David James Templeton and Rachel Templeton, Appellants, v. Commissioner of Internal Revenue, Appellee, 719 F.2d 1408 (7th Cir. 1983)

The appellants David and Rachel Templeton appeal the tax court's affirmance of a $227.24 deficiency assessment for unpaid self-employment taxes in 1977. On appeal, they essentially raise two issues: (1) whether they qualify for an exemption from self-employment tax under 26 U.S.C. §§ 1402(e) & (g), Internal Revenue Code; and, if not (2) whether those sections are unconstitutional. We find the appellants' arguments to be without merit and affirm the decision of the tax court.

On December 31, 1976, the Templetons filed Internal Revenue Service Form 4029 ("Application for Exemption From Tax on Self-Employment Income and Waiver of Benefits") and Form 4361 ("Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners"). The IRS returned both forms to the taxpayers on February 22, 1977, because neither form had been properly completed as filed. Form 4029 had been altered by deleting the words "member of" from the printed phrase "I certify that I am and continuously have been a member of __________ (name of religious group), ...." Form 4361 was incomplete in that it: (1) failed to designate the qualifying category under Sec. 1402(e)¹ , i.e., the Templetons failed or refused to check the appropriate box to indicate whether they were ordained ministers, priests, rabbis; members of a religious order; commissioned or licensed ministers; or Christian Science practitioners; (2) failed to state the date on which they were ordained or licensed; (3) failed to name the denomination or religious order to which they belonged; and (4) failed to set forth the first two calendar years following 1954 in which they had self-employment income of $400.00 or more some part of which was for services as a minister, priest, rabbi, etc. The IRS also informed the Templetons that they would have to file separate forms if they both wished to be considered for exemption.

A week later, on March 1, 1977, Mr. Templeton submitted a revised set of Forms 4029 and 4361. This time Form 4029 was modified to delete the words "private or" from the printed phrase "I am conscientiously opposed to accepting benefits of any private or public insurance which makes payments in the event of death, disability, old-age or retirement ...." In addition, Form 4361 again failed to state the first two years after 1954 in which Mr. Templeton had self-employment earnings equal to or exceeding $400.00. This revised Form 4361 did, however, report that Mr. Templeton was ordained or licensed in 1940, and was a member of the denomination or religious order of "Bible Believing Christian [s]." On March 21, 1977, the IRS notified Mr. Templeton that both applications for exemption from self-employment tax had been rejected. The 4029 application was rejected because it failed to meet the requirements of Sec. 1402(h) (now Sec. 1402(g)) because the form had been modified. The 4361 application was rejected because it was not timely filed.

On June 29, 1977, Mr. and Mrs. Templeton jointly submitted a third 4029 application. This time the taxpayers altered the form by striking the words "application for" and inserting therein the words "notice of." As in the March 1, 1977, application, the words "private or" were deleted. In this latter application, however, the word "taxpayer" was also stricken from the printed phrase "name of taxpayer." On August 4, 1977, the IRS notified the Templetons that it would not process this renewed application because it had previously received a Form 4029 application, which had been disapproved because the form had been modified.

During 1977, the Templetons received net self-employment income of $2,876.42 which they reported on their 1977 tax return. They did not, however, pay any self-employment tax on this amount. The Commissioner of the IRS sent the Templetons a statutory notice of deficiency in the amount of $227.24. The taxpayers unsuccessfully sought a redetermination of that assessment in federal tax court. From the tax court's decision the taxpayers appeal.

The first issue is whether the trial court erred in holding that the Templetons failed to qualify for an exemption under either Secs. 1402(e)²  or (g)³ . It is well established that exemptions and deductions are not matters of right but rather are granted by "legislative grace; and only as there is clear provision therefor can any particular deduction be allowed." New Colonial Co. v. Helvering, 292 U.S. 435, 440, 54 S. Ct. 788, 790, 78 L. Ed. 1348 (1934). See also Kirk v. C.I.R., 425 F.2d 492, 494 (D.C. Cir.), cert. denied, 400 U.S. 853, 91 S. Ct. 53, 27 L. Ed. 2d 91 (1970). The taxpayer has the burden of proving that he qualifies for an exemption from taxation under the Internal Revenue Code. See Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S. Ct. 8, 9, 78 L. Ed. 212 (1933); New Colonial Co., 292 U.S. at 440, 54 S. Ct. at 790 (1934); and Potts, Davis & Company v. C.I.R., 431 F.2d 1222, 1224 (9th Cir. 1970). "This burden on the taxpayer is accompanied by the presumption that the determinations of the Commissioner are correct." Potts, 431 F.2d at 1224 (footnote omitted); Welch, 290 U.S. at 115, 54 S. Ct. at 9. An examination of the record in light of the requirements of Secs. 1402(e) and (g) clearly demonstrates that the Templetons failed to establish that they qualify for an exemption under either provision.

