Methodist Deacon Failed to File a Timely Application for Exemption from Social Security Taxes

An ordained United Methodist deacon who also served as pastor of a local church for

Bio

State: Federal
Categories: Income Taxes - Clergy, Tax Exemption

An ordained United Methodist deacon who also served as pastor of a local church for two years attempted to argue that the deadline for filing an application for exemption from social security taxes had not elapsed since he was not acting as a minister.

The Tax Court rejected this argument, noting that the deacon had the authority to conduct divine worship, administer sacraments, perform marriages, and bury the dead. The court concluded that the deacon was a minister for self-employment tax purposes, and accordingly had failed to file a timely application for exemption from Social Security taxes. Wingo v. Commissioner, 89 T.C.____ (1987)

Legal Developments

Two Religious Organizations Lost Tax-Exempt Status

First, the Tax Court revoked the exempt status of the "Ecclesiastical Order of the Ism

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Tax Exemption

First, the Tax Court revoked the exempt status of the "Ecclesiastical Order of the Ism of Am" since the organization was not operated exclusively for exempt purposes. In particular, the organization counseled individuals on the purported tax benefits available to ministers of the Ism of Am under federal tax law.

The court concluded that the organization was "nothing more than a commercial tax service, albeit in a narrow range of matters of interest to its members, operating under the cover of a professed religious purpose. That religious belief may be the body of the automobile but its engine and the gasoline on which it runs consist of tax information and advice as to methods of tax avoidance, if not downright tax evasion." Baustert v. Commissioner, T.C.Memo. 1987-488 (1987)

Similarly, the Court of Claims revoked the tax-emempt status of the Universal Life Church on the basis that the supplying of tax advice and information by the church constituted a substantial nonexempt purpose. Universal Life Church v. Commissioner

Legal Developments

Charitable Contribution Deduction for Tuition Payments Denied

A taxpayer was denied a charitable contribution deduction for tuition payments made on behalf of

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

A taxpayer was denied a charitable contribution deduction for tuition payments made on behalf of his daughter. Guenther v. Commissioner, T.C. Memo. 1987-440 (1987).

Legal Developments

Congress Extending Copyright Violated First Amendment

A federal appeals court concluded that a special act of Congress giving the Christian Science

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Copyright, First Amendment

A federal appeals court concluded that a special act of Congress giving the Christian Science Church extended copyright protection in a 1906 edition of Mary Baker Eddy's book Science and Health violated the first amendment's nonestablishment of religion clause.

In 1971, Congress enacted a special law extending copyright protection in the central and most sacred writing of Christian Science until the year 2046, in order to perpetuate the purity and integrity of the work. Without this special legislation, copyright protection would have expired no later than 1981. Such favored treatment of the central religious writing of a religious sect clearly violated the nonestablishment of religion clause: "When Congress departs from generalized copyright legislation and enacts special copyright protection for a religious entity in order to enhance its sway over the manner of religious worship, it has engaged in … an act of establishment." United Christian Scientists v. First Church of Christ, Scientists, 829 F.2d 1152 (D.C. Cir. 1987)

Legal Developments

Free Exercise Clause Not Violated by Textbooks Used in Public Schools

Federal court ruling addresses the issue of whether textbooks used in public schools, and that

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Freedom of Religion, Schools

Federal court ruling addresses the issue of whether textbooks used in public schools, and that are offensive to the religious beliefs of certain parents and students, can be banned on the ground they violate the first amendment guaranty of religious freedom.

A federal appeals court (by a vote of 2-1) reversed a lower federal court ruling that the Holt, Rinehart, and Winston basic reading series used in grades 1 through 8 violated the constitutional rights of fundamentalist Christian parents. The parents had argued that the reading series contained numerous passages that violated their religious beliefs. In particular, they cited passages dealing with evolution, feminism, role reversal, and occultism.

The court concluded that a requirement that a person be exposed to ideas he or she finds objectionable on religious grounds does not constitute an impermissable burden on the free exercise of that person's religion. Rather, "governmental compulsion either to do or refrain from doing an act forbidden or required by one's religion, or to affirm or disavow a belief forbidden or required by one's religion, is the evil prohibited by the Free Exercise Clause."

