INTEGRATED AUXILIARIES by Charles M. (Chip) Watkins Webster, Chamberlain & Bean Washington, DC Background and significance In 1969, when Congress first required religious organizations to begin filing annual information returns, it exempted churches, conventions and associations of churches, and integrated auxiliaries of a church or convention or association of churches from filing Form 990. 1 This was done in deference to the constitutional objections, rooted in the Free Exercise Clause, by churches and denominations to being required to file Form 990 and disclose the details of their finances to the Internal Revenue Service. 2 Like churches and conventions and associations of churches, integrated auxiliaries are also exempt from the requirement to file an application for exemption, 3 and are precluded from electing to have the substantiality of their attempts to influence legislation tested under the objective rules of 501(h) and 4911. Congress did not define an integrated auxiliary, but did describe them in the legislative history: Among the auxiliary organizations to which this exemption applies are the mission societies and the church s religious schools, youth groups, and men s and women s organizations, and interchurch organizations of local units qualifying as local auxiliaries. 4 In conference, the Senate s version of 6033 was adopted, and the Conference Committee Report states: The integrated auxiliary organizations to which this [filing exemption] applies includes the church s religious school, youth group, and men s and women s clubs. 5 1 I.R.C. 6033(a)(2)(A)(i). 2 See Blaine, The Unfortunate Church-State Dispute Over the I.R.C. Section 6033 Exclusively Religious Activity Test, 23 N.Eng.L. Rev. 1 (1988) (hereinafter cited as Blaine). 3 508(c)(1). 4 S.Rep. No. 552, 91 st Cong., 1 st Sess. 52, reprinted in 1969-3 C.B. 423, 458. 5 H.R. Rep. No. 782, 91 st Cong., 1 st Sess. 286, reprinted in 1969-3 C.B. 644, 649.
1977 Regulations Unfortunately, Congress failure to enact a definition of an integrated auxiliary left to the IRS admittedly ill-equipped and reluctant 6 the task of crafting a definition from an inadequate foundation. As published in 1977, the final regulations required that an integrated auxiliary be exempt under 501(c)(3), be affiliated with a church or convention or association of churches, and have an exclusively religious principal activity. 7 An organization s principal activity could not be exclusively religious if it was educational, literary, charitable, or of another non-religious nature that would qualify if for exemption under 501(c)(3). 8 The effect of the exclusively religious test, the only controversial part of the regulations, was to prevent charitable and educational organizations sponsored by churches, such as colleges and universities, hospitals, orphanages, old age homes, and other charitable service organizations from being treated as integrated auxiliaries. Only colleges or seminaries that teach principally religious subjects could be integrated auxiliaries. 9 The principle of the regulations approach was that it attempted to segregate a church s allegedly secular activities from its religious activities, imposing the IRS narrow opinion of religious activity on churches that view their religiously motivated indeed, compelled charitable and educational activity as no less religious than Sunday morning s worship service. 10 However, it did so without any statutory authority. 11 Under the 1977 regulations, rulings were not models of consistency. For example, a mission society composed of separate congregations sharing common beliefs with its denomination was ruled to be an integrated auxiliary. The society engaged in church planting, made loans and grants to churches, attempted to reduce tension among social and ethnic groups in changing neighborhoods, assisted in the settlement of immigrants, and engaged in other community welfare projects. All of these activities were undertaken to assist in the Society s evangelistic mission. 12 In contrast, an organization whose sole function is to publish and distribute an archdiocesan newspaper, 6 Blaine, supra, note 2, at 8. 7 Treas. Reg. 1.6033-2(g)(5)(i). The proposed regulations, published in 1976, included a religious purpose test, which provoked an equally vehement protest, Blaine, supra, note 2, at 1-2. 8 Treas. Reg. 1.6033-2(g)(5)(ii). 9 Treas. Reg. 1.6033-2(g)(5)(iv); Rev. Rul. 77-381, 1977-2 C.B. 482. 10 Blaine, supra, note 2, at 9-12. 11 Lutheran Social Services of Minnesota v. United States, 758 F.2d 1283 (8 th Cir. 1988). 12 PLR 8134195 (Jun. 1, 1981). 2
which was absolutely controlled by the archbishop, and whose content included explanations of the denomination s position on moral and theological questions, was held not to be an integrated auxiliary. 13 In addition, despite concluding that church financing and pension management organizations were not integrated auxiliaries, 14 the IRS avoided conflicts with churches regarding these types of organizations by issuing a discretionary exemption for organizations that carry out church-related finance, funding, and pension programs. 15 The IRS issued numerous other rulings addressing the religious activity issue. However, in light of the issuance of Rev. Proc. 86-23, 1986-1 C.B. 564 and the revision of the regulations under 6033 defining an integrated auxiliary, they are primarily of historical interest. 16 Litigation The 1977 regulations were quickly challenged. In Lutheran Social Services of Minnesota v. United States, 17 the court overturned the regulations, principally because they imported the exclusively religious activity test, despite the fact that Congress had chosen not to use the term with respect to integrated auxiliaries. 18 The court also noted that the kinds of organizations described in the legislative history quoted above were not necessarily exclusively religious. 