Not long ago Dr. Eugene Carson Blake, former president of the National Council of Churches, made a startling statement: “In view of their favored tax positions, with reasonably prudent management America’s churches ought to be able to control the whole economy of the nation within the predictable future” (CHRISTIANITY TODAY, Aug. 3, 1959, issue).
Dr. Blake and many other churchmen—Protestant, Catholic and Jewish—are seriously concerned about the rising number of tax-free church business enterprises that have nothing to do with religion. There is good reason for their concern.
In a nation-wide study I found that many religious denominations and their subordinate agencies have gone into competitive profit-making businesses on a large scale. Churches own radio stations, hotels, office buildings, parking lots, bakeries, warehouses. They do contract printing, invest in stocks and bonds, and speculate in real estate. They have investments in stocks and bonds that for some major denominations run into millions of dollars.
The federal government and all the states specifically exempt places of worship, whatever their name or faith, from taxes of all kinds—33 of the states by their constitutions. Churches pay no property taxes. They pay no federal income taxes, even if they derive profits from unrelated business enterprises. Estate and gift taxes cannot be levied on them.
Tax exemption for churches and their related activities rests upon two historic American principles: complete freedom of conscience and worship, and recognition of the benefits of organized religion to society.
American tradition solidly upholds exemption for all nonprofit religious organizations, and few would ever question that religious worship and teaching add a moral strength to the nation incalculable in money.
But when churches and agencies under their control step over into business enterprises, unrelated to their religious and sacerdotal functions, they raise pressing questions as to the justice of their favored tax position.
Today those questions are acute. Churches and their agencies have increased their business activities tremendously in the last decade, and at the same time all levels of government have been forced to find more and more revenue. Many tax officials have told me during this research: “Something has to give!”
Churches In Unrelated Business
Thirty years ago, about 12 per cent of real property in the United States was tax-exempt; today, about 30 per cent pays no taxes. Biggest exemption goes to government property, such as post offices, parks, military posts, state universities, city halls, and public schools. Next come churches and other religious organizations, accounting for about one third of all exempt properties. While exemption from property taxes for religious organizations is not a great burden on any community, the rub comes when a church with its favored tax status embarks upon business for profit.
“I buy all my gas at a filling station on a lot owned by my church,” a prominent Methodist layman in Washington, D. C., told me. “An oil company leases the lot, with an agreement that the church will receive one cent a gallon on all gas sold.”
“And your church pays no tax on such business income?” I asked.
“Of course not,” he replied.
A realtor in Missouri, prominent in his Presbyterian church, drove me to an expanding residential area. “My church owns that tract adjoining mine,” he said, pointing it out. “When the church sells its tract, it will pay no capital gains tax. When I sell mine, I’ll pay the tax. Thus my church presents unfair competition to every real-estate firm in town.”
Many churches own and operate retail stores, industrial plants, and cattle ranches—all free of taxes on sales and profits. A large farm in Nebraska was recently taken over by a church organization, which meant that it was taken off the tax rolls.
Does your church conduct bingo games for profit? It pays no income or amusement taxes. Does your church organization operate a cafeteria primarily for its employees? Again, no tax. Proceeds of athletic contests, motion pictures and other paid entertainments, given to a church, are exempt from admissions tax.
Does your minister, priest, or rabbi live in a manse owned by your church officials or congregation? In most states, the property is not taxed. A Church of Christ minister informed me that when he purchased his latest automobile the salesman suggested: “Why don’t you buy this car through your church? That would save you the state sales tax.” The minister related further: “I told the agent that would not be right, and he assured me that many preachers do it that way.”
