Some Tax Benefits Are Just for Churches

(I originally wanted to call this “Pastoral Housing, Take 2″[fn1] but, it turns out, pastoral housing is only one small aspect of the case.)

Last week, a federal court in Kentucky issued a decision in a lawsuit that could have far-reaching ramifications for churches.[fn2] In broad strokes, American Atheists, Inc., Atheists of Northern Indiana, Inc., and Atheist Archives of Kentucky, Inc. sued the IRS, arguing that certain tax provisions applicable solely to churches were unconstitutionally discriminatory. Specifically, the suit appears to have targeted:

  • The fact that churches do not have to file an application for tax-exempt status;
  • The fact that churches do not have to file annual information returns;
  • The fact that pastors (read broadly) can receive housing from churches tax-free;
  • The fact that ministers’ salaries are exempt from income tax withholding and payroll taxes; and
  • The fact that the I.R.S. faces certain constraints when auditing a church that it doesn’t otherwise face.

These provisions apply solely to churches; these special exemptions and tax provisions aren’t available even to non-church organizations that are exempt under section 501(c)(3) (including tax-exempt hospitals and non-profit universities).

This different treatment, the plaintiffs argued, is unconstitutional, violating, among other things, the Establishment Clause of the First Amendment and the Due Process Clause of the Fifth.

So what did the court decide? It determined that the plaintiffs had failed on their Equal Protection claim. It also decided that they had pleaded facts sufficient to support an Establishment Clause claim: that these provisions do not have a secular purpose and they improperly endorse religion.

And yet the plaintiffs lost. Why? Because they didn’t have standing to challenge the laws.

And what is standing? Standing is the ability to show injury, caused by the defendant’s actions. And standing is a prerequisite to a federal court’s having jurisdiction to hear a case.

The problem here, said the court, was that the three plaintiff organizations had never applied for tax-exempt status as churches. Sure, they didn’t get the special treatment churches get, but that was purely as a result of their not trying to qualify.

The plaintiffs responded that (a) it was against their values to claim to be churches, and (b) it was irrational to think that the IRS would treat “purely anti-theistic entities” as churches. To which the court responded, But you didn’t try.[fn3]

So here’s the thing: this court, like the court in Wisconsin, believes that the special treatment of churches, as compared with other section 501(c)(3)s, may violate the Establishment Clause. The problem with this suit wasn’t substantive; it was procedural.[fn4] Which means that, if another organization successfully claims that it asked for those benefits and was refused, the case may go forward.[fn5] And there’s a chance that some or all of the provisions will be held unconstitutional.[fn6]

Assume that, in the future, somebody brings an identical suit, only this time with standing, and the courts ultimately strike down the five provisions. What effect, if any, will it have on the Mormon church?

The biggest thing would be that the Church would have to file a Form 990 annually. Form 990 is an information return, detailing, among other things, the revenue and expenditures of a tax-exempt organization. Forms 990 are available for inspection by the public; suddenly, the Church’s finances would become a matter of public record.

I imagine that the Church provides housing for at least some of the General Authorities, and I imagine that housing is currently tax-free to the General Authorities who receive it. Presumably, if that went away, the Church would gross-up their pay, meaning the Church would have a slight uptick in its salary expenses.[fn7] And it’s possible that the Church doesn’t withhold or pay payroll taxes. So all of that adds a little expense, but we have so few people who qualify for these ministerial benefits and earn a salary from the Church[fn8] that any additional cost would really just be marginal.

[fn1] Take 1 being here.

[fn2] At least in parts of Kentucky. Though those ramifications would likely have eventually reached further.

[fn3] (though maybe I’m paraphrasing a little bit)

[fn4] And seriously, who was representing these groups? The court points out that the original complaint didn’t identify the Code provisions that provided objectionable benefits; instead, the court had to do its own research. I mean, c’mon, that’s shoddy and lazy.

[fn5] If you’re really interested in the problems of tax standing, I have an article that discusses it in pretty decent detail (and suggests how to solve the problem of the IRS offering benefits to certain taxpayers that nobody has the standing to challenge) here.

[fn6] How much of a chance? I really don’t know; I’m not a constitutional law guy. But facially, at least, it’s hard to argue how these provisions serve a secular purpose, and they seem to benefit religion over non-religion.

[fn7] I explain the math under the second heading here.

[fn8] Because administrative employees wouldn’t qualify for the various withholding and housing exemptions.


  1. The court’s logic here makes my head hurt. In order to challenge these laws, the plaintiffs would have to establish a church and try to claim certain church-only tax privileges, even though the plaintiffs’ argument is that these church-only tax privileges are unconstitutional?

    I must be mis-reading the OP, because that makes no sense whatsoever.

  2. Doug, not only did you understand correctly but, as a legal matter, I’d say the court’s conclusion isn’t really controversial. That’s why I was so surprised at the earlier Wisconsin case.

  3. How high is the bar for declaring as a Church?

  4. lastlemming says:

    But if an organization tries to establish a church, is rejected, and sues, wouldn’t the natural remedy be to extend the listed benefits to that organization (and, by implication, other non-profits) instead of denying them to churches?

  5. lastlemming, as a policy matter, extending these benefits to everybody (or even to every organization exempt under 501(c)(3)) may or may not make sense. Extending the housing, withholding, and payroll tax benefits would represent a revenue loss to the government, though how significant, I don’t know.

    That said, it’s not a remedy available to courts: extending these benefits would be a legislative action, and Congress would have to do it. The courts generally can’t extend bad laws to apply to everybody; what they can do (if plaintiffs have standing) is declare the laws unconstitutional.

  6. Okay, let me see if I get it this time:
    –government benefits for religions are constitutional as long as they do not discriminate between religions (and meet various other criteria I’m sure)
    –since the atheists were not trying to claim these benefits, they could not claim discrimination
    –if the atheists set up a church, apply for benefits, and get them, they could claim discimination
    –the only way atheists could challenge the constitutionality of these benefits under the Establishment clause would be if they set up a church, applied for benefits, and were denied

    I’m sure I’m missing something and using the wrong language, but is that more or less correct? In which case it was just the oddity of asking atheists to set up a church that was throwing me off.

  7. Third point should say “could not”.

  8. Doug, that’s close enough to give you a general sense of where things stand.

  9. Geoff - A says:

    I live in Australia. Ward budgets have been greatly reduced this year without any official explanation. The rumor I hear is that the money is being diverted to defend the tax exempt status in Australia.Can anyone confirm?

  10. The rumor I have heard about Australia (from some well-placed sources) is that Australia requires that tithing receipts be spent only within Australia, so the Church was dealing with an excess buildup of funds there that it couldn’t spend the way it would like. But this is inconsistent with the idea that they would reduce ward budgets, so now I am more curious.

  11. Out of curiosity, what do we think the church’s payroll for pastoral positions is? I wouldn’t be surprised if the church spends at least 10million salaries and benefits. The point being, whatever the number is, when you add up insurance, housing, living allowance, etc. for 100-200 it might actually sound like a huge number.

  12. In general though, the procedural excuse seems pretty lame. It’s as if the courts basically said, “gay men can get married too, go find a girl and marry her.”

  13. DQ, that’s the way I saw it at first too, but now, as I understand it (thanks Sam!), the courts are saying, “you can’t get married at all, so this marriage law doesn’t affect you, and you have no standing to complain about it.”

  14. racerxisalive says:

    Doug, I think it is closer to “You never tried to get married, so you weren’t technically denied marriage. So you have no standing to complain about it.”

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