The Myths of the “508 Free Church” Status

By Raul Rivera

Periodically, the “508 Free Church” misconception circulates the internet, leading pastors and leaders astray. Advocates of this notion assert that a church labeled as a "508 church" enjoys a distinctive classification that grants them immunity from taxes and IRS audits, autonomy from government regulations, and increased freedom of speech.  None of these claims are true. Section 508 has been interpreted by the courts many times. In the case of Steeves v. Internal Revenue Service., the court explicitly refuted the argument that Section 508(c)(1)(a) shields a church from IRS scrutiny. In the case of Branch Ministries v. Rossotti, the court determined that such claims are creative rather than substantive, ultimately deeming them without merit. I will discuss this case later in this blog and expound on the real meaning of Section 508.

Every Possibility Considered

At StartCHURCH, our foremost commitment is to advocate for the church's interests. We diligently examine church law to identify every viable means within the legal framework that enables churches to operate with maximum freedom and minimal restrictions. Should a 508-church status genuinely offer autonomy from section 501(c)(3) obligations, it would be our top recommendation for all religious institutions. However, it has become apparent that the purported advantages of the '508 free church' are not only overstated but fundamentally inaccurate. I intend to expound the reality of this matter by examining the explicit statutes of the law and relevant judicial precedents, thereby dispelling the misconceptions surrounding the 508 church's supposed exemptions and immunities.

So, What Does the Plain Language of the Law Really Say?

Section 508(c)(1)(a) essentially confirms that churches are automatically tax-exempt and need not apply for Section 501(c)(3) status separately. Still, it doesn't relieve them from adhering to the rules and regulations associated with Section 501(c)(3) organizations. This interpretation has been affirmed in various legal opinions and cases. Let’s begin by looking at the plain language of the law.  I will outline it in the following three points and then include a copy of the law itself.

1. Section 508(a) outlines how a church can attain tax-exempt status. It says that all organizations that want to be tax-exempt must apply for 501(c)(3) status.
2. Section 508(c) says that certain organizations are exempt from having to apply to be considered tax-exempt under section 501(c)(3).
3. Section 508(c)(1)(a) says that churches, their integrated auxiliaries, and conventions or associations of churches do not have to apply for 501(c)(3) status to be tax-exempt under section 501(c)(3). The courts have ruled that section doesn’t relieve a church from complying with all the rules and regulations of section 501(c)(3) to be tax-exempt.

26 U.S. Code § 508 - Special rules with respect to section 501(c)(3) organizations

1. New organizations must notify the Secretary that they are applying for recognition of section 501(c)(3) status:

Except as provided in subsection (c), an organization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)—

1. unless it has given notice to the Secretary in such manner as the Secretary may, by regulations, prescribe that it is applying for recognition of such status or
   
2. for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection.
   

(b) Presumption that organizations are private foundations Except as provided in subsection (c), any organization (including an organization in existence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be presumed to be a private foundation.

(c) Exceptions

1. Mandatory exceptions

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

1. churches, their integrated auxiliaries, and conventions or associations of churches, or
   
2. any organization which is not a private foundation (as defined in section 509(a)) and the gross receipts of which in each taxable year are normally not more than $5,000.

There is No Such Thing as a 508(c)(1)(a) Classification

Section 508(c)(1)(a) does not establish a distinct entity separate from Section 501(c)(3). In fact, it does the opposite.  This section unequivocally states that, by default, a church falls under the jurisdiction of Section 501(c)(3). Churches need not formally request IRS recognition of their status but must adhere to all the rules and regulations of Section 501(c)(3).

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If A Church Doesn’t Have to Apply for 501(c)(3) . . .

This is an important question. In summary, churches and religious organizations classified under 508(c)(1)(a) are automatically considered exempt under Section 501(c)(3). However, this automatic status does not exempt them from adhering to the rules and regulations applicable to all Section 501(c)(3) organizations. When a church relies on Section 508(c)(1)(a) and holds itself out as tax-exempt, it is automatically under the jurisdiction of Section 501(c)(3). Two fundamental presumptions arise: firstly, that the church is exempt from income taxes under section 501(c)(3), and secondly, that donors can deduct their contributions from their taxable income.

Branch Ministries v. Rossotti highlights this point. In this case, The Church at Pierce Creek argued that the IRS lacked statutory authority to revoke the tax-exempt status of a legitimate church. They reasoned that Section 501(c)(3) pertains to tax-exempt status for religious organizations, not churches. Conversely, Section 508(c)(1)(a) specifically exempts "churches" from the requirement of applying for advance recognition of tax-exempt status. Therefore, according to the Church at Pierce Creek, its tax-exempt status does not emanate from Section 501(c)(3). The court rejected that argument by affirming that Section 508 does not absolve a church from complying with all the regulations applicable to a Section 501(c)(3) organization.

Furthermore, the court ruled that a church that holds itself out as tax-exempt under section 508(c)(1)(a) cannot guarantee to its donors that their donations are tax-deductible. For example, If I donate to a church that has not filed for 501(c)(3) status and I get audited, I must prove to the IRS that the church I donated to meets all the qualifications of a 501(c)(3) organization. Here is a quote from the case.

A person who contributes to a church claiming tax-exempt status under Section 508(c) may deduct that contribution from his or her income, but if the contributor is audited, he or she has the burden of establishing that the church, in fact, meets the qualifications of a Section 501(c)(3) organization (Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000).

Considering these judicial decisions and others pertinent to the matter, getting 501(c)(3) status, while not mandatory for churches, presents distinct benefits such as:

1. Assurance to donors of the tax-deductibility of contributions, including tithes, offerings, and charitable gifts.
2. Eligibility for sales tax exemption, as required by many states.
3. Qualification for property tax exemption, also a common state requirement.
4. The opportunity to apply for various grants.
5. Access to reduced postal rates for certain mailings.

Avoid the Temptation

As highlighted in our blog, StartCHURCH would wholeheartedly endorse and promote the precepts championed by advocates of 508(c)(1)(a) should they bear legitimacy. It remains our hope that church leaders will discern and dismiss the enticing yet unfounded premise of an 'above-the-law' ecclesiastical structure and the deceptive claim that exclusive knowledge rests solely with the proponents of a 508 free church. Experience has taught some congregations a difficult lesson when such promises fail to materialize as anticipated.

If you seek guidance or require clarification, please don't hesitate to reach out to us at 770-638-3444. Our ministry is dedicated to assisting you and providing support to navigate through any uncertainties you may encounter.

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