Do I seriously have to say this? Again? Look, Obergefell does not mark the end of churches’ tax-exempt status. It’s just not going to happen.
I thought I’d put this bit of end-of-days hand-wringing to bed here, but apparently I didn’t do a good enough job, because it’s still out there, even in Mormon circles (most credibly repeated by Gene Schaerr, who included loss of church tax-exempt status as one of the potential consequences of of the Obergefell decision).
I don’t know Schaerr personally; I’ve heard through the grapevine that he’s an excellent appellate litigator. But appellate litigation is not tax practice, and does not generally provide any insight into the tax law. And Schaerr apparently doesn’t have any significant insight into the law of tax-exempt entities.
Quick summary of the argument that Obergefell will inexorably lead to the loss of tax-exempt status by churches that oppose same-sex marriage: an entity that violates an established public policy does not qualify as tax-exempt. That’s established law. People who worry about churches’ loss of exemption allege that Obergefell sets the stage for same-sex marriage to be an established public policy, and thus, churches that oppose it, or won’t perform it, will not qualify as tax-exempt.
I already explained why that’s wrong (Constitution plus actual history with the provision), but I thought I’d give some evidence of how the IRS has used the public policy doctrine up until now.
In WestlawNext, I searched the “IRS Private Letter Ruling” database. (Why that database? Because the IRS tells an entity that it did not receive tax-exempt status or that it lost its tax-exempt status in a private letter ruling.) My search was:
advanced: “publc policy” AND “501(c)(3)”
The search pulled up 88 private letter rulings. The earliest was from 1978, and the most recent from 2015.
I then went through the rulings to see if they actually dealt with putative tax-exempt organizations that either were not granted tax-exempt status in the first instance, or that lost their tax-exempt status, as a result of violating public policy. That narrowed my list to just nine private letter rulings. You can see a spreadsheet listing all 88 rulings, and the nine responsive rulings (plus a little more information) here.
I was surprised by how few rulings were responsive, but it turns out the Westlaw private letter ruling database, while it technically goes back to 1950, only captures select rulings prior to 1977.[fn1] Most of the IRS’s disqualification of racially-discriminatory schools happened in the first half of the 1970s, so by the end of the 1970s, there weren’t as many tax-exempt discriminatory private schools. Still, 1978 to the present gives us the most recent 37 years of IRS actions, which seems like a pretty good indication of what the IRS actually does.
And, as the data make clear, the focus of the public policy requirement really was racially-discriminatory private schools. Which makes sense, because the Supreme Court expressly said in Bob Jones University that those schools violated an established public policy, so the IRS didn’t have to stretch to get there.
It’s also worth noting that, during these 37 years, not a single tax-exempt entity lost its exemption for violating public policy. Each of these nine cases involved an entity applying for tax-exempt status, and the IRS denying its application.
So, without further ado, what kinds of entities failed the public policy test? and how did those entities violate it?
Of the nine, five were racially-discriminatory private schools. A couple of the schools had written non-discrimination policies, but the IRS determined that their policies didn’t actually do anything. I just skimmed through the PLRs, but one of the schools, in its 40 years of existence, had never had a single black student, faculty member, or administrator. Another hadn’t in its 30 years of existence.
Two entities were denied exemption because of polygamy. One was applying as a church, the other as an educational institution that promoted polygamy. In both cases, the IRS pointed out that the U.S. had an established federal policy against polygamy dating back to the Reynolds decision of 1879.
One putatively educational and charitable entity was denied an exemption because of pot. I’m kind of fudging on this one, but it was too much fun to not include. The public policy doctrine goes hand-in-hand with the illegality doctrine: an entity that engages in illegal activity also does not qualify as tax-exempt. So an entity that plans on distributing cannabis cannot qualify as tax-exempt.
So the last one is actually really icky, and inarguably violates public policy. An entity that planned to lobby for changes in laws that criminalize having sex with minors and taxing sexually-exploitative pictures of minors (srsly?) was denied an exemption on public policy grounds.
So there you have it: every applicant for tax-exempt status from the last 37 years that has had its application denied on public policy grounds. It just doesn’t happen, unless you’re a racially-discriminatory private school, or you engage in behavior that is illegal or that is considered really, really icky.
And no entity since 1978 has lost its exemption for violating public policy, much less any church. (In fact, there’s only one church in this list of 9 entities, and I suspect that’s the FLDS church which, had it been better-advised, would have not bothered applying, and just acted exempt.) Which is to say, the church will not lose its tax-exempt status.
And now I’m done.
[fn1] Why? Because they really were private until the early 1970s, when Tax Analysts started filing FOIA requests for them. As Westlaw explains, “Coverage begins with 1950 with selected documents through 1976. After 1976 the IRS made these letters public and we include all letters issued by the IRS from 1977 to date.”