The "Free Church" Fallacy
By Raul Rivera
It was close to 5:00 pm in the afternoon and another day of researching and writing was coming to a close when a gentleman from Washington called. He stated that he needed help with his 501(c)(3) application. When the call transferred to me he asked me why I help churches get their 501(c)(3) status? Before I could comment, he proceeded with asking, "Are you aware that if a church incorporates and gets 501(c)(3) status, it becomes inferior and subservient to the state?" Once again I tried to respond, but he went on to say, "Don't you know that a true church is a free church that is separate and independent from the state and operates as a sovereign entity?" He closed by telling me that I would one day give account for my false teachings that have brought the church under the rule of the state. Finally, I got a chance to respond. I asked him a question. "Are you asking me these questions because you want to learn by hearing my answers, or are you just trying to make a point?"
My question was not what he expected to hear. After a delay, he reposed by saying, "I want to know the truth." Now that I knew I had his attention, I started my response by stating that the church of Jesus Christ is made up of people. While a church may form a corporation, the people are always separate from the corporation. In fact, the corporation is merely a legal vehicle by which the people can collectively manage, own, and control assets. People who proclaim that a church must never incorporate because it makes the church subject to the state misunderstand the basics of incorporation. The people (church) always remain independent from the corporation and are never subject to any state rule. On the other hand, the corporation is subject to the people. They use the corporation to transact business, own assets, and purchase and sell in the name of the corporation. "Hmm . . . " was his response.
What "free church" promoters teach
In essence, the Free Church movement teach that a true church is a church that is not an entity under state law and therefore cannot be subject to the state: One of the first things they teach is that because a church is never an entity under state law, therefore it is not subject to state and federal laws as it pertains to taxes because it is immune. They teach that churches that declare themselves to be free churches do not have to follow payroll tax rules. Not only is this teaching wrong; it is very dangerous. A church in Indianapolis took that position and it lost everything it ever owned. Indianapolis Baptist Temple was founded in 1950 and operated as a not-for-profit corporation until 1983, when it began operating as a unincorporated religious society. In 1986, IBT renounced its status as an unincorporated religious society, opting instead to define itself as a "New Testament Church," based on its belief that the exclusive sovereignty of Jesus Christ over the church required it to disassociate itself from secular government authority. Around the same time, and for the same reason, the church also stopped filing federal employment tax returns and paying the federal employment taxes for which it was responsible. After attempting for over seven years to amicably resolve the delinquent tax status of the church, the Internal Revenue Service (IRS) contacted it about its failure to file employment tax returns, but the church offered no indication that it would file returns. As a result, in early 1994, the IRS prepared quarterly returns for the church beginning in 1987 and continuing through 1993. The IRS then sent the forms to the church so that it could check the accuracy of the amounts on the returns, but the church ignored the returns and submitted no corrections. After the time for submitting corrections had passed, the IRS calculated an assessment of tax, interest, and additions totaling $3,498,355.62 and sent a notice and demand for payment. This matter ended up in court. At trial, the church argued that it was a "New Testament Church," and it was not an entity created by the state and that by characterizing itself as an entity under state law, it was establishing a state church in violation of the 1st amendment. They also argued that complying with the federal employment tax laws would require the church to recognize the sovereignty of the federal government over it, something that would be inconsistent with its belief in the exclusive sovereignty of Jesus Christ over the church. Of course, they found those arguments to be without merit and stated, "it does not matter what sort of entity Indianapolis Baptist Temple is. Whatever it is, it must comply with the federal employment tax laws."
On February 13, 2001, following the court's order, federal marshals seized the church's property that was reportedly worth six million dollars. If the church had any opposition to collecting and paying payroll taxes, all it would have had to do was fill out form 8274 and gotten an exemption.
When churches revoke or choose to operate outside of 501(c)(3)
Free church promoters teach churches to revoke their 501(c)(3) status and incorporation. This teaching has an inherent problem with the law as found in treasury regulation 1.508(c), which requires churches to meet all of the requirements of section 501(c)(3) in order for it to be tax exempt. If a church chooses to operate as a church outside of the 501(c)(3) rules, then it is treated as a for profit corporation. This creates a real problem for the church because it loses its religious protections under the Civil Rights Act of 1964 that grant whole exemptions on hiring practices based on religious grounds. For profit corporations are treated as places of public accommodations and must follow state hiring and firing practices without any religious exemptions. This can have disastrous consequences.
The man on the phone
It is very rare for someone who has bought in to the "free church" teaching to be won over. Yet, that day on the phone, after one half hour on the phone with him, he came around and was thankful that we talked. He realized one thing about the "free church" movement. At its core, it operates out of a spirit of lawlessness.
My passion