Court Rejects Illinois Unemployment Tax on Religious Ministry

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An Illinois court ruled recently that the state can’t tax a religious ministry to underprivileged children. The Illinois Department of Employment Security had attempted to assess unemployment compensation taxes to By the Hand Club For Kids, a ministry of The Moody Church, reversing the Department’s previous determinations that By the Hand was nontaxable since its creation in 2001. The Department had previously allowed such exemption to By The Hand, as required by Illinois state law, based on the Church’s control of the organization and By the Hand’s primarily religious purposes in helping children. Beginning in 2015, however, the Department changed course and instead contended that By The Hand was a “covered” employer and therefore owed unemployment taxes.  

By the Hand challenged the Department’s attempts to impose tax liability. Through protests, hearings, and appeals, By The Hand relied on its strongly religious nature and evangelistic operations to contend that the Department’s original acceptance of By The Hand’s religious exemption should remain in effect. Wagenmaker & Oberly was privileged to represent By The Hand through this legal journey, with the capable assistance from Alliance Defending Freedom as co-counsel.  

On appeal to the Circuit Court of Cook County, Judge McGing ruled decisively in By The Hand’s favor, recognizing from the outset that By The Hand’s primary focus is “to evangelize impoverished Chicago schoolchildren.” As the Court noted, “context is important” when it comes to matters of religious tax exemption. Performing charitable activities thus may constitute religious practices, along with overtly religious activities such as chapel services, Bible studies, discipleship, prayer, and worship. Significantly, in its evaluation of the whether the organization’s purposes were sufficiently religious for the exemption, the court emphasized the rule of law that requires government to accept a ministry organization’s own good faith characterization of its religious purposes. The court wrote:

More important than the motives inferred by this court, however, are the facts that (i) Plaintiff characterizes these superficially secular activities as a part of its religious practice, and (ii) nothing on the record indicates that Plaintiff made this characterization in bad faith. Therefore, the inquiry need not go further. Cavalry Baptist Church of Tilton v. Dep 't of Revenue, 349 Ill. App. 3d 325, 331 (4th Dist. 2004).

For further information about the By The Hand tax ruling, please see this recent press release.