Section 1402(e) only exempts self-employment income from tax "imposed by this chapter with respect to services performed by him [the taxpayer] as such minister, member, or practitioner." Thus, only that portion of self-employment income received for services performed as a minister, etc., is exempt under Sec. 1402(e). The Templetons have not demonstrated that the self-employment income in question, some $2,876.42, was in fact income received exclusively from the performance of pastoral services. The stipulation of evidence provided to the tax court established that the self-employment income in question consisted of $5,113.08 obtained from the operation of "The Sewing Center", a loss of $2,509.66 from "Temple Enterprises" and $273.00 in income from "Carnegie International Corp." The record is devoid of evidence demonstrating that any of the $2,876.42 in self-employment income was derived from the practice of a religious ministry. Therefore, we hold that the Templetons fail to qualify for an exemption under Sec. 1402(e).

The result is the same under Sec. 1402(g). That section provides an exemption only if the:

"Secretary of Health, Education, and Welfare finds that ... it is the practice, and has been for a period of time which he deems to be substantial, for members of such sect or division thereof to make provision for their dependent members which in his judgment is reasonable in view of their general level of living ...."

The taxpayers have failed to furnish any evidence (detailed or otherwise) establishing that their church, "Bible Believing Christians," actually makes provisions for its dependent members, i.e., they have failed to provide any specific information regarding the facilities and benefits provided by their church on behalf of its dependent members. Absent such documented information in the record, the taxpayers have not sustained their burden of proving that they qualified for an exemption under Sec. 1402(g).⁴  See Jackson v. Commissioner, 39 T.C.M. 805 (1979); and Henson v. Commissioner, 66 T.C. 835 (1976).

The taxpayers next contend that Secs. 1402(e) and (g) violate both the Establishment and the Free Exercise Clauses of the First Amendment. We do not pass on the merits of these claims because we hold that the Templetons are without standing to assert them. If we found that Secs. 1402(e) and (g) violated the First Amendment, those exemptions would be entirely void. The Templetons, however, seek to be excluded from self-employment tax under those sections. Obviously, this court is without the authority to grant the remedy they seek since those exemptions would no longer be valid if they violated the First Amendment. As the Supreme Court stated in Valley Forge College v. Americans United, 454 U.S. 464, 102 S. Ct. 752, 70 L. Ed. 2d 700 (1982), "at an irreducible minimum, Art. III requires the party who invokes the court's authority to [show that his] injury ... 'is likely to be redressed by a favorable decision,' Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 38, 41, 96 S. Ct. 1917, 1924, 1925, 48 L. Ed. 2d 450 (1976)." Valley Forge, 454 U.S. at 472, 102 S. Ct. at 758 (footnote omitted). Because the Templetons cannot fall within the exemptions provided in Secs. 1402(e) and (g) if those sections are held unconstitutional under the First Amendment, the Templetons alleged injury cannot be redressed by a favorable decision and they therefore lack standing to assert these claims. Accord Ward v. C.I.R., 608 F.2d 599 (5th Cir. 1979), cert. denied, 446 U.S. 918, 100 S. Ct. 1851, 64 L. Ed. 2d 272 (1980).⁵ 

Finally, the Templetons argue that Secs. 1402(e) and (g) violate the Equal Protection Clause of the Fourteenth Amendment. Although by its terms the Fourteenth Amendment only applies to state, and not to federal, action, our circuit has held that the Equal Protection Clause of the Fourteenth Amendment is incorporated in the Due Process Clause of the Fifth Amendment and therefore is applicable to federal action. See United States v. Falk, 479 F.2d 616, 618 (7th Cir. 1973).

Based on our research, the Supreme Court has never had an occasion to pass on the constitutionality of the questioned sections under the Fifth Amendment Due Process Clause. It has, however, discussed the taxing power of state and federal governments under the Due Process and Equal Protection Clause of the Fourteenth Amendment and the Due Process Clause of the Fifth Amendment. In Carmichael v. Southern Coal Co., 301 U.S. 495, 57 S. Ct. 868, 81 L. Ed. 1245 (1937), the Supreme Court undertook a review of Alabama's Unemployment Compensation Act in light of the Fourteenth Amendment. With regard to a state's general taxing power the Court held:

"First. Validity of the Tax Qua Tax. It is inherent in the exercise of the power to tax that a state be free to select the subjects of taxation and to grant exemptions. Neither due process nor equal protection imposes upon a state any rigid rule of equality of taxation. See Bell's Gap R. Co. v. Pennsylvania, 134 U.S. 232, 237 [10 S. Ct. 533, 535, 33 L. Ed. 892]; Lawrence v. State Tax Comm'n, 286 U.S. 276, 284 [52 S. Ct. 556, 558, 76 L. Ed. 1102]. This Court has repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption, infringe no constitutional limitation.

