Separation of Church and State Law

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The Internal Revenue Code § 501(c)(3) Exemption-Definition-Control Scheme

Jerald Finney
Copyright © September, 2009
Jerald Finney teaches on “The Internal Revenue Code 501(c)(3) Exemption-Definition-Control Scheme”

Left click the above link to hear Jerald Finney teaching on this subject. Right click the link and then left click “Save link as…” to download. The teaching is preceded by a hymn sang by Rocky Otwell, a great man of God, and prayer. The teaching is approximately 25 minutes, not including the song.

“And the lord commended the unjust steward, because he had done wisely: for the children of this world are in their generation wiser than the children of light” (Lu. 16.8b).

It is amazing to see that most of the fundamental “Bible believing” pastors and Christians that I know believe that something is wrong with a church who refuses to incorporate and get Internal Revenue Code (“IRC”) §501(c)(3) (“501(c)(3)”) status. Biblical principles are against incorporation and 501(c)(3) for churches, and civil law does not purport to require that churches get either corporate or 501(c)(3) status. In fact, the First Amendment to the United States Constitution, laws, and regulations of the federal government as well as the constitutions, laws, and regulations of the states guarantee that churches may remain free under God without persecution. This article addresses church 501(c)(3) status.

501(c)(3) invites churches to seek a tax exemption from civil government, even though the First Amendment already has erected a “high and impregnable wall” of separation between church and state which forbids civil government from making any law, including any taxing law, respecting a New Testament Church.

The more I study the subject of “separation of church and state,” the more I realize that secular scholars have more insight into the issue than do most of those, including pastors, who call themselves fundamental Bible believers.  Both the Internal Revenue Service and secular scholars know that churches are not required by law to be incorporated and get 501(c)(3) status and that 501(c)(3), as applied to churches, is an exemption-definition-control scheme which is implemented simply by invitation. In this article I give a brief review of the 501(c)(3)  exemption-control-definition scheme and insights from the law, from the Internal Revenue Service, and from legal scholars.

To qualify for tax exempt status under 501(c)(3) religious organizations must meet the following requirements, i.e. abide by the following rules:

1. Must be organized and operated exclusively for religious, educational, scientific, or other charitable purposes,
2. net earnings must not inure to the benefit of any private individual or shareholder,
3. no substantial part of its activity may be attempting to influence legislation,
4. the organization may not intervene in political activity, and
5. the organization’s purposes and activities may not be illegal or violate fundamental public policy.

The above listed rules, except for rule number 5, are stated in 501(c)(3). The original 501(c)(3) law had no accompanying rules, but four of the five were added by legislative enactment, and signed into law by the president. The last one, “may not violate fundamental public policy,”is not stated in the law; that is, it is not listed as a requirement in § 501(c)(3). This requirement was unilaterally implemented by the Internal Revenue Service and upheld as law by the United States Supreme Court in the illogical Bob Jones University, 461 U.S. 574,  (1983) case. The federal government may add additional requirements to the law in the future.

Under these rules, the state controls, defines, and instructs a corporate 501(c)(3) religious organization to a large degree. Control and definition go hand in hand. The federal government wants to control churches, and does so through 501(c)(3).

A study of relevant law, as well as IRS regulations and legal scholarship reveals that 501(c)(3) is voluntary and that it is a control-definition scheme.

IRC § 508(a),(c), in line with the First Amendment, says churches are excepted from obtaining § 501(c)(3) tax exempt status. In other words, churches are non-taxable; and, therefore, churches are an exception to the civil government requirement that certain organizations file for 501(c)(3) tax exempt status. Thus, the law recognizes that a New Testament Church is non-taxable under the First Amendment to the United States Constitution.

The IRS doesn’t hide the fact that churches are non-taxable under the First Amendment and IRC § 508(a),(c) and that the exemption-definition-control scheme is implemented by invitation. The IRS proclaims in IRS Publication 1828 (2007):

“Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS because such recognition assures church leaders, members, and contributors that the church is recognized as exempt and qualifies for related tax benefits…. Unlike churches, religious organizations that wish to be tax exempt generally must apply to the IRS for tax-exempt status unless their gross receipts do not normally exceed $5,000 annually.”

