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Jan 02 2013

IRS Sued Over Preferential Treatment for Churches

Two separate lawsuits have been filed against the IRS, one by American Atheists and one by the Freedom From Religion Foundation, over preferential treatment for churches compared to other non-profit organizations. The particular arguments being offered are fascinating. You can read the complaint for the FFRF’s suit, which also includes the Triangle Freethought Society, here.

FFRF and churches are classified as non-profits under section 501(c)(3) of the Internal Revenue Code, but churches are treated differently in several ways from non-church 501(c)(3) groups. As the complaint says:

The plaintiffs are tax-exempt 501(c)(3) non-profit organizations that must file detailed, intrusive, and expensive annual reports to maintain tax-exempt status, but such reports are not required for churches and certain other affiliated religious organizations in order to remain tax-exempt…

All non-profit organizations, except churches and certain other affiliated religious organizations, must first file an application and fee with the IRS in order to qualify for the benefits of §501(c)(3) status…

Churches and certain other affiliated religious organizations are exempted from the IRS requirement of filing the detailed application, Form 1023, necessary in order to be considered a tax-exempt organization under §501(c)(3).

All organizations recognized as tax-exempt under §501(c)(3), except churches and certain affiliated religious organizations, also are required to file an annual information return, Form 990, in order to maintain their tax-exempt status.

Churches and affiliated religious organizations are exempted from having to file the detailed annual information return, Form 990, in order to maintain their tax-exempt status…

The plaintiffs expend substantial time and resources in making the detailed annual information filing, including the annual expense of engaging and paying a certified professional accountant to prepare and file the required Form 990.

Form 990 requires organizations, including the plaintiffs, to provide detailed information, including information about governance, composition of governing body, information about governance and management policies, and disclosure practices.

Form 990 also requires organizations, including the plaintiffs, to list their officers, directors, trustees, and key employees, and they must also report compensation paid by the organization to such persons.

Form 990 further requires organizations, including the plaintiffs, to provide information regarding the organization’s mission, activities, and current and prior years’ financial results.

Form 990 additionally requires reporting of each organization’s new, ongoing and discontinued exempt purpose, achievements, and reports of revenue and expenses.

Form 990 also requires organizations, including the plaintiffs, to file detailed financial schedules, including information about donations and whether donations are spent on programs or management and fundraising.

Finally, Form 990 requires that detailed statements of revenue and functional expenses, as well as organizational balance sheets, comprising the financial statements of the organization, be filed each year.

The preferential treatment of churches and certain other affiliated religious organizations by the IRS, under the direction and control of the defendant Miller, directly benefits churches and other religious organizations, while discriminating against other non-profit organizations, including the plaintiffs, solely on the basis of religious criteria.

The preferential treatment of churches and other affiliated religious organizations by the defendant results in obligations imposed on secular non-profits, including the plaintiffs, that are not imposed on churches.

The preferential treatment provided to churches and other affiliated religious organizations constitutes an exclusive and discriminatory benefit to religion in violation of the Establishment Clause, as well as the equal protection rights required by the Due Process Clause of the Fifth Amendment to the United States Constitution.

The complaint in the American Atheists suit can be found here. AA’s suit challenges many of the same disparities in treatment between religious and secular non-profits but also adds a couple more:

Churches are able to take advantage of the “parsonage exemption” or “parish exemption,” allowing them to deduct housing costs for “licensed, commissioned, or ordained” ministers. Also, churches need not withhold income tax from compensation to “licensed, commissioned, or ordained” ministers.

There is no limit on the size of the parsonage allowance each church may deduct or the amount of cash a church may give a religious leader to use for housing costs.

FFRF actually has a separate lawsuit over the parsonage allowance, which it filed in November. These will be very interesting lawsuits to watch. The government’s defense will be that the Free Exercise clause requires such disparate treatment because otherwise the government would be interfering in the internal workings of churches. And that’s not a frivolous argument. In fact, if I was a betting man — and I am — I would bet that the ruling will come down exactly that way.

25 comments

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  1. 1
    slc1

    Given the current makeup of the SCOTUS, there is not the slightest change in hell of any of these lawsuits being successful.

  2. 2
    Trebuchet

    There’s also the blatant political activity secular organizations can’t get away with.

  3. 3
    heddle

    The ideal solution is no tax break for non-profits and no deduction for charitable contributions or mortgage interest. You should not be forced subsidize my charities or my house, and I should not be forced to subsidize your charities or your house.

  4. 4
    janiceintoronto

    @2

    There’s also the blatant political activity religious organizations are getting away with.

  5. 5
    bobafuct

    On a personal level, I would love to see religious orgs lose this battle. My mom teaches at a christian school and only just learned that they are exempt from contributing to the state unemployment fund, meaning she won’t get unemployment assistance if she loses her job. She also doesn’t get health care or a pension/retirement. Somehow, she justifies this to herself by saying that the only way the school can stay in business is to forgo such “perks” and get the tax breaks. Seems like it’s always the holiest organizations that treat their employees like that.

