Ayahuasca Church’s Tax-Exempt Status Denial Appeal Should Not Be Reheard, IRS Tells Court

A federal appellate court correctly affirmed the district court’s decision to deny tax-exempt status to an Iowa-based religious entity for using in its ceremonies a controlled hallucinogenic substance without prior approval, the IRS said in a reply brief.

Background.

Iowaska Church of Healing’s doctrine includes the incorporation of Ayahuasca tea in its services. Ayahuasca is regulated by the federal government under the Controlled Substances Act (CSA) because it contains the hallucinogen dimethyltryptamine, or DMT. On its website, the organization claims Ayahuasca is “safe” for “anyone seeking help” and stands by its core belief in the “incredibly healing properties” of the plant.

Generally, a religious organization can obtain an exemption from the Drug Enforcement Agency (DEA) to possess and distribute controlled substances. But Iowaska applied for tax-exempt status under Code Sec. 501(c)(3) in January of 2019 without first receiving a CSA exemption, which it sought afterwards but did not receive a determination from the DEA. Iowaska continued to distribute Ayahuasca during multiple ceremonies that summer before voluntarily suspending future ceremonies for fear of prosecution.

Since Iowaska lacked the proper exemption, the IRS concluded the organization did not exist for exclusively tax-exempt purposes because its activities were illegal and denied the status application after a series of information requests. Iowaska sued the agency in the U.S. District Court for the District of Columbia, kickstarting what would become a five-year legal battle.

The self-proclaimed church in its arguments before the court said the IRS incorrectly assumed its use of Ayahuasca was illegal. Further, Iowaska maintained a Religious Freedom Restoration Act (RFRA) claim for injuries to its reputation and ability to conduct charitable activities, on top of economic harm in the form of lost income and profits. Without Ayahuasca, the church earned no income from membership or contributions. But the district court was unconvinced and ruled in favor of the IRS’ decision, prompting Iowaska to appeal.

Ultimately, the IRS prevailed again in June when the District of Columbia Circuit Court of Appeals held that the church lacked standing to make its RFRA claim, which also doomed its tax-exempt status claim.

“The Church’s primary organizational and operational purpose — Ayahuasca use and ceremony — is illegal on its face without a CSA exemption and the Church did not prove otherwise to either the IRS or the District Court,” the circuit court said in its opinion (133 AFTR 2d 2024-1865). That is the reason the IRS “asked the Church about the status of its CSA exemption several times while considering the Church’s application” before denying the application.

Rehearing.

On August 5, Iowaska decided to continue litigation and filed a petition for a panel rehearing and rehearing en banc with the D.C. Circuit, but the IRS’ response on October 11 said a hearing is not necessary.

According to the IRS’ reply, Congress “has not authorized the IRS to make exceptions to the CSA when determining an organization’s qualification for tax-exempt status” and the IRS does not administer the CSA. Only the Attorney General and the DEA by delegation can make such exceptions, or a federal court. Iowaska has no exemption from either.

Noting that Iowaska voluntarily ceased its Ayahuasca ceremonies “two years before” the IRS denied its tax-exempt status application, the agency said the church hadn’t expressed to the district court throughout proceedings that its primary injury underlying its RFRA claim was its denied application. (emphasis in original)

“In its rehearing petition (and before the panel), however, Iowaska advances a new theory of standing not pressed or passed upon in the District Court …” the IRS filing continued. “With its injury theory thus reframed, Iowaska argues that the panel’s ruling on standing is erroneous, and conflicts with decisions of other courts of appeals in non-RFRA cases, because Iowaska’s RFRA claim alleges the exact same injury and seeks the exact same relief as its § 501(c)(3) claim and must therefore also satisfy standing.”

The case is Iowaska Church of Healing v. Werfel.