Religious Tax Reclassification for Public Charities

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Churches, synagogues, mosques, temples, and other houses of worship have long enjoyed Section 501(c)(3) public charity status, with resulting exemption from IRS Form 990 filings, availability of clergy housing allowances, and religious liberty protections. When, why, and how should other faith-based organizations affirmatively seek IRS reclassification as a “church” – or as an “association of churches” or “mission society” – with similar tax and other legal benefits? The following article addresses such questions extensively, including applicable tax considerations, corporate governance aspects, legal requirements for housing allowance, employment discrimination aspects, and other resulting implications. We hope this deep-dive guidance will help those who are interested in religious tax reclassification. This article was co-authored by W&O Partners Sally Wagenmaker, Ryan Oberly, and Paul Winters and was previously published in Thomson Reuters’ Taxation of Exempts Journal (Jan./Feb. 2022).

IRC Section 501(c)(3) entities may seek tax reclassifications from the IRS as a “church,” “association of churches,” or “mission society.” Each designation carries its own requirements and implications, including potential governance adjustments and operational considerations. An organization that is reclassified with such religious recognition may be eligible for additional legal benefits including: (a) exemption from future IRS Form 990 annual filing obligations; (b) availability of clergy tax benefits, including the ministerial housing allowance; (c) improved applicability of employment-related “ministerial exception”; (d) increased eligibility for exemptions from state charitable solicitation registration and reporting requirements; (e) “church plan” benefits eligibility; (f) potential exemption from state unemployment taxes; and (g) decreased risk of IRS audit.

Notably, except for exemption from future Form 990 filings, reclassification under a religious designation does not automatically lead to these other benefits. Rather, each benefit depends on a combination of an organization’s activities and applicable laws. For example, IRS recognition of an organization’s “church” status does not automatically mean that each of its employees can claim a clergy housing allowance. Likewise, reclassification does not bar all employees’ possible employment discrimination and wage claims due to the ministerial exception. But an organization’s decision to pursue tax reclassification may well provide for the current availability of such additional benefits as well as their future availability, to the extent that an organization adjusts its governance and operational aspects sufficiently in connection with its IRS tax reclassification application.

This article provides a roadmap for organizations described under IRC Section 501(c)(3) for pursuing an IRS application for religious reclassification and evaluating related legal benefits. It first discusses applicable tax provisions for a “church,” an “association of churches,” and a “mission society.” The article next addresses governance and operations, particularly whether any changes would be warranted for consideration by the organization’s leaders. The article then addresses related implications for clergy tax benefits and the ministerial exception barring certain employee claims. Please note that since the tax code and related guidance refers to houses of worship as “churches,” irrespective of religious tradition, this article uses similar terminology. Thus, for these purposes, “churches” includes synagogues, mosques, temples, and other places of worship and religious activity.

IRS Form 8940 Request for Reclassification

Once an organization’s leaders determine that tax reclassification would be beneficial and legally appropriate, they may proceed to file for reclassification using IRS Form 8940. The application consists of the one-page Form 8940 itself, together with IRS Form 1023 Schedule A, which is ordinarily required of churches electing to apply for recognition of exemption under IRC Section 501(c)(3). (Churches, integrated auxiliaries, and conventions/associations of churches are exempt from the notification requirements of IRC Section 508(a).[1]) In addition to these two forms and in support of the information provided within, applicants provide summary information concerning their religious activities, a supporting narrative, related program materials, and governance documents such as articles and bylaws (as may be amended). The user fee associated with a Form 8940 may be found in the applicable year’s IRS procedures issuing for determination letters on issues under the jurisdiction of the director of exempt organizations rulings and agreements (e.g., Rev. Proc 2021-05, Appendix A the Schedule of User Fees. Specific procedures for the filing of IRS Form 8940 are similarly located in Rev. Proc 2021-01 and Rev. Proc. 2021-05).

