Bloomberg Bloomberg
Comprehensive Tax Research. Practitioner to Practitioner. ®

Internal Revenue Code, § 3127. Exemption For Employers And Their Employees Where Both Are Members Of Religious Faiths Opposed To Participation In Social Security Act Programs

I.R.C. § 3127(a) In General
Notwithstanding any other provision of this chapter (and under regulations prescribed to carry out this section), in any case where—
I.R.C. § 3127(a)(1)
an employer (or, if the employer is a partnership, each partner therein) is a member of a recognized religious sect or division thereof described in section 1402(g)(1) and an adherent of established tenets or teachings of such sect or division as described in such section, and has filed and had approved under subsection (b) an application (in such form and manner, and with such official, as may be prescribed by such regulations) for an exemption from the taxes imposed by section 3111, and
I.R.C. § 3127(a)(2)
an employee of such employer who is also a member of such a religious sect or division and an adherent of its established tenets or teachings has filed and had approved under subsection (b) an identical application for exemption from the taxes imposed by section 3101,
such employer shall be exempt from the taxes imposed by section 3111 with respect to wages paid to each of the employees thereof who meets the requirements of paragraph (2) and each such employee shall be exempt from the taxes imposed by section 3101 with respect to such wages paid to him by such employer.
I.R.C. § 3127(b) Approval Of Application
An application for exemption filed by an employer (or a partner) under subsection (a)(1) or by an employee under subsection (a)(2) shall be approved only if—
I.R.C. § 3127(b)(1)
such application contains or is accompanied by the evidence described in section 1402(g)(1)(A) and a waiver described in section 1402(g)(1)(B),
I.R.C. § 3127(b)(2)
the Commissioner of Social Security makes the findings (with respect to such sect or division) described in section 1402(g)(1)(C), (D), and (E), and
I.R.C. § 3127(b)(3)
no benefit or other payment referred to in section 1402(g)(1)(B) became payable (or, but for section 203 of the Social Security Act, would have become payable) to the individual filing the application at or before the time of such filing.
I.R.C. § 3127(c) Effective Period Of Exemption
An exemption granted under this section to any employer with respect to wages paid to any of the employees thereof, or granted to any such employee, shall apply with respect to wages paid by such employer during the period—
I.R.C. § 3127(c)(1)
commencing with the first day of the first calendar quarter, after the quarter in which such application is filed, throughout which such employer (or, if the employer is a partnership, each partner therein) or employee meets the applicable requirements specified in subsections (a) and (b), and
I.R.C. § 3127(c)(2)
ending with the last day of the calendar quarter preceding the first calendar quarter thereafter in which (A) such employer (or, if the employer is a partnership, any partner therein) or the employee involved does not meet the applicable requirements of subsection (a), or (B) the sect or division thereof of which such employer (or, if the employer is a partnership, any partner therein) or employee is a member is found by the Commissioner of Social Security to have ceased to meet the requirements of subsection (b)(2).
(Added Pub. L. 100-647, title VIII, Sec. 8007(a)(1), Nov. 10, 1988, 102 Stat. 3781, and amended Pub. L. 101-239, title X, Sec. 10204(b)(1), Dec. 19, 1989, 103 Stat. 2474; Aug. 15, 1994, Pub. L. 103-296, title I, Sec. 108(h)(3); Pub. L. 115-141, Div. U, title IV, Sec. 401(b)(35), Mar. 23, 2018, 132 Stat. 348.)
BACKGROUND NOTES
AMENDMENTS
2018 - Subsec. (b)(3). Pub. L. 115-141, Div. U, Sec. 401(b)(35), amended par. (3) by striking “or 222(b)”.
1994 - Subsec. (b)(2), (c)(2). Pub. L. 103-296, Sec. 108(h)(3), amended this section by striking ‘Secretary of Health and Human Services’ each place it appeared and inserting ‘Commissioner of Social Security’.
1989 - Subsec. (a). Pub. L. 101-239, Sec. 10204(b)(1)(B), substituted ‘the employees thereof’ for ‘his employees’ in concluding provisions.
Subsec. (a)(1). Pub. L. 101-239, Sec. 10204(b)(1)(A), inserted ‘(or, if the employer is a partnership, each partner therein)’ after ‘an employer’.
Subsec. (b). Pub. L. 101-239, Sec. 10204(b)(1)(C), inserted ‘(or a partner)’ after ‘an employer’ in introductory provisions.