In the exemption and restriction scheme, the government extends an invitation to incorporated “religious organizations” to receive a tax exemption in return for allowing the government to interpret and categorize their expression and activities.

Civil government not only knows what it is doing when encouraging churches to incorporate and seek 501(C)(3) status; it also blatantly belittles the fact that the IRC provisions exempting churches from taxation and providing for certain controls over corporate 501(c)(3) “churches” are contrary to the First Amendment. The federal government flaunts the lack of knowledge and understanding of the average Christian as to both spiritual and earthly matters. IRS Publication 1828 states:

Congress has enacted special tax laws applicable to churches, religious organizations, and ministers in recognition of their unique status in American society and of their rights guaranteed by the First Amendment of the Constitution of the United States.” [Emphasis mine.] …

A comparison of the above statements of the IRS with the words of the religion clause of the First Amendment reveals the fact that the IRS flaunts the fact that Congress has enacted laws “respecting the establishment of religion and preventing the free exercise thereof.” The First Amendment religion clause says:

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof….”  [Emphasis mine.]

Some legal scholars who have studied the issue know what the civil government is up to with the exemption-definition-control scheme. For example, Richard Garnett, assistant professor at Notre Dame Law School, wrote in A Quiet Faith? Taxes, Politics, and the Privatization of Religion, published in Volume 42 of B.C. L. Rev. starting on page 771 (this is a paraphrase of selected portions of the article with citations omitted):

  1. “The imposition of a tax is, after all, an assertion of power and an ‘application of force.’ The same is true of the decision not to tax, or to exempt from taxation. A power is no less real that is exercised selectively or indulged with restraint. The decision to exempt certain associations, persons, activities, or things from taxation presupposes and communicates the ability to do otherwise; definitional lines drawn to mark the boundaries of such exemptions implicitly assert the power to draw them differently…. My claim here is that the decision to exempt religious associations from federal taxation may reasonably be regarded as an assertion of power—the power, perhaps, to ‘destroy’—over these communities, their activities, and their expression….
  2. “In other words, maybe the power to tax churches, to exempt them from taxation, and to attach conditions to such exemptions really does as Chief Justice Marshall quipped, ‘involve the power to destroy’ religion. Neither heavy-handed repression nor even overt hostility toward faith is required, but merely the subtly didactic power of the law. Government need only express and enforce its own view of the nature of religion—i.e., that it is a private matter—and of its proper place—i.e., in the private sphere, not in politics—and religious believers and associations may yield to the temptation to embrace, and to incorporate, this view themselves….
  3. “It is an exemption-and-restriction scheme in which the government extends an invitation to ‘religious organizations’ to receive a tax exemption in return for allowing the government to interpret and categorize the expression and activities of the church.  There is the danger that, having made their own the government’s view of religion’s place, now-humbled and no-longer-prophetic religious associations will retreat with their witness to the ‘private’ sphere where—they now agree—they belong, leaving persons to face the state alone in the hollowed-out remains of the public square….
  4. “Still it strikes me that the Internal Revenue Code Section 501(c)(3)’s exemption-and-restriction scheme is noteworthy in the extent to which it invites government to label as ‘propaganda’ or ‘campaign[ing]’ what are, for religious believers and communities, expressions of their faith and responses to their calling. It is far from clear that this is an appropriate task for the liberal state….
    “My concern … is that the premises of the conditional exemption scheme, the labeling it invites, and the monitoring of distinctions it creates will tame religion by saying what it is and identifying what it is not, tempt religion to revise its conception of itself and of its mission, and convince religious consciousness to internalize the state’s own judgment that faith simply does not belong in politics….
  5. “[The tax exemption] is simply the government’s way of paying churches not to talk about certain things, enforce certain beliefs, or engage in certain actions—in other words, it’s the government’s way of privatizing the church….
  6. “By determining for its own purposes the meaning of religious communities’ statements and activities, and by enforcing the distinctions it draws, government subtly reshapes religious consciousness itself. In other words, by telling religion what it may say, really is saying, or will be deemed to have said, and by telling faith where it belongs, government molds religion’s own sense of what it is….
  7. “[Certain pronouncements] led my colleague, Professor Bradley, to suggest in another context that ‘[t]he Court is now clearly committed to articulating and enforcing a normative scheme of ‘private religion.’ Indeed, he argues powerfully that the Court’s post-Everson v. Board of Education cases ‘are most profitably understood as judicial attempts to move religion into the realm of subjective preference by eliminating religious consciousness.’ … [T]he Court turned to privatization ‘as the ‘final solution’ to the problem of religious faction.’ Its ambition—not merely the unintended effect of its decisions—is not only to confine the potentially subversive messages of religion to a ‘nonpublic ghetto,’ but also to revise and privatize the messages themselves. Having acquiesced to judicial declarations that it is a private matter, and accepted that its authority is entirely subjective, religious consciousness is unable to resist the conclusion that its claims to public truth are ‘implausible nonsense,’ and therefore cannot help but concede the field of public life and morality to government….
  8. “[T]his privatization of religion is not simply its institutional disestablishment or an entirely appropriate respect on government’s part for individual freedom of conscience and autonomy of religion institutions. Nor is the claim only that the exemption privatizes religion by deterring political activism and silencing political advocacy by religious believers and communities. It is, instead, that the exemption scheme and its administration subtly re-form religion’s conception of itself. Government evaluates and characterizes what churches say and do, and decides both what it will recognize as religious and what it will label as political….
  9. “[P]rivatization of the church is its remaking by government and its transformation from a comprehensive and demanding account of the world to a therapeutic ‘cacoon wrapped around the individual.’ It is a state-sponsored change in religious believers’ own notions of what their faith means and what it requires…. The government tells faith communities that religion is a private matter, and eventually, they come to believe it.
  10. “And finally, the retreat of religious associations to the private sphere suggests an ill-founded confidence that government will not follow. But it will. The privatization of religion is a one-way ‘ratchet that stems the flow of religious current into the public sphere, but does not slow the incursion of political norms into the private realm.’”

