February 23, 2010
Will churches be required to form separate 501(c)(3) nonprofit organizations in order to operate federally funded programs? Various news stories are reporting that the President's Advisory Council on Faith-Based and Neighborhood Partnerships will recommend that requirement.
It is the true that the Advisory Council has narrowly voted—13 to 12—to recommend that churches should be required to establish "separate corporations" if they seek federal funds to provide social services. The goal is to preserve church autonomy and the required separation between the institutions of church and state.
But note that the Council has yet to decide whether to accept the recommendations as a whole—that vote is still a week away. More important, note that this is only a recommendation: the administration may or may not accept it. And note especially this: the recommendation is not that churches must establish a separate 501(c)(3) organization. 501(c)(3) designation is a particular tax-exempt status that has to be gained from the IRS, and obtaining that determination usually takes a significant amount of time, effort, and money. Rather, the recommendation is for a separate (nonprofit) corporation. That kind of organization is formed under state, not federal, law, and is normally much easier and quicker to create.
Churches already often create separate organizations to offer services to the community, particularly if those services will be supported by government funds. A separate organization keeps government monitors out of the church's business, avoids having inappropriate government restrictions applied to the house of worship, and makes it easier for staff and volunteers to keep their focus on offering social services instead of worship services. Corporate donors, foundations, and many government programs often already require a separate organization.
But some churches worry that a separate nonprofit organization may drift away from the church and from the faith. Moreover, as stressed by those on the Advisory Council's Reform of the Office taskforce who opposed the new requirement, the government can often achieve its legitimate oversight responsibilities in other ways, and a church may reasonably decide in particular circumstances that it can preserve its autonomy through some other mechanism, such as separate bank accounts or creating a separate operating division within the overall church organization. These experts proposed that instead of requiring a separate organization, the federal government should compile a list of all of the different ways that churches can appropriately structure their relationship with government, and then promote those varied methods to churches seeking funds. They pointed out the proposed new requirement would end some currently flourishing partnerships. And the requirement would impose perpetual costs—not just the cost of first establishing the new organization but also the continuing burden of maintaining a separate board of directors and separate accounting records, a separate human resources policy and insurance policy, etc. That's quite a burden, particularly if a separate organization is not constitutionally required. And particularly if the federal funds involved are minimal and would be come to the church only for a short while. Should an entire separate organization be required to make it possible for a small congregation to receive $1,000 to defray its expenses for conducting an outreach to neighborhood families to draw mothers-to-be into a public health program? That was an actual successful program operated by a New Jersey county.
Additional notes:
- Extreme church-state separationists have often promoted the requirement of a separate nonprofit organization as the magical way to strip every hint of religion out of a service program that uses government funds. Yet neither the rules for nonprofit incorporation under state law nor those for designation as a 501(c)(3) charity under federal law require secularism. The separate organization established by a church could—should—be just as religious, in its own way—relevant to social services—as the church itself. (Services funded by government grants cannot include inherently religious activities such as prayer and proselytizing.)
- Good thing the recommendation isn't for actual 501(c)(3) status—a costly and time-consuming requirement. Indeed, the Unlevel Playing Field report of the Bush White House named it as a distinct "barrier" inhibiting partnerships between government and nonprofit organizations that officials operating federal programs have often required proof of 501(c)(3) status even if the congressional statutes governing a program only required participating organizations to be "nonprofits." To relieve this burden, the Bush administration actually published regulations, e.g., for SAMHSA programs that require officials to accept a variety of ways for applicants to prove their nonprofit status without having IRS 501(c)(3) status.
- Most federal funds are awarded to private organizations (secular and faith-based nonprofits, businesses) by state and local governments, who fund many of their services with federal dollars. Programs operated by states, cities, or counties may award very small amounts of government funds in an effort to engage grassroots organizations or to ensure widespread availability of the services. Yet the requirement of a separate organization would follow the federal funds, no matter which government awards the grants. Possibly the requirement would be enforced even for non-financial federal support—e.g., receipt of a small amount of surplus agricultural commodities, acceptance of an old computer donated by a federal agency, etc.
Churches interested in the pros and cons of establishing a separate nonprofit organization, and how to do it, should consult Joy Skjegstad's clear and empathetic guide, Starting a Nonprofit at Your Church (Alban Institute, 2002).
Source: Institutional Religious Freedom Alliance, February 22, 2010
This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.