Churches Challenge Constitutionality of Johnson Amendment

The Johnson Amendment which prohibits 501(c)(3) tax-exempt organizations from supporting or opposing political candidates was challenged this week as being unconstitutional as applied to churches. The complaint (full text) in National Religious Broadcasters v. Werfel, (ED TX, filed 8/28/2024) alleges in part:

Churches are placed in a unique and discriminatory status by the IRC. Under § 508(c)(1) of the IRC, churches need not apply to the Internal Revenue Service [“IRS”] to obtain recognition of their 501(c)(3) status. The IRC places them automatically within the ambit of 501(c)(3) and thereby silences their speech, while providing no realistic alternative for operating in any other fashion. Churches have no choice; they are automatically silenced vis-à-vis political candidates.

Hundreds of newspapers are organized under § 501(c)(3), and yet many openly endorse political candidates....

Many 501(c)(3) organizations engage in electoral activities that are open, obvious, and well known, yet the IRS allows some, but not all, such organizations to do so without penalty. Again, Plaintiffs believe that such churches have the constitutional right to engage in such participation; they simply want the same right for themselves. ...

The IRS operates in a manner that disfavors conservative organizations and conservative, religious organizations in its enforcement of § 501(c)(3). This is a denial of both religious freedom and equal protection....

Plaintiffs contend that the Johnson Amendment, as written and as applied by the IRS, violates the First Amendment’s Free Speech Clause, Free Exercise Clause, the Fifth Amendment’s Due Process Clause (Void for Vagueness), the Fifth Amendment’s Due Process Clause (Equal Protection), and the Religious Freedom Restoration Act.

Catholic News Agency reports on the lawsuit.

DC Circuit: No Tax-Exempt Status for Church Promoting Psychedelics Unless It Has Received DEA or Judicial Exemption

In Iowaska Church of Healing v. Werfel, (DC Cir., June 21, 2024), the U.S. Court of Appeals for the District of Columbia Circuit upheld the IRS's denial of tax-exempt status to a church whose practices revolved around the use of the psychedelic Ayahuasca.  According to the court:

The Church’s purpose and mission revolve primarily around the consumption of Ayahuasca and embracing certain spiritual benefits that the Church’s members believe follow from Ayahuasca consumption.  

The church contended that denial of tax-exempt status violated the Religious Freedom Restoration Act. However, the court concluded that the church lacked standing to assert a RFRA claim because it did not show sufficient economic injury, and it had waived other theories of standing.

Additionally, the church argued that it qualified for an exemption under Internal Revenue Code §501(c)(3) because it was organized for religious purposes. The court said, however, that tax-exempt status can be denied if its purposes or activities are illegal.  Use of Ayahuasca in religious ceremonies is legal only if the Drug Enforcement Agency or a federal court has issued the church an exemption from the Controlled Substances Act. The church had received no exemption. The court rejected the church's argument that the Supreme Court's 2006 O Centro decision made the use of Ayahuasca presumptively legal for churches. the court concluded:

... [T]he IRS was correct in concluding that the Church’s Ayahuasca use foreclosed its eligibility for tax-exempt status.

D.C. Circuit Hears Arguments on Tax Exempt Status of Church Promoting Religious Use of Psychedelic Drug

The U.S. court of Appeals for the D.C. Circuit yesterday heard oral arguments in Iowaska Church of Healing v. Werfel (audio of full oral arguments). In the case, the D.C. federal district court upheld the IRS's refusal to grant §501(c)(3) non-profit status to a church that promotes the religious use of Ayahuasca, a tea brewed from plants containing a drug that is illegal under the federal Controlled Substances Act. (See prior posting.) Bloomberg Law reports on the oral arguments.

