Originally published on Forbes.com May 22nd, 2014
The institutions most sheltered from taxation are churches. L Ron Hubbard is reputed to have said “You won’t get rich writing science fiction. If you want to get rich start a religion”. The religion he started, Scientology, fought a veritable “Thirty Years War” with the IRS to maintain its church status. It was well worth its while. Church status is the most enviable of all exempt statuses under the Internal Revenue Code.
Is Special Tax Status For Churches Unconstitutional – Or Just A Bad Idea?
There are many people who think that the tax-favored status of churches is unconstitutional, bad tax policy, and fattening – to the wallets of the mega pastors of the mega-churches, prosperity preachers, and televangelists. Freedom From Religion Foundation has several cases targeting specific benefits and has been having some success, most notably in Judge Barbara Crabb’s decision that the tax treatment of cash housing allowances to “ministers of the gospel” is unconstitutional. American Atheists Inc took a shotgun approach. Along with two other plaintiffs, AAI filed suit in United States District Court:
As its form of relief, the Atheists request the Court issue a judgment declaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations of the Equal Protection of the Laws required pursuant to the Due Process Clause of the Fifth Amendment, the Religious Test Clause of Art. VI, §3, and the Establishment Clause of the First Amendment of Constitution of the United States of America;and enjoining from continuing to allow preferential treatment of religious organizations and churches under §501(c)(3).”
As sometimes happens when firing a shotgun, the result was disappointing.
Judge William O. Betelesman in deciding American Atheists Inc v Shulman noted that the Atheists had made a legitimate constitutional claim.
……the Atheists have sufficiently pleaded that the I.R.C. provisions at issue do not have a secular purpose and they improperly endorse religion
No Skin Off Your Nose
The claim did them no good, though, because they don’t have “standing”. Standing is a very lawyerly concept. The best I can explain it is that in order to have access to the courts, you need to show that you specifically are suffering some harm. If it is no skin off your nose, then you should write your congressman or start a petition drive.
Just to be thorough, I guess,Judge Betelesman enumerated the various tax benefits churches enjoy, which the Atheists had left unspecified.
(1.) Churches are not required to file an application for recognition of tax-exempt status. …….
(2.) Churches are not required to file an annual information return. …….
(3.) Ministers of the gospel are able to receive a parsonage allowance…….
(4.) Salaries of ministers of the gospel are exempted from income tax withholding and FICA taxes…….
(5.) The IRS is required to follow specific procedures when examining a church……
It is worth noting that many ministers think that 3 and 4 cancel one another out since they end up having to pay self-employment tax on their whole pay including housing allowances. Of course, overall both provisions make it easier for churches.
Most of the decision was about the standing issue, of course. Here are some of the high points.
The Atheists argue that as a direct consequence of the IRS’s allegedly discriminatory policies, they are injured by being forced “to (1) submit an application for exemption, (2) file Form 1023, or (3) pay the 501(c)(3) application fee that is up to $850,” which establishes their injury is concrete and particularized, and far from conjectural or hypothetical.
The Atheists contend that they have not applied for exemption as a religious organization or a church because it would violate their sincerely held belief to seek such a classification. Plaintiffs also assert seeking classification as a religious organization or church would be futile, as attempts by other atheist groups to do so have been rejected by the IRS.
I found the IRS answer rather odd.
Defendant, on the other hand, argues that the Atheists voluntarily choose to spend their time and money complying with the alleged discriminatory standards for tax-exempt organizations and their self-inflicted injury fails to rise to an injury in fact and is not traceable to Government action.
It seems that the IRS is arguing that compliance with a rule that you think is unfair cancels out your ability to say you were harmed by it.
Judge Beteleseman seemed entranced by the argument that you can have a church, even if you are an atheist.
A review of case law establishes that the words “church,” “religious organization,” and “minister,” do not necessarily require a theistic or deity-centered meaning.
Thus, the Atheists’ assertion that they are subjected to unconstitutional discrimination and coercion due to their alleged inability to gain classification as religious organizations or churches under I.R.C. §501(c)(3) is mere speculation. At this point, the Atheists have no idea whether they could gain classification as a church or religious organization under I.R.C. §501(c)(3) because they have never sought such classification. Accordingly, the Atheists have not suffered a particularized injury which is fairly traceable to the actions of the Commissioner.
Judge Beteleseman distinguishes his decision from that of Judge Crabb.
As to the §107(2) challenge, the FFRF Court granted the plaintiffs’ motion for summary judgment, because “ministers of the gospel” receive a tax-exempt housing allowance and Gaylor and Barker could not as they are not practicing clergy. .
In contrast, in this case, there are no named individual plaintiffs and no individuals who claim they could qualify for the minister of the gospel exemption under I.R.C. §107(1). Plaintiffs also do not allege they have any employees that receive a housing allowance, that they are suing on behalf of their employees who have been injured by I.R.C. §107(2), or that Plaintiffs have a right to claim a tax-exemption under I.R.C. §107(2).
In denying the defendant’s motion to dismiss, the FFRF Court “concluded that plaintiffs’ alleged injury is clear from the face of the statute and that there is no plausible argument that the individual plaintiffs could qualify for an exemption as “ministers of the gospel,” so it would serve no legitimate purpose to require plaintiffs to claim the exemption and wait for the inevitable denial of the claim.” Plaintiffs in this case never claim that their housing allowance was tax-exempt or that there are plaintiffs who could otherwise qualify for this tax exemption.
It is worth noting that FFRF has a case going on churches being exempt from filing Form 990. Judge Crabb has ruled that they have standing to pursue it. The resistance of churches to meeting the same level of transparency as other not for profits is rather disturbing.
And The Kitchen Sink
The Atheists brought up a constitutional argument that I have not seen before. Article VI, paragraph 3 of the Constitution states
The Senators and Representatives before mentioned, and the Members of the several State Legislatures, and all executive and judicial Officers, both of the United States and of the several States, shall be bound by Oath or Affirmation, to support this Constitution; but no religious test shall ever be required as a qualification to any office or public trust under the United States.
The argument is that 501(c)(3) status is a “public trust”. That one did not go anywhere either.
Reading Article VI, Cl. 3 as a whole, rather than deconstructing each of its words and phrases, would not lend itself to the extension of the phrase “public Trust” requested by the Atheists.
Expert Weighs In
Not to pat myself on the back too much, but I believe that my coverage of the parsonage exclusion controversy has been more thorough than anybodys’s. In the process, I have been working on developing a brain trust. I reached out to them, but so far have only heard back from Professor Edward Zelinksy who wrote:
Thanks for asking for my thoughts. In a recent article in the Hastings Constitutional Law Quarterly, I made two predictions: First, the federal courts will increasingly deploy standing doctrine to dismiss church-state taxpayer cases. Second, as a result, such church-state taxpayer litigation will gravitate to the state courts with more liberal standing rules. This decision confirms the first of these predictions.
Many federal statutes will be off-limits in such state court litigation, but a surprisingly large number will not. For example, many state income tax laws contain a parsonage allowance exclusion, either by incorporating Section 107 of the Internal Revenue Code or by adopting the same or similar language. We are thus likely in the future to see more church-state taxpayer cases in the state, rather than federal, courts.
Personally, I find using standing as a way to avoid addressing the issues rather distasteful, almost cowardly, but we’ll see how it goes.
You can follow me on twitter @peterreillycpa.
Trackbacks/Pingbacks