clearly defined and established public policy).

5See Treas. Reg. § 1.501(c)(3)-1(c)(2), (d)(1)(ii) (1990); IRSOverview of
Inurement‌/Private Benefit Issues in IRC 501(c)(3)
in Exempt Organizations Continuing Professional Education Technical Instruction Program for Fiscal Year 1990 (1989), https://‌ [].

6See Treas. Reg. § 1.501(c)(3)-1(c)(3)(ii), (iii) (1990); Judith E. Kindell & John Francis ReillyLobbying Issues, in Exempt Organizations Technical Instruction Program for FY 1997, at 261, 273 (1996), https://‌‌/pub‌/irs-tege‌/eotopicp97.pdf []; Judith E. Kindell & John Francis ReillyElection Year Issues, in Exempt Organizations Technical Instruction Program for FY 2002, at 335, 339 (2001), https://‌‌/pub‌/irs-tege‌/eotopici02.pdf [].

7See Jean Wright & Jay H. RotzIllegality and Public Policy Considerations, in Exempt Organizations Technical Instruction Program for FY 1994 (1993), https://‌‌/pub‌/irs-tege‌/eotopicl94.pdf []; IRSActivities That Are Illegal or Contrary to Public Policy, in Exempt Organizations Technical Instruction Program for FY 1985 (1984), http://‌‌/pub‌/irs-tege‌/eotopicj85.pdf [].

8IRS, Tax Guide for Churches & Religious Organizations 4–7 (2015), https://‌‌/pub‌/irs-pdf‌/p1828.pdf [].

9See infra notes 25, 31, 43, and 44 and accompanying text.

10See infra notes 27, 32, 43, and 45 and accompanying text.

11See infra note 51 and accompanying text (citing Agency for Int’l Dev. v. All. for Open Soc’y Int’l, Inc., 570 U.S. 205 (2013)).

12See infra note 52 and accompanying text.

13See, e.g., Johnny Rex Buckles, The Penalty of Liberty, 25 Tex. Rev. L. & Pol. 159, 165–78 (2020) (reviewing Philip Hamburger, Liberal Suppression: Section 501(c)(3) and the Taxation of Speech (2018)) (summarizing and critiquing Philip Hamburger’s argument that certain political forces led to the political speech limitations); Andrew Grossman & Alexander Lyman Reid, And the Walls Came Tumbling Down: The Liberation of Civil SocietyFederalist Soc’y (Nov. 17, 2022), https://‌‌/commentary‌/fedsoc-blog‌/and-the-walls-came-tumbling-down-the-liberation-of-civil-society [] (arguing that questionable political motivations led to the political speech limitations).

14See Michael A. Helfand, There Are No Unconstitutional Conditions on Free Exercise, 98 Notre Dame L. Rev. Reflection (Special Issue) S50, S51 (2023).

15See infra Parts I & II.

16See infra note 69 and accompanying text.

17See infra notes 54-55 and accompanying text.

18See infra note 45 and accompanying text.