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Tither Denied Deduction Because Church was not 501(c)(3)

By Raul Rivera

In the case of Taylor v. Commissioner, Mr. Taylor was informed that his tax deductions were denied by the IRS, despite his legal counsel explaining that a church did not need 501(c)(3) status in order for him to get a tax write-off. He had given $8,647.00 to his church, only to discover later that these donations were not tax deductible. He felt that the IRS was wrong to deny his deductions because he had given them to a church (even though it was a church without 501(c)(3) status).

In his argument to the court, he stated that section 508(c)(1)(A) declares that churches are automatically exempt and that they do not have to comply with all of the requirements of section 501(c)(3). Therefore, he should be able to give to his church and still get a tax deduction.

The court disagreed.

A common misunderstanding amongst churches

The basis of Mr. Taylor's argument was that his church is automatically exempt and not required to meet the requirements of section 501(c)(3). 

This is an argument that has circulated the Internet and has created terrible repercussions. In this case, the court made it clear that in order for a person to get a tax deduction for giving to a church, the organization must meet the requirements of section 501(c)(3).

Discover How To Become 501(c)(3) Approved

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Furthermore, the court in the Taylor case maintained that nothing in the law "relieves a church from having to meet the requirements of section 501(c)(3)." The court also held that in situations in which the Commissioner determines that an organization is not entitled to an exemption as a church, the organization’s contributors must show that it has a right to an exemption under section 501(c)(3) if the contributors believe they are entitled to a deduction for their contributions. 

Since Mr. Taylor was not able to prove that his church had 501(c)(3) status his donations were not tax deductible.

(Recommended reading: “Does a Church Need to be 501(c)(3) Approved?”)

Burden of proof lies on donors, not the church 

A similar conclusion occurred in the Branch Ministries case.

Branch Ministries, Inc., which operated as the Church at Pierce Creek, sued the IRS because it lost its 501(c)(3) status due to noncompliance issues. It was concerned that the tithes and offerings of its donors would not be tax deductible. 

The Branch Ministries court concluded that when a church receives official 501(c)(3) status, there is a presumption that "one who contributes to the organization can deduct the amount of the contribution from his or her taxable income." The court said that if the IRS audits that person's tax return, the donations shall be tax deductible.

However, the court in this case also said a person who contributes to a church that does not have 501(c)(3) status "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 a . . . 501(c)(3) organization . . ." in order to get a tax deduction.

(Recommended reading: "How to Start a Church the Right Way")

Imagine having to prove you deserve the deduction

Under current settled law, a church that does not have 501(c)(3) status is allowed to receive tithes and offerings, and give tax-deductible contribution receipts to its donors. However, the donors must be aware that there is no 100% guarantee that the IRS will honor the receipt.

The reason it is not guaranteed is because section 170(c) states that the organization must operate in a manner that is consistent with the requirements of section 501(c)(3). 

Hence, if a church does not have official 501(c)(3) status, the donor must bear the burden of proving that his/her donation is tax deductible by showing that the church meets all of the requirements of section 501(c)(3).

(Recommended reading: “What Every Minister Needs to Know About Ordination”)

Is it time to take the next step?

While my giving to a church is not motivated by the tax deduction, I try to steward the money in my possession to the best of my ability. Anytime I am able to maximize my stewardship, I do it. 

I think many will agree that good stewardship seeks to maximize the impact of the finances entrusted. Depending on your tax bracket, a tax deduction can save you up to 33%. 

I highly recommend that every pastor and leader take a step of due diligence and secure the 501(c)(3) status of his/her church. By doing so, it removes the possibility that a member of your church (who gets audited) be denied a tax deduction because the church failed to secure and maintain its 501(c)(3).

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If you have any questions regarding church compliance and the steps that are necessary for your church to take, I invite you to call our office at 877-494-4655.

Court case citations:

  • Taylor v. Commissioner, No. 14021-98, 2000 Tax Ct. Memo LEXIS 17 (U.S. T.C. Jan. 18, 2000)
  • Branch Ministries, Inc. v. Rossotti, 40 F. Supp. 2d 15 (D.D.C. 1999)

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