From its headquarters in Salt Lake City, Utah, the Mormon church operates numerous business enterprises to help support its missionary and welfare activities. These include a newspaper, radio and TV station, apartment houses, hotels, mercantile and banking establishments. In October, 1960, Mormon President David O. McKay announced a large building project for Salt Lake City, to cost more than $40,000,000 and to include construction of a 28-story office building and the addition of 17 stories to the church-owned Hotel Utah. More recently this church purchased 786 acres of land and 14 industrial buildings in an expanding area of the city, to be held for investment and development purposes. Noted for its program of self-help for its members, the Mormon church owns and operates hundreds of “welfare farms.” One of the largest is in Florida, with 740,000 acres and 100,000 cattle.
Some Mormons business enterprises are administered by Zion Securities Corporation, which pays property taxes on all holdings not used for religious purposes, and pays both state and federal corporate income taxes. The church pays no income taxes upon dividends it receives from its vast unrelated profit-making activities.
Three churches of Bloomington, Illinois—First Christian, First Baptist, and Second Presbyterian—own the Biltmore Hotel of Dayton, Ohio, purchased in 1954 for $3,300,000. Eight business men, members of these churches, borrowed $200,000 for the down payment; mortgages took care of the rest. The property was leased to the Hilton hotel chain. An agent corporation assumed liability for the Hilton payments, and also for any damage suits that might arise in the hotel management. One of the laymen in the transaction told me:
“This type of business arrangement is especially profitable for churches. We leased out the hotel for a substantially lower figure than could a company not exempt from federal income taxes. From rentals, we have already paid off the amount we borrowed. Each church is now receiving about $2,500 annually, and will get more when the mortgages are liquidated. It’s a perpetual tax-free endowment.”
Office buildings are sources of business income for many congregations. The First Methodist Church of Chicago owns and worships in the Chicago Temple, a 22-story structure in the downtown area, completed in 1924 and valued today at about $6,000,000. The congregation pays property taxes, amounting to about $155,000 per year, assessed upon the offices rented out for commercial purposes, but pays no income taxes upon its receipts from office rentals, which gross about $250,000. Income from this business enterprise is used to support ministerial aid and other church welfare projects.
In downtown Los Angeles, the Temple Baptist Church owns the entire stock of the Auditorium Company, which owns the Auditorium Office Building and the Philharmonic Auditorium, valued at several million dollars. The company pays property taxes upon the offices and auditorium leased to the city’s philharmonic orchestra, the civic opera, and other commercial enterprises, but pays no state or federal income taxes because as a church it is exempt.
Station WWL in New Orleans, radio and television, is owned and operated by the Jesuits of Loyola University. It takes commercial advertising, yet the Internal Revenue Commission ruled the station tax-exempt as an integral part of a church.
Bread And Wine
In addition to spiritual food, numerous church organizations turn out cheese, bread, cakes, preserves, and packed meat. St. John’s bread is produced under franchises sold by a church organization in Minnesota, and is made by a formula brought to America by monks from Bavaria many years ago. Tax-free profits from this bread are used chiefly for education. The monks of St. Joseph’s Abbey in Massachusetts derive income from their business in high-grade jellies, distributed through a commercial firm.
Seventh-day Adventist churches have long specialized in the production and sale of vegetarian foods. One of the largest such operations is the Loma Linda Food Company of California, owned by the Pacific Union Conference of this denomination. Sales of the Loma Linda products total several million dollars a year, income-tax exempt. A large part of the profits goes to carry on research in nutrition.
Fastest growing of the profit-making activities for churches is the “sale and lease-back” enterprise. Churches have discovered that they can make up to 20 per cent on their money by this device. It works this way:
A business firm sells its physical properties to a religious organization, then leases them back, keeping the same management, personnel and production as before, and agreeing to pay all taxes, insurance, and other overhead expenses. The firm can write off the rentals and other expenses against its profits in greater amounts than would be permitted through depreciation if it still owned the plant—thus effecting savings in income taxes. The church group can almost always recover the entire cost of the property, plus interest, in 20 years, since it is exempt from the taxes a private business would have to pay. Then it holds what amounts to a tax-free endowment.
