The first step toward full compliance is full knowledge. But when it comes to the law, sometimes even the simplest questions have ambiguous answers. Consider these:

  • According to taxing authorities, is your theological school a "church"? 

  • What regulatory and tax requirements apply to church-related institutions? 

  • More broadly, what's the appropriate level of regulation for a seminary?

These questions, and others like them, surface regularly in conversations among seminary trustees.

To get some informed answers, In Trust recently spoke to a Washington attorney who knows more about nonprofit tax law than almost anyone. Marcus Owens spent much of his professional career at the Exempt Organizations Division of the U.S. Internal Revenue Service and was director of the division for 10 years — his responsibilities included the design and implementation of federal tax rulings and enforcement programs for tax-exempt organizations. In 2000 he left the IRS to join the law firm of Caplin & Drysdale.

Marcus Owens
Courtesy of Caplin & Drysdale

In terms of tax law and governmental regulation, are seminaries the same as other nonprofits? Or are they churches?

Most seminaries that I'm familiar with have theological instruction as their primary activity, but they are controlled by or otherwise affiliated with a denomination or a church. Those organizations fall into a category called "integrated auxiliary" — an organization that conducts religious activities in affiliation with a church or denomination.

For tax purposes, an integrated auxiliary is the same as a church.  It doesn't have to file application for exemption if it chooses not to. It doesn't have to file a Form 990. And the IRS review of integrated auxiliaries is arguably controlled by church audit procedures, which restrict the IRS's ability to conduct audits.

As I noted, churches are not required to file the Form 990. But I do have one client that, though it has been determined by the IRS to be a church, nevertheless prepares a mock 990 each year. They put the form up on its website as a matter of transparency and accountability, even though they don't file the return with the IRS.

Another of my clients is an integrated auxiliary of a church - a supporting organization that is controlled by a particular denomination that provides administrative services to various churches. As an integrated auxiliary, it could be exempt from filing a 990, but it does file with the IRS - again, as a matter of transparency and accountability.

Many In Trust member institutions probably fit this "integrated auxiliary" model.

That would be my guess. The integrated auxiliary definitions have a number of components, but as a general rule, in order to meet the requirements for "integrated auxiliary" status (and thus exemption from filing the Form 990), both the financial support requirement and the affiliation requirement must be met. That having been said, there is an exception to the general rule for seminaries, which need only meet the affiliation requirement.

Some seminaries are truly independent theological training institutions not affiliated with any particular church. These entities most likely have to file an application for exemption and file a Form 990. They are most likely classified as schools rather than churches, and thus they have to go through the whole process that governs charities in general to have that status confirmed.

Why do some seminaries file the Form 990 even if they can argue that they are integrated auxiliaries?

Typically they do it for several reasons. One is accountability  so that the members of their religious group know what happens to their money, and to give the general public confidence that the organization deserves tax-exempt status.

And to aid them in their fundraising.

That's right. Often funders want to know the financial state of affairs of an organization. Filing a Form 990, signed under penalty of perjury, is pretty persuasive as a financial disclosure document. It can serve a number of useful purposes.

But even exemption as a church or an integrated auxiliary does not relieve an institution from filing such things as the Form 990-T, right?

That is correct. They are liable for the unrelated business income tax (UBIT) that is reported on Form 990-T.

The IRS has taken more interest in the governance practices of nonprofits in recent years. Why? 

It got a big push from the Senate Finance Committee. The IRS was primed to act in that direction anyway, so it didn't take much of a push to get the IRS thinking about governance. That resulted in the new governance section of the Form 990 and various other enforcement-related efforts.

But there don't seem to be any penalties for "wrong" answers to the governance questions.

That's right, to an extent. An organization does file the Form 990 under penalty of perjury, with the person who is signing swearing that it's true and correct to the best of his or her belief. But an intentionally misleading answer, or a blank answer, is arguably a violation.

But if a theological school doesn't have a conflict of interest policy or a whistle-blower policy or one of the others listed, and the school answers truthfully, there is no penalty for not having those policies in place?

