You’ve probably heard of section 501(c)(3) of the Internal Revenue Code (IRC), which provides certain tax exemptions for qualifying charitable organizations. You also probably know that there are many psychedelic religious groups worldwide. The question I want to answer today is “can psychedelic religions obtain 501(c)(3) status?”

What is 501(c)(3) status and how do religions obtain it?

IRC 501(c)(3) is a federal law. Here’s what the Internal Revenue Service (IRS) says:

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organizationi.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

501(c)(3) exempts organizations that are “organized and operated exclusively for religious [or] charitable purposes.” It also requires that “no part of the net earnings of which inures to the benefit of any private shareholder or individual[.]” So it applies to charities, not for-profit businesses. It won’t apply to psilocybin businesses in Oregon, for example.

That said, 501(c)(3) at least reads in a way that it should apply to psychedelic religions. But many psychedelics are federally illegal, which leads to the next issue.

501(c)(3) status for federally illegal matters?

Way back in the 1970s, an antiwar organization sought 501(c)(3) status. The organization encouraged members to engage in non-violent acts of civil disobedience, which included illegal conduct. The IRS denied the group’s status. In Revenue Ruling 75-384, it explained that organizations that engage in illegal conduct cannot be exempt. The ruling states in part:

Its activities demonstrate an illegal purpose which is inconsistent with charitable ends. Moreover, the generation of criminal acts increases the burdens of government, thus frustrating a well recognized charitable goal, i.e., relief of the burdens of government. Accordingly, the organization is not operated exclusively for charitable purposes and does not qualify for exemption from Federal income tax under section 501(c)(3) of the Code.

The IRS treats this ruling as precedential and has applied it in the context of cannabis businesses. For example, it recently denied 501(c)(3) status to a medical cannabis business, citing Revenue Ruling 75-384.

Because of this line of precedent, it would at least seem like the federal government was well within its rights to deny 501(c)(3), tax exemption requests to psychedelic religions. But, the story doesn’t end there.

Federal law protects psychedelics religions

In 1990, the U.S. Supreme Court held that a state law banning peyote didn’t violate constitutional religious freedom because it was a neutral law and applied generally to all people. Congress then passed the Religious Freedom Restoration Act (RFRA) to “provide a claim or defense to persons whose religious exercise is substantially burdened by government” from the application of neutral laws of general applicability. Per RFRA, courts must determine whether a law (1) substantially burdens (2) a sincere (3) religious exercise. In 2006, in Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal, the Supreme Court used RFRA to side with a religious group that wanted to use ayahuasca. Following Gonzales the DEA issued Interim Guidelines for seeking petitions to the CSA for religious purposes.

I’ve described all of this in my posts linked at the bottom of this post. But suffice it to say, the DEA’s process is – in the most charitable light – opaque. The bottom line is that the Supreme Court believes that psychedelic religious practices can be legitimate. And that means they can – in theory – be protected.

The Iowaska case – psychedelics meet 501(c)(3)

In September 2021, a group called the Iowaska Church of Healing sued the IRS commissioner after the IRS denied it 501(c)(3) status. There are a few key things to point out from the complaint:

  1. The group was organized as a non-profit for religious purposes;
  2. Iowaska filed a DEA petition in 2019, which has not been processed; and
  3. It also managed to get Iowa Senator Charles Grassley to go to bat with the DEA and IRS, which still produced no results.

In spite of all this, the IRS issued a final adverse ruling denying Iowaska’s 501(c)(3) status. In the ruling, it amazingly noted that “the church in the O Centro case was “an organization with activities strikingly similar to your own.” But because Iowaska didn’t first seek relief through the courts or have a successful DEA petition, no dice.

Can psychedelic religions obtain 501(c)(3) status?

Federal law makes very clear that psychedelic religions may be since for RFRA purposes. The issue is that the process for recognition means either: (1) an expensive lawsuit that the government will fight tooth and nail on procedural grounds (a topic I will cover soon); or (2) submitting a petition that will likely sit there for years unanswered. It’s not every business that can get a U.S. Senator to go to bat for them – but even that apparently is not enough.

Until the DEA gets around to approving petitions for tax exemption, or until groups like Iowaska prevail against the IRS, the IRS will not almost certainly not allow psychedelic religions to obtain 501(c)(3) status.

For more of my Psychedelics Law Blog posts on religious freedom issues, see:

You can also check out another, more detailed post I wrote called “How the DEA is Interfering with Religious Use of Psychedelics” published on JURIST here.

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