Upon the IRS’s approval of the Form 8940 application, the organization may cease filing IRS Form 990 for the year of approval and thereafter. The organization should continue operating pursuant to its tax reclassification. Reclassified entities may implement applicable benefits such as providing clergy tax benefits (housing allowances as well as payroll tax adjustments), evaluating the extent to which the ministerial exception may apply to its employees, seeking religious exemptions from state charitable solicitation requirements (as may be available), and seeking exemption from unemployment tax liability (if a “church”).

Applicable Tax Considerations

Relevant IRC Provisions

IRC Section 501(c)(3) provides that a corporation organized and operated exclusively for religious purposes is tax exempt under IRC, provided that such corporation’s net earnings do not inure to the benefit of any private shareholder or individual, that no substantial part of its activities constitutes influencing legislation, and that it does not participate or intervene in any political campaign.

IRC Section 509(a) provides that an organization tax exempt under IRC Section 501(c)(3) is classified as a private foundation, unless it is described by 509 subsections (a)(1), (a)(2), or (a)(3). IRC Section 509(a)(1) describes organizations in Section 170(b)(1)(A) of IRC, other than in clause (vii) and (viii). Thus, Section 170(b)(1)(A) of IRC distinguishes multiple classifications of Section 501(c)(3) tax-exempt organizations, which are not private foundations, as “public charities.” This designation includes IRS Section 170(b)(1)(A)(i) for churches and associations of churches and Section 170(b)(1)(A)(vi) for public charities that have a broad base of public support.

Section 1.6033-2(g)(1) of the Treasury Regulations (accompanying Section 6033(a)(2) of IRC) provides that certain organizations are not required to file IRS Form 990 annual returns, including:

  • “a church, … association of churches…”; and
  • “a mission society sponsored by or affiliated with one or more churches or church denominations, more than one-half of the activities of which society are conducted in, or directed at persons in, foreign countries.”

Church Defined

Neither IRC nor the regulations define the terms “church,” “association of churches,” or “mission society” as those terms pertain to public charity classification under IRC Section 170(b)(1)(A)(i). Rather, the courts have generally applied one of two tests, or variations thereof, to determine such “church” status: the so-called fourteen-factor and associational tests. For a thorough discussion of the two main church tests and variations, as well as a history of the development of the tests, please see Nathan M. Boyce’s helpful article, “From Rubik’s Cube to Checkers: Determining Church Status Is Not as Hard as You Think.”[2]

The Fourteen-Factor Test

Since 1977, the IRS has applied a fourteen-factor test for determining whether an organization qualifies as a church for tax purposes. The IRS lists these factors in Schedule A to the IRS Form 1023 Application for Recognition of Tax-Exempt Status. To satisfy the IRS test, an organization need not meet all fourteen factors, which include: (1) a distinct statement of faith or creed; (2) its own religious literature; (3) a formal code of doctrine and discipline; (4) an ecclesiastical government; (5) part of a group of churches with similar beliefs; (6) a form of worship; (7) regularly scheduled religious services with members or other regular attendees; (8) an established place of worship; (9) an established congregation or membership group; (10) sacerdotal functions like weddings, funerals, and baptisms; (11) ministers or other recognized religious leaders; (l2) schools or other training for such religious leaders; (13) ordination, licensing, or commissioning for such religious leaders; and (14) affiliation with other churches sharing similar beliefs and structures.[3] Critics of the fourteen-factor test have noted that it may favor certain traditions of religious expression over others with potential First Amendment implications.[4]

The Associational Test

In Foundation for Human Understanding, the United States Court of Federal Claims, and, on appeal, the United States Court of Appeals for the Federal Circuit agreed “that the associational test is an appropriate test for determining church status.”[5] Under the associational test, a church must bring people together to accomplish the religious purposes of mutually held beliefs.[6] In Foundation for Human Understanding, the petitioner was denied classification as a church because it principally provided electronic ministry to a largely virtual congregation. The court reasoned that the organization’s “call-in show, like other forms of broadcast ministry, [did] not provide individual congregants with the opportunity to interact and associate with each other in worship.”[7] The Foundation of Human Understanding court’s requirement for in-person interaction and association seems ripe for review in light of COVID-19-related restrictions on public gatherings and worshiping groups’ shift to virtual services worldwide.