That's right. You're free to say you don't. The only penalty is perhaps having to explain to the media why you don't. And it could affect contributions, making donors wonder why there isn't some sort of conflict of interest disclosure by board members.

It has been suggested that even if a seminary doesn't have to file Form 990 and chooses not to, its trustees can use the new governance section of the 990 to understand practices that can help them.

I think the boards of seminaries can benefit from looking at the practices of secular charities when it comes to governance. To the extent that the Form 990's new governance section describes some of those practices, it can be a useful point of entry. Governance is not "one size fits all," and different organizations need different practices. But the base levels of disclosure and accountability are appropriate for practically any board.

Are there any other practices that seminary trustees might consider to assure their legal and regulatory compliance?

A host of requirements come out of the fiduciary duties of a board, and they are only tangentially touched on by the IRS. Trustees have a duty of care to the organization. Even though it is sometimes difficult for board members to separate their personal and business lives from that of the organization, the duty of care require that they do so. They may think they are doing good, but if there is both a personal benefit and an institutional benefit to one of their actions, the duty of care can be questioned.

In terms of legal compliance, are there any other things a board should be worried about?

There is a body of rules relating to employment law, discrimination, retaliation, and other personnel matters that boards should be aware of. They aren't tax compliance issues - not fiduciary duty issues - but boards need to be aware of them.

Do you see any front-page issues coming down the road in terms of new legislation or regulations?

I see the Senate Finance Committee stepping back from that a bit. On the other hand, with the change in the House of Representatives, with a possibility of more aggressive committee and subcommittee chairs, we could have a resurgence of activity though the House Ways and Means Committee's oversight subcommittee. It has as much authority to hold hearings and move legislation as Senate Finance does.

Disclaimer: This article provides general information only and should not be construed as providing legal or tax advice.

An IRS publication titled "Tax Guide for Churches and Religious Organizations" is available online at

Either one or two requirements for being an "integrated auxiliary"

An "integrated auxiliary" of a church need not complete Form 990. A seminary must fulfill only the affiliation requirement to be considered an integrated auxiliary and thus exempt from filing Form 990, but a college, university, or other school must fulfill both the financial support and affiliation requirements to be exempt.

Financial support

At least 50 percent of an institution's funds come from either from the church itself or from its members.


The institution maintains an affiliation with a church in one of these ways:

  • Group ruling. The seminary is included in an umbrella ruling to a parent body, and that parent is a church or a convention of churches. 

  • Church control. The seminary is operated, supervised or controlled by, or is connected to a church, with some sort of board overlap or appointment power. 

  • Other relevant facts and circumstances. For example, institutions that are structurally independent but have long supported a particular religious denomination may nevertheless be integrated auxiliaries because of that historic relationship.

Will the charity deduction be cut?

It was enough to chill a nonprofit's heart. The headline of the column in the business section of the Sunday New York Times read: "It's Time to Rethink the Charity Deduction."

A few weeks before that column ran on December 19, 2010, a news story in the Times was headlined "Nonprofits Fear Losing Tax Benefit."

Similar headlines have appeared in other media, beginning with an Obama administration proposal in early 2009 that would have reduced the allowable amount of the tax deduction for charitable donations. These donations are a critical component of most nonprofit budgets, including those of theological schools.

The Obama administration proposal seemed to go nowhere, but similar proposals have been recommended since then by blue-ribbon panels and organizations interested in policy issues.

Washington attorney Marcus Owens, who for 10 years was director of the Exempt Organizations Division of the Internal Revenue Service, thinks this is enough to raise the "alert level" for nonprofits. "Any new tax legislation needs to be watched carefully," he said, noting that proposals affecting the deductibility of charitable contributions are coming from both the Obama administration and outside sources typically considered protective of nonprofits.

But politics will play a major role in the likelihood of any substantial changes, he said. "Frankly, I think the Congress will be so divided over the next two years that not much will happen. The Republicans want new programs to be paid for, so changes that would generate new revenue — such as making charitable contributions more taxable — will have some exposure. But Republicans are sensitive to changes that will hurt donors."

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