Obligation to Pay Delinquent Taxes Trumps Religious Obligations and College Expenses
(Parker's Federal Tax Bulletin: March 14, 2013)

When an individual works out an installment plan with the IRS, the two parties must agree on how much to set aside for the individual's living expenses. As one might imagine, there is often disagreement on how much a taxpayer thinks he needs compared to how much the IRS thinks he needs. In Thompson v. Comm'r, 140 T.C. No. 4 (3/4/13), the disagreement centered on whether the taxpayer was required to tithe 10 percent of his income to his church and whether expenses for his children's college were necessary expenses. The Tax Court agreed with the IRS and held that such expenses are conditional expenses rather than necessary expenses. Thus, the taxpayer could not take them into account when calculating how much he could pay the IRS on an installment plan.

Background

George Thompson has been a member of the Church of Jesus Christ of Latter-Day Saints his entire life and has regularly contributed 10 percent of his monthly income to the Church. He holds a position as a shift coordinator in the Church's Manhattan Temple. Additionally, George is a scouting coordinator for the Church and is responsible for overseeing six scout troops in different congregations in New Jersey. He receives no money for these positions. In 2008, the IRS assessed trust fund recovery penalties against George for unpaid employment tax liabilities. The IRS advised George that it intended to levy to collect the unpaid tax penalties and that George could request a hearing with the IRS's Office of Appeals. George submitted Form 12153, Request for a Collection Due Process (CDP) or Equivalent Hearing, in which he did not contest the amount owed. The CDP period tax liabilities totaled approximately $151,000.

Two years earlier, George had entered into a partial payment installment agreement with the IRS for payment of non-CDP period tax liabilities and penalties. Subsequently, the IRS determined that George had defaulted on the partial payment installment agreement and sent him a Notice of Defaulted Installment Agreement under Section 6159(b) - Notice of Intent to Levy Under Section 6331(d). As of August 1, 2008, George owed $731,000 for the non-CDP period tax liabilities and penalties.

George requested a partial payment installment agreement that would encompass all of his tax liabilities and penalties for the CDP and non-CDP periods. George submitted Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and reported that he had a monthly income of $27,633 ($331,596 per year) and monthly expenses of $24,416 ($292,992 per year). Included in the total monthly expenses were other expenses of $5,294, which consisted of: (1) church tithing expenses of $2,110; (2) church service expenses of $232; and (3) college expenses of $2,952. George's lawyer requested a partial payment installment agreement whereby George would pay $3,000 a month for his unpaid tax liabilities and penalties for both the CDP and non-CDP periods.

According to the settlement officer, the other expenses of $5,294 did not qualify as necessary expenses under the guidelines of the Internal Revenue Manual. Rather, the IRS categorized them as conditional expenses. As a result, the settlement officer concluded that George was eligible for a partial payment installment agreement if the monthly payment was $8,389. George did not agree, and when the IRS issued a notice that it would proceed to levy on George's assets, George filed a petition in Tax Court.

Taxpayer's Arguments

Before the Tax Court, George argued that the settlement officer abused her discretion by classifying his tithing as a conditional expense in determining the amount he could afford to pay in a partial payment installment agreement. George made three separate arguments. First, he argued that given his positions in the Church, tithing is required by the Internal Revenue Manual to be treated as a necessary expense because it was a condition of his employment with the Church, notwithstanding the fact that he receives no financial remuneration for his Church positions. He introduced a letter from a bishop in the Church that stated that George would have to resign his positions with the Church if he did not tithe.

Second, George argued that classifying his tithing as a conditional expense was a violation of his rights under the Free Exercise Clause of the First Amendment because if he was not able to tithe then his church will require him to resign his ministerial positions. According to George, the settlement officer's classification of George's tithe as a conditional expense was tantamount to the settlement officer deciding who could be a minister in George's church.

Third, George argued that classifying his tithing as a conditional expense was a violation of the Religious Freedom Restoration Act of 1993.

George also contended that it was an abuse of discretion for the settlement officer to not allow his children's college expenses as a necessary expense. According to George, each of his five children had a neurological disability that required them to attend Brigham Young University.

Tax Court's Analysis

The Tax Court disagreed with all of George's arguments and concluded that it was not an abuse of discretion for the IRS to classify George's tithing and his children's college expenses as a conditional expense under the Internal Revenue Manual.

The court noted that, in evaluating a taxpayer's ability to pay an installment amount, the IRS classifies a taxpayer's expenses into two categories:(1) necessary expenses; and (2) conditional expenses. The necessary expense test has two prongs, one of which must be satisfied in order for an expense to be considered a necessary expense. The expense must provide for either (1) the taxpayer's health and welfare or (2) the taxpayer's production of income. If a taxpayer requests a partial payment installment agreement, then the taxpayer is allowed only necessary expenses; conditional expenses are not allowed.

With respect to the tithing requirement, the court noted that because George did not receive compensation for his positions in the church, his tithing payments were not for the production of income. Thus, he failed the second prong on that test. Therefore, to be considered a necessary expense, the tithing payments must satisfy the first prong of the necessary expense test; i.e., provide for George's health and welfare.

The Tax Court stated that the First Amendment to the Constitution provides that Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof and that George was correct that the Free Exercise Clause prevents the government from interfering in a church's selection of its ministers. However, the court observed, the settlement officer did not interfere with the church's decision of whether to keep George as a minister. With respect to the letter from the church bishop stating that if George did not pay his tithe he would be required to resign his positions with the church, the court said that George was overlooking the fact that it was his church who was requiring him to resign his positions if he did not tithe the settlement officer was not requiring George to resign his position, nor was she pressuring the church to do so.

The court stated that George was not entitled by the Constitution to be relieved of paying his substantial delinquent tax liabilities and penalties in order to pay his tithe. His position, the court said, would allow religious organizations to control vital government functions, and this was not the intention or purpose of the Free Exercise Clause of the First Amendment. Rather, it prohibits the government from exercising control over religious functions.

With respect to the college expenses, the court noted that Form 433-A states [w]e generally do not allow you to claim tuition for private schools, public or private college * * * [h]owever, we may allow these expenses, if you can prove that they are necessary for the health and welfare of you or your family or for the production of income. First, the court noted that Form 433-A does not have the force of law and confers no rights on taxpayers. Second, the court said that even if George had established the fact that each of his five children had a neurological disability requiring them to go to Brigham Young University, it would not make any difference in its analysis with respect to the allowability of college expenses. Form 433-A clearly states that the expenses may not be allowed, and that discretion to allow the expenses lies with the IRS. Thus, the court held that Form 433-A does not require the IRS to classify a taxpayer's college expenses as a necessary expense.

Staff Editor Parker Tax Publishing

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