Ministers are not exempt from paying federal income taxes. Since 1943 (Murdock v. Pennsylvania, 319 U.S. 105), the United States Supreme Court has ruled that the First Amendment guaranty of religious freedom is not violated by subjecting ministers to the federal income tax. And yet, ministers have tried to argue against this ruling for decades. The courts have rejected every attempt by them (some with only mail-order credentials) to claim that they are exempt from the payment of income taxes. Such ministers wrongly assume that because certain of their income may be exempt from withholding of taxes, this also means they're exempt from paying taxes. One case helps clarify this common misunderstanding.
A federal court rejected a couple's claim that they were entitled to an exemption from federal income tax because they "labor for the ministry." The court concluded, "Income received by ministers whether from the church itself or from other private employers or sources is not exempt from income tax. The income received by taxpayers must be included in gross income required to be reported for income tax purposes according to the Internal Revenue Code." The court acknowledged that ministers' income (from the exercise of ministry) is exempt from federal income tax withholding but noted that "while certain income of ministers may be exempt from withholding of income tax, the income received by ministers, even from religious activities…is not exempt from payment of income tax." Further, "the fact that a church itself may be exempt from payment of income taxes does not mean that the income received by ministers is exempt." Pomeroy v. Commissioner, 2003-2 USTC 50,568 (D. Nev. 2003).
Even with this clarification, some tax protestors use religion in a futile attempt to excuse the nonpayment of taxes. The IRS and courts have deemed dozens of arguments against paying taxes frivolous, including these:
- The Sixteenth Amendment (which permits a federal income tax) is invalid because it contradicts the Constitution.
- A taxpayer can escape income tax by putting assets in an offshore bank account.
- A taxpayer can eliminate tax by establishing a corporation sole (discussed below).
- A taxpayer can place all of his assets in a trust to escape income tax while still retaining control over those assets.
- Nothing in the tax code imposes a requirement to file a return.
- Filing a tax return is voluntary.
- Because taxes are voluntary, employers don't have to withhold income or employment taxes from employees.
- A taxpayer can refuse to pay taxes if the taxpayer disagrees with the government's use of the taxes it collects.
- Income received in the form of paper currency (Federal Reserve notes) is not legal tender, since it is not redeemable in gold or silver, and is not taxable as income until paid in gold or silver.
Congress has enacted legislation designed to discourage the use of tax protestor arguments. Besides the normal penalties for failure to pay taxes (including potential criminal penalties for willfully evading taxes or refusing to file a return), tax protestors face an array of additional penalties, including a $5,000 penalty for claiming a "frivolous" position on a tax return and a $25,000 penalty for maintaining a frivolous tax position (or a position designed solely for delay) before the Tax Court. IRC 6702, 6673.
One tax scam churches fall for
Some persons are promoting the use of "corporations sole" by churches and church members as a lawful way to avoid all government laws and regulations, including income taxes and payroll taxes. Church leaders are informed that by structuring their church as a corporation sole, they will become an "ecclesiastical" entity beyond the jurisdiction of the government. Further, individuals are told that by becoming a corporation sole, they can avoid paying income taxes. The promoters, who often use email and the internet, make it all sound believable with numerous references to legal dictionaries, judges, and ancient cases. Such claims are false. Any material you receive promoting the corporation sole scam should be discarded. Also, corporations sole are recognized in only the following 11 states: Alabama, Alaska, Arizona, California, Colorado, Hawaii, Montana, Nevada, Oregon, Washington, and Wyoming. If your church is not in one of these states, it cannot form a corporation sole, and you should ignore any information you receive to the contrary.
Are corporations sole exempt from government laws?
Absolutely not. First, a church cannot incorporate as a corporation sole. Only the presiding officer of a religious organization can do so. A church officer's decision to incorporate as a corporation sole has no effect on the relationship of the church with the government.
Second, not one word in any corporation sole statute suggests that a corporation sole is an "ecclesiastical corporation" no longer subject to the laws or jurisdiction of the government. In fact, most corporation sole statutes clarify that such corporations are subject to all governmental laws and regulations. A good example is the California Corporations Code, which specifies that "the articles of incorporation may state any desired provision for the regulation of the affairs of the corporation in a manner not in conflict with law" (emphasis added).
Similarly, the Oregon corporations sole statute specifies that such corporations differ from other corporations "only in that they shall have no board of directors, need not have officers and shall be managed by a single director who shall be the individual constituting the corporation and its incorporator or the successor of the incorporator." This is hardly a license to avoid compliance with tax or reporting obligations. Nothing in the corporation sole statutes of any state would remotely suggest such a conclusion.
In summary, a church officer who incorporates as a corporation sole will not exempt his or her church from having to withhold taxes from employees' wages, issue Forms W-2 and Forms 1099-MISC, file quarterly Forms 941 with the IRS, or comply with any other law or regulation. Further, an officer who incorporates as a corporation sole will not insulate his or her church from legal liability, nor him or herself from paying federal income taxes. Still, some promoters of corporations sole are marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments. The IRS has issued a warning to persons who promote or succumb to such scams (see Revenue Ruling 2004-27). Ministers and church leaders would do well to heed the IRS's conclusion:
A taxpayer cannot avoid income tax or other financial responsibilities by purporting to be a religious leader and forming a corporation sole for tax avoidance purposes. The claims that such a corporation sole is described in section 501( c)(3) and that assignment of income and transfer of assets to such an entity will exempt an individual from income tax are meritless. Courts repeatedly have rejected similar arguments as frivolous, imposed penalties for making such arguments, and upheld criminal tax evasion convictions against those making or promoting the use of such arguments.
This article was adapted from an excerpt of Chapter 1 of Hammar’s annual Church & Clergy Tax Guide.
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