Under Section 508 of the Internal Revenue Code, churches, their integrated auxiliaries, and conventions or associations of churches are not required to apply for recognition as a tax-exempt organization under Section 501(c)(3) of the Code. Basically, those types of organization – if properly organized and operated – are deemed automatically organized and operated in accordance with Section 501(c)(3) of the Code without having to make application for such determination by the Internal Revenue Service.
Neither the Code nor the Treasury Regulations prescribe a definition for “church” or “association of churches.” Rather, through judicial opinions, whether an organization qualifies as a church is based on application of numerous factors, such as whether the organization has a distinct legal existence, a recognized creed and form of worship, membership, places of worship, and other.
Similarly, churches, their integrated auxiliaries, and conventions or associations of churches are not required to file an annual federal tax disclosure, such as a Form 990. These types of organizations are exempt from the filing pursuant to Treasury Regulation § 1.6033-2(g)(1)(i), although a Form 990-T may be required for reporting unrelated taxable business income that the organization may generate.
So, what is an “integrated auxiliary” of a church?
To qualify as an integrated auxiliary, the organization must be:
(i) described both in sections 501(c)(3) (i.e., charitable, religious, educational) and 509(a) (1), (2), or (3) (i.e., not a private foundation);
(ii) affiliated with a church or a convention or association of churches; and
(iii) internally supported.
An organization is affiliated with a church if the organization is operated, supervised, or controlled by or in connection with a church or a convention or association of churches or relevant facts and circumstances show that the organization is so affiliated. An organization is internally supported, unless it both:
(i) 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 cost); and
(ii) Normally receives more than 50 percent 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.
See 26 C.F.R. § 1.6033-2(h)(4).
Some organizations need not meet the internally supported test. In this regard, men’s and women’s organizations, seminaries, mission societies, and youth groups that satisfy paragraphs (h)(1) (i) and (ii) of section 1.6033-2 can qualify as integrated auxiliaries, regardless of whether such an organization meets the internal support requirement under paragraph (h)(1)(iii).
Paragraph (h)(1)(ii) requires that the organization be “affiliated” with a church or a convention or association of churches. An organization is “affiliated” with a church for these purposes if
(i) The organization is covered by a group exemption letter issued to a church or a convention or association of churches;
(ii) The organization is operated, supervised, or controlled by or in connection with a church or a convention or association of churches; or
(iii) Relevant facts and circumstances show that it is so affiliated.
Below are the Facts and Circumstances enumerated in the Treasury Regulation. The absence of one or more of the factors does not necessarily preclude classification of an organization as being affiliated with a church or a convention or association of churches.
(i) The organization’s corporate charter, bylaws, or similar governing documents affirm that the organization shares common religious doctrines, principles, disciplines, or practices with a church or a convention or association of churches;
(ii) 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;
(iii) The corporate name of the organization indicates an institutional relationship with a church or a convention or association of churches;
(iv) The organization reports at least annually on its financial and general operations to a church or a convention or association of churches;
(v) 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
(vi) 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 an affiliate thereof.
Integrated auxiliary status is a valuable organizational structure. No application for tax exemption is required to qualify as a tax-exempt organization under Section 501(c)(3), and the organization is not required to file a Form 990.
Due care should be taken in organizing an entity or “auxiliary” that is intended to be an integrated with a church, as defined in the Treasury Regulations. The governing documents and affiliation or ties to a church or an association of churches should be well structured and concrete so that there is no question the favorable tax status applies, thus preventing the significant consequences that can arise from failing to file a federal tax disclosure form when required.
Another important consideration is mission drift.
Sometimes an integrated auxiliary will, over time, forget that its governing documents are vitally important to its favorable tax status or that its affiliation with a church is critical to the favorable tax status. Those who direct or control an auxiliary may desire to amend governing documents to promote greater independence from the church or association of churches with whom the auxiliary is affiliated or may want to distance from the faith or tenets that, too, may have evolved over time. Those amendments could draw the organization out of the integrated auxiliary tax cocoon, so careful attention to and recollection of the integrated auxiliary status is key to ensuring the favorable tax treatment can withstand governance or mission-related changes that the organization may desire to employ for go-forward existence.
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