You and I eventually will go to be with the Lord. Our tents will cease to exist. The life of a corporation, however, is continuous and ceases to exist only when those in control, the board of directors, have taken steps to cause it to end. An important point is that the control rests with the board of directors. To make this point clear, let us look at the basics of corporate structure and the difference between profit and nonprofit organizations. This will be a basic outline without great detail.

Stockholders/Board of Directors

For an example of a profit-making corporation, let us take two men who are plumbers and who decide to join forces to become one business. Their lawyer advises against partnership for a number of reasons, but he does advise them to incorporate. Let us also assume that plumber Al has more equipment, a newer truck, and more accounts receivable than plumber Bob. Each is contributing his assets to the corporation. The attorney drafts the articles and bylaws and files them with the state. Then he meets with Al and Bob to issue stock in their new corporation. Since Al put more and better equipment into the corporation, the attorney issues 60 percent of the stock to Al and 40 percent to Bob. Now, since this is a profit-making corporation, the majority stockholder(s) controls the board and thus controls the corporation. Bob has his minority stock position, but Al is the boss. This is an ultrasimplified example for the sake of illustration, and in real life it would not necessarily develop this way.

The Need for Incorporation

Now, in the case of a profit-making corporation, we have seen that the majority stockholder is in control. What about the stockholders of the nonprofit corporation? The answer is, there are no stockholders. In fact, to be exempt, the articles must clearly state that no part of the net earnings of the corporation shall inure to the benefit of, or be distributable to, its members, trustees, officials, or other private persons. Thus, we can see that the board is still in charge, but the corporation is not organized to generate profits for stockholders. Rather, the corporation is organized for a tax-exempt purpose and its bylaws must specifically state that no individual is to profit from the existence of the corporation.

We remarked in the preface that fewer than 10 percent of active business endeavors function as corporations. Yet, in order to qualify for tax exemption, the church and parachurch organizations must be a legal entity (a corporation). Each application for recognition of exemption must be accompanied by a conformed copy of its organization’s certificate of incorporation, constitution, articles of association, trust indenture, or other enabling instruments. It is possible to function as something other than an incorporated entity (i. e. , trust or association). However, the corporate path seems to be the one of least resistance and most often will fit the needs of the church and parachurch organizations.

To illustrate, let us create a hypothetical situation involving a character we will cal] Rev. E. Van Gelizer. Let us make him a well-known spiritual leader and evangelist. In his earlier years, after completing his schooling, he set about the task to which he was called. As he went about bus ministry, the problem of taxation did not even enter his mind. His message was heard by more and more people, and his ministry grew. People began to send him money and gifts. His ministry continued to grow until he found himself preaching before convention center crowds. Gifts continued to come in cash and checks. And, as fast as the money came in, Rev. Van Gelizer sent it back out to further the Great Commission.

Enter the IRS. Some friends have made large contributions by check to Rev. Van Gelizer, and they deducted the amounts on their income tax returns. The IRS investigated and found that, while Rev. Van Gelizer was honest, he was not a tax-exempt organization for which income tax deductions are allowed. The contributors’ deductions were disallowed, causing a bad witness, not only for the ministry but certainly for the good minister as it related to his personal taxes. Rev. Van Gelizer was aghast. Intent upon rectifying the situation, he sought the advice of an attorney, who recommended that a nonprofit corporation be formed. They did this in the name of Van Gelizer Evangelical Ministries, Inc. , and filed for a tax-exempt status. Once the Internal Revenue Service granted the exemption, Rev. Van Gelizer’s organization functioned under the umbrella of a corporate structure free from tax, and contributions to the organization were now deductible.


IRS Guidelines for Church Exemption

In most states, a church does not need to incorporate nor file for tax-exempt status. It is exempt simply because it is a church. This can lead to some very touchy situations, however. For example, what constitutes a church? Are you sure your fellowship group qualifies? Because of the farce being perpetrated by such organizations as the Universal Life Church, the Temple of Bacchus, and others, the IRS is taking a tough stand against what it considers abuses of tax relief designated for churches. At times, the IRS has ruled against the use of a home, store, or garage as a church building.

The Rev. Van Gelizer might have taken the position that his group was a church, and he might have been right, but could he meet these guidelines as published in IRS News Release IR-1930?


