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Beer and Blessings, 501(d) Organizations and How Businesses Can Work for Churches

Have you ever sipped a glass of really good champagne? Or how about an ice-cold Trappist Ale? Would it surprise you to know that each of those was brought to you by Catholic monks? Champagne, Trappist Ale, and a range of other goods like these dog biscuits to these caskets are all produced, distributed, and sold by monasteries in the United States. This business is conducted tax free to the organization. This biggest shocker: the organizations are not exempt under Section 501(c)(3). They’re not even tax exempt under Section 501(c) at all. Nope, their tax exemption comes from a more obscure section of the tax code, Section 501(d).

Section 501(d) classifies these organizations as “Religious and Apostolic Organizations”. In order to receive tax-exemption under this section, an organization must:

  1. Be a religious or apostolic association or corporation;
  2. Maintain a common or community treasury;
  3. Engage in a business for the common benefit of its members; and
  4. Ensure that its members include in their gross income, as dividends received, their entire pro-rata share of the organization’s taxable income for the year, whether such income is distributed to them or not.

Be a Religious or Apostolic Association or Corporation

Section 501(d) has no separate definition for religious or apostolic association or corporation. According to IRS publications, a religious organization for purposes of Section 501(c)(3) will meet the definition of religious or apostolic association or corporation. 

Common Treasury and Engage in Business for the Benefit of Members

The next two requirements are often looked at together. These requirements have been well defined by the IRS and the tax courts. For an organization to prove that it has a common or community treasury and that it engages in a business for the common benefits of its members, it must show that  (1) all income is generated internally by community-operated businesses and from any income generated from property owned by the organization; 2) the income is placed into a common fund maintained by the organization, 3) the income is used for the maintenance and support of its members, 4) all members have equal, undivided interests in this common fund, and 5) no member has the right to claim title to the fund. 

Members Must Report Their Pro-Rata Share

Finally, the members must report their pro-rata share of the organization’s income for the year to the IRS as part of their gross income. This is required whether the income is distributed to the member or not. 

What To Do With 501(d) Organizations?

Unlike organizations exempt under Section 501(c)(3), 501(d) organizations can do a lot of business, and I mean A LOT of business. Some Trappist monasteries make over a million dollars per year from their businesses. As a 501(d) exempt organization the business does not need to be related to the organization’s exempt purpose. 501(c)(3) organizations need to be operated solely for 501(c)(3) purposes and are intentionally limited in the amount of commercial business they can conduct. But a 501(d) organization can engage in as much unrelated business activity as it would like so long as it meets the above requirements. 

This advantage shouldn’t be looked over by churches and other religious organizations. A church, as a 501(c)(3) organization, is limited in how much business it can do. However, if it were to partner with a 501(d) organization which can give regular offerings and tithes to the church, a valuable alternative form of revenue could be available to the church. The religious organization, in turn, would gain a valuable ministry partner and “home-base” church for its religious activities. A strong symbiosis may very well develop. 

So, raise a mug to the Trappists, take a lesson from their book, and find a way to make a business work for the church! 

This blog is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact us or visit our blog. You might also like to read, Newman’s Own Law.

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