Religious Organizations Must Pay Taxes

Court rules that organizations must pay, even if doing so violates their religious tenets.

Church Law and Tax 1991-05-01 Recent Developments

Freedom of Religion

A federal district court in Pennsylvania ruled that the IRS has the authority to compel a religious organization to collect and pay over to the government the unpaid federal taxes of an employee even if doing so violates the religious tenets of the organization and its employees. The “Yearly Meeting of the Society of Friends” was established in 1681 by William Penn. It presently includes some 13,000 members and 100 congregations in Pennsylvania, New Jersey, Delaware, and Maryland. The Yearly Meeting has about 45 full-time employees. In 1985 and 1986, the IRS served the Yearly Meeting with “notices of levy” against the salary of two employees who had not paid all of their federal taxes. A “levy” is an order directed at an employer that requires it to satisfy an employee’s unpaid taxes by withholding funds from his or her salary. The Yearly Meeting refused to honor the two levies, informing the IRS that the two employees were “deeply religious and conscientiously motivated individuals who feel they cannot pay the military portion of their taxes without violating the central tenets of their religious faith.” The Yearly Meeting further informed the IRS that it was its policy “not to coerce or violate the consciences of such persons, or to act as agents for those who do. We therefore advise you that we cannot honor the levy you have served.” The IRS sought a court order compelling the Yearly Meeting to collect the unpaid taxes out of the employees’ wages. It also asked the court to assess a penalty (in the amount of 50% of the uncollected taxes) against the Yearly Meeting on the basis of section 6332(c)(2) of the Internal Revenue Code. The Yearly Meeting defended its actions on the basis of the first amendment’s guaranty of religious freedom. It asserted that enforcement of the levy would deny the Yearly Meeting’s free exercise of religion because it is a fundamental tenet of the Yearly Meeting to respect the conscientious actions of its members. The Yearly Meeting further asserted that the government is constitutionally required to accommodate the religious principles of the Society of Friends by finding another way to collect delinquent taxes from Yearly Meeting employees who are “religious pacifists.” The court rejected the Yearly Meeting’s arguments, claiming that a 1990 decision of the United States Supreme Court (Employment Division v. Smith—discussed in the September-October 1990 issue of this newsletter) left it no choice. The court pointed out that prior to the Smith case, persons whose religious beliefs were burdened by a government practice were entitled to an exemption from that practice unless the exemption frustrated a “compelling state interest.” The Supreme Court in the Smith case repudiated this approach to resolving first amendment claims. It observed that “the right of free exercise does not relieve an individual of the obligation to comply with a valid and neutral law of general applicability on the ground that the law proscribes (or prescribes) conduct that his religion prescribes (or proscribes).” The Supreme Court concluded that claims for religious exemption from criminal prohibitions should not be evaluated under any “balancing test” requiring an inquiry into the existence of a compelling state interest, since “the government’s ability to enforce generally applicable prohibitions of socially harmful conduct … cannot depend on measuring the effects of a governmental action on a religious objector’s spiritual development.” On the basis of this language, the federal district court concluded that it had no option but to reject the Yearly Meeting’s claim of first amendment protection. However, the court refused to assess the 50% penalty against the Yearly Meeting, as the IRS had insisted. The court pointed out that the Yearly Meeting’s refusal to honor the initial IRS demand occurred prior to the Smith case. At that time, the refusal to honor the IRS demand was based upon a reasonable interpretation of the first amendment, and so no penalty could be assessed. The court cautioned that the penalty would apply to any future (post-Smith) refusals to comply with IRS demands. The court clearly was frustrated by its inability to assist the Yearly Meeting. It concluded: “It is ironic that here in Pennsylvania, the woods to which Penn led the Religious Freedom Society of Friends to enjoy the blessings of religious liberty, neither the Constitution nor its Bill of Rights protects the policy of that Society not to coerce or violate the consciences of its employees and members with respect to their religious principles, or to act as an agent for our government in doing so.” But, “unless we wish anarchy to prevail within the federal judicial system, a precedent of the Supreme Court must be followed by lower federal courts no matter how misguided the judges of those courts think it to be.” There is no doubt that the Smith case was a serious blow to religious freedom. It has generated considerable opposition, and attempts are underway in Congress and in some state legislatures, to limit its effect. Hopefully, these activities will persuade the Supreme Court to re-evaluate and repudiate its Smith decision. United States v. Philadelphia Yearly Meeting of the Religious Society of Friends, 91-1 U.S.T.C. ¶ 50,042 (E.D. Pa. 1990).

The Free Exercise Clause

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