The ATA Journal of Legal Tax Research American Accounting Association Volume 13, Issue 1 DOI: 10.2308/jltr-51086 2015 Pages 36–53 The Church and the Tax Law: Keeping Church and State Separate Mary Ann Hofmann ABSTRACT: In a democracy characterized by the separation of church and state, what role does the federal government play in regulating the activities and the financial transactions of churches and other religious nonprofit organizations? What are the current federal requirements regarding tax exemption for churches, tax deductibility of donations to churches, and political activity by churches, and are these requirements justified? Rather than interfering with the free exercise of religion, does the federal government actually come closer to violating the establishment clause of the First Amendment by providing inappropriate tax benefits to churches and clergy? This paper discusses tax laws and federal court decisions relating to these and other issues. Keywords: taxation of churches; religious freedom; nonprofit organizations. INTRODUCTION Does Congress have the right to define what is or is not a bona fide religion or church? Can the Treasury Department dictate who is or is not a minister? Can the Internal Revenue Service (IRS) decide that a church has violated the tax laws by participating in a political campaign and revoke its tax-exempt status? Can a citizen who is conscientiously opposed to insurance avoid paying Social Security taxes? Can a taxpayer sue the government for religious discrimination based on the fact that the tax law provides a deduction, exemption, or exclusion to churches (or ministers) that is not available to nonreligious organizations or non-clergy? Can the federal courts rule that a minister’s cash housing allowance is taxable? These questions have no simple answers. Congress, the Treasury, the IRS, and the federal courts have been struggling with these issues and others like them for almost 100 years. Recently, these controversies seem to have escalated, and the possibility of satisfactory resolution seems remote. These issues strike at the heart of one of the freedoms Americans hold most sacred, freedom of religion, and also at the integrity of the federal income tax, by which the U.S. government raises the largest portion of its revenues. The U.S. Constitution and the accompanying Bill of Rights promote and protect freedom—of speech, of the press, of religion. The First Amendment prohibits Congress from making any law respecting an establishment of religion (the Establishment Clause) or impeding the free exercise of religion (the Free Exercise Clause). Some interpret this to mean that the government must keep a Mary Ann Hofmann is an Associate Professor at Appalachian State University. Published Online: February 2015