Michael Hatfield, Associate Professor of Law at Texas Tech University School of Law makes some important points in his article published in Volume 20 of Notre Dame Journal of Ethics and Public Policy beginning on page 125. (I suggest that the serious student get the article and study it for himself.):

  1. “There is an assumption among contemporary scholars [&, I might add, among Pastors and other Christians] that a church doing without tax exemption is ‘fundamentally repugnant,’ so there is no need for substantive analysis of the tax issues involved if a church becomes taxable. Instead of analyzing the tax problem, the tax problem tends to be used to introduce ‘bigger’ ideas about the Constitution, religion, and politics. In the current scholarship, the context of the issue – religion and politics – tends to become substituted for the substance: federal income taxation. The critical issue, however, is federal income taxation.”
  2. Professor Hatfield states that he uses the terms ‘Taxable Church’ and ‘Tax Exempt Church’ to make it clear that churches need not be Section 501(c)(3) organizations.…
  3. Professor Hatfield states, “A tax without a cost has no meaning.… Because of the unique treatment churches receive under the Internal Revenue Code, the impact of the revocation is likely to be more symbolic than substantial.”
  4. He states: “Churches ought not make guesses about the value of their assets or their moral convictions. There is no reason to believe that most American churches are eager to claim an express political identity, though there are indications that, more and more, religious and political identities in America are being fused. For churches with a clear moral conviction to campaign, the implication of the Asset Management Analysis is clear: crunch the numbers. Determine the cost of losing tax exemption. Decide if that cost is worth campaigning. Do not be distracted by imaginations as to what tax exemption is about. It is about taxes. It is about money. It is not about the ‘right’ and ‘wrong’ way to be a church, which is a religious issue and not a tax issue. It should be – and presumably is – the religious convictions and not the tax worries of churches that keep them out of politics.”