Subsec. (c). Pub. L. 101-239, Sec. 10204(b)(1)(D), substituted ‘the employees thereof’ for ‘his employees’ in introductory provisions.
Subsec. (c)(1). Pub. L. 101-239, Sec. 10204(b)(1)(E), inserted ‘(or, if the employer is a partnership, each partner therein)’.
Subsec. (c)(2). Pub. L. 101-239, Sec. 10204(b)(1)(F), substituted ‘such employer (or, if the employer is a partnership, any partner therein) or the employee involved does not meet’ for ‘such employer or the employee involved ceases to meet’ in cl. (A) and inserted ‘(or, if the employer is a partnership, any partner therein)’ after ‘such employer’ in cl. (B).
EFFECTIVE DATE OF 2018 AMENDMENT
Amendment by Pub. L. 115-141, Div. U, Sec. 401(b)(35), effective March 23, 2018.
Sec. 401(e) of Pub. L. 115-141, Div. U, provided the following Savings Provision:
“(e) General Savings Provision With Respect To Deadwood Provisions.—If—
“(1) any provision amended or repealed by the amendments made by subsection (b) or (d) applied to—
“(A) any transaction occurring before the date of the enactment of this Act,
“(B) any property acquired before such date of enactment, or
“(C) any item of income, loss, deduction, or credit taken into account before such date of enactment, and
“(2) the treatment of such transaction, property, or item under such provision would (without regard to the amendments or repeals made by such subsection) affect the liability for tax for periods ending after such date of enactment,
“nothing in the amendments or repeals made by this section shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”
EFFECTIVE DATE OF 1989 AMENDMENT
Section 10204(b)(2) of Pub. L. 101-239 provided that: ‘The amendments made by this subsection (amending this section) shall be effective as if they were included in the amendments made by section 8007(a)(1) of the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3781) (Pub. L. 100-647).'
EFFECTIVE DATE
Section applicable to wages paid after Dec. 31, 1988, see section 8007(d) of Pub. L. 100-647, set out as an Effective Date of 1988 Amendment note under section 1402 of this title.
ROLLOVER OF AMOUNTS RECEIVED IN AIRLINE CARRIER BANKRUPTCY
Section 1106 of Pub. L. 112-95, as amended by Pub. L. 113-243, Sec. 1, provided that:
“(a) GENERAL RULES.—
“(1) ROLLOVER OF AIRLINE PAYMENT AMOUNT.—If a qualified airline employee receives any airline payment amount and transfers any portion of such amount to a traditional IRA within 180 days of receipt of such amount (or, if later, within 180 days of the date of the enactment of this Act), then such amount (to the extent so transferred) shall be treated as a rollover contribution described in section 402(c) of the Internal Revenue Code of 1986. A qualified airline employee making such a transfer may exclude from gross income the amount transferred, in the taxable year in which the airline payment amount was paid to the qualified airline employee by the commercial passenger airline carrier.
“(2) TRANSFER OF AMOUNTS ATTRIBUTABLE TO AIRLINE PAYMENT AMOUNT FOLLOWING ROLLOVER TO ROTH IRA.—A qualified airline employee who has contributed an airline payment amount to a Roth IRA that is treated as a qualified rollover contribution pursuant to section 125 of the Worker, Retiree, and Employer Recovery Act of 2008, may transfer to a traditional IRA, in a trustee-to-trustee transfer, all or any part of the contribution (together with any net income allocable to such contribution), and the transfer to the traditional IRA will be deemed to have been made at the time of the rollover to the Roth IRA, if such transfer is made within 180 days of the date of the enactment of this Act. A qualified airline employee making such a transfer may exclude from gross income the airline payment amount previously rolled over to the Roth IRA, to the extent an amount attributable to the previous rollover was transferred to a traditional IRA, in the taxable year in which the airline payment amount was paid to the qualified airline employee by the commercial passenger airline carrier. No amount so transferred to a traditional IRA may be treated as a qualified rollover contribution with respect to a Roth IRA within the 5-taxable year period beginning with the taxable year in which such transfer was made.
“(3) EXTENSION OF TIME TO FILE CLAIM FOR REFUND.—A qualified airline employee who excludes an amount from gross income in a prior taxable year under paragraph (1) or (2) may reflect such exclusion in a claim for refund filed within the period of limitation under section 6511(a) of such Code (or, if later, April 15, 2015).
