Speaking before the Family Research Council, the Republican nominee for president, Donald Trump, called for a repeal of the “Johnson Amendment.” The Johnson Amendment is part of Section 501(c)(3) of the Internal Revenue Code, and prohibits tax-exempt organizations such as schools, hospitals, and churches from participating in political campaigns. The Republican Party’s 2016 platform echoes Mr. Trump.
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On one level, I admire the public furor now surrounding Indiana’s Religious Freedom Restoration Act (RFRA). In an important sense, this discussion reflects the Founder’s vision of a republican citizenry robustly debating the meaning of important values like nondiscrimination and religious freedom. On the other hand, this public controversy has, at times, regrettably reflected failure on both sides to respect their fellow citizens and confront the merits of the issue in civil fashion.
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In Freedom From Religion Foundation, Inc. v. Lew, the US Court of Appeals for the Seventh Circuit recently dismissed a constitutional challenge to the parsonage allowance provisions of the Internal Revenue Code (Code). Under Section 107(2) of the Code, a “minister of the gospel” need not pay income taxes on the housing allowance received by the minister as part of his or her compensation. According to the plaintiffs in this case, the income tax exclusion established by Code Section 107(2) violates the Establishment Clause of the First Amendment because the exclusion is available only to clergy, not to individuals who receive cash housing allowances from their secular employers.
In dismissing the case brought by the Freedom From Religion Foundation (FFRF), the appeals court did not reach the substantive merits of this constitutional claim. Rather, the Seventh Circuit dismissed the case on the basis of standing or, to be precise, the plaintiffs’ lack of standing. In procedural terms, the appeals court ruled, the FFRF plaintiffs never asked the IRS for tax-free treatment for their housing allowances:
[T]he plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance of about Section 107(2)’s unconstitutionality, which does not support standing. (Emphasis in the court’s original).
The Seventh Circuit’s decision is consistent with the trend, encouraged by the US Supreme Court, to narrow taxpayer standing in the federal courts. As I recently argued in the Hastings Constitutional Law Journal, the corollary of this formalistic trend is that First Amendment lawsuits like FFRF’s challenge to the income tax exclusion for clerical housing allowances will increasingly occur in the state courts which are generally more receptive than the federal courts to claims of taxpayer standing.
FFRF has announced its intention to press its constitutional objections to Section 107. It is thus likely that these objections will be addressed in one or more state courts with more liberal procedural rules for standing.
The US Constitution empowers federal courts to hear “Cases” and “Controversies.” Over the years, the federal courts have elaborated the Constitution’s “case or controversy” test to require what has become known as “standing.” Among other elements, such standing necessitates that a plaintiff have experienced “personal and individual” injury rather than a generalized grievance shared with others.
In dismissing the FFRF challenge to the parsonage allowance provisions of the Internal Revenue Code, the Court of Appeals for the Seventh Circuit held that the plaintiffs did not meet this exacting standard of personalized injury. As a procedural matter, the plaintiffs had not asked the IRS to exclude from their respective gross incomes the housing allowances paid to them by their secular employer. Hence, in formal terms, the plaintiffs had no individualized injury and thus no standing to pursue their lawsuit.
The FFRF plaintiffs can now ask the IRS to exclude their housing allowances from their gross incomes and, when refused such favorable treatment, can commence their litigation again in the federal courts. Alternatively, FFRF can restart this litigation in the state courts where the tests for standing are generally more liberal than in the federal courts.
FFRF originally began its challenge to the Code’s parsonage allowance provision as a federal case in the US District Court for Eastern District of California. FFRF then refiled its litigation in the US District Court for the Western District of Wisconsin, where the FFRF plaintiffs prevailed on the merits. From there, the case went to the US Court of Appeals for the Seventh Circuit which has now ordered the case dismissed for lack of standing.
In terms of statutory law and case law, the standing rules for California’s state courts are among the most liberal in the nation. The case law of Wisconsin similarly opens the door to that state’s courts in contrast to the less welcoming standing tests of the federal courts.