Thus, a New Testament Church (“NTC”) – that is, a church operating according to New Testament principles – is non-taxable, because even if the term “taxable” is used, civil government cannot, according to its own IRS law, tax a NTC because (1) all her income is from gifts (See Section 102 of the IRS Code; Professor Hatfield points this out in his article), and (2) a NTC spends every dime given in tithes and offerings for church ministries.  Since gifts are not net income, what is left after subtracting expenses from net income? Even a business with no net income pays no taxes. And an individual or a business has to make a certain amount of money before paying any taxes.

How can it be that “Bible believing” Christians have gotten the churches of America so far astray from the principles for churches laid down by God in His Word? Are pastors and Christians ignorant or are they willfully ignorant? We cannot hope to straighten America out unless we first straighten our churches out, but it seems that more Christians are concerned about the state of America than they are about the state of the churches in America. God’s people and God’s churches, as well as America, are being destroyed because of a lack of knowledge.

Note. The sodomites understand what 501(c)(3) for churches means, yet pastors and other Christians continue to ignore the issue because they, like lepers to whom the leprosy has spread to the head, have ‘their understanding darkened, being alienated from the life of God through the ignorance that is in them, because of the blindness of their heart: Who being past feeling have given themselves over to lasciciousness, to work all uncleanness with greediness” (Ephesians 4.18-19).  Here is a link to a sodomite article on the issue: Equality is what we’re all about in Maine” (Click link to go to article).  

END


6 Comments

  1. Dear pastor,

    Please forgive me for waiting so long to reply to your comments. The Lord’s work keeps my very busy. I reply to your comments in love. If you could hear me, instead of just reading the words, you would hear the following soft, but non-compromising responses. Full and complete answers to your questions can be found in my books which are listed on the “Books” page of churchandstatelaw.com and also on the articles and audio teachings on the “Separation of Church and State Law” blog (jeraldfinney.wordpress.com).

    Your first mistake was consulting businessmen who obviously equate a church with a business. The two are entirely different entities. Incorporating a church clearly violates many biblical principles. Please permit me to briefly explain the issues from both a biblical and legal standpoint.

    The church was ordained by God to be run under His guidelines and rules, not those of man. Our Lord said, “And I say unto thee, That thou art Peter, and upon this rock I will build my church; and the gates of hell shall not prevail against it” (Mt. 16.18). The epistles of Paul develop the doctrine of the church. “In his letters to seven Gentile churches (in Rome, Corinth, Galatia, Ephesus, Philippi, Colosse, and Thessalonica), the church, the ‘mystery which from the beginning of the world hath been hid in God’ (Eph. 3.9), is fully revealed, and fully instructed as to her unique place in the counsels and purposes of God. Through [Paul] alone we know that the church is not an organization, but an organism, the body of Christ; instinct with His life, and heavenly in calling, promise and destiny. Through him alone we know the nature, purpose, and form of organization of local churches and the right conduct of such gatherings.”

    It is clear from a study of God’s Word that he does not want a church work with or under any entity other than the Lord Jesus Christ. By incorporating, getting a 501(c)(3) or by becoming an earthly legal entity in any way, a church combines with the state, organizes herself according to man made rules instead of completely according to God’s rules, and so forth (see my resources). I thoroughly explain the biblical doctrines as well as the facts about incorporation in my books, articles, and audio teachings. The worst thing about uniting church and state is that it grieves our Lord who desires to be the only Head, Husband, and Bridegroom of a church. Uniting church and state ultimately brings bad consequences for a church, society, and the state. See my books in which I give all my biblical authority to prove this.

    From a legal standpoint, churches in America are treated entirely differently than businesses. Churches are free to organize according to biblical principle without persecution. In many countries, true churches organize according to biblical principles, but with persecution. The First Amendment to the United States Constitution as well as the constitutions and laws of the states protect churches by guaranteeing freedom of religion. I go over the history and meaning of the First Amendment in my materials.