The court found no compulsion in the requirement that students read the Holt series, and therefore there had been no violation of the guaranty of religious freedom. No one was required to affirm or deny a religious belief or to engage in a practice forbidden by a religious belief. On the contrary, parents were free to send their children to religious schools or educate them at home.

The court observed that "were the free exercise clause violated whenever governmental activity is offensive to or at variance with sincerely held religious precepts, virtually no govermental program would be constitutional." Therefore, to establish a violation of the constitutional right of religious freedom, a person "must show that the challenged state action has a coercive effect that operates against the practice of his or her religion." Mozert v. Hawkins County Board of Education, 827 F.2d 1058 (6th Cir. 1987)

Legal Developments

Charitable Contribution Cannot Be Substantiated by Oral Testimony

A taxpayer was denied a charitable contribution deduction where the only evidence offered to substantiate

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

A taxpayer was denied a charitable contribution deduction where the only evidence offered to substantiate the contribution was oral testimony. Gardner v. Commissioner, T.C.Memo. 1987-420 (1987)

Legal Developments

Annual Display of a Nativity Violated the First Amendment

A federal appeals court ruled (by a 2-1 vote) that the annual display of a

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: First Amendment

A federal appeals court ruled (by a 2-1 vote) that the annual display of a nativity scene in Chicago's city hall violated the first amendment's nonestablishment of religion clause.

For 30 years the city of Chicago had displayed the scene, which consisted of twelve-inch figures, in the lobby of city hall. The display had been donated to the city, and no public funds were expended in maintaining or installing it. The display contained 6 disclaimer notices which recited that the display had been donated and that it was in no way sponsored or endorsed by the city government.

The American Jewish Congress challenged the display on the ground that it constituted the establishment of religion. In agreeing that the display violated the nonestablishment of religion clause, the court distinguished a 1984 Supreme Court ruling upholding the validity of a nativity scene in Pawtucket, Rhode Island. Unlike the Chicago display, the Pawtucket display was "only one element in a larger display that consisted in large part of secularized symbols and decorations" (e.g., a Santa Claus, reindeer, Christmas trees, lights).

The Chicago display was not a part of a larger, secularized display. Further, the Pawtucket display, while sponsored by the city government, was situated in a park owned by a private nonprofit organization. The Chicago display was situated in "the official headquarters building of the municipal government." Under these circumstances, the Chicago nativity scene impermissibly "advanced religion by sending a message to the people of Chicago that the city approved of Christianity." American Jewish Congress v. City of Chicago, 827 F.2d 120 (7th Cir. 1987)

Legal Developments

Court Upheld Ban on Hare Krishnas from Soliciting Donations at Traffic Lights

A federal court in Louisiana upheld the constitutionality of a municipal ordinance that barred Hare

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Freedom of Religion

A federal court in Louisiana upheld the constitutionality of a municipal ordinance that barred Hare Krishna adherents from soliciting donations from occupants of motor vehicles temporarily stopped at traffic lights.

The adherents solicited donations during the Christmas season, while dressed in Santa Claus costumes, from drivers stopped at the busiest intersections in Baton Rouge. Though the solicitation of donations was admittedly a religious practice of the Hare Krishna adherents, it could be limited in the interests of public safety. "Mixing pedestrians and temporarily stopped motor vehicles in the same space at the same time is dangerous …. [Further], the driver who fumbles to unfasten his seat belt so that he can get into his pocket for a handful of coins to pass out the window and who does not move off promptly when the light turns green, holds up those vehicles behind him … invariably causing delays and disruptions to traffic." International Society for Krishna Consciousness v. Baton Rouge, 668 F. Supp. 527 (M.D. La. 1987)

Legal Developments

IRS Ruled Rabbi Qualified for the Housing Allowance Exclusion

In Private Letter Ruling 8739009, the IRS ruled that a rabbi's teaching and the performance

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Income Taxes - Clergy

In Private Letter Ruling 8739009, the IRS ruled that a rabbi's teaching and the performance of religious services for a Jewish education foundation were clearly ministerial in nature, and qualified for the housing allowance exclusion.

Legal Developments

Court Rulings on the Constitutionality of Including Invocations at Public High School Graduation Ceremonies

Two courts have ruled on the constitutionality of including invocations at public high school graduation

Richard R. Hammar, Attorney, CPA

Bio

State: California
Categories: Freedom of Religion, Schools

Two courts have ruled on the constitutionality of including invocations at public high school graduation ceremonies, with mixed results.