“Association of Churches”

The “association of churches” designation is quite similar to the “church” designation. In essence, as an association of churches, an organization builds on its partnering (i.e., “associated”) churches. The organization largely uses the associated churches’ activities to satisfy the tests above instead of its own. For example, the associated churches should have statements of faith, carry out sacerdotal functions, exercise ecclesiastical leadership, have members, engage in regular worship activities, have religious literature, and possibly be associated with other churches.

The IRS indicated that the term “association of churches” should be interpreted broadly and, perhaps, cross-denominationally, or even through interfaith affiliations:

Although the term “convention or association of churches” has a historical meaning generally referring to a cooperative undertaking by churches of the same denomination, nothing in the legislative or religious history of the term prevents its application to a cooperative undertaking by churches of differing denominations, assuming such convention or association otherwise qualifies for recognition of exemption as an organization described in Section 501(c)(3). The term is not limited in its application to a group of churches of the same denomination.

See Revenue Ruling 74-224. Such language is consistent with the prior IRS regulations — Treasury Regulations Section 101.15(b)(2)(ii) from 1953, repealed as part of 1965 excise tax repeal — which defined an “association of churches” as including “a union of churches of different denominations which meet and act in concert to further a particular religious purpose.”

Notably, this Revenue Ruling recognized an organization as an “association of churches” based on the following information:

The organization is recognized as exempt under Section 501(c)(3) of IRC and was created to act as the coordinating agency for its member churches for the purposes of developing the spirit of Christian fellowship and cooperative mission among the denominations and churches in a particular geographical area and to promote through cooperative effort the spiritual, moral, social, and civic welfare of the area. Membership is comprised of Catholic and Protestant Churches of various denominations. The Governing board of the organization consists of two voting members from each church. The organization engages in a number of activities such as provision of clergymen at hospitals and college campuses, pastoral counseling, coordinated religious educational programs and facilities, and coordinated efforts to aid the poor. Support for the organization is primarily derived from its members and public contributions.

Based on this tax guidance, an organization could similarly qualify as an association of churches if it promotes similarly common religious goals through partnering churches or faith traditions.

“Mission Society”

The third designation is “mission society,” which focuses on activities in foreign countries. This designation may be particularly attractive to an organization if it wishes to emphasize its focus on conducting religious activities overseas. Treasury Regulation 1.6033-2(g)(iv) does not define a mission society but states, for purposes of the Form 990-filing exemption, the mission society is required to be both: (1) “sponsored by or affiliated with one or more churches or church denominations; and (2) more than one half of the activities of which society are conducted in, or directed at persons in foreign countries.” Later in the Treasury Regulation, the term mission society is referenced again in the specific section governing integrated auxiliaries and what it means to “affiliate” with a church or association of churches. This has resulted in many interpretations that a mission society must generally meet the following “facts and circumstances” test applicable to integrated auxiliaries, for which not all factors must be satisfied, stated in 26 CFR Section 1.6033-2(h)(3):

  1. The organization’s enabling instrument (corporate charter, trust instrument, articles of association, constitution or similar document) or bylaws 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 a 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 an affiliate thereof.

A careful reading of Treasury Regulation 1.6033(g) and (h) indicates that a mission society can qualify either through the above affiliation test or sponsorship, which is not defined in the Treasury Regulations but presumably lacks the same degree of organizational connection. For some organizations, this may be an attractive fit as many mission groups operate as structurally independent organizations but are sponsored by, and closely collaborate with, many U.S. and foreign churches. In many cases, however, a more conservative and beneficial approach for an IRS reclassification application may be to assert “church” or “association of churches” designation because these classifications are under Section 170(b)(1)(a)(i), unless an entity clearly qualifies as a mission society under the above facts and circumstances test.

Which Religious Designation is Appropriate?

The specific religious designation requested warrants careful evaluation of the organization’s current operations, governance, and amenability to related adjustments prior to its IRS reclassification application.

