Wednesday, September 18, 2013

Third Standing Shoe Drops: Challenge to Church Form 990 Filing Exemption Survives Motion to Dismiss

As readers of this blog know, two lawsuits challenging the preferential federal tax law treatment of churches and ministers and brought by the Freedom from Religion Foundation survived motions to dismiss on standing grounds .  A year ago, the U.S. District Court for the Western District of Wisconsin found FFRF had standing to challenge the income tax exemption for parsonages and pastor housing allowances provided by Internal Revenue Code section 107.  About a month ago, the same court concluded FFRF had standing to challenge the IRS's alleged lack of enforcement of the section 501(c)(3) political campaign intervention prohibition as against churches. 

Finally, about four weeks ago the same court rejected the government's motion to dismiss FFRF's complaint challenging the exemption for churches from having to file an annual information return (the Form 990) with the IRS.  Relying heavily on its decision in the first case it considered, the court found that FFRF alleged a sufficient injury in fact because it is not able to claim such an exemption since it does not qualify as a church.  FFRF also challenged the exemption of churches from the exemption application (Form 1023) requirement applicable to other groups seeking recognition of their section 501(c)(3) status, but the court questioned whether FFRF and the other plaintiff in the case had a future injury in fact that would justify the injunctive relief they were seeking given that both groups had already filed their applications and paid their application fees.  It therefore asked the plaintiffs to demonstrate why their second claim should not be dismissed.

As John Colombo detailed in his previous post about the second case, and for the reasons Johnny Rex Buckles described in this space more generally and I also discussed with respect to Establishment Clause claims, this trio of decisions appears inconsistent with long-standing precedents relating to standing in the tax area.  The judge in all three cases also has previously been reversed on a standing issue relating to an Establishment Clause challenge to the National Day of Prayer brought by FFRF.  In that case the district court found the statute requiring that the President proclaim a National Day of Prayer each year to be a violation of the Establishment Clause, but the U.S. Court of Appeals for the Seventh Circuit concluded FFRF and the other plaintiffs lacked standing to bring the case (Freedom from Religion Foundation v. Obama, 651 F.3d 803 (7th Cir. 2011)). 

A similar fate for the trio of tax cases therefore seems likely as well.  Before the cases get to the appellate court, however, there may be some interesting information uncovered in discovery.  While the housing allowance and Form 990 cases appear to turn solely on the statutory provisions and so should not require much if any factual discovery, the lack of enforcement case would appear to require discovery regarding the extent to which the IRS has enforced the political campaign intervention prohibition as against churches and non-churches in recent years.  While there is some anecdotal information available regarding such enforcement efforts, since the quiet end of the IRS's Political Activity Compliance Initaitive  after the 2008 election season (and perhaps earlier - the IRS never issued a report for that election season) there has not been more comprehensive information available regarding enforcement in this area. While not FFRF's primary aim, the discovery in their lawsuit may reveal a lot about the frequency and results of that enforcement.

Lloyd Mayer

Church and State, Federal – Judicial | Permalink

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