Tithing Is Not Necessary Expense

Procedure & Administration

The Tax Court upheld the IRS’s determination that a taxpayer’s tithing payments to his church were conditional expenses for purposes of determining the amount of the taxpayer’s monthly payments under a partial payment installment agreement.

Background

George Thompson, a resident of New Jersey, is the president of Compliance Innovations Inc. In addition, Thompson has been a member of the same church his entire life and has regularly contributed 10% of his monthly income to the church. He is actively involved in the church and holds a position as a shift coordinator in his local congregation. Additionally, Thompson is a stake Scouting coordinator for the church and is responsible for overseeing six Scout troops in different congregations in New Jersey. The church does not compensate Thompson for his work.

On Jan. 7, 2008, the IRS assessed trust fund recovery penalties under Sec. 6672 against Thompson for employment tax liabilities owed by Compliance Innovations Inc., of approximately $151,000 for the periods ending Dec. 31, 2004; June 30 and Sept. 30, 2005; and June 30, 2007 (CDP period tax penalties). The IRS later filed a federal tax lien with respect to his unpaid CDP period tax penalties. Thompson requested a collection due process (CDP) hearing, in which he did not contest the amounts of the underlying CDP period tax penalties.

The IRS had also previously assessed trust fund recovery penalties against Thompson for employment tax liabilities owed by Compliance Innovations Inc., for the periods ending Dec. 31, 1999, June 30, 2000, and Sept. 30, 2000, and personal income tax liabilities for the tax years 1992, 1995, 1996, 1999, and 2000, which remained unpaid (non-CDP period tax liabilities and penalties). Thompson had entered into a partial payment installment agreement with the IRS in 2006, for payment of the non-CDP period tax liabilities and penalties, but had defaulted on it, and as of Aug. 1, 2008, he still owed approximately $731,000 of them.

In September 2008, Thompson requested a partial payment installment agreement that would encompass all of his tax liabilities and penalties for the CDP and non-CDP periods. The IRS requested that Thompson submit a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. Thompson’s Form 433-A reported that he had a monthly income of $27,633 and monthly expenses of $24,416. The total monthly expenses included church tithing payments of $2,110. Thompson requested a partial payment installment agreement whereby he would pay $3,000 a month for his unpaid tax liabilities and penalties for both the CDP and non-CDP periods. Because Thompson owed more than $888,000, at this rate, even without additional penalties and interest added on, it would take Thompson more than 24 years to pay his entire balance.

In its calculation of the monthly amount Thompson should pay, the IRS allowed only $19,244 of his monthly expenses as necessary expenses, disallowing, among other things, his church tithing expenses. The IRS determined that the monthly payment amount should be $8,389. Thompson rejected an agreement based on this monthly payment amount and challenged in Tax Court the IRS’s determination that the church tithing expenses were not necessary expenses for purposes of the monthly payment calculation.

Necessary and Conditional Expenses

Under the rules set out in the Internal Revenue Manual (IRM), in determining the terms of a partial payment installment agreement, the IRS considers all the taxpayer’s income and expenses. The IRS classifies the taxpayer’s claimed expenses into two categories: necessary expenses and conditional expenses (IRM §5.15.7). Total necessary expenses are the minimum expenses a taxpayer and his or her family need to live. Thus, necessary expenses are taken into account in determining the monthly payment amount under a partial payment installment agreement. To be a necessary expense, the IRM specifies that the expense must provide for either the taxpayer’s health and welfare or the taxpayer’s production of income. Conditional expenses, which are expenses other than necessary expenses, are not taken into account in determining the monthly payment amount.

The Tax Court’s Decision

The Tax Court held that the IRS had not abused its discretion in treating Thompson’s church tithing payments as conditional expenses instead of necessary expenses in calculating the monthly payment amount for a partial payment installment agreement. It further held that treating the expenses as conditional expenses did not violate the Free Exercise Clause of the First Amendment to the Constitution or the Religious Freedom Restoration Act of 1993, P.L. 103-141.