IRS Correctly Denied Non-Profit Ruling to Church That Promoted Use of Ayahuasca

In Iowaska Church of Healing v. United States, (D DC, March 31, 2023), the D.C. federal district court upheld the IRS's refusal to grant §501(c)(3) non-profit status to a church that promotes the religious use of Ayahuasca, a tea brewed from plants containing a drug that is illegal under the federal Controlled Substances Act. The church, which has 20 members located around the world, applied to the Drug enforcement Administration for a religious exemption from CSA provisions. After four years, that application is still pending.  The court said in part:

The IRS correctly concluded that, until plaintiff obtains a CSA exemption, its promotion and use of Ayahuasca remains illegal under federal law, and plaintiff is neither organized nor operated exclusively for public purposes. As a result, plaintiff is not entitled to an exemption from income tax under section 501(c)(3).

Plaintiff had argued that the Supreme Court's decision in the O'Centro case entitled it to a tax exemption.  The court responded:

[T]he holding in O Centro stands only for the principle that obtaining a CSA exception for religious use of Ayahuasca is possible, if such use is in fact a sincere religious exercise. The flaw in plaintiff’s reliance on O Centro here, is that plaintiff has still not obtained that CSA exception—and whether plaintiff’s showing made to the DEA is sufficient to qualify for this exemption remains an open question that is not before this Court. O Centro simply does not stand for plaintiff’s asserted holding, that all Ayahuasca use is necessarily religious, and that case certainly does not establish that all organizations making use of Ayahuasca are entitled to an exemption from income tax, which is the issue pending here.

The court also held that the church lacks standing to challenge the denial of non-profit status as a violation of RFRA because "plaintiff’s inability to use Ayahuasca does not stem from the IRS Determination Letter, but rather from the CSA’s ban on using DMT, and plaintiff’s lack of a CSA exemption thus far."

Federal Circuit Hears Arguments By Organization Seeking "Church", But Not Non-Profit, Tax Status

The Court of Appeals for the Federal Circuit heard oral arguments on Wednesday in an unusual appeal, Alearis, Inc. v. United States. (Audio of full oral arguments.) In the case, the U.S. Court of Federal Claims dismissed a challenge by Alearis to the refusal by the Internal Revenue Service to pass on its application to classify it as a "church". (Alearis, Inc. v. United States, (Ct. Fed. Cl., Jan. 11, 2022)). "Church" status would exempt the organization from various restrictions otherwise imposed on "private foundations." IRS forms require organizations seeking classification as a church to first apply on Form 1023 for an exemption as a non-profit organization under Section 501(c)(3).  Alearis says it does not seek non-profit status, only "church" status. It contends that completing Form 1023 would violate its religious tenets, presumably because it would require disclosure of elements of the religion that its doctrines require to be kept secret. The Court of Federal Claims opinion described Alearis as follows:

Plaintiff, Alearis, Inc., is an organization incorporated in the state of Delaware. Its sole member, “the Church,” was “founded at time immemorial when the Old Ones placed the Game into ecclesiastical trust for such purpose.” Plaintiff is “organized exclusively for religious purposes to perform or carry out the functions of the Church.”

Title IX Applies To Religiously Affiliated School That Is Tax Exempt

The provisions of Title IX of the Education Amendments Act of 1972 which bar sex discrimination apply to "any education program or activity receiving federal financial assistance". In Buettner-Hartsoe v. Baltimore Lutheran High School Association, (D MD, July 21, 2022),  a Maryland federal district court held that a §501(c)(3) tax exemption for a religiously-affiliated high school constitutes federal financial assistance so that the school is subject to Title IX. The court added that also in its view, schools that discriminate on the basis of sex, just like those that discriminate on the basis of race, are not entitled to federal tax exemptions. The court's opinion applies to cases brought by 5 women who are former students at the high school who allege sexual assault and verbal sexual harassment by male students at the school. JDSupra reports on the decision.

Non-Profits Are Seeking IRS Classification As "Churches"

Both Baptist News Global and ProPublica have recently published lengthy investigative articles on the growing number of non-profit entities that have sought classification by the IRS as a "church" or "association of churches" or an "integrated auxiliary of a church." this exempts them from filing the annual Form 990 required of other non-profits. Form 990 disclose income, expenditures and compensation of officers, directors and key employees.