Governing Documents

A nonprofit’s corporate purpose statement as set forth in the articles of incorporation or similar formation document serves as the cornerstone of its existence, demonstrating IRC Section 501(c)(3) qualifications and showing what it aims to accomplish. For such reasons, an organization’s purpose statement should be clearly articulated and consistent throughout its governing documents.

The organization’s corporate tax-exempt purpose should be evaluated as set forth in its articles of incorporation (and any amendments thereto) and the bylaws. The purpose language should be harmonized so that it is set forth identically in bylaws and articles. Additionally, the corporate purposes statement in these governing documents should orient the organization toward its strong religious identity for an IRS Form 8940 tax reclassification.

The Organization’s Church-Related Activities

The organization’s church-related activities should be evaluated as well, particularly if the organization seeks the “association of churches” designation. The IRS tax reclassification application should carefully document associated churches’ worship, ministries, internal faith community, interchurch collaborations, and common church purposes and similar engagement.

The Organization’s Governance

An organization’s governance should be evaluated, particularly with respect to its board of directors and any governing members. Depending on the desired type of religious designation, it may be appropriate to adjust board governance aspects. For example, the bylaws could require at least one director to be appointed by a church (or churches). Additionally, or alternatively, the bylaws could provide for a council of churches to address ecclesiastical matters and be more engaged with the organizational structure.

Clergy Tax Benefits: Focus on Housing

Organizations receiving classification under IRC Section 170(b)(1)(A)(i) may be eligible for benefits available to churches and their employees under the IRC, such as the minister’s housing allowance. If an employee is eligible under applicable tax law to be classified as clergy (in tax parlance, “Minister of the Gospel,” irrespective of religious or faith tradition), then he or she should be eligible for housing-related clergy benefits through organization-provided housing (i.e., a parsonage) or for his or her own housing (rented or owned). Two key requirements apply: (1) the worker must fit within the “Minister of the Gospel” definition, as described below; and (2) the worker must engage in work “under the authority of a religious body constituting a church or church denomination,” per available IRS guidance. Such tax classification also means that the clergy worker should be treated as self-employed for purposes of Social Security and Medicare taxes and employed for purposes of state and federal income taxes (the legal compliance and reporting obligations of which are beyond the scope of this article).

“Minister of the Gospel” Qualification

IRC Section 107 provides for housing-related federal income tax exemptions for Ministers of the Gospel. IRC divides the housing-related exemption into two categories. The first category is found in Section 107(1) and excludes from gross income the rental value of a home furnished to a minister as part of their compensation. The second category is found in IRC Section 107(2) and excludes from gross income a minister’s “rental allowance paid to him as part of his compensation to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.” While the clergy housing allowance’s constitutionality has been the subject of much debate, it was upheld by the federal Seventh Circuit Court of Appeals in 2019 and has not been significantly challenged since then.[8]

The benefit encompassed by such housing allowance is substantial because, subject to the “fair rental value” limitation, it includes an income tax exemption for the following types of expenses: mortgage payments (including principal and interest), improvements to the home, utilities, down payments on the home, furnishings, repairs, real estate taxes, and maintenance.

Who is a “Minister of the Gospel”?

The threshold question in determining whether an employee may claim the housing allowance exemption under IRC Section 107 is whether the employee may be classified as a Minister of the Gospel – another term of art, applicable irrespective of religious tradition. Most authorities agree that ministers have certain ministerial functions or characteristics as follows:

  1. ordination, licensure, or commission;
  2. authority to administer sacraments;
  3. conducting religious worship;
  4. controlling, governing, or maintaining a church or other religious organization; and
  5. recognition as a religious leader by the minister’s church or denomination.

Unfortunately, the law and related cases do not agree on what measure of these ministerial functions must be present for an individual to qualify as a Minister of the Gospel.

The Narrow View

The IRS and some tax courts have adopted a restrictive view of who qualifies as a Minister of the Gospel. This restrictive view has been described by the IRS as follows:

Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister…[9]

The above IRS interpretation of “Minister of the Gospel,” includes only those persons who:

  1. are ordained, licensed, or commissioned; and
  2. may conduct substantially all of the ministerial functions performed by ordained pastors.

