The Exemption Is the Loophole

The Pattern

The question people keep asking is how to make churches pay for child protection without calling it a tax. The First Amendment and the Religious Freedom Restoration Act make a direct tax on churches nearly impossible. The political will for one does not exist.

The question is also the wrong question. The loophole is not something we need to find. The loophole is the one churches already have. The largest subsidy in the tax code is the 501(c)(3) exemption, and religious organizations receive it automatically. The conditions that justify that subsidy are already written into the law. The problem is that no one enforces them.

The mechanisms below are not new taxes. They are conditions on an existing benefit, equal application of existing law, and liability for harm already caused. Each one is on the books. Each one is underused. The advocacy is not invention. It is enforcement.

The subsidy is conditional

Section 501(c)(3) of the Internal Revenue Code exempts organizations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.” The statute is public. The list of exempt purposes includes, verbatim, “prevention of cruelty to children or animals.”

The IRS’s own guidance is explicit. To keep the exemption, an organization must meet both an organizational test and an operational test. Treasury Regulation 1.501(c)(3)-1 states that an organization is regarded as operated exclusively for exempt purposes only if it “engages primarily in activities which accomplish one or more of such exempt purposes.” The regulation is on record. The IRS Publication 5781 repeats the standard: the organization must be “organized and operated exclusively to further Section 501(c)(3) exempt purposes.” The publication is public.

The exemption is not a right. It is a benefit conditioned on output. The output the statute names includes preventing cruelty to children.

The question that follows is the one no one asks: how many religious organizations that claim the exemption are engaged primarily in activities that accomplish that purpose? The answer, in most cases, is not measurable because no one is measuring it. The operational test exists on paper. It is not enforced against churches with any regularity. A church that runs a media empire, holds commercial real estate, and spends a fraction of a percent of its budget on direct child welfare is not obviously meeting the operational test. It is obviously meeting the worship test. Those are different tests, and only one of them is being checked.

This is the frame that inverts the whole conversation. You are not taxing churches. You are asking whether the largest tax break in the code is being earned by the organizations receiving it. The First Amendment protects worship. It does not protect a commercial operation’s right to a subsidy while it spends near-zero on the public good the statute says justifies the subsidy.

The mechanism: require tax-exempt religious organizations to demonstrate a minimum percentage of actual spend on direct charitable child welfare — foster placements, material aid to families, abuse prevention, survivor support — to keep the exemption. This is a condition on a benefit, not a tax. The political frame writes itself. If you want the break, earn it.

The Unrelated Business Income Tax already applies to churches

Before 1969, churches were exempt from the Unrelated Business Income Tax. Congress ended that. The Tax Reform Act of 1969 made churches subject to UBIT under Section 511 on income from trades or businesses unrelated to their exempt purpose. The IRS guide documents the history. The statute is on record.

The law exists because Congress saw churches operating publishing houses, hotels, factories, radio and television stations, parking lots, newspapers, bakeries, and restaurants, and decided that preferential treatment for commercial activity was not justified. The income from those activities is taxable. The law is not new. It is more than fifty years old.

The problem is enforcement. The IRS audits churches at a rate that makes the law largely theoretical. The commercial operations of large religious organizations — the publishing arms, the media empires, the leased parking, the real estate that generates income unrelated to worship — are the precise target of UBIT. The revenue is taxable under current law if the IRS chose to pursue it.

The advocacy is not a new tax. It is funding the IRS to enforce an existing one. The mechanism is appropriations, not legislation. The frame: the law already says commercial income is taxable. The question is why we are not collecting it.

Property tax on non-worship real estate

All fifty states exempt some church-owned property from property tax. The extent varies. In most states, the land and building used primarily for religious worship are exempt. Property not primarily used for religious purposes often does not qualify — even if it is owned by a church. Church Law & Tax documents the state-by-state variation. ChurchLend’s compliance guide confirms the same pattern.

Commercial rental property, leased parking, investment property held for future use, and in some states parsonages above a value threshold, are already taxable in many jurisdictions. The carve-outs that exempt them in the states that still do are state-level decisions, not constitutional requirements.

