Integrated Auxiliaries: Tax Privileges and Qualification

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An integrated auxiliary is a creature of tax law:  in a nutshell, it is typically a separately formed legal entity operating a ministry extension of a church or other house of worship.  Integrated auxiliaries may range from an afterschool sports ministry to more complex elder care or housing programs.  Because churches are exempt from the initial exemption and annual Form 990 filing requirements under Section 501(c)(3), so too are churches’ integrated auxiliaries.  These significant benefits warrant careful evaluation with respect to formation of church-related organizations and their tax compliant operations.

Tax Basics of Churches and Their Integrated Auxiliaries

Churches are distinguished from most other nonprofit organizations under the provisions of the Internal Revenue Code.  The general rule is that nonprofits must affirmatively apply for Section 501(c)(3) status, but Section 508 of the Code provides that churches (and associations of churches) can self-declare their tax-exempt status under Section 501(c)(3).  Such exclusion is grounded in fundamental First Amendment religious freedoms.  Consequently, while churches may apply for an IRS determination letter (as some do), this is not legally required.  Notable considerations regarding whether a church should or should not apply for an IRS tax-exempt letter include (a) desire for legal clarity, such as when a church is rather unorthodox in its structure or philosophical approach (e.g., a coffee house church), and (b) if the church will seek pastors who need R-1 visas, for which the U.S. government will require the church to have an IRS letter.  

The “church-filing exceptions” also extends to church-related organizations, such as parachurch ministries that grow out of a church’s mission or otherwise are connected to a church.  But in order to qualify, the church-related organization must satisfy a 3-part test as an integrated auxiliary.   The first non-negotiable element for “integrated auxiliary” status is that the ministry organization is likewise organized and operated as a public charity.   A second requirement is that the organization must be affiliated with a specific church, which in most instances means being operated, supervised or controlled by that church.   Such control and supervision may be reflected through the church’s power to appoint and to remove the other ministry organization’s directors, as well as shared religious doctrine, financial accountability required from the other organization, a dissolution clause regarding distribution of assets to the church, and related names reflecting a strong institutional connection (e.g., “The Mission Society of First Baptist Church”). 

The “Internal Support” Requirement

The third and final element is the internal support requirement, referring to the extent to which the parachurch organization is connected financially to the church.  This IRS test is set forth as a negative.  In other words, an organization meets the “internal support” requirement, unless both of the following are true:

The organization offers admissions, goods, services or facilities for sale to the general public, on other than an incidental basis (and except those sold at a nominal charge or insubstantial portion of the cost); and,

The organization receives more than 50 percent combined support from governmental sources, solicited contributions, and/or receipts from the sale of admissions or goods, the performance of services, or the furnishing of facilities in activities that are related trades or businesses.

The key tax point here is that the internal support test is generally met so long as an organization is not charging fees for services or goods to the general public.  Notably, certain types of organizations are categorically exempt from meeting this last internal support requirement too. This includes “men’s and women’s organizations, seminaries, mission societies, and youth groups.”  See 26 C.F.R.  § 1.501(h)(5)). 

Applying the Internal Support Test

The IRS’s internal support test is meant to determine if the organization is selling goods or services to the general public and receiving substantial funding from outside the church.  The internal support test is perhaps most easily understood by reviewing the helpful examples set forth in the Treasury Regulations applying the integrated auxiliary test.   

First, let’s assume that Organization A is affiliated with a church and is organized and operated in accordance with Section 501(c)(3).  Organization A’s only activity is publishing a weekly newspaper, available for free to the church’s members.  The organization on an incidental basis, sells some copies to nonmembers of the church.  Organization A is internally supported because it does not offer goods for sale on other than an incidental basis.  The source of Organization A’s financial support is not relevant because the first part of the internal support test (Paragraph 3 (a) above) is not satisfied. Thus, Organization A qualifies as an integrated auxiliary.

Second, consider Organization B - a retirement home described in Section 501(c)(3) and likewise affiliated with a church.  All members of the community may be admitted to Organization B, so long as they pay fees.  Organization B markets itself externally as a retirement home in publications unrelated to its denomination or church and maintains its name on non-church listings of retirement homes in the community.  Let’s also assume that Organization B receives fees for services equaling $100,000 per year, and its affiliated church donates $50,000 per year to the nursing home.  The organization has no other sources of revenue, so its total support is equal to $150,000, and its services result in 2/3 of its total revenue.  These facts show that Organization B offers its goods and services to the general public on more than an incidental basis, and it receives more than fifty percent of its revenue from these services.  Organization B therefore fails the internal support requirement, so it is not an integrated auxiliary. 

Third and last, let’s suppose Organization C is a hospital described in Sections 501(c)(3) and again is affiliated with a church.  Although most of its patients are members of the same denomination as the hospital, Organization C is accessible to anyone in the community in need of care.  Organization C is included in listings of hospitals used by the general public, and its doctors are allowed to admit all patients.  Thus, Organization C is offering its services for sale to the general public on more than an incidental basis. In addition, Organization C receives $250,000 in support from its affiliated church, $1,000,000 from patients or third party insurance payments for payment for services, $100,000 in contributions from the public, $100,000 in grants from the federal government, and $50,000 per year from investment income.  Of its $1,500,000 in total revenue, 80 percent is support received for performance of services, public contributions and governmental sources.  Consequently, Organization C normally receives more than fifty percent of its support from a combination of governmental sources, public solicitation of contributions and receipts from the performance of services.  As with Organization B, Organization C fails the internal support requirement and so is not an integrated auxiliary.

Wrapping Up

It may seem intuitive that a ministry organization that shares a related church’s or association of churches’ mission should be entitled to similar or like standing under applicable tax law. That may be the case – but not necessarily!  A close evaluation of the separately formed ministry’s organization and operational aspects will be necessary to determine if it may avail itself of such integrated auxiliary status.  In cases of uncertain or changing financial aspects or for other pragmatic reasons such as clear IRS tax-exempt status, it may be best for the ministry organization to seek its own IRS determination letter – as either definitively an integrated auxiliary of a church (with no Form 990 filing requirements) or as definitively not an integrated auxiliary (and therefore owing annual Form 990s).  And for continued IRS compliance, careful continued monitoring of a church-related ministry’s financial activities may be an important “best practices” measure.  Finally, for some organizations, filing a Form 990 is an important public fundraising tool and thus, the organization may elect to annually file a 990, even when it qualifies as an integrated auxiliary.