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Firstly, I'm curious as to how either public schools or small businesses are seen as tax exempt. (Public schools are generally a governmental *body*, and small businesses still *very much* have to pay taxes.)
What you may be thinking of here is the 501(c)3 exemption for *educational foundations and private schools* as well as *charitable organisations*; in those cases, they actually have to follow the exact same rules as churches do (a general prohibition on lobbying of any sort, though a church can say something like how it believes homosexuality is wrong (for example); telling a church congregation (even through flyers) not to "vote for people who support homosexuality" or to write their congresscritters to pass a law banning domestic partner benefits crosses the line, so the courts have held).
In fact, the prohibition on 501(c)3 lobbying is strict enough that for purposes of fundraising even groups like People for the American Way set up 501(c)4 foundations for the political activism ends; with a 501(c)4 group you can lobby as long as it's not in support of a specific candidate or party.
(Of note, there are only three nationwide dominionist groups with 501(c)4 status--the Traditional Values Coalition, the Eagle Forum, and the Christian Coalition. In fact, the CC lost its 501(c)4 status for several years as its voter guides were seen as excessively partisan. In other words, MOST dominionist lobbying groups are in fact in violation of this law, and a few have been investigated for it--the Family Research Council originally started as a 501(c)4 split from Focus on the Family (which is 501(c)3) because of the very real risk that FotF might have lost its tax-exempt status. (FRC now is, interestingly, 501(c)3.)
And yes, churches *and* educational foundations can lose not only their federal but state tax-exempt status for it (in fact, the University of the Cumberlands *nee* Cumblerland College may be about to lose its tax exempt status *and* accreditation in the state of Kentucky for merely kicking out a gay student; this is the case even though outside of Louisville, Lexington and Covington there are no Fairness ordinances or amendments).
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Actually, the courts have historically held that so long as a church, educational foundation or charitable group received tax exemptions (under 501(c)3 status) that the groups receiving tax exempt status and whose donations were tax-deductible were legally prohibited from lobbying or electioneering. In fact, Focus on the Family got in trouble for this a few years back (FotF, like most dominionist groups, is organised as a 501(c)3 for tax purposes) and had to create the Family Research Council (under 501(c)4 status, which allows lobbying so long as it is nonpartisan--and which does not allow donations to the group to be tax deductible) to save its own tax-exempt status. (Notably, both groups could be in trouble now, as the FRC has split completely and is now a 501(c)3.) This is also why Focus on the Family as well as the American Family Association often have state affiliates or even groups that are state partners (for example, the AFA of Kentucky is 501(c)3, but Frank Simon runs a predecessor group called "Freedom's Heritage Forum" which is a de facto wing of AFA Kentucky and which has 501(c)4 status; "Freedom's Heritage Forum" has also been the major distributor of partisan dominionist "voting guides" in the state, and likewise has been investigated for partisan lobbying (illegal under the 501(c)4 exemption). In fact, churches have lost their tax exempt status in past and been forced to pay back taxes to the IRS for illegal electioneering, as have educational foundations (aka "private school exemptions") and charity groups. Evidence of electioneering has ranged from stating opposition to the war in Iraq to handing out Christian Coalition and AFA voter's guides in church circulars. In other words, it's considered very *much* a two-way street as far as taxes go. The church gets tax-exemption and donations to it are tax deductible, but on the other hand, they are not generally supposed to get involved in the political process (as far as lobbying for certain bills to be passed or not passed, etc.) Were federal and state taxes not an issue, this would be less of an issue. Also of note, dominionist "tax protester churches" have on occasion refused to pay taxes and refused to register as tax-exempt churches due to the fact they are quite partisan. (Most of these groups are in fact linked to "Christian Militia" groups, tax-protester movements within the militia community, and Christian Identity groups. More info on these groups here; at least one publisher of dominionist homeschool curriculum (the "CLASS curriculum" published by the Church of Christian Liberty in Illinois) is linked with "Christian Patriot" groups of this sort and has had the Minutemen and Gary North (both linked with militia groups including "Christian Identity" militias) as speakers in the church.)
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This is one of those areas where, as I understand it, it is a VERY gray area.
If the brochure advocates voting for specific parties or specific candidates, then technically it's a violation of 501(c)3 status; if they do *not* advocate specific candidates or parties, but merely say something like "homosexuality is wrong", they *may* have more wiggle room.
The IRS has stated fairly recently, though, that it is disapproving of *any* sort of politicking in churches.
The general legal standard on this seems to be that if such a flyer is being sent as if it had the tactit approval of the church, it's a potential violation.
One thing that may help, too--just out of curiosity, does the flyer say whom they are from? (If it's from a lobbying group--like the Traditional Values Coalition or one of the 501(c)4 groups linked with the AFA or Focus on the Family, that also qualifies as a violation; if it's from a 501(c)3 group, depending on the content it could be a violation from BOTH groups, as 501(c)3 groups are generally *not* allowed to engage in political lobbying).
In fact, if a 501(c)4 group promotes specific candidates or parties THIS can earn them a violation in certain circumstances (the Christian Coalition lost its 501(c)4 status for partisan politicking and only this year regained it).
I would probably recommend in this case contacting Americans United and DefCon America; both have projects specifically involving investigation of potential violation of tax-exempt status by churches and other 501(c)3 groups.
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Ah, yes, the Illinois Family Institute--a true hive of scum and villany. (For those unaware, the Illinois Family Institute is a state-level affiliate of Focus on the Family (and yes, this is by FotF's own admission). Not only do they have a history of being virulently anti-gay (even protesting the "Gay Games" in Chicago) but is probably the leading dominionist group in the state (having links with, among others, the Constitution Party, a dominionist political party that is itself heavily linked with "Christian Militia" and racist groups) and has even joined the ranks of dominionist groups dead-agenting the ADL for its statements warning about dominionism (example here--in this case, the dead-agenting was the result of the ADL expressing grave concerns to the candidate in question about "appeals to religious faith" in politicking). (Per Foundation Center's database, the Illinois Family Institute--like most dominionist lobbying organisations--is registered as a 501(c)3 with the IRS meaning it is conducting its lobbying activity illegally.) I would strongly recommend at this point contacting Americans United and DefCon America *both* about this, making specific complaints about both the church involved *and* the Illinois Family Institute. Americans United can be contacted at americansunited@au.org and DefCon America can be contacted at Tips@DefConAmerica.org with their respective reporting hotlines; both would be highly appreciative if you could forward them copies of the offending flier and give all the details you can. You may also wish to contact the IRS directly. This website has instructions on how to forward a complaint (for "unreported income" I'd list all their income from the 2004 form 990 listed above and note that they are engaging in illegal electioneering; forward a copy of the flier and a copy of their form 990 as well to show they are a nonprofit illegally electioneering)
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