Under such an arrangement, the owners of the Yankee Stadium in New York sold this property to a Chicago broker for $6,900,000. This broker sold the land of the stadium to the Knights of Columbus and leased it back at $182,000 annual rent for 24 years. Then he leased the stadium and the land to the original owners. Here was a triple play that knocked Internal Revenue out of a 24-year inning! Is this legitimate tax exemption for religious reasons? Or is it, as it seems, a tax dodge for business purposes?
The Southern Baptist Annuity Board in 1959 purchased a property of Burlington Mills at Cheraw, South Carolina, for $2,900,000, and leased back the property to the firm. In 20 years’ time, rentals from the mills will liquidate the purchase and pay interest on the investment. “Our board has the advantage of paying no corporate taxes on the rentals from the property, while the company has the advantage of using the purchase money for other purposes,” Fred W. Noe, treasurer of this church agency, told me.
A growing variation of the lease-back plan is possible through a federal tax provision that permits nonprofit institutions to take over profit-making industries for five years tax free. Generally the purchase is made with small payments spread out over many years, which permits the business firm to pay capital gains taxes on the amounts each year rather than continue paying the higher income taxes. Of course the institution employs the former owner to keep running the business, and pays him a “salary.” At the end of the five-year period, the tax-exempt institution sells the property to a church group which can own and profit from the business indefinitely—tax free.
In 1954, Methodist-related Wesleyan University in Illinois purchased two California hotels for $10,000,000; it paid only $200,000 cash and carried the rest through mortgages. Five years later the institution had all its cash investment back, plus tax-free profits, and sold the hotels to the St. Andrew Catholic diocese of Chicago, which can carry them indefinitely as sources of tax-exempt income.
Concern By Church Leaders
Under existing laws such transactions are entirely legal. And income from church-owned businesses uniformly goes to support worthy causes, namely, missions, seminaries, colleges, community welfare, and religious programs. Is this not reason enough for exemption?
Most church leaders say no. They are concerned by the frequent charge that tax exemptions are poorly-concealed forms of tax support for organized religion. They reflect that it was the ever-increasing wealth of churches that led to revolutionary expropriations of church property in England in the sixteenth century, in France in the eighteenth century, in Italy in the nineteenth century, and in Mexico as late as 1942. They are aware that when the funds entrusted to them by their churches are invested in profit-making ventures, they enter the field of unfair competition with taxpaying citizens.
“It has been my observation that where churches have been supported by business enterprises there is the loss of the spirit of voluntary giving on the part of church members: this has the effect of deadening the spiritual life of the church,” says Dr. Billy Graham, noted evangelist.
Church leaders seem agreed that the deductions allowed on income taxes for contributions to churches and related organizations should be retained, as proper incentives to support religious causes. Many insist that in any sweeping reform of taxation policies, fairness demands that all nonprofit tax-exempt groups and foundations should be reviewed along with religious groups, and none should receive preferential treatment. “Still, our churches should take the lead in proposing and adopting rules that will be fair to both the churches and to our government,” comments C. Stanton Gallup, Connecticut businessman and former president of the American Baptist Convention.
Several official rulings point the way to a fair solution of the tangled problem. In Nashville, Tennessee, two major denominations, the Southern Baptist Convention and The Methodist Church, have large publishing houses to produce their religious literature. In 1959 for the first time the municipality assessed all the properties of these two church agencies.
Both church groups appealed to the state tax authority. That official agency ruled for the Baptists in striking out the taxes on the ground that their properties are used “either exclusively for religious purposes or for purposes so close thereto as to come within the tax exempt status provided by Tennessee law.” The Baptist position was strengthened by the fact that taxes have always been paid upon property owned by its board not used for religious purposes. The tax authority ruled against the Methodist Publishing House on the ground that a portion of its activities was secular and therefore outside its own denominational needs.
In the Napa Valley of California, Christian Brothers Winery, operating as the De LaSalle Institute, in a modern seven-million-dollar plant, turns out more than a million cases a year of high-grade wines and brandies. For several years the winery has contested assessments of federal income taxes on the ground that its organization is church-related. In August, 1961, a federal court ruled that this business enterprise was not an integral part of a church and therefore taxes must be paid on its profits.