The mechanism is standardization and expansion of existing law. Worship is exempt. The parking lot you lease to a developer is not worship. The strip mall you bought is not worship. The apartment building you operate is not worship. The advocacy is state-by-state, and in many states the law already says what it needs to say. The work is making assessors apply it.

Equal application of licensing and inspection fees

Churches that operate daycare, schools, foster homes, youth camps, and youth ministries are child-facing institutions. Many states exempt or discount religious providers from the licensing, inspection, and compliance fees that secular providers pay. Removing that carve-out is not a tax. It is ending a special break. It is the most defensible mechanism because it is literally equal treatment under law.

A secular daycare pays a licensing fee. A church daycare should pay the same fee. A secular school meets inspection standards. A church school should meet the same standards. The religious exemption from these costs is a subsidy, and the subsidy is the loophole. The mechanism is legislative repeal of the carve-out, state by state. The frame: equal treatment is not persecution.

Liability for harm caused

The Catholic Church in the United States spent over $5 billion on clergy sex abuse allegations between 2004 and 2023, according to the Center for Applied Research in the Apostolate at Georgetown University. The National Catholic Reporter documented the study. BishopAccountability.org confirmed the figures. OSV News calculated that the total likely exceeds $6 billion when more recent settlements are included, among them an $800 million settlement by the Archdiocese of New York. OSV News reported the running total.

That is not a funding mechanism for the child protection system. That is the cost of harm already caused, paid through tort law. But the mechanism that produced it — civil liability for institutions that cover up abuse — is the most morally powerful tool available, and it is underused.

The advocacy has two parts. First, remove statutes of limitations on child sexual abuse civil claims. Many states have reformed these. Many have not. The states that have not are protecting institutions from the consequences of what they covered up. Second, eliminate the clergy-penitent privilege carve-out from mandatory reporting of child abuse.

The clergy-penitent privilege is the legal doctrine that protects confidential communications between a clergy member and a penitent. All fifty states have adopted it in some form. Twenty-eight states specifically list clergy as mandatory reporters of child abuse. Eighteen more have “any person” as the reporting standard. But thirty-one of the forty-two states where clergy are mandatory reporters have exceptions for penitential communications. Telios Law documents the state-by-state landscape. The Child Welfare Information Gateway summarizes the same.

Seven states abrogate the privilege in child abuse cases. The rest let it stand. The result is that in most of the country, a clergy member who learns of child abuse during a confidential conversation is not required to report it. The privilege protects the institution. The child is not protected.

The mechanism is legislative. Remove the carve-out. The frame: a confession that contains the abuse of a child is not a sacrament. It is evidence. The privilege is a choice the state made to protect the institution over the child. The state can choose differently.

The transparency option

The weakest mechanism and the safest opening move: a public reporting requirement. Religious organizations that claim to protect children publicly report what percentage of their budget goes to direct child welfare. The ones that spend a fraction of a percent become visible. The ones that actually fund foster care, survivor support, and abuse prevention become visible. No money is extracted. The mechanism is shame, market pressure, and donor redirection.

This is not a charge. It is a disclosure. It costs nothing to demand. It is the hardest to legally challenge because it does not touch the exemption, does not tax income, and does not regulate worship. It regulates a claim. If you say you protect children, show the number.

The churches that do the work have nothing to fear. The churches that do not will fight it, and the fight is the point.

What this is not

This is not a tax on churches. The First Amendment and RFRA make that fight unwinnable, and the political will does not exist. This is not persecution. Equal application of law is the opposite of persecution. This is not an attack on worship. Worship is protected. The commercial empire, the real estate portfolio, the media operation, and the unreported abuse are not worship.

What this is: an audit of a gift. The 501(c)(3) exemption is the largest loophole in the tax code. The conditions that justify it are already written into the statute. The mechanisms to enforce those conditions are already on the books. The question is not what new loophole we can find. The question is why we are not using the ones we already have.

The duty is invoked every Sunday. The appropriations are not. The child is left with the sermon.

That is duty weaponization. The moral claim is loud. The material follow-through is quiet. The exemption is the cost the rest of us pay for a benefit the child never receives. The mechanism to change that is not invention. It is enforcement.

The loophole is the exemption. Close the gap between what the statute requires and what the institution does. The child is what it costs.