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Illinois Department of Revenue Revisits “Religious” Qualification for State Tax Exemption

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What is sufficiently “religious” for state tax exemption? The lawyers of Wagenmaker & Oberly and the Thomas More Society, a Chicago public interest law firm, collaborated together to reach a groundbreaking administrative appeal victory on this question, in Department of Revenue v. Great Lakes Catholic Fellowship, Inc. (Case No. 15-ST-019). The decision rejects the Department of Revenue’s position that the religious exemption under Illinois law is limited to houses of worship. Instead, the Administrative Law Judge ruled that this constrained interpretation improperly scrutinizes bona fide religious activities and that the term “religious” also extends to organizations with a broader religious nature. 

This administrative ruling is consistent with Illinois court rulings and therefore should pave the way for improved recognition of both property and sales tax exemptions based on religious qualifications with the Department of Revenue. Here’s why.

State Exemption, Not IRS

Under Illinois law and many other state laws, nonprofits may obtain exemption from both local property taxes and retail sales taxes. Such exemptions often provide valuable economic benefits. For these exemptions in Illinois, nonprofits generally must be Section 501(c)(3) tax-exempt organizations and additionally show that they fit into one of the following categories: religious, educational, or charitable. These categories are terms of art:

  • “religious” has historically been interpreted narrowly by the Department of Revenue as confined only to houses of worship (i.e., churches and other religious institutions), and not more broadly per Illinois court precedent;
  • “educational” generally means institutions of learning that relieve government burdens (i.e., grammar schools, but not trade schools); and
  • “charitable,” which is the catchall category for organizations that widely distribute charitable benefits without “undue obstacle and without any “view to profit” (to the extent any fees are charged).

Many nonprofits easily garner Section 501(c)(3) recognition from the IRS, under the federal requirements and qualify for income tax exemption and tax-deductible contributions. But they face an uphill climb to secure state sales and property tax exemption. In Illinois, nonprofits must not only fit precisely within one of the above exemption categories, they also must satisfy stricter evidentiary standards to prove qualification by “clear and convincing” evidence with “all debatable facts” resolved against exemption. This was the challenge faced by Great Lakes Catholic Fellowship (GLCF) in its administrative appeal against the Illinois Department of Revenue (DOR).

Great Lakes Catholic Fellowship’s Uphill Climb to State Exemption

GLCF is an Illinois nonprofit corporation dedicated to promoting Catholic fellowship and evangelism. GLCF is organized separately from the Catholic Church in order to promote wide participation among many Catholic parishes. GLCF’s primary exempt activity is its Great Lakes Catholic Men’s Conference, which annually unites men in public worship. GLCF’s state tax exemption journey began with an application for sales tax exemption, so that it could purchase tax-free goods for its annual men’s conference. 

As a religious event, each annual Conference is overseen by the Diocese of Rockford. In addition, ordained Roman Catholic clergy direct all Conference worship activities. The speakers are carefully vetted for consistency with Roman Catholic orthodoxy. Trained religious leaders also actively participate in all aspects of Conference planning to provide excellent worship, prayer, and instruction.

In short, GLCF operates as an extension of the Catholic Church, with a focused religious mission. As one witness testified, regular weekly worship may be likened to eating ordinary meals, but the Conference provides a Thanksgiving feast of religious worship, prayer, and fellowship. Nevertheless, until recently, the DOR rejected GCLF’s “religious” exemption qualification.  

The DOR initially summarily denied GLCF’s application. GLCF filed an administrative appeal within the DOR, as is customary for such cases. Throughout informal efforts to resolve the case without an evidentiary hearing, the DOR firmly rejected GLCF’s assertions about its religious nature and instead relied on its long-standing administrative position that only houses of worship are sufficiently “religious” for exemption qualification. 

The DOR’s position has historically conflicted with settled Illinois case law, which provides for a more expansive “religious” definition in keeping with an applicant’s bona fide characterization of its religious nature. As a result of the DOR’s interpretation, religious organizations like GLCF have faced a difficult and expensive choice: (a) accept the DOR’s narrow (and legally erroneous) interpretation of “religious” qualification and therefore abandon efforts to obtain state sales or property tax exemption; or (b) undertake the costly appeal process to obtain such recognition through administrative appeal and possibly further court appeals.[1] Recognizing the important legal implications to the broader religious community in Illinois, the Thomas More Society identified the issue as an important legal cause and therefore worthy of supporting the appeal process. The collaboration enabled GLCF to proceed through the necessary evidentiary hearing. 