“(4) OVERALL LIMITATION ON AMOUNTS TRANSFERRED TO TRADITIONAL IRAS.—
“(A) IN GENERAL.—The aggregate amount of airline payment amounts which may be transferred to 1 or more traditional IRAs under paragraphs (1) and (2) with respect to any qualified employee for any taxable year shall not exceed the excess (if any) of—
“(i) 90 percent of the aggregate airline payment amounts received by the qualified airline employee during the taxable year and all preceding taxable years, over
“(ii) the aggregate amount of such transfers to which paragraphs (1) and (2) applied for all preceding taxable years.
“(B) SPECIAL RULES.—For purposes of applying the limitation under subparagraph (A)—
“(i) any airline payment amount received by the surviving spouse of any qualified employee, and any amount transferred to a traditional IRA by such spouse under subsection (d), shall be treated as an amount received or transferred by the qualified employee, and
“(ii) any amount transferred to a traditional IRA which is attributable to net income described in paragraph (2) shall not be taken into account.
“(5) COVERED EXECUTIVES NOT ELIGIBLE TO MAKE TRANSFERS.—Paragraphs (1) and (2) shall not apply to any transfer by a qualified airline employee (or any transfer authorized under subsection (d) by a surviving spouse of the qualified airline employee) if at any time during the taxable year of the transfer or any preceding taxable year the qualified airline employee held a position described in subparagraph (A) or (B) of section 162(m)(3) with the commercial passenger airline carrier from whom the airline payment amount was received.
“(6) SPECIAL RULE FOR CERTAIN AIRLINE PAYMENT AMOUNTS.—In the case of any amount which became an airline payment amount by reason of the amendments made by section 1(b) of Public Law 113-243 (26 U.S.C. 408 note), paragraph (1) shall be applied by substituting “(or, if later, within the period beginning on December 18, 2014, and ending on the date which is 180 days after the date of enactment of the Protecting Americans from Tax Hikes Act of 2015)” for “(or, if later, within 180 days of the date of the enactment of this Act)”.
“(b) TREATMENT OF AIRLINE PAYMENT AMOUNTS AND TRANSFERS FOR EMPLOYMENT TAXES.—For purposes of chapter 21 of the Internal Revenue Code of 1986 and section 209 of the Social Security Act, an airline payment amount shall not fail to be treated as a payment of wages by the commercial passenger airline carrier to the qualified airline employee in the taxable year of payment because such amount is excluded from the qualified airline employee's gross income under subsection (a).
“(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this section—
“(1) AIRLINE PAYMENT AMOUNT.—
“(A) IN GENERAL.—The term “airline payment amount” means any payment of any money or other property which is payable by a commercial passenger airline carrier to a qualified airline employee—
“(i) under the approval of an order of a Federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, or filed on November 29, 2011, and
“(ii) in respect of the qualified airline employee's interest in a bankruptcy claim against the carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount. The amount of such payment shall be determined without regard to any requirement to deduct and withhold tax from such payment under sections 3102(a) of the Internal Revenue Code of 1986 and 3402(a) of such Code.
“(B) EXCEPTION.—An airline payment amount shall not include any amount payable on the basis of the carrier's future earnings or profits.
“(2) QUALIFIED AIRLINE EMPLOYEE.—The term “qualified airline employee” means an employee or former employee of a commercial passenger airline carrier who was a participant in a defined benefit plan maintained by the carrier which—
“(A) is a plan described in section 401(a) of the Internal Revenue Code of 1986 which includes a trust exempt from tax under section 501(a) of such Code, and
“(B) was terminated, became subject to the restrictions contained in paragraphs (2) and (3) of section 402(b) of the Pension Protection Act of 2006, or was frozen effective November 1, 2012.
“(3) TRADITIONAL IRA.—The term “traditional IRA” means an individual retirement plan (as defined in section 7701(a)(37) of the Internal Revenue Code of 1986) which is not a Roth IRA.
“(4) ROTH IRA.—The term “Roth IRA” has the meaning given such term by section 408A(b) of such Code.
“(d) SURVIVING SPOUSE.—If a qualified airline employee died after receiving an airline payment amount, or if an airline payment amount was paid to the surviving spouse of a qualified airline employee in respect of the qualified airline employee, the surviving spouse of the qualified airline employee may take all actions permitted under section 125 of the Worker, Retiree and Employer Recovery Act of 2008, or under this section, to the same extent that the qualified airline employee could have done had the qualified airline employee survived.
“(e) EFFECTIVE DATE.—This section shall apply to transfers made after the date of the enactment of this Act with respect to airline payment amounts paid before, on, or after such date.”
