• Key point. The first amendment guaranty of religious freedom does not permit churches to avoid their federal payroll tax obligations, including the withholding and payment of income taxes and social security taxes, even if compliance interferes with a church’s religious beliefs.
A federal appeals court ruled that a church was not “exempt” from paying more than $5 million in unpaid payroll taxes. The church was founded in 1950 and operated as a not-for-profit corporation until 1983, when it began operating as an unincorporated religious society. In 1986, the church renounced its status as an unincorporated religious society, opting instead to define itself as a “New Testament Church,” based on its belief that the exclusive sovereignty of Jesus Christ over the church required it to disassociate itself from secular government authority. Around the same time, and for the same reason, the church stopped filing federal employment tax returns and paying the federal employment taxes for which it was responsible. There are three federal employment taxes-the social security tax, the medicare tax, and the income tax. Employers must pay half of the applicable social security and medicare taxes and must withhold from employees’ wages the other half of the applicable social security and medicare taxes, as well as all of the applicable normal income tax. Employers are liable for both the taxes imposed directly on them and the taxes they are required to withhold from employees. Since sometime before 1987, the church has paid none of these taxes. Eventually, the IRS contacted the church about its failure to file employment tax returns, but the church offered no indication that it would file returns. As a result, in early 1994, the IRS prepared quarterly returns for the church beginning in 1987 and continuing through 1993. The IRS then sent the forms to the church so that it could check the accuracy of the amounts on the returns, but the church submitted no corrections. After the time for submitting corrections had passed, the IRS calculated an assessment of tax, interest, and additions totaling some $3.5 million and sent a notice and demand for payment to the church. With accrued interest and penalties, the church’s obligation increased to $5.3 million by 1998. The IRS asked a federal court to enter a summary judgment in its favor and against the church for the full $5.3 million, and to foreclose on a tax lien the IRS had imposed on the church’s property. In defense of its failure to pay, the church argued that the first amendment guarantees of religious freedom and nonestablishment of religion, as well as the Religious Freedom Restoration Act, protected it from liability. A trial court ruled summarily in favor of the government, and the church appealed.
Freedom of religion
On appeal, the church argued that compliance with the federal employment tax laws would require it to recognize the sovereignty of the federal government over the church, something that would be inconsistent with its belief in the exclusive sovereignty of Jesus Christ over the church. The court conceded that the first amendment guarantee of religious freedom “absolutely protects the freedom to believe and profess whatever religious doctrine one desires.” However, “neutral laws of general application that burden religious practices do not run afoul” of the first amendment. Since federal employment tax laws are “neutral laws of general application” (that is, they apply to a large class of employers, and do not single out religious employers for less favorable treatment) they do not violate the first amendment.
Religious Freedom Restoration Act
Even if the Religious Freedom Restoration Act applied in this case, the court concluded that it provided no relief to the church. Under RFRA, laws that substantially burden the free exercise of religion cannot be enforced unless the burden furthers a compelling government interest and is the least restrictive means of furthering that interest. The court noted that “the Supreme Court and various courts of appeals [have] concluded both that maintaining a sound and efficient tax system is a compelling government interest and that the difficulties inherent in administering a tax system riddled with judicial exceptions for religious employers make a uniformly applicable tax system the least restrictive means of furthering that interest.” The church insisted that none of these cases were relevant since each involved a “state recognized legal entity,” while it was a “New Testament Church.” Once again, the court dismissed this argument, noting that “none of these cases, expressly or implicitly, rely on the fact that the entities involved were state-recognized, nor does such a distinction have any logical connection to the relevant legal standards. Accordingly, we conclude that RFRA provides no basis for sustaining [the church’s] challenge to the federal employment tax laws.”
Nonestablishment of religion
The church argued that applying the federal employment tax laws to it violates the first amendment’s nonestablishment of religion clause by involving the government in the internal affairs of the church. In the church’s view, the payment and withholding obligations imposed by federal law, as well as the enforcement proceedings that have resulted from the church’s refusal to comply with these laws, create a constitutionally impermissible amount of government involvement in church affairs. The court disagreed, noting that, “While taxing religious organizations involves greater government entanglement than not taxing them does, this greater entanglement is not necessarily unconstitutionally excessive. In fact, the Supreme Court has held that the sorts of generally applicable administrative and record keeping requirements imposed by tax laws may be imposed on religious organizations without violating the [first amendment] …. The normal incidents of collecting federal employment taxes simply do not involve the intrusive government participation in, supervision of, or inquiry into religious affairs that is necessary to find excessive entanglement. Even the somewhat more intrusive tax foreclosure ordered in this case is a discrete event involving no inquiry into religious matters and, as such, raises no excessive entanglement concerns.”
Application. It is now clear, based on this case as well as those cases cited by the court, that any attempt by a church to avoid compliance with applicable federal payroll tax obligations (including the withholding and payment of income taxes and social security taxes) on the basis of the first amendment, its religious beliefs, or its unique structure or status, will be summarily rejected by the civil courts. Indianapolis Baptist Temple v. United States, 2000-2 USTC ¶50,663 (7th Cir. 2000).
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