19 13 TAM 8402014 (undated), relying on the questionable authority of Rev. Rul. 68-306, 1968-1 C.B. 257 (publication of a newspaper dedicated to news of church activities is a charitable activity, not a religious activity, because it substantially contributes to the advancement of religion). 14 PLR 8004042 (Oct. 30, 1979) and TAM 8416005, and TAM 8414006 (undated). 15 Notice 84-2, 1984-1 C.B. 331, superseded by Rev. Proc. 86-23, 1986-1 C.B. 564. Rev. Proc. 86-23 was itself superseded by the 1995 final regulations, discussed infra, at 13.3, as to the definition of an integrated auxiliary, and by Rev. Proc. 96-10, 1996-1 C.B. 577 on all other issues. See also, PLR 8448087 (Aug. 30, 1984). 16 Unfortunately, the revised final regulations may require some organizations whose activities were determined to be exclusively religious to begin filing Form 990 because they are not internally supported. See infra at 13.3[b] E.g., TAM 8436003 (Mar. 30, 1984) (operator of Christian bookstore is an integrated auxiliary). This is difficult to determine because most rulings issued before the publication of Rev. Proc. 86-23 do not recite sufficient facts to determine whether the organization would satisfy the internal support test. 17 758 F.2d 1283 (8 th Cir. 1985). 18 Cf. 6033(a)(2)(A)(iii) (exempting the exclusively religious activities of religious orders). 19 See also Lutheran Children and Family Service of Eastern Pennsylvania v. United States, 86-1 U.S.T.C. 9593 (E.D.Pa. 1986). 3
The Sixth Circuit Court of Appeals also ruled that the regulations definition was unduly narrow. In Tennessee Baptist Children s Homes, Inc. v. United States, 20 the court upheld a jury verdict that a Baptist-affiliated children s home was engaged in an exclusively religious principal activity, where the children lived in family-type facilities, attended Bible studies in local Baptist churches, and were thoroughly trained in Baptist doctrine and practice. The organization s administrators were ordained ministers; and the house parents were members of Baptist churches, were recommended by their pastors and received additional training before assuming their duties. The court refused to apply the regulations rule that a principal activity is not exclusively religious if it would otherwise be the basis for exemption under 501(c)(3), because the jury had reasonably determined, as a matter of fact, that the taxpayer s principal activity was exclusively religious, and therefore was distinguishable from a similar example in the regulations because of its pervasively religious character and purpose. 21 Revenue Procedure 86-23 Following its loss in the Eighth Circuit, and anticipating its loss in the Sixth Circuit, the IRS continued negotiations, with a broad coalition of religious organizations, that had begun in 1984, shortly after the district court decision in Lutheran Social Services, and finally issued Rev. Proc. 86-23, 1986-1 C.B. 564. 22 Rev. Proc. 86-23 adopted the internal support test, subsequently incorporated into revised regulations, proposed in 1994, and adopted as final regulations in 1995. This test, described in detail below, focuses on the operational and financial relationships between the church and the putative integrated auxiliary, and is modeled after Congress description of certain church-controlled organizations that may elect exemption from Social Security and Medicare taxes. 23 1995 Regulations Under the revised final regulations, an organization ordinarily is an integrated auxiliary if it is (1) exempt under 501(c)(3); (2) affiliated with a church or convention or association of churches; and (3) internally supported. 24 The internal support test does not apply to men s and women s organizations, seminaries, mission societies, and youth groups that are both exempt under 501(c)(3) and affiliated with a church or a convention or association of churches. These organizations qualify as integrated auxiliaries without regard to the internal support test. 25 20 790 F.2d 534 (6 th Cir. 1986), affirming 604 F.Supp. 210 (M.D. Tenn. 1984). 21 790 F.2d at 539. 22 Rev. Proc. 86-23, an exercise of the Commissioner s discretion under 6033(a)(2)(B,) was released May 6, 1986, 8 days before the Sixth Circuit issued its opinion in Tennessee Baptist Children s Home, Inc. 23 3121(w)(3)(B). See Chapter 15. 24 Treas. Reg. 1.6033-2(h)(1). 25 Treas. Reg. 1.6033-2(h)(5). 4
[a] Affiliation An organization is affiliated with a church or a convention or association of churches if 1. It is covered by a group exemption letter issued under Rev. Proc. 80-27, 26 to a church or a convention or association of churches; 2. It is operated, supervised, or controlled by or in connection with, i.e., it is a supporting organization of, 27 a church or a convention or association of churches; or 3. Other relevant facts and circumstances establish the affiliation. 28 In the absence of a group exemption letter or a supporting organization relationship, the following factors tend to show that an organization is affiliated with a church or a convention or association of churches: 1. The organization s governing documents affirm that the organization shares common religious doctrines, principles, disciplines, or practices with a church or a convention or association of churches; 2. A church or a convention or association of churches has the authority to appoint or remove, or to control the appointment or removal of, at least one of the organization s officers or directors; 3. The corporate name of the organization indicates an institutional relationship with a church or convention or association of churches; 4. The organization reports at least annually on its financial and general operations to a church or a convention or association of churches; 5. An institutional relationship between the organization and a church or a convention or association of churches is affirmed by the church, or convention or association of churches, or a designee thereof; and 6. In the event of dissolution, the organization s assets are required to be distributed to a church or a convention or association of churches, or to 26 1980-1 C.B. 677. 27 See Treas. Reg. 1.509(a)-4. 28 Treas. Reg. 1.6033-2(h)(2). 5