Court of Federal Claims Denies Motion For Reconsideration Of Church Camp's Tax Liability

In Steeves v. United States, (Fed. Cl., Sept. 7, 2021), the U.S. Court of Federal Claims denied a motion for reconsideration filed pro se in a case challenging the IRS's enforcement of tax liability against Camp Noble, Inc. (CNI). Petitioner claims that CNI is an integrated auxiliary of a church and that therefore the IRS lacks jurisdiction over it. The court previously dismissed the case because petitioner failed to comply with its instructions to join or substitute CNI as the real party in interest. In this decision, the court holds that plaintiff is merely reasserting arguments it previously made in the case.

Churches Respond To IRS Proposed Changes In Group Exemption Letter Program

 In May, the Internal Revenue Service issued a 63-page proposal (full text) to update procedures for a parent organization to obtain 501(c)(3) non-profit status rulings for a group of subordinate organizations. The Notice explains its purpose, saying in part:

The Internal Revenue Service (IRS) is issuing this guidance in proposed form to provide an opportunity for public comment because the IRS recognizes that, if finalized, the proposed revenue procedure would make substantial changes to the procedures set forth in Rev. Proc. 80-27 and that the application of these new procedures may impose an additional administrative burden on central organizations with group exemption letters in existence on the date the final revenue procedure is published in the Internal Revenue Bulletin (preexisting group exemption letters).

The IRS oversees more than 4,000 group exemption letters that include more than 440,000 subordinate organizations. The IRS has considered how to reduce the administrative burden and increase the efficiency of the group exemption letter program, to improve the integrity of data collected for purposes of program oversight, to increase the transparency of the program, and to increase compliance by central organizations and subordinate organizations with program requirements....

Last week, a 14-page joint comment letter (full text) was filed with the IRS by the Evangelical Lutheran Church, the United Church of Christ, The United Methodist Church, The Episcopal Church, and the Reformed Church in America. It contends that the proposal in its present form violates both RFRA and the 1st Amendment, saying in part:

This letter asks that if the IRS adopts a revamped procedure for the administration of the group ruling exemption process, it make an accommodation to allow the faith communities to continue their status quo.... We do not believe the IRS desires a set of modifications that would burden the expression of religious beliefs in ways that would range from making group rulings overwhelmingly unmanageable to obviously unconstitutional....

The Proposed Revenue Procedure requires that subordinate organizations participating in a group exemption ruling must adopt a uniform governing instrument... 

Considering the decades during which these religious organizations added first thousands, and then tens of thousands, of subordinate organizations to their group rulings, the impact of this requirement going forward is enormous....

Further, the very act of requiring uniform governing instruments is theologically untenable in these denominations that have chosen respective ecclesiastical structures and relationships that best express their beliefs about where authority resides and how it is exercised, and how and by whom ultimate decisions about key theological issues are made....

Even if RFRA were not dispositive, the First Amendment would bar the IRS from effectively dictating polity and structure matters inside a denomination. The IRS cannot close the Group Exemption process to all churches except those able to eccelsiologically impose specific civil forms on subordinates.

Other denominations have also filed comment letters. [Thanks to Jennifer Gniady for the lead.]

Church Leaders Sentenced To Prison In Scheme To Siphon Off Church Funds

The U.S. Attorney's Office for the District of New Jersey announced this week:

The leader and the main treasurer of the Israelite Church of God in Jesus Christ were sentenced to federal prison today for their respective roles in a scheme in which both men caused the church to pay millions of dollars in personal expenses for the leader that the leader then omitted from his personal tax returns.

The two men had previously pleaded guilty to one count of conspiring to defraud the United States of at least $250,000 in taxes.  Jermaine Grant, the church leader, was sentenced to 18 months in prison. The treasurer, Lincoln Warrington, was sentenced to 12 months and one day.