The Broad View

Other tax courts have adopted a broader definition of “Minister of the Gospel.” These courts also require ordination, licensure, or commissioning. But under the broader scheme, these courts balance the presence or absence of each of the other ministerial functions listed above. Under this balancing test, an individual who is involved in a majority of the ministerial functions listed above, and who has the proper credentials, discussed below, will qualify as a Minister of the Gospel for housing allowance purposes.

Credentialing Requirement

Significantly, both narrow and broad definitions of “Minister of the Gospel” include ordination, licensure, or commissioning as a basic requirement for the classification. The IRS and the tax courts do not state specific educational or other qualifications for such credentialing to pass muster. However, the IRS and tax courts seem to hold that ordination, licensure, and commissioning must convey to credentialed individuals the authority to conduct specific ministerial functions in a way, or in some measure, that non-credentialed individuals are not permitted to conduct.[10][11]

Assessing Qualifications

Based on the above considerations, a qualifying organization’s employees seeking clergy tax benefits must at a minimum be ordained, licensed, or commissioned, and either be (1) involved in a majority of the ministerial functions listed above (under the broad view), or (2) conduct substantially all of the ministerial functions (under the narrow view). Examples of specific services that are considered duties of a minister for purposes of Section 107 include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries.

Implications Regarding Tax Reclassification: Additional “Under the Authority” Requirement

What It Means to be “Under the Authority of a Religious Body.”

Additionally, as set forth in U.S. Treasury Regulation Section 1.1402(c)-5(b)(2), which concerns self-employment tax issues involving Social Security, “service performed by a minister in the exercise of his ministry includes the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious organizations… under the authority of a religious body constituting a church or church denomination.”

Consequently, if an organization is classified as a “church,” then its employees must operate under the ecclesiastical authority of the church pursuant to its particular governance model (e.g., Episcopalian, Congregational, Presbyterian). Such authority includes ministerial responsibilities, religious duties, and related sacerdotal functions, with the board commissioning or ordaining its religious leaders. But if an organization is more properly classified as an “association of churches” or “mission society” (i.e., a “denomination” or religious body other than a church), then it may become important for at least some of the partnering churches to participate in governance matters as set forth in an affiliation agreement, bylaws for the association, or other governing documents.

Additional IRS Guidance

With respect to the “under the authority” requirement, in IRS Revenue Ruling 56-187, the IRS discussed “whether services performed by a duly ordained, commissioned, or licensed minister of a church in an executive or administrative capacity for the X federation of churches [were] in the exercise of his ministry and excepted from “‘employment’ under the Federal Insurance Contributions Act.” The IRS then described the “federation of churches” as follows, “the X federation of churches was organized by some of the local congregations of the city in order that they might work together toward meeting the religious and moral needs of the community. It is an official interdenominational agency serving the member denominations and is under the supervision of a governing body of delegated representatives appointed by the member denominations.”

The IRS further noted that “the organization’s governing body constitutes a central board of interdenominational strategy developing a common mind, planning united policies, and providing for concerted action resulting in the formation of policies embodying the dictates of each member denomination.” The IRS determined that the federation qualified as an “association of churches” for tax purposes and that its ministers likewise qualified for special clergy self-employment tax treatment under IRC Section 1402.

Tax and Governance Implications

IRC Section 107-related housing allowance benefits should be available to qualified Ministers of the Gospel in organizations reclassified as “churches.” But organizations reclassified as “associations of churches” or “mission societies” should further address their governance models and delegated authority to clergy before implementing housing allowance exemptions. Several options exist for addressing this governance constraint. For example, an organization could add a “Council of Churches” or certain “Voting Member” churches to handle ecclesiastical matters with appropriate oversight authority of clergy. Such matters should be carefully addressed as part of any tax reclassification process.

Employment-Related “Ministerial Exception”

Distinct from the compensation-oriented tax issues for Ministers of the Gospel discussed above, entities described under IRC Section 501(c)(3) seeking reclassification as churches, associations of churches, or mission societies should also be mindful of the employment-related “ministerial exception.” The ministerial exception applies in employment litigation arising from alleged adverse employment actions. While the word “minister” figures in both tax and employment legal concepts, what it means to be a minister differs significantly.

