Secular Income and Vows of Poverty

Church Law and Tax Report Secular income and vows of poverty Key point. Attempts to

Church Law and Tax Report

Secular income and vows of poverty

Key point. Attempts to avoid taxes on wages earned from secular employment by taking a vow of poverty and assigning the wages to a “religious order” are considered fraudulent by the IRS and courts, and result in substantial penalties.

A federal appeals court rejected a minister’s attempt to avoid taxation of his secular income by taking a vow of poverty and “assigning” his income to a religious order. A man (the “defendant”) was designated as a minister by a mail-order religious order, took a vow of obedience and a vow of poverty, and transferred title to all of his property to the order. He also assigned to the order all income earned from his secular employment, either endorsing their employment checks in favor of the order or directing his employer to deposit his earnings directly into various accounts of the order. The minister’s home, now owned by the order, was designated as a parsonage, and his mortgage and other expenses were paid for by the order.

The order’s Minister’s Handbook, which the defendant drafted, states: “When ministers take the Vow of Poverty, even the IRS recognizes that they have no income and that any income that they would receive belongs to the religious order. If a minister under a Vow of Poverty has no income, nor assets, then it would be futile for someone to sue them. If a minister has no income, then there is no income tax.”

A federal district court ruled that the minister’s secular employment resulted in taxable income, and this ruling was affirmed by a federal appeals court. The court conceded that secular income may be exempt from income tax and self-employment tax if a person is a member of a religious order who (1) has taken a vow of poverty, (2) receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and (3) renounces the earnings and gives them to the order. The court stressed that the tax code “provides tax-exempt status to a minister’s earnings only when the minister earns the income as an agent of the church and not in his individual capacity.”

In deciding if a minister is receiving funds as an agent of a religious order, the court considered “various factors pertinent to the relationships between the religious order and the minister, between the minister and the third-party employer, and between the employer and the order.” The court concluded that the relationship between the defendant and the order “provides little evidence to support the conclusion that he acted as an agent of the order in this employment.” The defendant claimed that he was formally “assigned” by the order to his secular job, and this made him an agent of the order with respect to his secular employment. The court disagreed, noting that “the agency assignment simply directed him to continue in his present employment, and nothing in the record suggests the agency assignment should be treated as anything other than illusory… . The defendant was already employed by [his secular employer] when he became a minister of the order, and there is no evidence that anything about his employment—with the sole exception of the payee on his employment checks—changed as a result of his ministry. His testimony reflects that he simply continued as usual with his employment and that the order has never exercised any control over the work he performed there.”

The court concluded that under the anticipatory assignment of income doctrine, “when income is assigned to a third party before the moment of receipt, the income is still considered earned by the assignor if he retains dominion over the income-generating asset. And here, the defendant retained control over the income-generating asset because he had the unfettered ability to direct [his employer] to deposit his salary into his own account instead of the order’s.”

What This Means For Churches:

One of the three appeals court judges who issued the ruling commented: “Paying income taxes is a statutory duty; some also consider it a civic duty. Few gladly pay, but most faithfully do. Faithful compliance is tested, sometimes beyond elastic limits, by the siren’s song of the unscrupulous—pay 10% of your income to the “church” and completely avoid the much higher extractions demanded by the taxman AND do so without changing your life circumstances in any significant manner. Sounds great! To the unprincipled or the naïve, it is precisely what the doctor ordered. It is also illegal.” 2014 WL 2443023 (10th Cir. 2014).

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