President Proclaims National School Choice Week

Yesterday President Trump issued a Presidential Proclamation (full text) declaring January 26 to February 1 as National School Choice Week.  His Proclamation says in part:

Each child is a gift from God who has boundless potential and deserves a fair shot at the American Dream. To have that fair shot, children and their families must be free to pursue an educational environment that matches their individual learning style, develops their unique talents, and prepares them with the knowledge and character needed for fulfilling and productive lives.....

Today, I renew my call on the Congress to focus on what is best for children and pass a Federal tax credit to support State-based educational choice programs.....

Challenge To Form 990 Rules Is Dismissed

In Nonbelief Relief, Inc. v. Rettig, (D DC, Jan. 10, 2020), the D.C. federal district court dismissed a challenge by a non-profit organization to the exemption which excuses churches from filing an annual form 990 with the Internal Revenue Service.  NonBelief Relief was formed to assist atheists and other non-religious individuals.  It contributes funds to other charitable organizations. When NonBelief Relief failed to file its Form 990 for three years, its tax-exempt status was revoked.  It then sued seeking an injunction reinstating its status, and a declaratory judgment that the church exemption violates the Establishment Clause.  The court first held that the Anti-Injunction Act and the Declaratory Judgment Act bar granting relief:

... the award of an injunction or declaratory judgment on NonBelief Relief’s behalf would restrain the government’s collection of taxes against NonBelief and its donors.

The court went on to hold that once NonBelief Relief's tax exempt status was revoked, it lost standing to challenge the constitutionality of the church exemption from filing Form 990:

NonBelief Relief alleges that it suffered an injury when, as a 501(c)(3) tax-exempt organization, it was required to file a Form 990, while churches and other religious institutions were not. But assuming that is so, that injury is neither ongoing nor imminent, because NonBelief Relief is no longer a tax-exempt organization and has expressed no intent to reapply for that status..... [I]t is being treated the same as all other non-501(c)(3) organizations.

WAPO: IRS Whistleblower Says Mormon Church Misled Regarding Charitable Accounts

The Washington Post reports today:

A former investment manager alleges in a whistleblower complaint to the Internal Revenue Service that the Church of Jesus Christ of Latter-day Saints has amassed about $100 billion in accounts intended for charitable purposes, according to a copy of the complaint obtained by The Washington Post.

The confidential document, received by the IRS on Nov. 21, accuses church leaders of misleading members — and possibly breaching federal tax rules — by stockpiling their surplus donations instead of using them for charitable works. It also accuses church leaders of using the tax-exempt donations to prop up a pair of businesses.

Misunderstanding of RFRA Not A Defense To Willful Failure To File Tax Returns

The Oregonian reports that an Oregon federal district court yesterday found a tax protester guilty on four counts of willful failure to file tax returns.  The verdict came in a second trial on stipulated facts after defendant's first trial ended in a hung jury. The court ruled that while a good faith misunderstanding of the tax law is a defense to "willfulness", that defense was unavailable here. As reported by The Oregonian:

Bowman’s lawyer had argued during Bowman’s jury trial that Bowman’s reliance on another federal law, the Religious Freedom [Restoration] Act, led to his "good faith’' misunderstanding of his obligations under the federal tax code. The judge threw out that defense before Bowman’s second trial, ruling that any "good faith'' misunderstanding had to be of the tax code itself, not another law.

The court's ruling was presumably based on its reading of the U.S. Supreme Court's decision in Cheek v. United States (1991).  An appeal of the conviction is planned.

Hung Jury In Pro-Life Tax Objector's Trial

KGW8 News reports that the federal court trial of an Oregon man, Michael Bowman, on misdemeanor charges of willful failure to file a tax return has ended in a mistrial.  Bowman has not filed a return since 1999 because he refuses to have any of his funds go toward funding abortions. Charges were filed against him in 2017. Bowman argues that the 1st Amendment, RFRA and the Oregon Constitution protect his decision on religious grounds to refuse to pay taxes. A jury could not reach a verdict after 11 hours of deliberation.

