May 23, 2014

Tax exemption as an IRS weapon

For religious groups at odds with the government, tax exemption can be a dangerous deal.

There's a persistent concern in some sectors of the religious right that when churches accept the legal conditions of tax-exempt status they sacrifice important freedoms. Internal Revenue Service rules, for example, forbid political endorsements and explicit campaigning from the pulpits of tax-exempt churches. There have been organized protests of this rule, but others, including Baptist pastor and sometimes-presidential-candidate Mike Huckabee, have suggested churches should be wary of tax-exemption altogether, whatever the rules. The very fact there are any rules is a problem, at least potentially. "Freedom," Huckabee has argued, "is more important than government financial favors."

A forthcoming study of U.S. tax law, to be published in the South Texas Law Review, argues there's good reason for conservative religious groups to be wary of tax-exempt status.

Tax-exempt status can be used as a weapon to force religious groups to conform.

Amy L. Moore, an assistant professor at Belmont University College of Law, in Nashville, Tenn., specifically looks at the laws pertaining to the tax-exempt statuses of religious institutions of higher learning. The IRS has the power, Moore writes, to force Christian colleges and Bible schools and seminaries to adopt policies on homosexuality or gender equality that violate the schools' religious beliefs. If educational institutions need that tax-free status to survive, the IRS can force them to either conform or die.

"The agency does not have to limit its power in this area and the judiciary cannot deny the exercise of this power," Moore writes. "The agency indeed has the power to destroy universities or other organizations that are dependent on their tax-exempt status to provide them revenue."

The IRS has a lot of leeway in granting or denying tax-exempt status, which means it is "rife with latent power."

The precedent for this was set in Bob Jones University vs. the United States, a 1983 case in which the Supreme Court upheld the IRS's decision to revoke Bob Jones' tax-exempt status. Bob Jones had a long history of racial discrimination. The IRS decided that, as a matter of public policy, no group that discriminates on the basis of race would be classified as a 501(c)(3) charity. The school sued, but the court sided with the IRS.

According to Moore, this ruling granted the tax-collecting agency massive powers, which are latent even today.

She writes,
The logic of this case, especially in light of changing law in other areas, has the possibility of being extended on a grand scale, and the IRS could legally revoke the tax benefits of any institution for violation of any IRS-declared public policy.
Critics of the court ruling at the time, and Moore today, found the decision troubling for two reasons. One, it gave no ground to the school's claim that sincerely held religious beliefs should be protected. Tax-exempt status is a not a right, so while private educational institutions may bar minorities from enrolling, they may not do so while receiving what amounts to financial support from the state. Second, the decision gave the IRS great leeway in deciding what public policy actually is.

"The Court gave no real guidelines for what or how other public policy arguments could be made in the future," Moore writes. In fact, the ruling acted as a carte blanche "validation of the power of the IRS: its ability to use its own sense of what public policy was, subject to possible judicial review, in classifying organizations as tax-exempt."

That power may not be as far-reaching as it appears, though. While it may be the case that tax-exempt statuses could be legally used to force organizations to change, there's always a difference between matters of law and matters of fact.

There is no rush of cases where the IRS is threatening the tax-free status of religious groups unless they change their policies towards women or gays. Nor, in fact, has the agency been putting pressure on religious groups at all. In fact, the IRS has been defending specific tax-free privileges of ministers, arguing it's right that they shouldn't have to pay taxes on housing allowances. The IRS has also been ignoring those churches that flout the law against electioneering. They haven't audited a church for violating that law since 2009, and have actually reorganized in a way that makes it technically impossible to enforce the law that limits what tax-exempt churches can do.

Even concerns that the agency was targeting politically conservative non-profit applications for tax-exemption turned out to be overblown. When the IRS scrutinized applications that used conservative keywords, it wasn't an exercise of power, but "a routine bureaucratic procedure meant to bundle potentially problematic applicants together."

The rules about tax exemption may give the IRS a latent power, but in actual practice, it would seem to be very, very latent.

In fact, even 31 years ago, when the IRS did use tax-exempt status to push Bob Jones to stop racial discrimination, the school didn't cave on its principles or conform to public standards. It just started paying taxes.