The Ministerial Exception: A Bar to Employment Discrimination and Wage Claims

As the Seventh Circuit Court of Appeals recognized earlier in 2021, “[t]he First Amendment ministerial exception protects a religious organization’s employment relationship with its ministers, from hiring to firing and the supervising in between.”[12] The ministerial exception requires courts to “stay out of employment disputes involving those holding certain important positions with churches and other religious institutions.”[13] The ministerial exception is not a creature of statute. Rather, the ministerial exception is a long-standing judicial application of the First Amendment religion clauses. Ultimately, the “purpose of the ministerial exception is to ensure that the authority to select and control who will minister to the faithful — a matter ‘strictly ecclesiastical’ — is the church’s alone.”[14] Courts have applied the exception to both wage claims and employment discrimination claims, such as claims based on race, sex, disability, and age.

The ministerial exception doctrine means that certain employees (i.e., “ministers”) may not pursue certain claims against their employers. In other words, courts will defer to such organizations in their employment decisions, effectively closing the door for employment discrimination claims raised by ministers. As discussed above, the applicable legal definition of ministers is different from Ministers of the Gospel, for purposes of clergy tax benefits, although perhaps with significant overlap. For example, a teacher who includes religious aspects in his or her teaching may be barred from bringing a discrimination claim by the ministerial exception because she is a “minister” in that context, and yet not be eligible for a clergy housing allowance, because she is not a “minister” under IRC Section 107 and related law. On the other hand, a pastor who preaches each Sunday should be eligible for a clergy housing allowance while also being barred from bringing an adverse employment claim.

Wage Claims

The U.S. Department of Labor has consistently treated clergy as categorically excepted from the federal Fair Labor Standards Act, which governs overtime and other wage claims.[15] Parallel state legislation also includes such categorical exclusions.[16] This legal approach is consistent with appellate court decisions interpreting the ministerial exception for purposes of wage claims as well as for employment discrimination claims (e.g., seminarian barred by the ministerial exception from asserting any overtime claim,[17] adopting a presumption that clerical personnel are not covered by the FLSA,[18] barring an employee’s wage claim under the ministerial exception[19])

Employment Discrimination Claims

The ministerial exception was first affirmed by the U.S. Supreme Court in its 2012 Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC decision. In that case, a parochial schoolteacher sued her employer, claiming that the church/school had violated her rights under the Americans with Disabilities Act. The court reasoned that the church’s right to select and control its own ministers was a matter “strictly ecclesiastical,” and thus protected under the First Amendment. Accordingly, the Supreme Court barred the teacher’s claim. “Because [Plaintiff] was a minister within the meaning of the exception, the First Amendment require[d] dismissal of this employment discrimination suit against her religious employer.”[20]

Since Hosanna-Tabor was decided, courts have wrestled with the question of who is a “minister” for purposes of the exception. In 2020, the U.S. Supreme Court directly addressed that question in Our Lady of Guadalupe School v. Morrissey-Berru.[21] Rejecting formulaic checklist ministerial inquiries, the court determined instead that functionality is paramount: “What matters, at bottom, is what an employee does.”[22] Specifically, the court said, employees of religious organizations whose jobs “lie at the core of the religious organization’s mission” are likely “ministers” for purposes of the exception and therefore may not sue their employers for adverse employment actions. Under Our Lady of Guadalupe, courts thus must not judicially scrutinize religious employers’ hiring, disciplinary, or termination decisions regarding employees whose job it is to carry out religious activities as part of the employers’ religious mission.