another organization affiliated with the church or convention or association of churches. 29 [b] Internal Support Test An organization is internally supported unless it both 1. Offers admissions, goods, services, or facilities for sale, other than on an incidental basis to the general public (except goods, services, or facilities sold at a nominal charge or for an insubstantial portion of the costs); and 2. Normally receives more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. 30 The internal support test is illustrated by three examples. In the first example, the organization publishes a weekly newspaper primarily for members of the church with which it is affiliated. On an incidental basis, some copies of the newspaper are sold to non-members. The organization advertises for subscriptions at places of worship of the church. On these facts, the example concludes that the organization is internally supported, because it does not offer goods, etc., for sale, other than on an incidental basis, to the general public. In the second example, a retirement home is open to all members of the community for a fee, advertises in publications of general distribution appealing to the elderly, and maintains its name on nondenominational listings of available retirement homes. The organization also receives 2/3 of its total support (gifts and fees) in the form of fees from residents. Because it both offers its services for sale to the general public on more than an incidental basis, and receives more than 50% of its support from receipts from the performance of services, the organization is not internally supported, and is not an integrated auxiliary. The third example reaches the same conclusion with respect to a hospital that offers its services to the general public on more than an incidental basis, and receives 80% of its total support from the performance of services, government sources, and public contributions. [c] Post-1986 rulings After the publication of Rev. Proc. 86-23, the IRS has issued numerous rulings addressing whether an organization was affiliated with a church or a convention or association of churches and/or satisfied the internal support test. In one ruling, an 29 Treas. Reg. 1.6033-2(h)(3). 30 Treas. Reg. 1.6033-2(h)(4). 6
organization incorporated for the purpose of renewal and encouragement of Christian ministers, missionaries, workers, and lay persons employed only one individual, a retired minister holding a ministerial certificate from a church. The minister also received a pension from the church, and was required to renew his ministerial certificate from the church annually. Despite the fact that the organization received much of its funding from churches of the denomination, the organization was not covered by a group exemption letter, nor was it a supporting organization of a church or association of churches. Finally, none of the other facts and circumstances described in the then proposed and subsequently final regulations has indicated affiliation with a church or convention or association of churches was present. Because the only connection between the church and the organization was the minister who held his credentials on the church, the Service concluded that the organization was not affiliated with the church, and was therefore not an integrated auxiliary of the church. 31 In contrast, in another ruling, the IRS concluded that a retirement home for members of a church, whose directors were appointed by the church and were required to report annually to the church, was affiliated with the church. In addition, the retirement home satisfied the internal support test, and was determined to be exempt from filing Form 990 pursuant to Rev. Proc. 86-23. 32 Conclusion Notwithstanding the lengthy battle between churches and the IRS over the original regulatory definition of an integrated auxiliary, the publication of Rev. Proc. 86-23, and the subsequent incorporation of its principles into the revised final regulations under 6033, has led to an apparent truce, and no litigation. The lack of publicly released rulings since 1996 can be attributed to the fact that new organizations can obtain a determination that they are an integrated auxiliary as part of the process of applying for exemption using Form 1023, and existing organizations that want to be classified as an integrated auxiliary now apply for a determination letter from the Exempt Organizations Determinations office in Cincinnati, instead of filing a request for a private letter ruling. 33 31 PLR 9518021 (Feb. 8, 1995). 32 PLR 9619024 (Feb. 1, 1996). Other favorable rulings include PLR 8724057 March 18, 1987) (children s homes and service agencies); PLR 8738039 (June 23, 1987) (childcare and adoption services); PLR 8747032 (Aug. 25, 1987) (church-controlled spiritual renewal organization); PLR 8819037 (Feb. 18, 1988) (job counseling and placement service affiliated with Jewish seminary); PLR 8825044 (Mar. 23, 1988), (refugee assistance agency controlled by rabbi); PLR 8832006 (May 6, 1988) (child assistance agency); PLR 8834010 (May 24, 1988) (lay minister training); PLR 904038 (July 9, 1990) (shelters for battered women and homeless); PLR 9103047 (June 28, 1990) (therapeutic centers for care of present and former members of the clergy, ministry, and religious communities); PLR 9253044 (Oct. 5, 1992) (captive insurance company); PLR 9310045 (Dec. 16, 1992) (captive insurance company). The benefit of the change in the IRS position is that not more than two of the recipients of the 11 rulings might have qualified under the former religious activity test. 33 Rev. Proc. 2005-4, 7.04(8); 2005-1 I.R.B. 126, 138 (updated annually). 7