A California appeals court ruled that the inclusion of a religious invocation in a public high school graduation ceremony violated state and federal constitutional provisions prohibiting the establishment of religion. In reaching its conclusion, the court applied the three-part test often employed by the United States Supreme Court in deciding whether a challenged governmental action violates the first amendment's nonestablishment of religion clause: (1) the governmental action must have a secular purpose; (2) it must not have a primary effect that advances or inhibits religion; and (3) it must not create an excessive entanglement between church and state.

The inclusion of invocations at public high school graduation ceremonies violated all three of these tests, concluded the court. The court also observed that "the citizens of this country, and perhaps of this state in particular, are a people of highly diverse cultural, ethical and religious backgrounds," and that "any religious invocation … therefore almost certainly will not comport with the beliefs of a number of those persons present, and may in fact be offensive to some." Freedom to believe and to worship, concluded the court, "includes the freedom not to engage in the religious practices of the majority." Bennett v. Livermore Unified School District, 238 Cal. Rptr. 819 (1987).

A federal appeals court also struck down the inclusion of invocations and benedictions at public high school graduation ceremonies. However, the court acknowledged that invocations and benedictions would be constitutionally permissible if they were similar to the "civil invocations or benedictions used in public legislative and judicial sessions." Permissible invocations, noted the court, would be nonsectarian, nonproselytizing, and solemnizing.

The invocations and benedictions that the court invalidated employed the language of Christian theology and prayer, often invoking the name of Jesus Christ as the Savior. Such language "symbolically placed the government's seal of approval on one religious view—the Christian view," and was therefore impermissible. Stein v. Plainwell Community Schools, 822 F.2d 1406 (6th Cir. 1987).

Legal Developments

Operation of a Childcare Facility, Even By a Church, Is a Secular Activity

A federal district court in Virginia held that state licensing of church-run childcare facilities to

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Child Abuse Reporting, Freedom of Religion, Schools

A federal district court in Virginia held that state licensing of church-run childcare facilities to certify compliance with health, safety and welfare standards would not burden a church's free exercise of religion.

The court concluded that "the operation of a childcare facility, even by a church, is a secular activity not entitling it to free exercise protection." Even if such as activity were deemed to be religious, the state's licensing requirements would be justified on the basis of the state's compelling interest in protecting the health and safety of small children.

The court also rejected the contention that church-run childcare facilities should be exempted from the law's financial disclosure requirements, prohibition of corporal punishment, child abuse reporting requirement, and program content requirements. Forest Hills Early Learning Center, Inc. v. Lukhard, 661 F. Supp. 301 (E.D. Va. 1987).

Legal Developments

United States Tax Court Disallowed a $10,000 Charitable Contribution

In 1983, the Universal Life Church (ULC) adopted a "revised receipts and disbursements" program for

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

In 1983, the Universal Life Church (ULC) adopted a "revised receipts and disbursements" program for amounts received as "charitable contributions."

Under the revised program, donors sent contributions along with a listing of personal debts. When the ULC received such a form with a contribution, it would issue checks payable directly to the donor's creditors. Donors were charged a fee for the service, and claimed a charitable contribution deduction for the amount of their "donation" to the church.

The United States Tax Court recently disallowed a $10,000 charitable contribution made by a donor under this program, concluding that there was no evidence that the "contributed funds" were for the payment of any church-related expenses. The court also assessed a negligence penalty, and awarded $5,000 in damages to the federal government on the basis of the "flagrant and abusive" nature of the program. Svedahl v. Commissioner, 89 T.C. ___ (1987).

Legal Developments

The Constitutional Guaranty of Freedom of Religion

Court refused to allow a “disfellowshiped” Jehovah’s Witness to sue her former church

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Church Membership - Discipline and Removal, Freedom of Religion

A federal appeals court has refused to allow a "disfellowshiped" Jehovah's Witness to sue her former church for defamation, invasion of privacy, fraud, and outrageous conduct.

The disfellowshiped member claimed that she had been aggrieved by the Jehovah's Witness practice of "shunning" which requires members to avoid all social contacts with disfellowshiped members. The court, acknowledging that the harm suffered by disfellowshiped members is "real and not insubstantial," nevertheless concluded that permitting disfellowshiped members to sue their church for emotional injuries "would unconstitutionally restrict the Jehovah's Witness free exercise of religion."

