Courts Rule Constitution Doesn’t Protect Churches

By Raul Rivera

Pastor Dixon of Indianapolis Baptist Temple (IBT) decided his church would be a Free Church or a New Testament Church. This decision was based on the belief that the exclusive sovereignty of Jesus Christ over the church necessitated its disassociation from secular government authority, and he believed this provided the church with constitutional protection from any government regulation.

So, for years, the church existed as an unincorporated church, rejecting 501(c)(3) status. Moreover, like many others, IBT presumed that Internal Revenue Code Section 508(c)(1)(A) provides churches tax immunity. Nothing could be further from the truth. On August 14, 2000, after three years of litigation, the United States Court of Appeals, Seventh Circuit ruled that the church’s stance was wrong and ordered the church to pay over three and a half million dollars to the IRS. 

What really happened?

After years of back and forth and many IRS efforts to bring the church into tax compliance, IBT refused to cooperate. In a final effort, the IRS prepared all the quarterly tax returns for the church to see if IBT would reply, but the church did not respond. Finally, the IRS calculated an assessment of tax, interest, and additions totaling $3,498,355.62 and sent a notice and demand for payment. When the taxes went unpaid, the IRS filed suit against the church.

In the appeals court, U.S. v. Indianapolis Baptist Temple, 224 F.3d 627 (7th Cir. 2000), IBT argued “both the Free Exercise and Establishment Clauses of the First Amendment, as well as general principles of religious liberty embodied in the First Amendment, protect it from having to pay taxes.” The church further contended that “federal employment tax laws, as applied to it, violate the Free Exercise Clause of the First Amendment by requiring the church to act in a manner inconsistent with its beliefs.

Can a church be out of the reach of law?

IBT remained unmoved in its position that churches when set up as IBT, are immune to any government laws, rules, or regulations. It presented three main arguments rejected by the court and confirmed by other subsequent rulings. The arguments are below:

1. It’s a New Testament Church: IBT argued that tax laws apply only to a church if it is incorporated and/or has 501(c)(3) status because it is a “state-recognized legal entity.” Whereas IBT is unincorporated and a “New Testament Church,” their idea was that if a church is not incorporated or has 501(c)(3) status, then it is outside the reach of state and federal laws.
   
2. Churches are Constitutionally Protected: The second argument made by IBT is that “both the Free Exercise and Establishment Clauses of the First Amendment, as well as general principles of religious liberty embodied in the First Amendment,” protect it from having to pay taxes.
   
3. Paying taxes Forces the church to violate their sincerely held religious beliefs: The third argument was that “federal employment tax laws, as applied to it, violate the Free Exercise Clause of the First Amendment by requiring the church to act in a manner inconsistent with its beliefs” because it would require it to recognize the sovereignty of the federal government over the church.

The Court Rejected IBT’s Arguments

In considering the three arguments presented by IBT, the court ruled:

1. It rejected IBT’s 1st argument: In rejecting IBT’s first argument that it is not a state-recognized entity, the court ruled that it does not matter what sort of entity IBT claims to be. Whatever it is, it must comply with federal employment tax laws.
2. It rejected IBT’s 2nd argument: In rejecting IBT’s second argument, the court ruled that the imposed tax laws are of general application and that whatever burden they may place on religious practices does not run afoul of the Free Exercise Clause.
3. It rejected IBT’s 3rd argument: In rejecting IBT’s third argument that paying taxes would force it to act in a manner inconsistent with its beliefs, the court ruled that the 1st Amendment provides considerable, though not absolute, protection for the ability to practice one's religion. However, taxation has a secular purpose, and it has a primary effect of neither advancing nor inhibiting religion and that IBT’s argument must be rejected.
   

What happened to Indianapolis Baptist Temple?

After the court ruled against IBT, they refused to come into tax compliance. U.S. District Judge Sarah Evans Barker ordered members to vacate the church property on Indianapolis's south side, and Federal Marshals seized the property on Feb. 13, 2001.

Why do some continue teaching the free church movement?

Quite often, we get calls from pastors and leaders asking if a church can be tax-exempt under Section 508(c)(1)(A). The best and shortest answer can be found in the case of Branch Ministries vs. Rossotti. The church argued that they were not exempt under Section 501(c)(3) but rather that they were exempt under Section 508(c)(1)(A) and therefore could not lose their tax-exempt status. The court stated that they found their “argument more creative than persuasive.”

The court went on to say that Section 508(c)(1)(A) doesn’t grant any special tax-exempt status. It simply means that a church doesn’t have to apply for official 501(c)(3) status but that it must still comply with all of the requirements of Section 501(c)(3) in order to be tax-exempt. Below are several court cases that better explain how tax exemption works for churches.

Tax exemption is by legislative grace

In Church of the Chosen People v. United States, the court discussed a church's entitlement to a tax exemption under Section 501(c)(3) of the Internal Revenue Code. It emphasized that while a church may not need to file for Section 501(c)(3) status to be tax-exempt, the burden is on the church to establish that it qualifies for the exemption.

This case highlights the notion that tax exemptions are a matter of legislative grace, and the exempt status must be substantiated by the organization seeking it. In Colgate v. Harvey, the court ruled that tax exemption is not a matter of right but is allowed only as a matter of legislative grace. Tax exemption exists only because Congress passed Section 501(c)(3).

What if my church does not have 501(c)(3) status?

In Branch Ministries v. Rossotti, the court noted that the Internal Revenue Code treats churches differently from other tax-exempt organizations. While churches are not required to file for Section 501(c)(3) status to be tax-exempt, they can claim tax-exempt status under Section 508(c). However, if a donor is audited, they bear the burden of establishing that the church meets the qualifications of a Section 501(c)(3) organization.

In Taylor v. Commissioner, the IRS denied an individual’s tax deductions because the church to which he donated did not have Section 501(c)(3) status. The taxpayer argued that Section 508(c)(1)(A) exempts churches from the requirements of Section 501(c)(3). However, the court disagreed, stating that for a donor to get a tax deduction for giving to a church, the organization must meet the requirements of Section 501(c)(3). This case further confirms that while churches are automatically exempt under Section 508(c)(1)(A), they still need to comply with the substantive requirements of Section 501(c)(3) for their donors to receive tax deductions.

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