Refund of minister’s self-employment taxes denied

The Court of Federal Claims denied a taxpayer couple’s claim for refund of self-employment taxes, holding that they did not show that the husband, a minister, was exempt from the taxes.

Facts: Keith Arensmeyer was an ordained bishop and full-time pastor of a church in Washington state. He and his spouse filed joint returns for 2017 and 2018 including Schedule SE, Self-Employment Tax, reporting more than $9,000 in self-employment tax for each of the two years.

In 2019, the couple employed a new firm to submit amended returns requesting a refund of the self-employment taxes, which the IRS denied. The Arensmeyers filed suit, and the government moved for judgment on the pleadings.

Law and regulations: Secs. 3101 and 3111 impose Federal Insurance Contributions Act taxes on wages, which are defined in Sec. 3121(a) as all remuneration for employment unless specifically excluded. Sec. 3121(b)(8)(A) specifies that employment for this purpose does not include “service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order.”

However, remuneration for such services is generally self-employment income. Sec. 1402(c)(4) excludes from the definition of a trade or business for purposes of self-employment income or net earnings from self-employment services performed by a minister or religious order member, defined identically as in Sec. 3121(b)(8)(A). Flush language of Sec. 1402(c) adds, however, that this exclusion does not apply unless the individual (other than a religious order member who, as such, has taken a vow of poverty) obtains an exemption under Sec. 1402(e).

Sec. 1402(e)(1) allows the minister of a church, member of a religious order, or Christian Science practitioner to file an application with the IRS, in a form and manner specified by regulations, along with a statement certifying under penalty of perjury that the individual is opposed, due to conscience or religious principles, to accepting for services performed as a minister, religious order member, or Christian Science practitioner any public insurance making payments for death, disability, old age, retirement, or medical care (or providing medical care), including Social Security benefits. The individual must also have informed his or her ordaining, commissioning, or licensing body of this opposition.

Sec. 1402(e)(2) further requires the IRS to approve the application after verifying that the individual seeks the exemption and is aware of its grounds. Secs. 1402(e)(3) and (4) specify that the application is due on or before the due date (including extension) of the return for the second tax year for which the individual has $400 or more of net earnings from self-employment from performing services as a minister, religious order member, or Christian Science practitioner and is effective for the first such tax year and all succeeding years.

Issues: The Arensmeyers claimed that because they were entitled to an exemption from Social Security taxes under Sec. 1402(c)(4), Sec. 1402(e) did not apply to them. The government argued that the taxpayers did not comply with the statutory requirements for the exemption, which included Sec. 1402(e).

Holding: The court reviewed the requirements under Secs. 1402(c)(4) and (e), as well as Regs. Sec. 1.1402(e)-2A, which requires the application for exemption and statement to be made on Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners.

The court denied the taxpayers’ argument that they needed to comply only with Sec. 1402(c)(4), noting that their complaint did not allege that Keith Arensmeyer took a vow of poverty. That they had sought (and were denied) leave to amend their complaint to plead that he did take such a vow was futile, the court said, because they did not assert that argument before the IRS.

The taxpayers’ incorrect reading of Sec. 1402(c), the court stated, along with their admission that they did not file an application for exemption under Sec. 1402(e), required it to find that the taxpayers were not entitled to relief and to grant the government’s motion for judgment.

• Arensmeyer, No. 21-154T (Fed. Cl. 7/7/21)

— By Paul Bonner, a JofA senior editor.