The constitutional guaranty of freedom of religion, observed the court, "requires that society tolerate the type of harm suffered by [disfellowshiped members] as a price well worth paying to safeguard the right of religious difference that all citizens enjoy." Paul v. Watchtower Bible and Tract Society of New York, 819 F. 2d 875 (9th Cir. 1987).

Legal Developments

IRS Acknowledged Clergy Can Deduct Interest and Property Taxes

In Internal Revenue Release IR-87-54, the IRS acknowledged that the Tax Reform Act of 1986

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Income Taxes - Clergy

In Internal Revenue Release IR-87-54, the IRS acknowledged that the Tax Reform Act of 1986 enables clergy who own their homes to deduct mortgage interest and property taxes ( if they itemize their deductions) in computing taxable income, even though these items also reduced gross income as part of the housing allowance exclusion.

The IRS also advised homeowning ministers to file amended federal income tax returns (Form 1040X) for any prior year beginning with 1983 in which they were unable to deduct mortgage interest and property taxes because of the more restrictive rule that applied prior to 1987. Amended returns ordinarily must be filed within three years of the date the original return was filed, or two years from when the tax was paid, whichever is later.

Legal Developments

Charitable Contribution Definition

Supreme Court remarks shed light on donations to church.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

The United States Supreme Court has remarked that a charitable contribution is in essence "a transfer of money or property [to a charity] … in excess of any benefit received in return."

Accordingly, a charitable contribution is deductible "only if and to the extent it exceeds the market value of the benefit received" and "only if the excess payment was made with the intention of making a gift."

Based on this language, a donor may deduct "contributions" to a church school attended by his or her child only to the extent that the contribution exceeds the fair market value of the child's tuition. Similarly, a "contribution" for which a donor receives a premium (e.g., a Bible, record, book) is deductible only to the extent it exceeds the value of the premium.

But what about contributions to a church? Could it not be argued that they are nondeductible since the donor receives substantial services in return (worship services, sacraments, sermons, hospital calls, counseling, etc.)? This fascinating question was recently presented to a federal court of appeals.

In affirming the deductibility of charitable contributions to churches, the court relied on the following two considerations:

how could a court or the IRS ever place a value on the benefits and services associated with church membership; and
any attempt to do so would involve an "excessive entanglement" between church and state in violation of the first amendment's nonestablishment of religion clause.

Hernandez v. Commissioner, 819 F.2d 1212 (1st Cir. 1987).

Legal Developments

Church Employees Not Paying Any Social Security Taxes

Many churches that filed a timely Form 8274 (waiving a church's obligation to pay the

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Employment Practices

Many churches that filed a timely Form 8274 (waiving a church's obligation to pay the employer's share of FICA taxes on the wages of nonminister employees) are not advising employees of their obligation to report and pay social security taxes as self-employed persons.

In many cases, the church employees are simply not paying any social security taxes. The nonminister employees of any church that filed a timely Form 8274 are treated as self-employed for social security purposes, meaning that they must estimate and prepay (in quarterly installments) their self-employment tax obligation.

Employees should obtain Form 1040-ES, and use the worksheet included with the form to estimate their self-employment tax liability. One-fourth of the total liability is then paid to the IRS with a payment voucher (included with the form) by April 15, June 15, September 15, and the following January 15 of each year. Alternatively, some churches are withholding additional taxes to cover the self-employment tax liability. The additional tax withholding of course requires that each employee complete a revised W-4 form and the additional withheld taxes are reported as withheld income taxes on the church's quarterly Form 941.

An employee's Schedule SE lists his or her total self-employment tax liability, but this is offset by the additional withholding reported as a credit on the employee's Form 1040. While the IRS has never specifically sanctioned this procedure, it is unlikely that it would object since the total tax liability is in fact paid.

The same approach is used by some ministers who elect voluntary income tax withholding and who increase their withholding to cover their self-employment tax liability.

Finally, churches that obtained a refund of FICA taxes after filing the Form 8274 must distribute to church employees that portion of the refunded taxes allocable to employee withholding.

