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Should Newly Started Denominations Wait to Get 501(c)(3) Status?
By Raul Rivera
A view that primarily advocates for the reliance on IRC §508(c) to achieve tax-exempt status for churches concerning federal income tax as they wait for the headquarters to obtain group status may leave many churches in a bind as they wait. While we recognize that this approach has some validity, it is important to acknowledge that the broader implications extend beyond federal income tax considerations for the church.
Firstly, many states require churches to possess official 501(c)(3) status or be officially included in a group exemption to be eligible for exemptions such as:
- Sales Tax,
- Property Tax,
- Franchise Tax,
- Bulk rate postage reductions.
Secondly, not having official 501(c)(3) status places the burden of proof regarding the deductibility of donations on the donor, as underscored in the case of Branch Ministries v. Rossotti, 211 F.3d 137, 139 (D.C. Cir. 2000).
Expanding on this legal backdrop, the Tax Court has provided clear guidance on the matter. It stated that while donors to churches claiming tax-exempt status under Section 508(c) are entitled to deduct their contributions, they must be prepared to substantiate the church's compliance with Section 501(c)(3) qualifications if audited. Specifically, the court observed:
A person who contributes to a church claiming tax-exempt status pursuant to Section 508(c) may deduct that contribution from his or her income, but if the contributor is audited, he or she has the burden of establishing that the church, in fact, meets the qualifications of Section 501(c)(3) organization. In other words, because the church has not previously been determined by the IRS to have met the Section 501(c)(3) criteria, there is no presumption that the church is tax-exempt under Section 501(c)(3).
To address these concerns and provide greater assurance to donors, it is wise for churches to actively pursue official 501(c)(3) status as early as possible.
It is also important to acknowledge the current state of affairs at the IRS, which, since 6/17/2020, has halted the acceptance of new applications for group exemptions. The pause is attributed to the anticipation of the publication of the final revenue procedure. The catch? There's no clear timeline on when this crucial guidance will be released, leaving organizations uncertain about the fate of group exemptions. The burning question remains: Will the IRS resume processing group exemptions at all? Unfortunately, the answer is elusive, adding a layer of complexity to the landscape for organizations eagerly awaiting clarity on their tax-exempt status.
Given this situation, it is foreseeable that several more years may elapse before the IRS resumes accepting new applications for group exemptions. It is also unclear whether churches will find group exemptions appealing under the forthcoming regulations. In light of these circumstances, many churches in similar situations may find it most practical and prudent to pursue official 501(c)(3) status. If it wishes, it will not prevent the church from joining a group in the future.
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Such a proactive approach not only offers assurance to donors regarding the deductibility of their contributions but also ensures that the church is well-positioned for any future developments in tax regulations.
In conclusion, I believe that churches should take every available measure to safeguard their donors' interests by pursuing 501(c)(3) status early on. While letters and documentation are undoubtedly valuable, they may not give donors the assurance that the official 501(c)(3) status can offer.
Take the first step towards assurance, compliance, and peace of mind. Don't wait – secure your church's 501(c)(3) status today. Your proactive approach protects donors and positions your church for a resilient future in the ever-changing landscape of tax regulations.
Explore the path to 501(c)(3) status and ensure your church's stability. Have Questions or Need Assistance? We are here to help. Call us at (
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