INCOME AVERAGING FOR AMOUNTS RECEIVED IN CONNECTION WITH THE EXXON VALDEZ LITIGATION
Pub. L. 110-343, Div. C, Sec. 504 provided that:
“(a) Income Averaging of Amounts Received From the Exxon Valdez Litigation.—For purposes of section 1301 of the Internal Revenue Code of 1986—
“(1) any qualified taxpayer who receives any qualified settlement income in any taxable year shall be treated as engaged in a fishing business (determined without regard to the commercial nature of the business), and
“(2) such qualified settlement income shall be treated as income attributable to such a fishing business for such taxable year.
“(b) Contributions of Amounts Received to Retirement Accounts.—
“(1) IN GENERAL.—Any qualified taxpayer who receives qualified settlement income during the taxable year may, at any time before the end of the taxable year in which such income was received, make one or more contributions to an eligible retirement plan of which such qualified taxpayer is a beneficiary in an aggregate amount not to exceed the lesser of—
“(A) $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior taxable years pursuant to this subsection), or
“(B) the amount of qualified settlement income received by the individual during the taxable year.
“(2) TIME WHEN CONTRIBUTIONS DEEMED MADE.—For purposes of paragraph (1), a qualified taxpayer shall be deemed to have made a contribution to an eligible retirement plan on the last day of the taxable year in which such income is received if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).
“(3) TREATMENT OF CONTRIBUTIONS TO ELIGIBLE RETIREMENT PLANS.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to paragraph (1) with respect to qualified settlement income, then—
“(A) except as provided in paragraph (4)—
“(i) to the extent of such contribution, the qualified settlement income shall not be included in taxable income, and
“(ii) for purposes of section 72 of such Code, such contribution shall not be considered to be investment in the contract,
“(B) the qualified taxpayer shall, to the extent of the amount of the contribution, be treated—
“(i) as having received the qualified settlement income—
“(I) in the case of a contribution to an individual retirement plan (as defined under section 7701(a)(37) of such Code), in a distribution described in section 408(d)(3) of such Code, and
“(II) in the case of any other eligible retirement plan, in an eligible rollover distribution (as defined under section 402(f)(2) of such Code), and
“(ii) as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution,
“(C) section 408(d)(3)(B) of the Internal Revenue Code of 1986 shall not apply with respect to amounts treated as a rollover under this paragraph, and
“(D) section 408A(c)(3)(B) of the Internal Revenue Code of 1986 shall not apply with respect to amounts contributed to a Roth IRA (as defined under section 408A(b) of such Code) or a designated Roth contribution to an applicable retirement plan (within the meaning of section 402A of such Code) under this paragraph.
“(4) SPECIAL RULE FOR ROTH IRAS AND ROTH 401(k)s.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to paragraph (1) with respect to qualified settlement income to a Roth IRA (as defined under section 408A(b) of such Code) or as a designated Roth contribution to an applicable retirement plan (within the meaning of section 402A of such Code), then—
“(A) the qualified settlement income shall be includible in taxable income, and
“(B) for purposes of section 72 of such Code, such contribution shall be considered to be investment in the contract.
“(5) ELIGIBLE RETIREMENT PLAN.—For purpose of this subsection, the term “eligible retirement plan” has the meaning given such term under section 402(c)(8)(B) of the Internal Revenue Code of 1986.
“(c) Treatment of Qualified Settlement Income Under Employment Taxes.—
“(1) SECA.—For purposes of chapter 2 of the Internal Revenue Code of 1986 and section 211 of the Social Security Act, no portion of qualified settlement income received by a qualified taxpayer shall be treated as self-employment income.
“(2) FICA.—For purposes of chapter 21 of the Internal Revenue Code of 1986 and section 209 of the Social Security Act, no portion of qualified settlement income received by a qualified taxpayer shall be treated as wages.
“(d) Qualified Taxpayer.—For purposes of this section, the term “qualified taxpayer” means—
“(1) any individual who is a plaintiff in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska); or
“(2) any individual who is a beneficiary of the estate of such a plaintiff who-
“(A) acquired the right to receive qualified settlement income from that plaintiff; and
“(B) was the spouse or an immediate relative of that plaintiff.
“(e) Qualified Settlement Income.—For purposes of this section, the term “qualified settlement income” means any interest and punitive damage awards which are—
“(1) otherwise includible in taxable income, and
“(2) received (whether as lump sums or periodic payments) in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska) (whether pre- or post-judgment and whether related to a settlement or judgment).”
PRIOR PROVISIONS
A prior section 3127 was renumbered section 3128.