GUIDELINES FOR IRS AGENTS. Since beliefs and practices are so varied, IRS cannot define a church, but resorts to a case-by-case approach to determine whether an organization is a church, says IRS Commissioner Jerome Kurtz. IRS looks at 14 elements:

(1) a distinct legal existence;

(2) a recognized creed and form of worship;

(3) a definite and distinct ecclesiastical government;

(4) a formal code of doctrine and discipline;

(5) a distinct religious history;

(6) a membership not associated with any other church or denomination;

(7) a complete organization of ordained ministers ministering to their congregations;

(8) ordained ministers selected after completing prescribed courses of study;

(9) a 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; and

(14) schools for the preparation of its ministers. ‘

How many of these fourteen qualifications does your unincorporated fellowship (church) meet? Could your group stand up to an IRS audit? Organizations do not need to meet

all these standards, but the more they do, the better chance they have of being exempt as a church.

One wonders how the church at Colosse or the church at Philippi would be considered by the IRS today. Could they qualify for exemption? If a church seeks IRS exemption today, it will not only have to meet a majority of the fourteen IRS guidelines, but it will have to answer a series of questions aimed at, in my opinion, discouraging the continuing of the request for exemption. In other words, the church having filed a form 1023, and requested federal exemption, is now going to get a letter back (form letter 1000d. 0) from the Internal Revenue Service. The letter is sent to the applicant church, the church that filed application on form 1023. The letter says in part:

Before we can recognize an organization as being exempt from federal income tax, we must have enough information to show that all legal requirements have been met. Please send us the requested information within 15 days [note, 15 days] so we can complete action on your case. If we do not hear from you within that time, we will assume you do not want us to consider the matter further and we will close your case. In the event that we do that, we will notify the appropriate state officials as required by section 6104C of the Code, that based upon the information we have, we are unable to recognize you as an organization of a type described in code section 501C3. If you do not provide the requested information it will be considered by the Internal Revenue Service that you have not taken all reasonable steps to secure the determination. Under section 7428 (b,2) of the code, not taking all reasonable steps in a timely manner to secure the determination may be considered as a failure to exhaust administrative remedies available to you within the service and may preclude the issuance of a declaratory judgment in the matter under judicial proceedings.

Imagine the stress and confusion a young pastor would experience when attempting to comply with this vague form letter within the strenuous two-week time frame.

Let us assume for a moment, that your fellowship group has grown to where you or your group feels it is big enough to be called a church. Upon the advice of counsel, you decide that you should seek nonprofit and exempt status. You make application on form 1023 to the Internal Revenue Service for exempt status determination, and in a few weeks you receive a letter from the IRS containing the above message. What kind of information is the IRS really seeking? And, will you be able to comply within the fifteen-day deadline? As an example of the questions the IRS asks, let me quote from a letter a Southern California church recently received. This particular church had already filed an application for exemption and had fulfilled all other requirements.

1. Do you maintain ecclesiastical control over your members?

2. Does the congregation have any control over the pastor or any say in who he will be?

3. How frequently do you hold services? What are the necessary qualifications to be eligible to conduct the services?

4. Submit a copy of a sample sermon or service.

5. What are the specific beliefs of your organization? Please submit a copy of your tenets or creed.

6. Has your organization established any permanent place of worship? Please submit a description of the facility.

7. Will anyone use your facility other than for the purpose of directly carrying out your work? Will any of your directors or employees reside at your facility? If so, explain fully. Is the owner of the

facility related to you in any way, other than as a landlord?

8. Does your organization carry out the administration of sacerdotal functions?

9. Does your organization plan to ordain ministers? If so, what are the necessary requirements for a person to become a minister?

10. Is the general public made aware of your religious services? If so, by what means?

11. Will anyone connected with your organization  receive a salary or expense money from you? If so, explain fully including their names, their duties,  and the numbers of hours each week that they will work. State the amount of compensation each will receive and the basis for arriving at the amounts of such payments.

12. Does your organization have ordained ministers? What formal training do they have? Please submit copies of your certificates of ordination.

13. What is the present size of your congregation?

Can you imagine Philemon, as pastor of “the church in your house” (Philemon 2), receiving such a letter? Can you further imagine him responding to it within fifteen days? It should be noted that the answer to most of the questions had already been covered within the Articles of Incorporation and Bylaws that were submitted with the application for exemption! Many of these questions are, however, relevant because of the fraudulent churches which are formed by those seeking to avoid taxes by using the church as a tax shelter. A publication on taxation with a note worthy heading in bold print recently caught my eye. “Form-Your-Own Churches Are High on the IRS Hit List and It Intends to Go After Their Founders.”