California’s and Wisconsin’s respective income taxes include benefits for clerical housing allowances identical to Code Section 107. Thus, any constitutional deficiency of the federal exclusion also applies to the equivalent state income tax exclusions of parsonage allowances. So why didn’t FFRF start its litigation against the parsonage allowance in the California or Wisconsin state courts in the first place, rather than resorting to the federal courts located in those states?
Perhaps the FFRF litigants thought that a state court’s constitutional invalidation of that state’s parsonage allowance exclusion would be insufficiently influential. Or perhaps FFRF’s lawyers concluded that elected state court judges would be less receptive to their challenge than life-tenured federal judges.
In any event, FFRF says that its procedural defeat in the Seventh Circuit will not deter additional litigation concerning the alleged unconstitutionality of the favorable tax income treatment extended to parsonage allowances. Whatever the reason the FFRF lawyers chose to proceed in the federal courts, they must now be considering the advisability of litigating their concerns in the state courts, with more generous tests for standing.
On the substantive merits, I disagree with FFRF that the income tax exclusion for clerical housing allowances violates the First Amendment. As I have discussed in the Cardozo Law Review, that exclusion has both secular purpose and secular effect: In constitutional terms, Code Section 107 is a permissible (though not required) attempt to minimize the church-state entanglement which would result from taxing such allowances. While there are strong tax policy arguments against Section 107(2), those arguments don’t make that section unconstitutional.
In light of FFRF’s determination to keep litigating, it is likely a matter of time before this substantive constitutional issue will be addressed in one or more state courts with more liberal procedural rules for standing.
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Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. In this article, Professor Zelinsky discusses Warren Buffett’s plans to donate his assets in a tax-free fashion to the Bill and Melinda Gates Foundation. Zelinsky suggests that Buffett, a prominent and outspoken proponent of the federal estate tax, should instead contribute his fortune on a taxable basis.
I am a Warren Buffett fan. In large measure, this reflects an Omahan’s pride in the success of another native son. My Buffett enthusiasm also stems from admiration for Buffett’s earthy wisdom and simple lifestyle. Though I have spent the last thirty years living in Connecticut and teaching in New York, I am still a Nebraskan at heart and Warren Buffett is the ultimate Nebraskan.
Among his other observations, Buffett has correctly noted the dangers to a democracy of inherited wealth as well as the moral obligation of those who have done particularly well in American society to give back to that society. As Buffett observed, he would not be Warren Buffett if he had been born in Bangladesh.
These concerns have led Buffett to support retention of the federal estate tax and to express dismay that his federal income tax bracket is lower than his secretary’s. Buffett’s observations are particularly noteworthy because Buffett is an acquisitive investor who believes in the marketplace. He cannot be dismissed as hostile to accumulation, success or capitalism. On the contrary, he is one who celebrates and embodies those qualities even as he raises important concerns about federal tax policy.
All of this leaves me perplexed by the way Buffett is contributing the bulk of his assets to the Bill and Melinda Gates Foundation. Buffett has received excellent legal advice to guarantee that his contributions will not generate federal tax. This provokes the question: Why?
Buffett could give his fortune to the Gates Foundation in a manner which generates federal tax. This would leave less for the foundation but more for the federal fisc. Indeed, Bill Gates, like Warren Buffett, advocates retaining the federal estate tax. He too could leave his assets to his foundation in a fashion which would share part of those assets with Uncle Sam.
It seems strange for prominent and outspoken advocates of the federal estate tax to dispose of their assets in a manner meticulously designed to avoid the federal estate tax.
Buffett (and Gates) might explain this apparent contradiction by arguing that their charity is an effective substitute for taxation. Thus, the argument would go, when they give $1.00 to the Gates Foundation with no corresponding tax payment, they should nevertheless be treated as if they had paid $1.00 in tax since the contributed $1.00 is devoted to public purposes.
For two reasons, this explanation proves unconvincing. First, this explanation undercuts Buffett’s now famous comparison of his tax rate with his secretary’s. If Buffett’s charitable contributions are to be treated as if they were tax payments, Buffett’s taxes are then far higher than claimed when he compared his burden to his secretary’s.
