Some promoters have reportedly claimed that individuals may avoid income taxes without changing their life styles in any manner by using a kit available at a substantial price to form and utilize a “family religious order,” i.e., a religious order consisting of an individual and his immediate family; the individual directs the order as its minister. In accord with a “vow of poverty” the family members assign all their assets, income, and the use of their personal services to the family religious order. In return, the family religious order provides the family members with all their former living expenses, including the rent-free use of their former home and possible “spiritual retreats” to traditional vacation areas. The only creed that members of the religious order must adhere to is the U.S. Constitution; moreover, the members of the order may continue to belong to and exercise the precepts of any traditional religion. The success of this scheme presupposes the validity of three propositions: first, the income payed by third parties for the use of the individual’s services and property will be considered earnings of the religious order rather than the individual; second, the family religious order, a religious organization, is not subject to income taxes; and third, any payments that the religious order makes to its members, particularly its minister, will not be subject to income taxes. Each of these propositions is, to say the least, quite dubious.
Aside from a religious veneer for the purported recipient of the individual's income, family religious orders are very similar to family estate trusts. Individuals also assign all their assets, income and the use of their services to a controlled entity, a trust whose trustees and beneficiaries are the individual and his immediate family. The trust purportedly compensates the individual for the use of his services by permitting him and his family to continue to enjoy their prior life style, but this compensation is a tax-free benefit for the individual and deductible by the trust. Although the Internal Revenue Service (hereinafter designated as the “IRS”) has become so concerned about the tax evasion possibilities of family religious orders, that it recently added an audit procedure for examining returns associated with such organizations, it has not issued a single ruling targeted specifically at family religious orders. By contrast, the IRS has issued numerous rulings targeted at family estate trusts. The IRS has, however, recently issued many rulings to the effect that compensation paid by third parties for the use of services of a member of a religious order, whether or not the order is a family religious order, is usually includable in the member's gross income, if an employer-employee relationship exists between a third party and the member. This policy is contrary to traditional tax principles, and it is causing many members of traditional religious orders, who are assigned to positions outside their order's church, such as military or prison chaplains, to face improper challenges of their tax returns. Moreover, such policies provide IRS examiners with no guidance regarding the treatment of the self-employed who try to evade taxes by means of family religious orders.
"The Taxation of Family Religious Orders,"
University of Dayton Law Review: Vol. 6:
1, Article 4.
Available at: https://ecommons.udayton.edu/udlr/vol6/iss1/4