501(d) apostolic organizations
In 1936, Congress provided a way for religious groups that follow the Apostles in “holding all things in common” to receive fair tax treatment.
In 1978, the IRS arbitrarily ruled that communities would not receive this tax treatment if they were supported by wage income from members’ employment.
We believe the ruling was wrong as a matter of law, and that this precedent does harm to well-meaning Christian communities called to live a thoroughly charitable life in urban environments where outside employment may be a necessity.
Right after the famous section of the U.S. Internal
Revenue Code that provides the commonly known 501(c)(3) non-profit
exemption from income tax is section 501(d).
The section applies to organizations and associations of
religious individuals who have chosen to follow the example of
the Apostles in the Church at Jerusalem in the Book of Acts:
they hold all things in a commmon treasury, providing for each
according to his need.
Congress designed section 501(d) so that religious organizations
like this would not be taxed unfairly like a corporation.
Instead of being taxed as a corporation, the taxable business
income of the organization is reported in equal shares on each
individual member's tax return as dividends.
While the Church maintains a number of monastic communities that
hold all in common, every Christian is called to steward all he
has as a gift from God, and Congress recalled examples of
non-monastic communities that took this calling seriously when
designing 501(d).
In 1978, the IRS ruled (Rev. Rul. 78-100) that organizations
would not qualify for 501(d) recognition if they were supported
by wages earned by members from outside employment. We believe
this decision has no grounding in the language of the statute
and that it forms an unwarranted obstacle to apostolic
communities in city environments, where it may be necessary or
desirable for members to work in ordinary jobs while still
contributing their earnings to a communal treasury.
Wage income is a legitimate source of support for 501(d) organizations
In addition to the support provided by internally operated enterprises, which can take any form in a 501(d) organization (imagine workshops and farms as traditional methods ), wage income is a legitimate source of material support for the needs of such a communal organizations.Members of a 501(d) organization supported in part by wage income would pay ordinary income taxes on wage income like other U.S. taxpayers, in addition to taxes on the dividends reported on their returns from the taxable income of their community's businesses.
We respectfully submit that a community’s structure would represent a faithful and legitimate application of §501(d), for the following basic reasons.
A. The statutory text does not require that all, or even predominantly, support come from internal business. Section 501(d) extends exemption to a religious or apostolic association having a common treasury “even if [it] engages in business for the common benefit of the members.” The phrase “even if” is concessive. It was included to reassure Congress and the Service that the conduct of common business would not itself destroy exemption. It was not drafted, and cannot naturally be read, to make internally operated business a prerequisite for exemption, still less the dominant source of support. What the statute requires is a common treasury and a genuinely common religious or apostolic life; both would be present here.
Twin Oaks Community, Inc. v. Commissioner, one of the few precedential tax court decisions on 501(d), quotes the Ninth Circuit's Kleinsasser v. United States (707 F.2d 1024, decided 1983):
“The only requirements for the exemption are that there be a common treasury, that the members of the organization include pro rata shares of organization income when reporting taxable income and, implicitly, that the organization have a religious or apostolic character. Once this requirement of form is fulfilled, the exempt organization is unlimited as to function.”The text of the statute and the Ninth Circuit's interpretation both lend credence to the argument that the Code does not forbid § 501(d) organizations from being supported in part or substantially by wages from members' outside employment. So long as the organization operates with a common treasury, fulfills reporting requirements, and has a bona fide religious or apostolic character, it should qualify for § 501(d) recognition.
B. The legislative purpose is fully satisfied. Congress added what is now § 501(d) in the Revenue Act of 1936 in order to relieve religious communal organizations—whose members cannot individually own property—of corporate-level income tax burdens that would otherwise fall on their shared life. That purpose applies with equal force to a community whose members have genuinely renounced individual ownership and pooled their earnings, regardless of whether those earnings originate in an in-house mill, an in-house clinic, or a member's outside employment conveyed under a binding assignment to the common treasury.
C. The Twin Oaks precedent counsels against atextual glosses on § 501(d). In Twin Oaks Community, Inc. v. Commissioner, 87 T.C. 1233 (1986), the Tax Court declined to read into “common treasury” an atextual requirement that members take a vow of poverty and totally divest themselves of property. The same plain-text methodology counsels caution before reading into the statute an equally atextual “internally operated business” requirement.
D. The concern animating Rev. Rul. 78-100 may not be presented in all cases. Rev. Rul. 78-100 addressed an organization that “does not conduct any business activities” and was supported entirely by members’ outside wages. Publication 5627 (Rev. 2-2024) likewise frames the disqualifying case as one of “substantial dependence” on outside wages “rather than on internally operated business.” While we see no issue with communities that operate this way, IRS guidance excludes a community that might aim to operate internal enterprises and charitable ministries from day one, but temporarily or permanently needs or chooses to be supported in large part by wage income.
E. Such communities would not seek to avoid ordinary individual taxation. Members will report and pay federal income tax and employment tax on their personal wages in the ordinary course, and communities would report their own net earnings and pass them through to members pro rata as § 501(d) and Treas. Reg. § 1.501(d)-1 require. What we seek is simply the recognition that § 501(d) was enacted to provide: that the common life itself, and the common treasury at its center, are not subjected to an additional corporate-level tax by reason of the means by which members lawfully earn the support they bring to the common fund.
Relevant resourcs
Here will you will find resources related to the statute, regulations, court precedent, and our arguments.
| Document Type | Document Name | Date | Description | Resources |
|---|---|---|---|---|
| Statute and Regulations | ||||
| I.R.C. code for 501(d) | 26 U.S.C. 501 | 1936 | Search for section (d) containing “Religious and apostolic organizations” | – |
| Federal regulation for this type of organization | 26 CFR 1.501(d)-1 | 1960 | Federal regulation mirrors the language of the statute almost exactly. | – |
| IRS Rulings & Guidance | ||||
| Revenue Ruling | Rev. Rul. 78-100 | 1978 | Binding internal rule for the IRS, but does not have the force of law. This ruling excludes wage income organizations, and we believe it should be overturned. | – |
| Technical Guidance | IRS Technical Guide TG23 | – | Internal IRS guidance providing comprehensive overview of 501(d) organization structure and IRS interpretations of statutory requirements. | – |
| Case Law & Precedent | ||||
| Tax Court Case | Twin Oaks Community, Inc. v. Commissioner | 1986 | Tax Court precedent (87 T.C. No. 71) establishing judicial interpretation of 501(d) organizational requirements and tax treatment, especially that members are not required to take vows of poverty or disavow all private possessions. | – |
| Court of Appeals Case | Reverend Joseph J. Kleinsasser v. United States | 1983 | Ninth Circuit Court of Appeals precedent (707 F.2d 1024) addressing 501(d) organization status and member taxation issues. | – |
| Basiliad Briefs & Arguments | ||||
| Additional materials related to our effort to enable the creation of new communities that hold all things in common will be posted here in the future. | ||||