D.C. Circuit: IRS’s denial of tax-exempt status upheld
Taxpayer did not have standing to challenge the IRS’s denial of tax-exempt status
Taxpayer did not have standing to challenge the IRS’s denial of tax-exempt status
The U.S. Court of Appeals for the District of Columbia Circuit recently affirmed a decision of the D.C. District Court upholding the IRS’s denial of the taxpayer’s application for tax-exemption under section 501(c)(3) and holding that the taxpayer did not have standing to challenge the IRS’s denial of tax-exempt status on the grounds that it unfairly burdened their religious practices in violation of the Religious Freedom Restoration Act (RFRA).
The case is: Iowaska Church of Healing v. Commissioner, No. 23-5122 (D.C. Cir. June 21, 2024). Read the D.C. Circuit’s decision
Summary
The taxpayer, a church that uses Ayahuasca—a tea containing the hallucinogenic DMT regulated by the Drug Enforcement Administration (DEA) under the Controlled Substances Act (CSA)—in its religious ceremonies, argued that the IRS's decision to deny its application for tax-exemption under section 501(c)(3) was based on an incorrect assumption that their religious use of Ayahuasca was illegal. The taxpayer also argued that the denial of tax-exempt status unfairly burdened their religious practices in violation of the RFRA. The district court upheld the IRS’s denial, and the taxpayer appealed.
The D.C. Circuit affirmed the district court's upholding of the IRS’s denial of the taxpayer’s tax-exemption claim, agreeing that the taxpayer did not meet the requirements set forth under section 501(c)(3). The IRS had determined that the taxpayer’s primary activities, including the distribution and consumption of Ayahuasca, were illegal under federal law since the taxpayer had not secured a CSA exemption from the DEA. The D.C. Circuit noted that without this exemption, the activities involving Ayahuasca could not be considered in furtherance of an exempt purpose, thus failing the operational test required for tax-exempt status.
The D.C. Circuit also held that the taxpayer lacked standing to pursue its RFRA claim because it could not demonstrate that the IRS's actions had directly caused them injury that a favorable court decision could redress. Specifically, the cessation of their Ayahuasca ceremonies was due to the lack of a DEA exemption to legally use DMT, not the IRS’s denial of tax-exempt status. Consequently, the court dismissed the taxpayer's RFRA claim without prejudice.
For more information, contact your usual KPMG tax professional or one of the following Washington National Tax professionals:
Ruth Madrigal | ruthmadrigal@kpmg.com
Preston Quesenberry | pquesenberry@kpmg.com
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