Query -- Church Commercial Activities

[Alan Gunn]

At 02:01 PM 10/16/98 EDT, Harold Hallikainen wrote (in part):
>        Back on the "commercial activities" question, would a church be
>treated any differently than any other nonprofit organization with
>commercial activities by the IRS?  It would seem that the "soup kitchen"
>would not be commercial if they gave the soup away, but commercial if
>they sold it.

        The tax on unrelated business taxable income applies to churches as it
does to other charities (with a couple of very minor exceptions). So
churches, like other charities, do have to pay a tax on their incomes from
unrelated trades or businesses. The application of this principle to
commercial activities is a great deal more complex than just asking whether
the charity got money or gave stuff away, however. Even if a charity is
making big bucks from a business, the income will not be taxed unless the
conduct of the business is "unrelated" to the charity's exempt activity;
income from activities that aren't "businesses" isn't taxed; rents and
royalties (like those on sweatshirts bearing a university's logo) aren't
taxed; even income from business isn't taxed unless the business is carried
on "regularly."

        Someone deciding whether to impose ordinary regulations on profit-making
activities of churches would do well to learn something about the tax on
unrelated business taxable income, if only because an examination of this
tax will suggest how complex the extension of regulation is likely to be in
practice (even ignoring the problems of entangling the regulators in
matters of doctrine). Unless there is a strong reason for thinking that the
regulations do a lot of good, the benefits of the extension are likely to
be swamped by its costs.

        It may be worth noting that the policy arguments given for having a tax on
unrelated business taxable income are very shaky. No one has ever offered a
principled defense for either the tax itself or the particular lines drawn
by the Code. The tax was imposed in response to a Congressional feeling
that the NYU law school's owning a macaroni factory was somehow a worse
thing than a law school's owning rental property, stocks, or bonds. The
only argument Congress offered was that failure to impose the tax gave
charities a marketplace advantage over non-charities, a proposition that is
economically questionable in the case of an income tax (though it would
make sense for a sales tax).


Alan Gunn
Notre Dame Law School