The Indianapolis Baptist Church was an independent church founded in 1950 and incorporated as a nonprofit. In 1983 the church membership decided to manage the church as an unincorporated religious society called Indianapolis Baptist Temple. Later in May 1987 the church transferred all of its assets to Pastor Greg Dixon as trustee. The church stopped paying employment taxes for it’s employees in 1987.
In 1994 the IRS made an assessment of almost 3.5 million dollars against the church for unpaid income taxes and employment taxes for tax years 1987 to 1992.
Churches are income tax-exempt. However, if churches have employees they are required by federal law to withhold income tax from their employees’ payroll and to pay Medicare and Social Security taxes for their employees. Employment reporting is separate and distinct from income reporting. They are not the same thing. This church refused to withhold taxes and Social Security payments from employees’ paychecks. The loss of tax-exempt status for the Indianapolis Baptist Temple was a specific case involving the church’s refusal to comply with employment tax laws and the subsequent legal actions taken by the IRS.
In summary, the Indianapolis Baptist Temple’s issues with the IRS had nothing to do with Section 508(C)(1)(A) or recognition as a church. The issue was related to its noncompliance with employment tax laws.
If a church hires employees it has to pay employment taxes.
See Indianapolis Baptist Temple v. United States, 224 F.3d 627 (7th Cir. 2000).