    A business is not protected by the First Amendment or other constitutional provisions and statutes. In fact a business is a legal entity by its very nature. It can sue and be sued. A New Testament Church cannot sue or be sued. I totally expose all the spurious rational such as limited liability given by ignorant Christians for incorporating and getting 501(c)(3) in my books, articles, and audio teachings. Members of a New Testament church have far more protection in the law than members of a state incorporated church. A state church loses not only the power of God but also much of her First Amendment protections. State churches now come under the Fourteenth Amendment since corporations are legal persons or legal entities. I am not going to fully explain this here because I have fully explained it in the resources I have provided. To explain it all is impossible in a short letter.

    Your first step may be (and I say may because I realize that many saved people are totally biblically ignorant) to get saved. If you are saved, you can become Jesus’ disciple by “continuing” in His Word so that you may know the truth which will make you free (Jn. 8.31-32). God will reveal those things He has prepared for his children that love Him by His Spirit which searcheth all things (See 1 Co. 2). “Study to shew thyself approved unto God, a workman that needeth not to be ashamed, rightly dividing the word of truth” (2 Ti. 2:15). After you understand the principles in God’s Word, then you need to study history and law so that you will have facts to which the biblical principles can be applied.

    God gives individuals, families, churches and nations the choice of whether to do things His way or not. He gives this choice because He wants our love. Without choice, love cannot exist. He wants our love. I explain this in “The Most Important Thing: Loving God or Winning Souls.” Your comment that someone is trying to impose their position on any pastor or church certainly does not apply to God or to me. I make this abundantly clear in my writings and teachings. For you to make that statement shows that you are grasping for straws in your attempt to justify your betrayal of our Lord. I totally believe in religious liberty because that is what God gives everyone in all nations. Your statement in this regards is ridiculous.

    It is a churches choice as to whether to love God (as shown by actions) or to dishonor Him. Incorporating a church is a wicked act which brings bad consequences, but God gives churches the choice.

    For His Glory,
    Jerald Finney

  2. […] The Internal Revenue Code § 501(c)(3) exemption-definition-control scheme. One can also hear Jerald Finney’s teaching on this subject from  his radio broadcast by clicking the play button on the WordPress Player which is embedded in the article. Excerpt from article: “The more I study the subject of “separation of church and state,” the more I realize that secular scholars have more insight into the issue than do most of those, including pastors, who call themselves fundamental Bible believers.  Both the Internal Revenue Service and secular scholars know that churches are not required by law to be incorporated and get 501(c)(3) status and that 501(c)(3), as applied to churches, is an exemption-definition-control scheme which is implemented simply by invitation. In this article I give a brief review of the 501(c)(3)  exemption-control-definition scheme and insights from the law, from the Internal Revenue Service, and from legal scholars.” […]

  3. Bev says:

    I was wondering if you ever thought of changing the layout
    of your site? Its very well written; I love what youve got to say.

    But maybe you could a little more in the way of content so
    people could connect with it better. Youve got an awful lot of text for only having one or two
    pictures. Maybe you could space it out better?

    • Thanks for the suggestions. I had been thinking about the very issues you raised. I just did some changes. If you have the time, maybe you can tell me whether the new template is better than the old one.

      I do everything myself. This is a ministry with me. Therefore, no income is produced and I try to keep expenses to a minimum. The expenses are all born by me, and I really don’t have money to spend to get a professional to set up my website.

      I just returned from a week of travel, visiting families, churches, etc., speaking on the issues of the ministry. I paid for all expenses and it was all done for free.

      Again, thanks so much and may the Lord richly bless you and yours.

      For His Glory!
      Jerald Finney

  4. An interesting discussion is definitely worth comment.
    I think that you need to publish more on this issue, it might not be
    a taboo subject but usually folks don’t talk about these issues. To the next! All the best!!

  5. my profile says:

    I am regular visitor, how are you everybody? This piece of writing posted at this web page is really pleasant.

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