Courts have also struggled with whether “hostile work environment” employment discrimination claims are barred by the ministerial exception. A notable case is the Seventh Circuit’s en banc 2021 decision in Demkovich v. St. Andrew the Apostle Parish, Calumet City, quoted above. In that case, the plaintiff alleged that his church supervisor subjected him to extensive harassment before he was fired for being married to another man. On initial appeal, the court ruled that the ministerial exception did not apply to hostile work environment claims, distinguishing between “claims challenging tangible employment actions” and “hostile environment claims that do not challenge tangible employment actions.” On review, the en banc court reversed, concluding that the ministerial exception applies more broadly to bar hostile work environment claims based on constitutional religious freedom grounds:

Religion permeates the ministerial workplace in ways it does not in other workplaces. Ministers, by their religious position and responsibilities, produce their employment environment. From giving a rabbinic sermon on a Jewish holy day to leading a mosque in a call to prayer, ministers imbue a religious organization with spirituality. Given a minister’s role in the religious organization’s practice of the faith, allowing hostile work environment claims here “intrudes upon more than a mere employment decision.” Put differently, analyzing a minister’s hostile work environment claim based on another minister’s conduct is not just a legal question but a religious one, too.[23]

The court further expressed deep concern for the court’s “civil intrusion and excessive entanglement — that the ministerial exception prevents,”[24] and thereby recognized that the First Amendment “gives special solicitude to the rights of religious organizations.”[25]

Concluding Remarks

Tax reclassification as a “church,” “association of churches,” or “mission society” may be an attractive opportunity for many organizations described under IRC Section 501(c)(3), but reclassification should not be undertaken lightly. Careful evaluation of the organization’s current operations and governance structure should be made, particularly how strongly religious it is and whether it can likely satisfy the IRS’s fourteen-factor or associational tests. Additionally, the organization should identify whether adjustments are warranted to strengthen its religious identity and, if so, whether such adjustments are in keeping with the organization’s mission. Organizational leaders should determine the extent to which additional religious exemptions and related benefits may be available, such as the clergy housing allowance and the ministerial exception. Additional religious liberty protections may be available as well, consistent with the Demkovich court’s admonition to honor organizations’ First Amendment rights, depending on future religious liberty developments.


[1] Internal Revenue Code §508(c)(1)(A).

[2] Boyce, N.M., From Rubik’s cube to checkers: Determining church status is not as hard as you think,” Tax Analysts Special Report, The Exempt Organization Tax Review 68, no.1 (2011): 27–39. 

[3] 1977 GCM LEXIS 185 (Internal Revenue Service, Feb 3, 1977).

[4] Found. of Human Understanding v. United States, 88 Fed. Cl. 203, 217 (2009).

[5] Found. of Human Understanding v. United States, 614 F.3d 1383, 1389 (Fed. Cir. 2010).

[6] Ibid., p. 1388-89.

[7] Ibid., p. 1391.

[8] Branaugh, M., Seventh Circuit: Clergy housing allowance is constitutional, Church Law & Tax [MF1] (Mar 15, 2019). Available here

[9] Internal Revenue Service Publication 517, p. 3.

[10] Internal Revenue Service Publication 517, U.S. Treasury Regulation §1.107-1(a)

[11] “Ministers Audit Techniques Guide,” Internal Revenue Service (Apr 2009). Available here

[12] Demkovich v. St. Andrew the Apostle Par., 3 F.4th 968, 984 (7th Cir. 2021) (en banc).

[13] Our Lady of Guadalupe Sch. v. Morrissey-Berru, 140 S. Ct. 2049, 2060 (2020).

[14] Hosanna-Tabor Evangelical Lutheran Church & Sch. v. E.E.O.C., 565 U.S. 171, 195 (2012).

[15] U.S. Department of Labor, FLSA2018FLSA 2018-29 (Dec 21, 2018). Available here.

[16] 820 ILCS 105/3(d).

[17] Alcazar v. Corporation of the Catholic Archbishop of Seattle, 627 F.3d 1288 (9th Cir. 2010).

[18] Schleicher v. Salvation Army, 518 F.3d 472 (7th Cir. 2008).

[19] Shaliehsabou v. Hebrew Home of Greater Washington, Inc., 363 F.3d 299, 307 (4th Cir. 2004).

[20] Op. cit. note 14, p. 173.

[21] Op. cit. note 13.

[22] Ibid., p. 2054.

[23] Op. cit. note 12, p. 979.

[24] Ibid., p. 985.

[25] Ibid., p. 977.