Pastor Who Failed to File Form 4361 Was Not Exempt from Self-Employment Tax

(Parker Tax Publishing July 2021)

The Court of Federal Claims held that an ordained bishop and full-time pastor was not exempt from self-employment taxes because he failed to file Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, as required by Code Sec. 1402(e)(1). The court noted that only those that have taken a vow of poverty are exempt from filing an application and the taxpayer did not allege that he took a vow of poverty. Arensmeyer v. U.S., 2021 PTC 206 (Fed. Cl. 2021).

Keith Arensmeyer is an ordained bishop and a full-time pastor of the New Horizons Church of God in Shelton, Washington. Arensmeyer and his wife filed joint returns for 2017 and 2018 reporting a total income of $53,560 and $64,090, respectively. Each return contained a Schedule SE (Form 1040), Self-Employment Tax, showing the income subject to self-employment tax and the resulting tax as $9,094 for 2017 and $9,056 for 2018.

In 2019, after learning that their tax returns may have been filed incorrectly, the Arensmeyers hired a tax law firm, Castro & Co. The firm told the Arensmeyers that they were entitled to claim an exemption from social security taxes for services performed as a member of a religious order in the exercise of duties as required by such order. Castro & Co. prepared amended tax returns for 2017 and 2018, requesting refunds for self-employment taxes. The Arensmeyers never filed Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. The IRS denied the Arensmeyers' request for a refund. The Arensmeyers took their case to the Court of Federal Claims.

Employment wages are generally subject to withholdings under the Federal Insurance Contributions Act, codified in Code Sec. 3101 and Code Sec. 3111. Under Code Sec. 3121(b)(8), "employment" specifically excludes service performed by an ordained minister of a church in the exercise of his or her ministry. Instead, income from services performed in a capacity as a minister is considered self-employment income, and is therefore subject to self-employment tax under the Self-Employment Contributions Act (SECA). Under Code Sec. 1402(a), SECA tax applies to the gross income derived by an individual from any trade or business carried on by such individual, less allowable deductions. But Code Sec. 1402(c)(4) excludes from the definition of "trade or business" (and thus exempts from SECA tax) the performance of service by an ordained minister in the exercise of his or her ministry. The exemption from self-employment tax under Code Sec. 1402(c)(4) is not automatic. Under Code Sec. 1402(e), the taxpayer must apply for the exemption by filing Form 4361 and the application must be approved by the IRS. However, Code Sec. 1402(c) provides that the application requirement does not apply to service performed by a member of a religious order who has taken a vow of poverty as a member of such order.

The Arensmeyers' complaint asserted that they did not need to use Form 4361 to apply for the exemption under Code Sec. 1402(c)(4). The complaint stated that Mr. Arensmeyer performed duties in accordance with the religious order from the Church of God and thus fell into the exemption under Code Sec. 1402(c)(4). Therefore, according to the Arensmeyers, the application for exemption referenced in Code Sec. 1402(e) did not apply to them. The government filed a motion for judgment on the pleadings based on the fact that the Arensmeyers did not file a Form 4361. Three days before the hearing, the Arensmeyers filed a motion to amend the complaint in order to assert that Mr. Arensmeyer had taken a vow of poverty, but the court denied that motion.

The Court of Federal Claims held that the Arensmeyers were not entitled to a refund of their self-employment taxes because they did not apply for, or obtain, the requisite approval for exemption from self-employment taxes. The court said that the Arensmeyers were statutorily incorrect in asserting that because Code Sec. 1402(c)(4) applied to them, they were necessarily exempt from filing Form 4361. The court observed that only those that have taken a vow of poverty are exempt from filing the application mandated by Code Sec. 1402(e), and the Arensmeyers' complaint failed to state that Mr. Arensmeyer took a vow of poverty. Further, the court found that the Arensmeyers' request to amend their complaint to do so was futile because that theory was not explicitly asserted before the IRS. Coupled with the Arensmeyers' admission that they did not file an application for exemption, the court concluded that their complaint failed to state a claim that plausibly entitled them to relief.

For a discussion of the exemption from self-employment taxes for ministers, see Parker Tax ¶13,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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