A Pennsylvania court ruled that tax exemption for church property applies only to that used for actual worship, plus whatever land is needed for access. New York courts have held that occasional suppers, bazaars, and entertainments to raise money for church purposes are not taxable, while a cafeteria under church ownership, open to the public, is taxable.
Ending Tax Abuses
These and similar rulings form a pattern for a tax policy that meets the approval of spokesmen for many churches. This is their consensus: churches should not be taxed by any level of government for facilities and services related to their religious functions, and this historic policy should be maintained inviolate; on the other hand, churches should be taxed when they engage in business enterprises for business profit.
What is “related” and what is not? “If it is an integral part of its church organization, essential to the effective pursuit of its religious programs and not a device for financial profit from an outside enterprise, it is related,” says an active layman engaged in government tax affairs.
Following this rule, the use to which church-owned realty is devoted would determine whether it is taxed. Along with sanctuaries of worship, exemption from taxes would apply to auxiliary buildings used exclusively for religious instruction and training, offices for administration of religious activities and parking lots for the convenience of worshipers or church workers. Schools and welfare facilities owned or controlled by churches would be exempt as both religious and nonprofit institutions.
All facilities not used exclusively for church purposes, and particularly those that produce business income, would bear their fair share of taxes. A church-owned office building would be taxed for any proportion rented out commercially. Property owned by churches for future use or speculation, whether vacant or improved, would go on the tax rolls; as soon as the church began using it for church purposes, the property would of course attain tax-free status.
In the matter of income taxes, the source of the income should determine the tax liability. Some state and federal courts dealing with questions of taxation as applied to religious groups have followed the rule that the use to which the income is put is the proper test to determine tax exemption. But widespread support has been given the policy expressed a year ago by the Baptist Joint Committee on Public Affairs: “Earnings from businesses that have no direct connection with the religious purposes of the church should pay income taxes, regardless of how that income is used; the basic criterion should be the source from which the income is derived, rather than the use to which it is put.”
Following that rule, profits from the lease-back and other commercial ventures would pay corporate income taxes. Profits from publishing literature used by the church would not be taxed; profits from outside contracts would be taxed.
Numerous actions and statements by church groups indicate the concern felt over the widespread intrusion of religious organizations into profit-making businesses. The General Assembly of the United Presbyterian Church in the U.S.A. on June 2, 1958, requested its foundation “to make no investment in unrelated business where such income tax exemptions are allowable.” The National Association of Evangelicals takes the stand that profit-making by churches and their related organizations constitutes an unlawful subsidy forbidden by the first amendment to the Constitution.
The trustees of many churches, bequeathed income properties such as apartment houses and business blocks, have requested that all taxes be continued as before. Churches of many faiths insist upon collecting and remitting sales taxes on all items from their bookstores open to the public, paying property taxes on parking lots leased out for commercial use during the week, and accepting no subsidies by special interest rates on public loans for their institutions.
Some observers contend that uniform state laws should provide that all tax-exempt real property should be listed on the tax rolls, with a notice as to its value and reason for exemption. D. D. Cameron of Tulsa, a Protestant layman and assistant county attorney, comments that Oklahoma has just such a law—entirely ignored by public officials, presumably for fear of offending the countless members and friends of nonprofit organizations. Most churchmen and tax officials agree that such a provision would create better understanding of the reasons for fair tax exemptions, as well as place under scrutiny some practices that take unfair advantage of exemptions.
The attitude of the vast majority of American churchmen was summarized by the Rev. Robert E. Van Deusen of Washington, D. C., prominent Lutheran: “While we of the churches insist upon tax exemption for our exclusively religious activities, we should willingly pay our share of taxes when we get into profitable businesses, and thus render unto Caesar the things that are Caesar’s, and to God the things that are God’s.”