Classification of the Tithing Expenses

The Tax Court applied the test for necessary expenses from the IRM to decide whether the IRS had abused its discretion by treating the expenses as conditional expenses. It concluded that tithing did not qualify as a necessary expense under either of the two standards in the test. With regard to the production-of-income standard, Thompson pointed to a section of the IRM that discusses whether a minister’s tithing is an allowable expense (IRM §5.10.1.10). This IRM section states that a minister’s tithe will be considered a necessary expense if it is a condition of employment.

Thompson argued that his tithing was a condition of employment because his church would not allow him to continue his unpaid work for the church unless he continued to tithe and that “employment” was not limited to compensated employment. The Tax Court disagreed, finding that the most logical reading of the IRM was to limit employment to compensated employment and to treat tithing as a condition of employment only if it was related to the production of income, which is the case where a minister’s tithing to a church is a condition of his paid employment with the church.

The Tax Court then looked at whether tithing met the second standard of the test by providing for Thompson’s and his family’s health and welfare. Thompson argued that not being able to tithe would negatively affect his spiritual welfare, which was part of his overall health and welfare. The Tax Court found that Thompson had provided no evidence of specific spiritual benefits that would be affected by his tithing and provided no support for his claim that the phrase “health and welfare” in the IRM included spiritual health and welfare. It further found that it “would generally be inappropriate for [the IRS or the Tax Court] to make determinations concerning what is or is not necessary for a particular person’s religious or ‘spiritual’ health or welfare.”

Free Exercise of Religion

Thompson argued that the IRS’s classification of his tithing as a conditional expense violated the Free Exercise Clause of the First Amendment because, if he was not able to tithe, his church would require him to resign his ministerial positions with the church. Thompson thus contended that the classification of his tithe payments as a conditional expense is tantamount to the IRS’s deciding who can be a minister in his church.

The Tax Court agreed that the Free Exercise Clause prevented the government from interfering with a church’s selection of its minister, but that the IRS’s classification of the tithe payments as necessary expenses did not do this. It was the church that would require Thompson to resign his positions with the church if he did not tithe, not the government through the IRS. The Tax Court also stated that Thompson’s position would allow religious organizations to control vital government functions (in this case the collection of taxes due), which was not the intention of the Free Exercise Clause.

Religious Freedom and Restoration Act of 1993

Under the Religious Freedom and Restoration Act of 1993, the government may substantially burden a person’s exercise of religion only if it demonstrates that application of the burden to the person is in furtherance of a compelling government interest and is the least restrictive means of furthering that compelling governmental interest. Thompson argued that a partial payment installment agreement with a $3,000 monthly payment would have been the least restrictive means of collecting his tax liabilities and penalties.

Thompson conceded that the IRS had a compelling interest in collecting taxes. The Tax Court further found that the IRS’s compelling interest in collecting taxes also implied a compelling interest in collecting a taxpayer’s liability in a timely manner. According to the court, the Act only required the government to use a less restrictive means to satisfy its compelling interest where that less restrictive means would actually further that interest. Allowing Thompson a $3,000 monthly payment, which would allow him to continue to tithe to his church in lieu of making a larger monthly payment on the substantial liabilities for tax and penalties he owed, would not satisfy the IRS’s compelling interest and was not a satisfactory “least restrictive alternative.” Therefore, because the IRS had properly followed the guidelines in the IRM in its determination of the monthly payment amount, it was not required to accept Thompson’s suggested lower amount.

Reflections

Besides being legally correct, the Tax Court’s decision in the case seems fair. Thompson’s arguments focused on his ongoing religious requirement to tithe, but he would not have had the dilemma if he had paid his taxes when they were due using the ample funds available to him. Asking the court to allow him to put voluntary payments to his church ahead of his tax liabilities was not likely to succeed, and it did not.

Thompson, 140 T.C. No. 4 (2013)