Challenges to tax-exempt status

MARY REICHARD, HOST: Coming up next on The World and Everything in It: taxes, exemptions, and religious institutions.

MYRNA BROWN, HOST: Churches and religiously-affiliated organizations that meet IRS requirements are considered automatically tax exempt. That’s because under American tax law, charities don’t pay income and property taxes. The First Amendment says Congress shall make no law establishing religion, nor prohibiting its free exercise. In other words, freedom from state interference one way or another.

But some people question that, and are bringing court challenges.

Here now to explain is WORLD’s religious liberty beat reporter, Steve West.

REICHARD: Hey Steve, good morning to you!

STEVE WEST: Good morning to you!

REICHARD: Well, in a recent newsletter, Steve, you highlighted two cases involving religious organizations: a Christian school and Catholic Charities. Each one’s tax exempt status is being questioned. So let’s start with the Christian school in Baltimore called Concordia Preparatory Academy. What's going on there?

WEST: Well, a mother filed a lawsuit making serious allegations about her daughter’s treatment at Concordia. She says her daughter was sexually harassed, bullied, assaulted in school and the Title IX should hold the school accountable.

Now, those allegations are still to be addressed by the court and we’re not addressed here, but the trial court did consider whether Title IX should apply to the school. This school doesn’t receive federal money, unless you count the benefit it gained from being exempt from federal income tax, and the trial court here did find that. Thankfully, an appeals court ruled that the Christian school’s tax exempt status is not federal financial assistance, so Title IX wouldn’t apply.

But here’s the threat posed by this kind of attack on tax exempt status: If Title IX applies, then the federal government can not only investigate, but insist on compliance with its interpretation of Title IX, meaning things like letting biological males who identify as females to use female students restrooms, showers, and locker rooms.

REICHARD: Well, what options would the school have in such circumstances?

WEST: The school could opt out of its tax-exempt status and remove itself from Title IX oversight, but at a significant cost. And IRS could accomplish the same result by conditioning tax-exempt status on compliance with Title IX—though it has not done that yet.

REICHARD: What cost are we talking about, if the school had to forego tax-exempt status to avoid government mandates?

WEST: It would be a hard blow to Christian schools. Donors could no longer obtain a tax deduction for contributions to the school, and the school would be taxed on income. States may also withdraw their income tax exemption, and municipalities might also insist that property taxes be paid. That’s enough to shut down schools that often operate on a combination of tuition and donations and who now would be required to pay taxes. That’s a lot.

REICHARD: So many operate on a shoe-string budget as it is. Well, the other case you’re following involves Catholic Charities, the social service arm of the Roman Catholic church, and the state of Wisconsin.

WEST: Well, in this case, it’s not the federal income tax exemption at issue. Rather, it’s an exemption from the state’s unemployment tax. Employers pay the unemployment tax to fund state assistance to those out of work and looking for work. Although the various Catholic ministries under the Catholic Charities umbrella had been deemed exempt from the tax for years, a state agency went after them. And a one-vote majority of the Wisconsin Supreme Court agreed with the state, ruling that the activities Catholic Charities engaged in—things like vocational training, food services, and assistance to the aging and at-risk—weren’t different from those of secular agencies, so they weren’t religious. And if they aren’t primarily religious, the groups are not tax-exempt.

Three justices strongly dissented, accusing the court of religious discrimination and of substituting their own judgment for what the church deemed religious.

The case is being appealed to the U.S. Supreme Court. We’ll see if they take it.

REICHARD: I’m trying to recall…has the Supreme Court ever taken a case related to tax-exempt status?

WEST: Yes, but it’s been decades. In 1970, a property owner in New York City filed a lawsuit to stop the city from granting tax exemptions for property only used for religious purposes. The property owner claimed these exemptions unfairly benefited religious organizations and violated the First Amendment’s ban on government-sponsored religion. In a 7-1 ruling, the court rejected that argument. That’s good precedent, but it only goes so far. The Wisconsin court claims it can define religion. That’s something else.

Churches do have to be aware of an amendment to the tax code in 1954 called the Johnson Amendment, which says that 501(c)(3) nonprofit organizations cannot participate in “any political campaign on behalf of (or in opposition to) any candidate for public office.” Some disagree with that limitation, and the IRS may not always strictly enforce it, but it’s something to be aware of.

REICHARD: You know, Steve, tax-exempt status may seem like a given for many Americans, but cases like these serve as a reminder that it’s a stewardship…something our forefathers established and that it’s our responsibility to maintain for the common good. So where did it come from?

WEST: Churches and other religious, charitable, and educational entities have long enjoyed tax-exempt status. In fact, it goes back to the Roman Empire in the 4th century when Constantine converted to Christianity. One reason it’s said to exist is because churches and charitable groups contribute to society in so many beneficial ways, relieving the government of having to do so. That’s hard to quantify, but real. It also provides churches and other places of worship a greater autonomy and freedom from governmental oversight—something the First Amendment commends. But as religious observance wanes, and as people encounter fewer other people who are religious, their appreciation for religion wanes. That could impact more than a tax exemption. That could be a threat to religious liberty.

If the Supreme Court takes the Catholic Charities case, it offers the court an opportunity to say clearly how important these institutions—churches, synagogues, and other religious organizations—are to society. The law has always protected them. It’s also a reminder to churches, as you have suggested, that we have to steward this protected status by serving our communities and not engaging in partisan politics.

REICHARD: Steve West is a legal reporter for WORLD, and you can keep up with stories like these in his weekly Liberties newsletter. We’ve included a link in today’s show notes. Thanks Steve!

WEST: Thank you, Mary.

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