  6. 6
    eric

    The government’s defense will be that the Free Exercise clause requires such disparate treatment because otherwise the government would be interfering in the internal workings of churches. And that’s not a frivolous argument.

    I think its fairly frivolous. Making someone report their officers and expenses is not really interfering with them. At least not in terms of the 1st amendent concept of entanglement, because the IRS would not be telling churches who they can hire or how they can spend their money….unless they spend money on something a nonprofit chatirable organization cannot legally spend their money on. But if that’s the case, the IRS is not entangling itself with a religion so much as it is merely enforcing the law.

    Think of it this way: the purpose of the IRS reporting is fraud detection. Is government fraud detection in terms of religious causes unconstitutional? No – the judicial branch does it! Every time they put a Hovind type person in jail or nail some con artist who was trying to use religion to perpetrate their con, the courts are doing a form of religious fraud detection. So its hard for me to see how they could claim it is unconstitutional when the executive branch does it.

    Having said all that, I think you are right; the courts will uphold the difference in reporting requirements (by some mentally gymnastic interpretation of the first amendment). They will not see it the way they should see it, which is simply the executive branch using some teeth to ensure nonprofits are following established laws.

  7. 7
    unbound

    @3 – Unfortunately, if you were to eliminate the tax breaks, you would find that the non-profits would lose at least 50% of their funding. I was the treasurer for my local high school band boosters association, and once I established the association as a 501(c)(3) organization, then (and only then) were we able to start getting solid donations from businesses to allow us to fund the supplemental band activities to get the kids where they should be (resulting in winning a state championship for the marching band, and 3rd place in world indoor drumline competition). There is no way we could have gotten the equipment and training needed for the kids to reach their potential without the tax break associated with being a 501(c)(3).

    Churches are definitely abusing their status and getting away with a lot (I agree whole-heartily with the verbiage quoted from the lawsuits having filled out all those forms myself). But there is little that can be done without treading down the path of government interference. Just don’t advocate for negatively impacting the legitimate (IMO) non-profits that are doing actual good work for the communities.

  8. 8
    Deen

    The government’s defense will be that the Free Exercise clause requires such disparate treatment because otherwise the government would be interfering in the internal workings of churches.

    But that doesn’t address the issue of preferential treatment at all. After all, even if you accepted that argument, it is still possible to fix the disparity, simply by dropping the Form 990 requirements and fees for non-religious organizations as well.

  9. 9
    dogfightwithdogma

    Win or lose, I think it is long overdue for these matters to be legally contested. I am glad that FFRF has decided to take on this fight. The religionists and their defenders need to be reminded repeatedly, loudly and aggressively that we are a secular nation, founded on secular principles, and that secularists will no longer resist religious privileging with low-key, whiny, be-friendly-and-don’t-offend tactics. I praise FFRF for filing these lawsuits and think that FFRF is today probably the most effective opponent , certainly the most aggressive opponent, of church/state violations in the secular community. Ed: I think the lawsuit filed by FFRF in November is not about the parsonage issue but rather is over the failure of the IRS to enforce the rules prohibiting churches and other non-profits from engaging in partisan political activity, a rule that many churches routinely violate and is rarely enforced by the IRS when churches do violate it. I do hope, however, that FFRF will eventually file a lawsuit over the parsonage exemption.

  10. 10
    MissMarnie

    The government’s defense will be that the Free Exercise clause requires such disparate treatment because otherwise the government would be interfering in the internal workings of churches.

    I’m not sure how assuring that they are in compliance with tax laws can be seen as interfering. Churches would certainly be welcome to forego seeking the tax breaks other charities get if they don’t want to reveal something, but if they want to be treated as a charity, they should have to play by the same rules as everyone else. We don’t make churches sovereign nations, they are still expected to play by the same laws as everyone else. If your church’s free exercise comes up against our nation’s laws, the laws win.

  11. 11
    Raging Bee

    You should not be forced subsidize my charities or my house, and I should not be forced to subsidize your charities or your house.

    Not sure about the houses, but I do see a real state interest in giving tax breaks for charitable donations: if a private nonprofit uses donations to help the needy, that could well mean the government saves a bit of money because those needy don’t have to apply for as much government assistance as they otherwise might. And if certain private organizations can render assistance more efficiently than a government, then it makes sense for the government to encourage donations to that organization, rather than collect more taxes and try to do the same thing less efficiently.

    But that, of course, is a different issue — if we have tax breaks for nonprofits, then we MUST treat religious and nonreligious nonprofits according to the same rules.

  12. 12
    Raging Bee

    The government’s defense will be that the Free Exercise clause requires such disparate treatment because otherwise the government would be interfering in the internal workings of churches.

    It’s time for that interpretation of the Free Exercise clause to be scrapped altogether. How can any sane adult think that “free exercise” means churches are exempt from obligations the rest of us have? How can any sane adult not see that that interpretation violates teh Esablishment clause? If a church doesn’t have to obey the same laws as the rest of us, how can that not be “establishment of religion?”