New Tax Law Tweaks Non-Profit Annual Filing Requirements

President Trump yesterday signed the bipartisan Taxpayer First Act (full text) into law. The bill makes two changes applicable to non-profit organizations. Section 3101 provides that those organizations required to file annual returns must file them electronically. Section 3102 requires the IRS to give notice to a non-profit before revoking its tax exempt status for failure to file annual returns.  It should be noted that under IRC Sec. 6033(a)(3), churches and small religious organizations are exempt from annual return filing requirements. The Hill reports on the President's signing of the bill into law.

IRS Urged To Accommodate Amish On Child Tax Credit Claims

As required by the Internal Revenue Code, last week the National Taxpayer Advocate released her FY2020 Objectives Report to Congress.  One of the recommendations of the Report is that the IRS reconsider its position on the application of the Religious Freedom Restoration Act to the requirement that taxpayers include the Social Security Number for each child for which they claim a Child Tax Credit.  The requirement disadvantages members of the Amish community who often refuse, on religious grounds, to obtain Social Security numbers.

FFRF Foregoes Cert Petition In Challenge To Parsonage Allowance

In a press release last week, the Freedom From Religion Foundation explained why it had not sought Supreme Court review of the 7th Circuit's decision in Gaylor v. Mnuchin.  In the case, the circuit court rejected an Establishment Clause challenge to Internal Revenue Code Sec. 107(2) which excludes from taxable income housing allowances paid to members of the clergy. (See prior posting.)  FFRF said in part:

After “counting heads,” we concluded that any decision from the current court would put the kibosh on challenging the housing allowance for several generations.

We began this challenge years ago, when the composition of the Supreme Court was very different. We have (secular) faith that someday the Supreme Court composition will again favor the Establishment Clause and be willing to scrutinize this preferential code and declare it unconstitutional. By ending our challenge at this time, the Freedom From Religion Foundation is making it possible for another challenge to be taken in the future, and we hope to be part of that.

Tax Court Denies Deduction For Evangelist's Expenses

In Oliveri v. Commissioner (US Tax Ct., May 28, 2019), the U.S. Tax Court rejected claims by a Catholic evangelist that the disallowance of a charitable deduction for many of his evangelistic activities violated his rights under the First Amendment and RFRA:

Petitioner contends that respondent is characterizing his evangelism as if it were not a religious activity and that respondent’s characterization violates the First Amendment. Petitioner mischaracterizes respondent’s position, which is that petitioner’s expenses for evangelistic activities are not deductible as charitable contributions under section 170, not that they are not religious activities. Not all religious activities are services “to or for the use of” a religious organization for purposes of section 170....

Petitioner contends that disallowance of his section 170 deductions violates his right to the free exercise of religion by placing a substantial burden on his evangelization, in that it would result in his having less money to evangelize. We disagree. In Hernandez v. Commissioner, 490 U.S. 680, 699 (1989), the Supreme Court said that “we need not decide whether the burden of disallowing the §170 deduction is a substantial one, for our decision in Lee establishes that even a substantial burden would be justified by the ‘broad public interest in maintaining as ound tax system’”. 

The Tax Court also rejected petitioner's claim that "three audits of his Federal income tax returns within 10 years resulted in excessive Government entanglement with his exercise of religion."

IRS Recognizes Satanic Temple As A "Church"

The Satanic Temple announced yesterday that the Internal Revenue Service has recognized the organization as a "church" for federal income tax purposes. It says that among other things this will assure its standing in court to challenge religious discrimination and will allow it to apply for faith based government grants.  Rolling Stone reports on this, adding:

Although the Satanic Temple had previously rejected pursuing tax-exempt status, church president Lucien Greaves reversed this stance in 2017 after President Trump signed a “religious freedom” executive order. “As ‘the religious’ are increasingly gaining ground as a privileged class, we must ensure that this privilege is available to all, and that superstition doesn’t gain exclusive rights over non-theistic religions or non-belief,” Greaves wrote in the Satanic Temple newsletter....