Myth #1: 508c1as are PMAs (such as: faith-based ministries, organizations, and associations).

Truth #1: 508c1a is NOT an entity in and of itself. 508c1a is a section from the IRS Tax Code Title 26 that states: 

(C) Exceptions

  1. Mandatory exceptions

Subsections (a) and (b) shall not apply to—

  1. churches, their integrated auxiliaries, and conventions or associations of churches,

This code states that churches, their integrated auxiliaries, and conventions or associations of churches have an automatic mandatory tax exception and are not required to seek 501c3 status in order to be considered tax exempt.

Private Membership Associations (PMAs), referred to in legal text as unincorporated associations, are simply groups of two or more people that are gathering for a common purpose (whether for profit or non-profit).

It is important to note that faith-based ministries, organizations, associations, and/or businesses are NOT automatically tax exempt. If you wish to be considered tax exempt, you may apply using IRS Form 1023

ONLY Churches have the automatic mandatory tax exception. According to IRS Publication 1828,

“Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. Although there is no requirement to do so, many churches seek recognition of tax-exempt status from the IRS because this recognition assures church leaders, members and contributors that the church is recognized as exempt and qualifies for related tax benefits. For example, contributors to a church that has been recognized as tax exempt would know that their contributions generally are tax-deductible.” [emphasis added] 

While the IRS does not define what a “church” is, they do provide a “14-point-test” based on previous court case decisions in order to determine on a case-by-case basis if a church is a bona fide church. 

While a church does not have to meet all 14 requirements in order to be considered a legitimate church, these are the key components that the IRS is looking for in order determine the legitimacy of a church:

  1. Distinct legal existence
  2. Recognized creed and form of worship
  3. Definite and distinct ecclesiastical government
  4. Formal code of doctrine and discipline
  5. Distinct religious history
  6. Membership not associated with any other church or denomination
  7. Organization of ordained ministers
  8. Ordained ministers selected after completing prescribed courses of study
  9. Literature of its own
  10. Established places of worship
  11. Regular congregations
  12. Regular religious services
  13. Sunday schools for the religious instruction of the young
  14. Schools for the preparation of its members

A church may possibly be structured in one of four ways: (Page 5)

  • Corporations Sole
  • Nonprofit Corporations (501c3)
  • Unincorporated Associations
  • Charitable Trusts

To learn more about the churches and the 14-point criteria, please review the following case studies:

  • De La Salle Institute v. United States, 195 F. Supp. 891 (N.D. Cal. 1961).
    • The result was the so-called “fourteen points test,” which was later expanded to include a fifteenth criterion – any other facts and circumstances. The word “test” is misleading, as there is no minimum number of criteria an organization must meet to be classified as a church. Rather, the criteria serve as a guide to assist case-by-case analysis.
    • While the IRS does not explicitly define what a church is, by establishing this “fourteen point test,” it could be argued that the government is in fact attempting to regulate an establishment of religion, which is prohibited by the First Amendment. 
  • American Guidance Foundation, Inc. v. United States, 490 F.Supp. 304 (1980).
    • One criterion that consistently appears is the presence (or absence) of a regular congregation.
    • “At a minimum, a church includes a body of believers or communicants that assembles regularly in order to worship. Unless the organization is reasonably available to the public in its conduct of worship, its educational instruction, and its promulgation of doctrine, it cannot fulfill this associational role.”
    • The facts failed to show that the participants in the organization’s activities considered it their church. Thus, the participants did not form a congregation.
  • Spiritual Outreach Society v. Commissioner, 927 F.2d 335 (8th Cir. 1991).
    • The tax court ruled against SOS because it found that SOS failed to fulfill an associational requirement and certain factual requirements which are discussed more fully below. We agree with the tax court that SOS fails to satisfy the factual requirements. Therefore, we do not reach the associational requirement issue.
    • the court can make a declaration as to plaintiff’s church status based on a review of plaintiff’s activities without judging the sincerity of plaintiff’s religious beliefs.
    • plaintiff was not a church for federal tax purposes even though “there [wa]s no doubt that [plaintiff] [wa]s engaged in sincere religious activity”)
    • The concept of a congregation does not require that members meet regularly for prescribed religious services. For example, churches in some religions do not hold group services, but serve as quiet refuges where members come for individual reflection and prayer. Their membership can constitute a congregation for purposes of the Internal Revenue Code just as surely as a membership that assembles at least weekly for group services led by a minister. However, the concept implies that the membership, whatever the size, have some religious bond and some element of continuity. Usually in addition to individual practices, members participate in mutual ceremonies, observances, and celebrations important to their religion.

Questions to Consider:

  1. Do my founding documents state that our unincorporated association is a church? (If not, you may add an amendment to your faith-based ministry bylaws and articles to become a free church via meeting minutes). (See Myth #4 – A 508c1a is a free church.)
  2. Does my unincorporated association fit the 14-point criteria for a bona fide church mentioned above? If not, you may want to:
    1. Restructure your activities to align with the 14-point criteria and operate as a bona fide church
    2. Register for tax exempt 501c3 status if you are truly operating as a non-profit faith-based organization – not a bona fide church, or
    3. Return to the public domain as a for-profit entity)

Come back in 2 weeks for Myth #2 …

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