Section 501(c)(3) of the Internal Revenue Code provides tax exemptions for qualifying charitable organizations, like religious groups. Naturally, religious groups that use psychedelics want 501(c)(3) status. But the Internal Revenue Service (IRS) – like many of its counterpart agencies – refuses to play ball. In 2021, a group called the Iowaska Church of Healing took the IRS to court over its denial of the group’s 501(c)(3) status. In the year and change since I last wrote about the Iowaska case, a number of legal developments occurred. Let’s take a look at some of them below.
A brief refresher on 501(c)(3) status
Since I haven’t written on this topic in a while, let’s do a brief refresher on the law. The IRS says the following about 501(c)(3) status:
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 organization, i.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.
Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.
In the 1970s, the IRS issued Revenue Ruling 75-384, stating in part that:
[A]n illegal purpose . . . 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.
As I mentioned in a prior post:
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.
Psychedelics and 501(c)(3)
To understand this next part, you should probably have a baseline understanding of the federal law issues relating to religious use of psychedelics, which you can read about at length here. In a nutshell though, the Religious Freedom Restoration Act (RFRA) was applied to a religious psychedelics group in 2006 in Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal by the U.S. Supreme Court. The group there – which won its case and was permitted to use ayahuasca for religious purposes – eventually gained 501(c)(3) status.
To that end, other groups sought religious use petitions from the DEA and even 501(c)(3) status from the IRS. Iowaska was one such group, and eventually had to sue after their status was denied. To this day, apparently, the DEA still hasn’t replied to its exemption request…which it filed in 2019.
Federal court sides with the IRS
On March 31, 2023, a district court judge in the federal District of Columbia issued an order siding with the IRS over Iowaska. I won’t address the court’s analysis of legal standing (one of the grounds for tossing Iowaska’s case) but will instead focus on its denial of tax exempt status.
According to the court, one of Iowaska’s key issues was that it failed to meet the threshold for 501(c)(3) status because it was “not organized and operated exclusively for exempt purposes”. The court first noted that Iowaska’s articles of incorporation didn’t properly limit Iowaska’s operations to tax exempt purposes, nor did the group operate for tax exempt purposes – because the group wanted to use a substance in violation of the Controlled Substances Act (CSA). Part of its reasoning was the fact that Iowaska hadn’t obtained a CSA exemption. To the court, this also violates public policy.
As I have mentioned plenty of times before on this blog, this rationale leaves religious groups in limbo. If they file the DEA exemption petition, chances are they never hear anything back (Iowaska hasn’t heard back after five years and after apparently having a U.S. Senator go to bat for it with the DEA). If they engage in their religious practice, their petition will be summarily denied. If they put a pause on it, they will not have been able to engage in their religion (a pretty clear First Amendment issue if you ask me)– and in the meantime will STILL be denied 501(c)(3) status. On the other hand, if they avoid the DEA exemption process altogether, they will risk jail time and will not be given 501(c)(3) status. How the courts still don’t recognize these problems is beyond me.
What the future might hold
Iowaska recently filed an appeal of the district court decision. If you aren’t familiar with the federal appellate process, be prepared to wait a long time, more than a year, before there is any sort of written decision on the appeal. It’s entirely possible that the case will be subject to multiple appeals. It could be years before there is a clear outcome, and in the intervening time, other court cases may change things yet further. So all that said, if you are interested in these issues, please stay tuned to the Psychedelics Law Blog for additional updates.
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