Court Dismisses Atheist Challenge to Filing Exemptions for Churches

Judge cites federal appeals court’s rejection of housing allowance challenge.

A federal district court judge in Wisconsin ruled in December that an atheist group cannot legally challenge the Forms 1023 and 990 exemptions received by churches because the group lacks the legal standing to sue in the first place.

In its challenge to the filing exemptions, Freedom From Religion Foundation said the Internal Revenue Service showed preferential treatment to churches because churches do not have to apply for their tax-exempt status with Forms 1023, nor do they have to file lengthy and expensive annual reports with Forms 990. Other nonprofits do, including FFRF, a nonprofit atheist organization.

FFRF filed the lawsuit in the U.S. District Court’s Western District of Wisconsin—the same venue where it achieved initial success in a separate challenge in 2013 to the clergy housing allowance. But the clergy housing allowance challenge ended in November after the Seventh Circuit Court of Appeals determined FFRF didn’t suffer a direct injury and lacked the standing necessary to bring that lawsuit.

Judge Barbara Crabb for the Western District of Wisconsin said the Seventh Circuit’s logic also must apply to the filing exemptions case.

Judge Crabb presided over the clergy housing allowance case for the Western District of Wisconsin. In December’s ruling, Judge Crabb further explained her reasoning with the separate clergy housing allowance case, stating she allowed it to proceed because “the allegedly discriminatory treatment the plaintiffs received under the statute was an injury in fact that could be remedied by eliminating the exemption.”

However, Judge Crabb said the Seventh Circuit’s reversal in November concluded

the plaintiffs did not have standing because they never asked for the [clergy housing allowance] exemption … even if a party has no chance of getting the exemption, she does not have standing to challenge the exemption without a ‘personal denial’ … In addition, the [Seventh Circuit] noted that ‘[a]llowing members of discriminated-against groups who have not suffered a particularized injury to bring suit … would … create practical difficulties by opening the door to constitutional challenges to any tax exemption that a given individual suspects he may not be entitled to—without first giving the IRS and the Tax Court the opportunity to determine the proper construction and application of the law.’

Based on the Seventh Circuit’s decision, Judge Crabb said FFRF did not possess proper standing to bring the filing exemptions case, either. She wrote:

The standing problem in [clergy housing allowance case] was that the plaintiffs were not challenging the tax; they were challenging the exemption. That is the same problem in this case. Plaintiffs are not challenging the validity of the requirement under 6033(a)(I) to file a report; they are challenging the validity of the exemptions to the requirement in 6033(a)(3).

The decision is a significant victory for churches. In his November 2013 Church Finance Today article about FFRF’s challenge, Richard Hammar noted the costly burden churches would face if the form-filing exemptions were removed.

Matthew Branaugh is an attorney, and the content editor for Christianity Today's Church Law & Tax.

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