IRS Agent: Churches in OTOC May Imperil Tax-Exempt Status
By Mike Reilly
World Herald Staff Writer
Some Omaha churches could lose their exemption from federal income taxes because of their participation in Omaha Together One Community, an Internal Revenue Service agent says.
Carl R. Patterson, an Omaha IRS agent who specialized in tax-exempt organizations said he wants churches to know that "substantial"" contributions of time and money to OTOC might violate a federal statute.
The statute prohibits churches from engaging in a "substantial" amount of lobbying. The law has no precise definition of "substantial."
The potential penalty for violation is loss of tax-exempt status. That would mean that people who donate to churches could not deduct the money from their personal income taxes.
I'm not saying the churches are definitely in danger. Patterson said "I am saying this is a potential problem."
Omaha IRS spokesman Ed Daemon said the government rarely revokes a church's tax exemption.
"It is not the purpose of the IRS to put exempt organizations out of business" Daemon said "Our purpose is to keep them in compliance."
Patterson declined to say whether the IRS is investigating OTOC churches. He said he had been monitoring the development of OTOC through news stories.
OTOC leaders said they doubt that the IRS would penalize churches for participating in OTOC. They said that the financial contributions of individual churches are too small for the IRS to deem "substantial" and that similar organizations in other cities have not faced such a problem.
The stated purpose of OTOC is to influence public policy in such areas as police protection, youth recreation, juvenile detention and health care.
Twenty-two Catholic and Protestant churches have contributed about $90,000 to OTOC since the organization was formed in January 1992.
OTOC is affiliated with the Industrial Areas Foundation, which has ties to about 30 community-action organizations nationwide.
Edward Chambers, executive director of the IAF in New York, said the issue that Patterson has raised had never come up during his 38 years with the foundation.
"I just don't believe it's a problem," Chambers said.
But Patterson said some church donations to OTOC, which range from $300 to $5,000 this year, are large enough to question. And he said money is not the only issue. An IRS investigation also would consider other ways churches support OTOC, he said.
"We'd look at the number of notices in the church bulletin, the fliers, the free use of church meeting rooms, office space, equipment and supplies," Patterson said. "We'd look at the value of the time and services of the pastors themselves, too."
Patterson said he did not know whether the issue had been raised by the IRS in other cities with IAF organizations.
The World-Herald asked the leaders of six OTOC churches about Patterson's concern.
One of the most active OTOC churches is First United Methodist, 7020 Cass St. Its associate pastor, the Rev. Don Bredthauer, is a founder and co-chairman of OTOC.
First United Methodist announced a $5,000 contribution to OTOC at a rally Sunday. The church was host to an OTOC meeting on health care, Aug. 24 and it has promoted the organization in bulletins and from the pulpit.
The Rev. Denny Silk, senior pastor at First United Methodist, said he sees OTOC as a church organization rooted in Bible teachings that urge people to work together to improve society.
"When we define our ministries, we don't consult attorneys, We consult the Scriptures," Silk said. "If the IRS takes exception to this, then we will consult attorneys. But I can't believe that the government will purposely penalize church people for trying to help the community."
Churches are exempt from federal income taxes under section 501 (C) (3) of the Internal Revenue Service Code. The code exempts churches and certain other organizations from taxes as long as "no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation."
The IRS occasionally has questioned the political activities of churches or church affiliated organizations. Daemon said organizations associated with television evangelists Jimmy Swaggart and Jerry Falwell have lost tax exemptions temporarily in the past.
Another widely known case involves the Christian Coalition, which former GOP presidential candidate Pat Robertson founded in 1989. Democrats have accused the organization of working extensively for GOP candidates.
The Christian Coalition is considered a non-profit corporation under IRS section 501(C) (4), which allows more leeway to promote political agendas than section 501(C) (3), because it intends to try to persuade local governments to adopt certain policies. Its leaders have said that OTOC will not endorse candidates for election.
Churches generally prefer the more restrictive 501 (C) (3) status because people who donate to 501 (C) (3) organizations can deduct their contributions on their taxes.
Patterson and Daemon said that donations to 501 (C) (4) organizations are not tax deductible. Both types of organizations are exempt from paying federal income taxes.
An estimated 1,8000 Omaha area church goers participated in the OTOC rally Sunday, at which local government officials were urged to work with OTOC to address its concerns.
At the event, member churches announced $42,650 in contributions to OTOC. Two non-members also pledged money. St. John Vianney Catholic Church in Millard pledged $250. The Notre Dame Convent pledged $750.
While there is no specific formulas for defining "substantial" contributions under 501 (C) (3), Patterson said the IRS would consider, in part, the financial donations of OTOC churches in the context of their annual budgets.
The six OTOC churches contacted about Patterson's concern, their respective OTOC contributions this year and annual budgets are:
Patterson said that $5,000 from a $1 million budget and $2,500 from a $250,000 budget would "raise my eyebrows." He said he was unsure about $3,500 from a 1.2 million budget.
The following was not part of the article.
Tucson churches affiliated with PCIC:
Phoenix churches affiliated with VIP: