Recently, the U.S. Tax Court issued an opinion of at least glancing interest to the Mormon community (and, for that matter, any tithe-paying religious community). The plaintiff in the case is the president of Compliance Innovations, Inc. He’s also a life-long Mormon who currently serves as a shift coordinator at the Manhattan temple and a stake scouting coordinator in his New Jersey stake. Also, George has incredible outstanding tax liabilities.
Unpaid Taxes and Penalties
In total, he owed the IRS almost $883,000 in unpaid taxes and penalties (and, though the Tax Court doesn’t say it, probably interest).[fn1] This $883,000 is comprised of at least two parts: in the first instance, he had unpaid income tax liabilities for 1992, 1995, 1996, 1999, and 2000.
The second part is for employment taxes that Compliance Innovations didn’t pay over to the IRS (often called “trust-fund taxes”). Which raises at least two questions: what does it mean that Compliance Innovations didn’t pay its trust-fund taxes? and how can Thompson personally be liable for taxes a corporation didn’t pay?
Unpaid Trust Fund Taxes. When your employer pays you, it withholds some part of your paycheck and pays that withheld amount to the IRS. Essentially, withholding is a compliance mechanism, and a pretty good one at that. Sometimes, though, it breaks down, whether it’s because the company actively decides not to pay it over, the accountant embezzles the money rather than paying it over, or the company is on shaky financial footing and thinks that, if it uses that money, it’ll be able to meet its tax liabilities in the future, and then the future doesn’t turn out as brightly as the company expected.
Personal Liability. In any event, regardless of why a company doesn’t pay over its trust-fund taxes, the Internal Revenue Code provides mechanisms for the IRS to pursue that money. Clearly it can go after the company for the unpaid taxes. But it can also assess a penalty (equal to the amount of unpaid tax) against certain individuals who are responsible for collecting, accounting for, and paying over the tax. Theoretically, the IRS can collect both the unpaid taxes from the employer and the trust-fund taxes from a responsible person, but it generally doesn’t; instead, it uses the penalty to ensure that the trust-fund taxes are paid by somebody.
$883,000 is a lot of money. Few of us, I suspect, could rack up a tax liability that big, much less pay it in one shot. So George attempted to enter into a partial payment installment agreement. But to enter into the agreement, the IRS required George to fill out a form that essentially cataloged his income, assets, and expenses. Using that information, the IRS determined how much George could afford to pay every month toward his tax liabilities and penalties.
In some cases, a taxpayer can pay her full outstanding tax liability using a payment plan. George, however, could not. As a result, he requested a partial payment installment agreement. And, in calculating how much a taxpayer can afford to pay when he won’t pay the full amount, the IRS classifies expenses as “necessary” or “conditional.” And “conditional” expenses don’t reduce the amount the IRS requires a taxpayer to pay.
Herein lies the conflict between George and the IRS: George argued that $2,110 of monthly tithing was a necessary expense, and should reduce the amount he could afford to pay each month.[fn2]
So Is Tithing a Necessary Expense?
Apparently, George’s evidence that tithing constituted a necessary expense included a reference to Malachi 3:8-10. To which the Tax Court responded, Matthew 22:21.[fn3] The court continued that, though it was “incapable of determining what belongs to God, we believe that we can, and must, decide what is Caesar’s.” And then it addressed George’s three arguments for why tithing is a necessary expense:
Necessary Expense Test. To be a necessary expense, an expense must either provide for the taxpayer’s health and welfare or her production of income.
Paying tithing, he argues, is necessary for his spiritual health and welfare. And, while that may well be true, the Tax Court rejects that argument. It says he didn’t provide any evidence of specific spiritual benefits that would be affected if he failed to tithe;[fn4] moreover, it said that it would be inappropriate for the IRS to make determinations of what is or is not necessary for a person’s spiritual welfare.
Free Exercise. George also argues that treating tithing as a conditional expense violates the Free Exercise clause of the Constitution. His argument here is that, if he doesn’t pay his tithing, he will no longer be allowed to be a temple shift coordinator and a stake scouting coordinator.[fn5] That, he argues, means that the IRS will determine who can be a minister, contrary to the Supreme Court’s interpretation of the Free Exercise clause (which doesn’t allow the government to interfere with the selection of a minister, with “minister” defined broadly). He even got a letter from his bishop[fn6] saying that, if he didn’t pay his tithing, he’d have to resign his Church positions.
And the Tax Court points out that, no, the IRS doesn’t interfere with the Church’s decision of who will act as a minister (or, for that matter, in any calling). That is, the IRS neither required George to give up his callings, nor did she pressure the Church into making him resign. It concludes that the Church’s requiring somebody to withdraw from a calling is the Church’s decision.
RFRA. Finally, George argues that not including tithing as a necessary expense violates the Religious Freedom and Restoration Act, which holds that the government can only substantially burden an individual’s exercise of religion if it furthers a compelling interest and is the least restrictive means of furthering that interest.
Collecting taxes is unquestionably a compelling government interest. But George argues that it would be less restrictive if he were allowed to reduce the amount he could pay by his tithing (that is, if tithing were considered a necessary expense). Essentially, the Tax Court points out that , while collecting $3,000 a month is less restrictive than collecting $8,000 a month,[fn7] $3,000 a month will not pay his liabilities in a timely manner, and therefore does not meet the government’s compelling interest.
Some Other Things
It’s worth noting that the IRS and the Tax Court did not prohibit George from paying his tithing.[fn8] They just didn’t allow him to reduce the amount he’s able to pay by his tithing.
If he’s serious about paying his tithing, then, how does he do it? If we look at the allowed expenses, the IRS allowed, among other things, a monthly expense of $4,619 a month for housing and utilities. The Court points out that that amount is in excess of the IRS’s national standard guidelines. It allowed $2,680 for food, clothing, and miscellaneous expenses. It allowed $1,538 for transportation. (Not counting taxes and alimony, he’s basically allowed to live on about $10,000 a month.)
By laying out these permitted expenses, I’m not saying that George lives extravagantly, or that he needs to move into a smaller house or eat less. I don’t know, and it’s not my place to judge that. I am saying, though, that we make trade-offs when we budget. And classifying tithing as a conditional expense doesn’t eliminate a person’s ability to shift the budget and continue to pay tithing.
(h/t Julie. For another summary of the case with a slightly different emphasis than mine, see here.)
[fn1] It’s worth noting that George never contested the underlying tax liabilities.
[fn2] He also argued that his kids’ college tuition was a necessary expense, which is a much less interesting question for this post’s purposes. If you’re curious, though, no it’s not.
[fn3] Seriously, so awesome: did you ever imagine you’d see Bible-bashing in a Tax Court opinion?
[fn4] FWIW, I think he necessarily didn’t argue specific benefits. Although we believe the windows of heaven will be opened to the person who pays tithing, we don’t claim that any particular blessing comes as a result of paying our tithing.
[fn5] Technically, it’s not clear to me that he can in any event. The Handbook says that members who refuse to pay their taxes cannot have temple recommends or hold callings of “principal responsibility” (whatever that means). Still, though the Court hints that he’s been openly defiant of the tax law, it never says as much explicitly; there are possible benign explanations for his unpaid taxes.
[fn6] Seriously, he put a letter from his bishop into evidence!
[fn7] Because, remember, tithing is the only amount at issue in this case.
[fn8] That said, I originally wanted to title this post “BREAKING: IRS, TAX COURT PROHIBIT MAN FROM PAYING TITHING.” That, I think, is much catchier, and entirely untrue. But catchier.