Legal Developments

Tax Court Refuses to Officially Sanction IRS Criteria for Determining What is a Church

Tax Court recently reversed an IRS determination that a nonprofit religious corporation was not a church.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Taxation - Church Property

The Tax Court recently reversed an IRS determination that a nonprofit religious corporation was not a church.

In reaching its decision, the Tax Court applied the following fourteen criteria developed by the IRS for determining whether a particular organization is in fact a church :

a distinct legal existence;
a recognized creed and form of worship;
a definite and distinct ecclesiastical government;
a formal code of doctrine and discipline;
a distinct religious history;
a membership not associated with any other church or denomination;
an organization of ordained ministers;
ordained ministers selected after completing prescribed studies;
a literature of its own;
established places of worship;
regular congregations;
regular worship services;
Sunday schools for religious instruction of the young;
schools for the preparation of ministers.

The IRS has stated that no single factor is controlling, and that all fourteen criteria may not be relevant in every case. The Tax Court declined to adopt the criteria as a controlling test, preferring to treat them as a useful guideline. The court's refusal to officially sanction the IRS criteria should be applauded, since the criteria are far too restrictive and ambiguous to be used in making the critical determination of church status.

For example, few if any local churches would meet the seventh, ninth, and fourteenth criteria, since these ordinarily would pertain only to religious denominations. In addition, many newer, independent churches would fail the first and fifth criteria and could also fail the second, third, fourth, sixth, and eighth.

It is therefore entirely possible for a legitimate church to fail as many as ten of the fourteen criteria. The early Christian churches depicted in the Book of Acts easily would have failed a majority of the criteria. Such overly restrictive and ambiguous criteria are of little help in deciding if a particular organization is in fact a church, and should never be endorsed by the courts.

Foundation of Human Understanding v. Commissioner, 88 T.C. _____(1987).

Legal Developments

Taxpayer Could Only Claim a Charitable Contribution for Amount of the Sales Price Distributed to the Church

Taxpayer X owned a tract of real estate that he agreed to sell to Y.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

Taxpayer X owned a tract of real estate that he agreed to sell to Y.

In order to avoid reporting all of the sales proceeds as income, X instructed the escrow officer to distribute a portion of the sales proceeds to First Church and then pay him the balance. The Tax Court, affirming a well-established tax principle, refused to let X avoid realization of the total sales proceeds through his "anticipatory assignment of income." X was required to report the total sales price as income, and then claim a charitable contribution for the amount of the sales price distributed to the church. Ankeny v. Commissioner, T.C. Memo. 1987-247.

Legal Developments

Court Struck Down Provisions that Permitted Religious Organizations to Use Federal Funds

A federal district court struck down those provisions of the Adolescent Family Life Act that

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: First Amendment

A federal district court struck down those provisions of the Adolescent Family Life Act that permitted religious organizations to use federal funds for the counseling and teaching of adolescents on matters related to teenage pregnancy.

Such provisions had a legitimate secular purpose, concluded the court, but had a primary effect of advancing religion and accordingly violated the first amendment's nonestablishment of religion clause. Kendrick v. Bowen, 657 F. Supp. 1547 (D.D.C. 1987).

Legal Developments

Textbooks that Omitted Religion Violated the First Amendment

A federal district court in Alabama ruled that public school textbooks that omitted reference to

Richard R. Hammar, Attorney, CPA

Bio

State: Alabama
Categories: Freedom of Religion, Schools

A federal district court in Alabama ruled that public school textbooks that omitted reference to the significance of religion in American history and in current American life impermissibly promoted a religion of secular humanism in violation of the first amendment to the United States Constitution.

The court observed that though religion has been one of the most vital forces to shape our culture, "one would never know it by reading these books." Omitted were much of the history of the Puritans, the great awakenings, colonial missionaries (except when depicted as oppressors of native Americans), the religious influence behind the abolition of slavery, women's suffrage, temperance, and modern civil rights and peace movements, and the role of religion in the lives of immigrants and minorities.

"These books," concluded the court, "discriminate against the very concept of religion, and theistic religion in particular, by omissions so serious that a student learning history from them would not be apprised of relevant facts about America's history." Such deliberate underemphasis amounted to the establishment of the religion of humanism. Smith v. Board of School Commissioners, 655 F. Supp. 939 (S.D. Ala. 1987).