Nettling questions over tax exemptions now enjoyed by religious agencies are being raised by their reliance on tax exempt income from “unrelated” business ventures in which churches compete against secular corporations on a preferential basis.

United States corporate income tax law since its 1909 inception has stipulated exemption for charitable, religious, and educational organizations (similar exemption being granted scientific organizations in 1913). In 1950, Congress focused attention on abuses of the exemption privilege by some organizations using accumulated income to acquire or finance business ventures. New York University, for example, acquired the Mueller Spaghetti Company’s stock and sought tax exemption for the firm on the ground that its net income would go to the University.

Congress then tightened the exemption privilege for educational purposes by ruling: 1. taxes shall be imposed on feeder corporations when trade or business is that corporation’s primary purpose, and 2. exemption is not jeopardized by pursuit of business activity, but tax exemption does not apply to substantially unrelated trade or business activity. Congress thus recognized that an organization may be exempt and yet have business income subject to tax if unrelated to the purpose of the exempt organization. But it did not impose this new restriction on religious organizations. Before that decision either a college or a religious agency could raise income through a tax exempt spaghetti factory in Brooklyn, a trolley line in St. Louis, a publishing house in Philadelphia, a commercial hotel in New York, or a building-block business in Phoenix. Today religious organizations remain free to venture into unrelated business activities, and (because ...

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