One last comment regarding Rev. Van Gelizer and his situation: You will remember that the corporation formed was Van Gelizer Evangelical Ministries, Inc. Now let us assume that Rev. Van Gelizer and his board did not elect to become a church, but wanted to stay in the evangelistic field without a church affiliation. Under these circumstances, the corporation would have had to file for nonprofit status and then request exemption. Remember, it is only a church that is not required to file for exemption, and this is true only in some states.
Corporation-Liability or Protection?

Since it is so important to maintain a good witness, and since some people delight in finding fault with any organization or person professing to be Christian, it becomes important to protect both the image of the individual and the Christian name. If you recall, we discussed the fact that a corporation is an entity of its own; it is not Rev. Van Gelizer. He may be the president of the corporation, he may be the key person in its function, but he is not the corporation.

For example, if Rev. Van Gelizer were to leave his ministry, the corporation would continue to exist unless the board of Directors took steps to dissolve it. The fact that the corporation is separate from Rev. Van Gelizer has another advantage. The corporation is responsible to itself. So, if through negligence, the pastor or a member of his staff should fail to accurately report his own income tax, or if he should on his own violate the law in any way, it would not affect Van Gelizer Evangelical Ministries, Inc. (except by association). Additionally, if anyone within the corporation acted wrongly or illegally, Rev. Van Gelizer would not be hurt directly. It can readily be seen that this is very different from what would happen if all activities of Rev. Van Gelizer were carried out in his name without the protection of the corporate umbrella. Any unlawful act, intended or not, could lead to a forced shutdown of his work; his mission would cease, or would at the very least be adversely affected.

The corporation also has continuity of life beyond that of founder. If Rev. Van Gelizer, after a long and happy career of evangelistic work, should retire or go to be with the Lord, the corporation would not go with him (no, he can’t take it with him). The corporation would carry on the mission. Nothing would change, not even the name. All that would be necessary is the appointment of a new minister to take his place, and there would be continuity.

It should be noted that, while Rev. Van Gelizer was president of the corporation, he was not necessary running the organization. He was involved in the decision making and was the spiritual leader; however, the board of directors was charged with the responsibility of running the corporation. When the new minister arrived, he did not take over; the board continued to function just as it had before. Contrast that with a noncorporate organization led by one person, and the advantage of corporate management can readily be seen. Rev. Van Gelizer was called to be an evangelist, not a businessman. Having the centralization of management in the board of directors frees him to continue to be an evangelist, while the board functions as the business head.

There is good reason for the IRS to take a dim view of a person, Christian or otherwise, who receives contributions for a particular cause, but who keeps no records of the income or expenses. As honest as the person in charge may be, the IRS and the donors have a right to know how much was received and where the money went. The contributions were not given to increase the standard of living of the leader nor for his personal investment, but for the cause that was espoused. If the money should become the personal gain of an individual, it is certainly not nonprofit; and the IRS has the right to tax those dollars as income. Contributors are entitled to take charitable deductions on their income tax returns for genuine gifts of cash or property to qualified organizations.


Qualified Organizations

Now, how do we define qualified 501(c)(3) organizations? Let us look at what constitutes a qualified 501(c)(3) organization and pay particular attention to the requirements that must be met.

Basically the organizations fall into two groups. The first group includes “50-percent”-type organizations, which are churches, schools, hospitals, and governmental agencies. It also may include organizations that normally receive a substantial part of their support from governmental agencies, the general public, and certain private foundations, commonly referred to as operating foundations, “community” or “pooled fund” foundations. A 50-percent-type organization allows the noncorporate contributor to deduct up to 50 percent of his adjusted gross income in the year of his gift, with five years of carry over of the excess.

The second group comprises all other types of organizations, including private foundations, to which contributions are deductible. These organizations are referred to as “20 percent” corporations. For the sake of our discussion, we will concern ourselves with only the 50 percent type.

A common characteristic of all exempt corporations is that no part of their income may inure to the benefit of any individual. This refers to ownership, not to salaries or other forms of compensation. However, excessive salaries or other forms of excessive compensation (e. g. , travel, clothing, unlimited use of credit cards) may void a corporation’s exempt status on the grounds that a part of the corporation’s earnings inures to the benefit of an individual.


Nonprofit and/or Tax-Exempt

Confusion exists when we use the terms nonprofit corporation and tax-exempt corporation. An organization may be nonprofit under applicable state law, but this does not mean that it is tax-exempt. Nonprofit status may, in effect, be a prerequisite for exemption, but by itself does not confer exemption. Neither does exemption from state or local taxes establish that an organization is organized and operated exclusively for one or more federal exempt purposes. In other words, until an organization qualifies for and receives exempt status from the Treasury Department, it is not exempt from federal taxes.

