As a rule, organizations operated for religious purposes, commonly churches, are not required to file an application for tax exemption under Section 501(c)(3) of the Internal Revenue Code (this application is a “Form 1023”) but can still receive deductible contributions. However, where no application is made, the church will not receive a written IRS determination validating its tax-exempt status for purposes such as to show potential contributors.
A recent federal case, Alearis Inc. v. United States, No. 1:20-cv-00808 (Fed. Cl. 2022), shows the conundrum the lack of written IRS recognition can create for a church. In Alearis, the church never filed an application for exemption but later asked the IRS for written confirmation that it was a public charity. The IRS responded that no such confirmation could be issued because the church never filed an application for exemption. The church sued for declaratory judgment and the Court stated:
Under these circumstances, the Court ruled that the IRS was not required to issue any validation of public charity status.
If a religious organization believes IRS validation of tax exempt status would be useful, it should complete the application process. As an example, certain United Methodist congregations are breaking away from the United Methodist Church denomination which holds a group exemption ruling for its congregations. Without its own IRS exemption ruling, a breakaway congregation would have no written validation of its tax exempt status.
Please contact Dana Rose or your Weston Hurd attorney if you have questions about this topic.
