Robert W. Wood Contributor
A Utah man has been sentencedto two years in prison over a church the feds say was a tax avoidance scheme.Paul Ben Zaccardi plead guilty to one count of tax evasion, and five counts offiling false claims for income tax refunds. He transferred his house to achurch he formed, and even tried to pay his tax bill with fictitious U.S.Treasury bonds. He isn’t the first taxpayer to figure out that church status ispretty good
Churches don’t pay tax, anddonations to churches are tax deductible. But what qualifies as a church can bedebated. The stakes are high, as a Mississippi physician found out when he wassentenced to more than 6 years in prison. Prosecutors, the judge, and juryagreed that his church was a scam. Dr. Timothy Dale Jackson from PassChristian, Mississippi was found guilty of four counts of felony tax evasionand one of obstruction of due administration of the internal revenue laws.
The orthopedic physicianfunneled his practice income through the “Church of Compassionate Service.” Dr.Jackson took a vow of poverty, claiming that as a minister, he was tax exempt.He had a successful practice but hadn’t filed tax returns or paid taxes since2003.
Compassionate Service Churchmembers “donate” to the church, renouncing all worldly possessions. They alsohand over their assets to a Church trust. Ministers even sign over theirpaychecks to the Church. In return, the Church provides debit cards for livingexpenses. The Church even made mortgage payments on the homes it received where‘minister’ were housed.
In reality, 90 percent of Dr.Jackson’s income was returned to him. On $1.8 million of income just between2006 and 2009, the doc owed the IRS $650,000. When he was sentenced, the50-year-old Dr. Jackson received 75 months of incarceration, and was ordered topay taxes and interest of $806,983, plus a $12,500 fine.
The interaction of taxes andreligion is strange. Take the so-called parsonage allowance, a tax breakallowed by Section 107 of the tax code, dating to the 1920s. That was the eraof my favorite fictitious minister, Elmer Gantry, a shallow, philanderinghypocrite portrayed by Burt Lancaster in the movie. The parsonage allowancesays an ordained member of the clergy can live tax-free in a home owned by hisor her religious organization.
Alternatively, the clergymember can receive a tax-free annual payment to buy or rent a home. Theparsonage allowance makes being in the clergy sound pretty good, as does thislist of top ten clergy tax deductions. Yet religion doesn’t necessarily protectyou from criminal tax charges. Also consider Phil Driscoll, an ordainedminister and Grammy Award-winning trumpet player. He, too, went to prison fortax evasion.
Later, because of theparsonage allowance, the Tax Court ruled he didn’t owe federal income taxes on$408,638 provided to him by his ministry. The IRS appealed and the EleventhCircuit reversed. Mr. Driscoll asked the Supreme Court to review it, but theSupreme Court refused to hear it.
The Church of CompassionateService that got Dr. Jackson into such trouble is discussed in U.S. v.Hartshorn. There, the IRS got an injunction to silence Head Minister KevinHartshorn. Mr. Hartshorn had 50 ministers under his wing, telling them not topay the IRS. When the IRS had enough it went to court to enjoin the HeadMinister from preaching his no-tax mantra.
Mr. Hartshorn lost, appealed,and lost again when the appeals court ruled for the IRS. Thus, Mr. Harshornfailed to shake the injunction. Mr. Hartshorn’s claims about free speech didn’thelp him either. Even if the church was legit, the court said, Hartshorn’s planwasn’t. What’s more, Hartshorn’s knew his “you-don’t-have-to-pay-taxes” mantrawas false. Even if he didn’t, he should have known.
There are many tax advantagesof church status and an IRS determination letter. Even compared to othertax-exempt organizations, church status is the crème de la crème. For years,the IRS denied that Scientology was a church until lawsuits caused the IRS torule that Scientology was a church. The New York Times claimed that the IRSreversed 30 years of precedent to grant Scientology its Section 501(c)(3)status.
Since then, some say the IRSshould reconsider Scientology’s tax-exempt status, suggesting that the IRS hadthe wool pulled over its eyes when it granted church status in 1993. The filmGoing Clear, from HBO and director Alex Gibney is fueling those comments, asdid a St. Petersburg Times series a few years ago.
If the IRS decides to take onScientology for round two, the bout could be noisy. Churches reap a vast arrayof tax advantages. They even include special rules limiting IRS authority toaudit a church. A “church” is not specifically defined in the tax code, but theIRS lays out buzzwords in its tax guide for churches and religiousorganizations, including these characteristics:
1. Distinct legal existence;
2. Recognized creed and form of worship;
3. Definite and distinct ecclesiastical government;
4. Formal code of doctrine and discipline;
5. Distinct religious history;
6. Membership not associated with any other church or denomination;
7. Organization of ordained ministers;
8. Ordained ministers selected after completing prescribed study;
9. Literature of its own;
10. Established places of worship;
11. Regular congregations;
12. Regular religious services;
13. Sunday schools for religious instruction of the young; and
14. Schools for preparing its members.
The IRS considers all factsand circumstances in assessing whether an organization qualifies. But unlikeother exempt organizations, a church need not actually apply for tax exemption.Most churches do, but it is not technically required. The Nonprofit RiskManagement Center reports that over one hundred 501(c)(3) organizations losetheir tax-exempt status each year. The reasons vary, but in the case ofScientology, many wonder how it could have collected its church status in thefirst place.
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