I want to remind you that churches do not need to make application for federal exemption in many states. However, it may be a good thing to do anyway. In order to be listed in the IRS publication of exempt organizations, your ministry must have filed for and received exemption. If your organization is not a church, or if you are not sure what your ministry is qualified to be, and it is claiming an exemption, you would be wise to read very carefully How to Apply for Recognition of Exemption for an Organization (IRS Publication 557). The first paragraph of the first chapter includes these instructions:

An organization that claims to be exempt, but has not yet established its exempt status, should file Form 990, Return of Organization Exempt from Income Tax. In such cases, the organization must indicate on Form 990 that the return is being filed in the belief the organization is exempt under section 501(a) of the Code, but that the Internal Revenue Service has not yet recognized such exemption.

No organization may claim exemption from tax unless it is first determined to be an exempt organization. It must
submit proof of exemption to the IRS district director for the district in which the corporation’s principal place of business is located. To file for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, it must use IRS Form 1023. Once the exempt character of a corporation has been established and the IRS has issued a determination letter, the organization must file an annual information return using Form 990. Churches, however, are exempt from the information return reporting rules after they have received notice of final determination of exemption.
Unrelated Business Income

An exempt organization is not subject to tax on any of its income except unrelated business income, which is income generated by activities not related to the purpose for which the corporation was founded. That income must be reported on IRS Form 990-T. For example, if your church received a toy manufacturing company as a gift, the profits of the company would be unrelated business income and would be taxable.

The area of unrelated business income has been responsible for a great deal of confusion in the last few years. Few understand what is and what is not unrelated business income. The first consideration must be unfair competition. The tax-free status of Section 501 organizations enables them to use their profits tax free to expand operations, while their competitors can expand only with the profits remaining after taxes are paid. Some tax-free organizations, in effect, have used their tax exemptions to buy an ordinary business. They have acquired the business with little or no investment on their own part and paid for it in installments out of subsequent earnings. This is unfair competition. An exemption will not be revoked or denied in this case if the tax that is imposed on unrelated business income is paid. If an exempt organization has unrelated business income, and if that organization files a tax Form 990-T and pays its taxes on such income, it is conforming to the Internal Revenue Code. Prior to the Tax Reform Act of 1969, churches were not subject to the unrelated business income provisions. However, churches were involved in various types of commercial activities, and the Tax Reform Act made the income from unrelated business activities subject to tax.

It should be noted that some exclusions from unrelated business income are allowed. An in-depth study of these exclusions cannot be a part of this chapter. If you suspect your organization might be involved in unrelated business, you should discuss it with competent advisers, referring them to Internal Revenue Code 513(a).


Group Exemptions

In many incorporated religious organizations, it is not uncommon for one to file a separately incorporated subsidiary. While the parent corporation may be exempt, it does not follow that the subsidiary corporation is automatically exempt. The inclusion of the subsidiary’s financial information on the parent organization’s information return does not satisfy the reporting requirement. In certain situations, the parent organization’s reporting exemption does not carry over to the subsidiary organization. However, a group return may be filed by a central, parent, or like organization for two or more local organizations (none of which may be private foundations) provided the local organizations are:

1. Affiliated with the central organization at the close of the central organization’s annual accounting period
2. Subject to the general supervision or control of the central organization
3. Exempt from a tax under a group exemption letter which is currently in effect. ”

All three of these requirements must be met. Each local organization must annually authorize the central organization in writing to include it in the group return. It also must file annually with the central organization a declaration of the truth and completeness of the authorization and statements required under penalty of perjury. The group return is filed in addition to the separate return of the central organization. If an organization fails to file its Form 990 on or before the due date, it will have to pay $10 for each day the return is late (not to exceed $5, 000). All penalties are a waste of the funds God has provided for the ministry He has given you. Be aware and remember that a group return letter of exemption must be applied for and received for a group exemption to be in effect.



1. U.S., Department of the Treasury, Internal Revenue News Release, IR-1930.

2. Patrick A. Heller, “Form-Your-Own Churches Are High on the IRS Hit List and It Intends to Go After Their Founders,” T.C. Memo, 1978-149:4.

3. U.S., Department of the Treasury, How to Apply for Recognition of Exemption for an Organization, IRS Publication 557, 1978, P. 25

4.Ibid, p. 1.

5.Ibid, p.4.