  13. 13
    kylawyer

    Ed, I think your opinion that the government will defend on the Free Exercise clause may be the Constitutional principle if this case gets as far as the Supreme Court. On the District Court level, the courts appear to be looking for more mundane rationales not to mess with church exemptions. The IRS has already suspended audits of churches that appear to violate the ban on politicizing from the pulpit. A 2009 Minnesota case laid the matter off against the IRS by claiming that the audit summons could be ignored by the church in question because it was not from an IRS official of sufficient authority. The IRS is currently rewriting the rules in alignment with this ruling. I think the federal courts will try and continue to avoid this political hot potato on technical grounds, if possible.

  14. 14
    anubisprime

    kylawyer @ 13

    I think the federal courts will try and continue to avoid this political hot potato on technical grounds, if possible.

    Yep…they will play legal tennis b’twixt ‘n’ b’tween the various courts up and down the circuit.
    SCOTUS will try and avoid it for as long as possible and guaranteed they will not rush to deliver any ruling even if they accepted to consider the matter, which is far from certain they would.
    So keep kicking it into the long grass seems to be the tactic here!

  15. 15
    Area Man

    It’s really hard to see how the parsonage exemption can be Constitutional. It amounts to nothing less than giving a free pile of taxpayer money to preachers. What possible secular purpose could that solve?

  16. 16
    John Hinkle

    @Area Man

    They might argue that parsonage is “part of” their charitable work, in which case it should be extended to all 501(c)(3)s, or none.

    All you need is a weak magnifying glass to see that religion, most especially (or maybe solely) Xianity, is privileged in this country. We don’t have to put them out of business; just make them play by the same rules as everyone else. This is like letting the free market determine which is the best charity. All the peripheral woo that churches offer is not charity, it’s business; it’s transaction-based money for “services.”

  17. 17
    lorn

    I’ve always felt that, to the extent a church or religious organization, uses and/or benefits from public infrastructure and services – think roads, schools, police, fire, and the rest of the amenities offered by a developed society – they should be taxed in a similar fashion and rate as any other organization.

  18. 18
    democommie

    “Every time they put a Hovind type person in jail or nail some con artist who was trying to use religion to perpetrate their con…”

    I can just see Kent–in a bid to keep himself from being treated the way that he and his fellow KKKristians think women should be treated–saying to a fellow con:”

    “What am I in here for? The same thing as Al Capone, mothafuckah!”

  19. 19
    John Horstman

    The government’s defense will be that the Free Exercise clause requires such disparate treatment because otherwise the government would be interfering in the internal workings of churches. And that’s not a frivolous argument. In fact, if I was a betting man — and I am — I would bet that the ruling will come down exactly that way.

    Bullshit. That’s an entirely frivolous argument because it presupposes that the government must treat non-church non-profits as it currently does. If the government MUST treat churches as it presently does and ALSO MUST not make special exceptions for religious institutions, then the proper resolution is to treat all organizations in the same way that it’s necessary to treat churches. Problem solved (creating several worse ones – really the best course is to laugh at the assertion that taxing churches is a violation of the free exercise of religion – wrong meaning of “free” there).

  20. 20
    MissMarnie

    It’s also worth noting that the freedom of the press doesn’t afford the press any special tax exemptions.

  21. 21
    Marcus Ranum

    laugh at the assertion that taxing churches is a violation of the free exercise of religion

    Yep. The real estate is the key, especially since real estate is (whether intentional or not) an investment. Basically it’s a huge tax-shelter, which is also taken advantage of by many many universities and hospitals as well. A member of my family is a big shot attorney specializing in bond issues and has to deal with these bizzare situations like a non-profit hospital that owns six square blocks of downtown Baltimore. Well, one way to keep from showing how insanely profitable you are is to keep buying real estate and building on it… The mega-churches are playing the same game.

    Random fact: the catholic church’s subsidiaries owned about 10% of the land wealth in France before the revolution.

  22. 22
    grumpyoldfart

    My prediction:
    Case dismissed (and atheists warned to never pull a stunt like that again)

  23. 23
    frog

    @21
    One solution (sadly) to that is more lawsuits that prompt financial losses (e.g., the victims of sexual assault by priests). The RCC has been selling off property to make ends meet.

    Question: if a church rents property to a third party, is that rent tax exempt? In this case I’m thinking specifically of a Catholic school that closed due to lack of enrollment, and is now renting that space to the local public school, which overflowed its building.

  24. 24
    Raging Bee

    frog: not sure what the legal answer to your question is; but in the case you cite, I’d be inclined to give the church a tax break, because it’s renting space to ap public school, and thus facilitating a public good (assuming, of course, that they’re not trying to dictate what gets taught on church property).

  25. 25
    baal

    Bee – outside of unusual cases, property taxes are not payed by public schools regardless of where they are cited. They may have to pay rent to a landlord who would be required to pay property tax but I’m not aware of examples of that happening. My understanding of the various church related exemptions is that the land in question does need to be used for a religious purpose. I.e. If a regular commercial mall is built on a church property, the church would pay property tax on that lot.

    http://www.irs.gov/Charities-&-Non-Profits/Churches-&-Religious-Organizations

    I’m more than happy that this case is going forward.

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