D.1. Taxation of Churches

(1) Prior to the Tax Reform Act of 1969, churches weren’t subject to the unrelated

business income tax provisions. However, churches were involved in various types of commercial activities, such as operating publishing houses, hotels, factories, radio and TV stations, parking lots, newspapers, bakeries, and restaurants. Congress sought to end this preferential treatment for churches.

(2) The Tax Reform Act of 1969 made income derived by churches and

conventions or associations of churches subject to the taxes imposed by Section 511. See Treas. Reg. 1.511-2(a)(3)(iii). Treas. Reg. 1.511-2(a)(3)(ii) provides the following description of what constitutes a church or convention of churches for purposes of Section 511:

a. The term church includes a religious order or a religious organization if

such order or organization is:

• An integral part of a church, and

• Engaged in carrying out the functions of a church, whether as a civil

law corporation or otherwise.

b. In determining whether a religious order or organization is an integral part

of a church, consideration will be given to the degree to which it is connected with, and controlled by, such church. A religious order or organization shall be considered to be engaged in carrying out the functions of a church if its duties include the ministration of sacerdotal functions and the conduct of religious worship. If a religious order or organization isn’t an integral part of a church, or if such an order or organization isn’t authorized to carry out the functions of a church (ministration of sacerdotal functions and conduct of religious worship) then it is subject to the tax imposed by Section 511 whether or not it engages in religious, educational, or charitable activities approved by a church.

c. What constitutes the conduct of religious worship, or the ministration of

sacerdotal functions depends on the tenets and practices of a particular religious body constituting a church.

(3) Revenue Ruling (Rev. Rul.) 77-290, 1977-2 C.B. 26, holds, in part, that where a

member of a religious order receives income as an agent of the order and, pursuant to a vow of poverty, remits the income to the order, such income is the income of the order and not of the member. In such cases the tax imposed by Section 511 may be applicable to the income of the order.