The hearing was held on September 22, 2015 before Administrative Law Judge (ALJ) Ted Sherrod, at which extensive testimony was elicited regarding GLCF’s religious nature, activities, and goals. ALJ Sherrod issued his favorable decision on February 4, 2016, and it was officially approved by the DOR as final on March 9, 2016. The administrative decision is not officially binding on the DOR’s other ALJs, but it is nonetheless instructive and important - especially given its consistency with applicable Illinois appellate law. GLCF’s victory therefore should be extremely helpful for other religious organizations seeking sales and property tax exemptions.   

Key DOR Errors About “Religious” Qualification

The DOR argued on GLCF’s appeal that religious qualification should be limited to those organizations whose activities characterized by, “regular worship, missionary work and religious education.” Under this restricted definition, only churches, synagogues, mosques and other traditional worshipping bodies could be eligible for the religious exemption. 

But as GLCF asserted, this constrained interpretation of “religious” is not the law. On the contrary, the Illinois Supreme Court has made clear that the activities identified by the Department are not the exclusive activities that qualify as having a religious purpose; rather, they are only illustrative and therefore allow for a broader definition of “religious.”[2] In other words, religious exemption is not limited to only traditional worshipping groups. Indeed, in this case, the ALJ properly concluded GLCF’s lack of regular public worship, Sunday school or regular public instruction was an insufficient legal basis for exemption denial.

In addition to erroneously restricting the term “religious,” the ALJ determined that the DOR erred by failing to defer to GLCF’s good faith self-characterization of its activities as religious. At the hearing, GLCF called multiple witnesses, including members of the Roman Catholic clergy, who consistently and in great detail testified about the Conference's religious worship activities. Despite this extensive testimony from GLCF’s adherents, the DOR instead engaged in its own interpretation and characterized the activities as merely a “seminar.” 

The ALJ rejected the DOR’s approach on constitutional grounds. As a matter of First Amendment religious freedom, the government must accept the organization’s good faith characterization of its activities and beliefs as religious. When particular purposes and activities of a religious organization are claimed to be other than religious, the civil authorities may engage in only two inquiries: (a) Does the religious organization assert that the challenged purposes and activities are religious? and (b) is that assertion bona fide? Both conditions were satisfied here. To delve beyond these inquiries into an exemption applicant’s religious nature, as the DOR sought within this appeal, impermissibly and unconstitutionally entangles the government in religion. 

Practical Takeaways for Other Religious Exemption Applicants

The DOR generally follows its own ALJ decisions. We thus expect this ruling will favorably influence future exemption applications filed by religious organizations that are not worshipping bodies. The following key pointers from GLCF’s victory thus may help such organizations in developing their applications.

  • As ALJ Sherrod recognized, the legal standard for “religious” is the same when property and sales tax exemption is sought. The GLCF decision should help both types of exemption applications. 
  • For both exemption qualification and other important reasons (both legal and practical), an organization’s governing documents should clearly set forth its religious nature. Articles of incorporation, bylaws, other policies, and program descriptions should clearly demonstrate how the program’s activities are anchored in the group’s sincerely held religious beliefs. 
  • An organization’s activities should comport with its statements of faith. Articulated religious beliefs need to be bona fide – that is, sincerely held. In other words, a religious organization must make clear that it practices what it preaches. For example, if an organization states that a denomination has ecclesiastical oversight, it should be prepared to demonstrate specific ways in which such oversight takes place. 
  • Involvement by ordained, licensed, or otherwise specially trained and officially authorized religious leaders will strengthen the religious organization’s grounds for exemption. Similarly, official ties to a church, denomination, or other worshipping organization will demonstrate that the organization is an extension of those approved and exempt types of ministries.
  • Money matters. GLCF’s religious qualification was significantly bolstered by the following helpful financial facts: GLCF heavily relied on volunteers instead of paid staff; GLCF’s funds were almost exclusively used for worship and related activities; GLCF periodically donated remaining conference funds to other religious organizations; and GLCF offered free or reduced-fee conference admission based on financial need and other religious considerations.

Thanks to GLCF, other religious organizations in Illinois should not face the same steep climb in seeking property and sales tax exemption. Instead, they may apply the ALJ’s legal interpretation and the above takeaways to successfully establish religious qualification, so that they too can enjoy significant economic benefits available under Illinois law.

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