Second, giving money to the Gates Foundation is not the same as giving money to the federal Treasury. The federal Treasury is controlled by the people of the United States through their elected representatives. The Bill and Melinda Gates Foundation is controlled by Bill and Melinda Gates.
I hope that Warren Buffett will rethink his plans. The same skilled lawyers who arranged for Buffett’s fortune to go the Gates Foundation tax-free could instead arrange for Buffett’s assets to go to this foundation on a taxable basis. The resulting payment to the federal Treasury would demonstrate that the sage of Omaha is willing to put his money where he says his heart is.
This article misses the whole point of why Buffett supports the estate tax. It is not simply to get revenue for the federal Treasury. It is to prevent a permanent aristocracy from forming based on inherited wealth.
In addition, the taxes on his Berkshire investment, were it not tax-free, would be taxed at the long-term capital gains rate–which is far lower than the rates discussed which include the payroll tax et al.
Another reason the article misses the point is that Buffett’s fortune can accomplish much more public good than giving his money to the bloated inefficient, Federal Government. Nor, do I think Buffett wants his billions funding the Iraq war?
This article misses the whole point of why Buffett supports the estate tax. It is not simply to get revenue for the federal Treasury. It is to prevent a permanent aristocracy from forming based on inherited wealth.
The fact that Mr. Buffett’s company, Berkshire Hathaway, has insurance as its core business, and that life insurance (together with transferring the policy) is a primary way to avoid estate tax doesn’t mean anything? Repealing the estate tax would be bad for his company by making people less likely to buy life insurance.
This writer has missed the boat. Buffet has lobbied against the accumuation of wealth in individual hands - has never said anything against the transfer tax policy alowing the charitble estate and gift tax deduction. And further - it takes no particular skill to get the charitable deduction for your client - just give it to the charity.
The kids - and presumably further lineals - haven’t exactly been “left by the roadside”:
He (Buffett) also announced plans to contribute additional Berkshire stock valued at approximately $6.7 billion to the Susan Thompson Buffett Foundation and to other foundations headed by his three children. The bulk of the estate of his wife, valued at $2.6 billion, went to that foundation when she died in 2004.
mr parker is right buffet left the bulk of his estate tax free to his childrens’ charity. I should either start my own charity for my kids or make my own church.
Remember who he is and what he does to make money, and there is your answer.
The genius of Buffett is to come across as an average Joe, the guy next door.
The majority of his holdings are small closely held businesses that are well run. The problem for most of these type businesses is that either by improperly planned retirement, sudden disability or death - the family has an income and/ or estate tax bills, but are well shy of it with liquidity.
Buffett swoops in like superman. He provides a service, but he comes out way ahead.
If the estate tax was taken away, he would have to pay a much fairer price as the business is not between a rock and and a genius providing the hard place.
I respect and support Mr. Buffett as a philanthropist, however if Mr. Buffett is so inclined to pay more in taxes or distribute the wealth, why doesn’t he start with taking a normal salary like every CEO does instead of hiding his true tax bracket under capital gains at only 15%? The vast majority of Americans making payroll income do pay taxes according to what they make. We work to take care of our children and grandchildren as the Bible promotes, it is our obligation to do so. Mr. Buffett shouldn’t generalize about taxation in any aspect of the tax code for the entire country when he is the only CEO collecting his fortune while avoiding social security & Medicare taxes, avoiding payroll income taxes as well as matching the 7.65% tax from his employees paying into FICA; this in addition to avoiding estate taxes by donating to charities – however very generous. He takes the money that he makes under capital gains/losses (on investments) and taxed at only 15%. Be clear, Mr. Buffett’s payroll or income tax is based on the value of his stock (Berkshire Hathaway), so his ‘salary’ therefore is only $100,000 to $200,000 per year. His personal reasons for doing so are commendable; however he should not make statements or promote for the rest of Americans to pay more in taxes in whatever area of the tax code, when he himself avoid taxes or uses the system to avoid them because of his personal decisions.