Legal Brief

The new administration’s focus on faith-based institutions as sources of innovative programming and providers of social services comes as no surprise to many grantmakers. For years, private foundations and public charities have recognized religious institutions’ strong roots in their communities and their commitment to the development of individuals and families. Many grantmakers have supported churches, synagogues, mosques and other religious institutions (for convenience I will call these groups “churches”) in their efforts to provide services to their members and local communities.

Other grantmakers have shied away from funding churches because they mistakenly believe that such grants would be illegal or would constitute an endorsement of a particular sect’s beliefs. In an effort to educate grantmakers, the Council on Foundations in 1993 published two resources, Legal Considerations Affecting Public and Private Grantmaking to Religious Organizations and a questions and answers pamphlet on the same subject. Funded by the Ford Foundation and written by the law firm of Caplin & Drysdale, the publications seem particularly timely now.

Following are brief discussions of some of the issues raised in these publications as well as other related topics.

Question: Are grants to churches legal?

Answer: Provided that a grantmaker’s organizing documents (certificate of incorporation, trust instrument or by-laws) do not prohibit funding religious institutions, generally, there is no restriction against making grants to churches, synagogues, mosques or other religious institutions. The First Amendment to the Constitution, with its bar on governmental action that advances or inhibits religion, does not apply to private grantmakers.

Charitable purposes include the promotion of religion, so that grantmakers with organizing documents that allow them to promote broad charitable purposes may make grants to religious institutions for their core, religious functions. Some grantmakers choose to support only the nonsectarian activities of these organizations, but this is a policy choice, not a legal requirement.

Grantmakers with organizing documents that bar them from advancing religion may have to make fine distinctions between church-based programs that do and those that do not promote the religious beliefs of the sponsor.

Question: How do you know if a church is a public charity?

Answer: Unlike most other charities, churches are not required to file an application for recognition of exemption from federal income tax with the Internal Revenue Service. Nonetheless, many churches are covered by group exemption rulings obtained by their convention or denomination, and many churches not covered by such rulings have obtained their own determination letters. If a potential grantee asserts that it is covered by a group exemption, the grantmaker may confirm its status by reviewing a copy of the determination letter and finding a listing of the grantee in the denominational directory or other comparable record.

If a potential grantee claims that it is a church but does not have a determination letter or a group exemption ruling, it will be the grantmaker’s responsibility to assess whether the entity is a church, and thus, a charitable organization. There is no definition of a church in the Tax Code, but the IRS has developed a list of common characteristics of churches.

Not all churches will feature all the attributes on the list, and the IRS will consider other facts and circumstances, but in general—the IRS and courts have held—churches will feature:

• A distinct legal existence 
• A recognized creed and form of worship 
• A definite and distinct ecclesiastical government 
• A formal code of doctrine and discipline 
• A distinct religious history 
• A membership not associated with any other church or denomination 
• An organization of ordained ministers 
• Ordained ministers selected after completing prescribed courses of study 
• A literature of its own 
• Established places of worship 
• Regular congregations 
• Regular religious services 
• “Sunday schools” for religious instruction of the young 
• Schools for the preparation of its ministers

If a private foundation makes a reasonable judgment that a potential grantee is in fact a church, it will not be required to exercise expenditure responsibility in connection with the grant even though the grantee does not have a determination letter.

Separate charitable organizations that are closely affiliated with a church and derive their financial support primarily from within the church are also not required to file an application for recognition of exemption. These “integrated auxiliaries” also include men’s or women’s organizations, seminaries, mission societies and youth groups that are closely affiliated with a church, even if they do not derive their financial support primarily from the church. Integrated auxilaries are often, although not always, listed in a denominational directory or other church resource. Affiliated entities that have a broader range of income sources—church-related hospitals and nursing homes—are not considered integrated auxiliaries and are generally required to secure a determination letter from the IRS.

Some religious organizations have separately incorporated entities that receive government funds or perform specific functions, but generally, they do not need to form a separate entity to receive funds from private foundations or public charities.

Churches and certain other religious organizations are not required to file an annual information return on Form 990 (Revenue Procedure 96-10 provides specific guidance on this filing exemption). Some institutions prepare a pro forma Form 990 for distribution to the public while others make their audited financial statements available.

Grantmakers may request financial and other organizational information from religious institutions as they would from other potential grantees. Similarly, grantmakers may place conditions on their grants to churches just as they would with other grantees, including imposing financial and other reporting requirements.