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"Like considerations govern exemptions from the operation of a tax imposed on the members of a class. A legislature is not bound to tax every member of a class or none. It may make distinctions of degree having a rational basis, and when subject to judicial scrutiny they must be presumed to rest on that basis if there is any conceivable state of facts which would support it."

Carmichael, 301 U.S. at 509, 57 S. Ct. at 872 (emphasis original). In Steward Machine Co. v. Davis, 301 U.S. 548, 57 S. Ct. 883, 81 L. Ed. 1279 (1937) the Supreme Court discussed the validity of the tax imposed upon the employer by Title IX of the Social Security Act of August 14, 1935. With regard to the Fifth Amendment, the Court stated:

"The Fifth Amendment unlike the Fourteenth has no equal protection clause.... But even the states, though subject to such a clause, are not confined to a formula of rigid uniformity in framing measures of taxation.... They may tax some kinds of property at one rate, and others at another, and exempt others altogether.... They may lay an excise on the operations of a particular kind of business, and exempt some other kind of business closely akin thereto.... If this latitude of judgment is lawful for the states, it is lawful, a fortiori, in legislation by the Congress, which is subject to restraints less narrow and confining."

Steward Machine Co., 301 U.S. at 584, 57 S. Ct. at 889 (citations omitted). Thus, as Carmichael points out, if a taxing statute makes distinctions having a "rational basis," and thus is not arbitrary, it does not run afoul of the Fifth Amendment.

Upon examination, we find that neither Sec. 1402(g) nor Sec. 1402(e) violates the Fifth Amendment since both exemptions are rationally based and therefore do not arbitrarily discriminate against the Templetons. The House Report on Sec. 1402(g) demonstrates Congress's intent to accommodate those individuals who sincerely believe that receipt of Social Security benefits would be irreconcilable with their religious convictions. However, the exemption was narrowly drawn because of the fear that a broadly written exemption could conceivably undermine the soundness of the Social Security program. See H.Rep. No. 213, 89th Cong., 1st Sess. 101 (1965-2 C.B. 739-40). Congress was also concerned with insuring the well-being of those individuals seeking the exemption as it included a provision that the exemption would not be granted absent a showing that the church, with which the individual was affiliated, made reasonable provisions for its dependent members. Thus, we hold that Sec. 1402(g) does not arbitrarily discriminate against the Templetons. On the contrary, its requirements are rationally based and therefore Sec. 1402(g) does not violate the Fifth Amendment. Accord Ward v. C.I.R., 608 F.2d 599, 602 (5th Cir. 1979), cert. denied, 446 U.S. 918, 100 S. Ct. 1851, 64 L. Ed. 2d 272 (1980).

Section 1402(e) was likewise very narrowly drafted to exempt only that self-employment income obtained by a minister, priest, etc., through the exercise of his or her ministry. The justification for this exemption was Congress's recognition of church officials' fear that their participation as employers in the old age and survivors' insurance program "might interfere with the well-established principle of separation of church and state." See S.Rep. No. 1987, 83d Cong., 2d Sess., 1954 U.S.Code Cong. & Admin.News 1954, p. 3710 (1954-2 C.B. 695, 701). A tax based on compensation paid to a minister by his church or parish might defeat Congress's objective of accommodating this concern. Thus, there is also a rational basis for Congress's narrow delineation of this exemption and we therefore hold that Sec. 1402(e) also does not violate the Fifth Amendment Due Process Clause. See also Seward v. United States, 515 F. Supp. 505 (D. Md. 1981); and Henson v. Commissioner, 66 T.C. 835 (1976).

For the foregoing reasons, the decision of the tax court is AFFIRMED.

ESCHBACH, Circuit Judge, concurring.

As I read the Templetons' pro se brief, I believe that they contend that the Free Exercise Clause of the First Amendment creates a constitutionally required exemption from social security taxes for those religiously opposed to public-funded social insurance. They have standing to make this argument because if they are correct, then they do not owe a $227 deficiency. I would thus reach the merits of the claim and reject it in light of United States v. Lee, 455 U.S. 252, 102 S. Ct. 1051, 71 L. Ed. 2d 127 (1982), which held that the Free Exercise Clause does not relieve taxpayers such as the Templetons from their obligations to pay social security taxes.