Minister’s Housing Allowance Survives Challenge

Posted on by Thomas Schetelich in Church Law, Tax Matters.

In a big win for churches and other religious organizations, the United States Court of Appeals for the Seventh Circuit has reversed a District Court decision which had declared the Minister’s Housing Allowance to be unconstitutional. The decision (issued on November 13, 2014) preserves the annual $700 million tax break given to religious organizations and their ministers.

The case is Freedom from Religion Foundation, Inc. v. Lew, which arose on appeal from the United States District Court for the Western District of Wisconsin. At issue is Section 107(2) of the Internal Revenue Code, which states that for a “minister of the gospel” the income received as a housing allowance is exempt from federal income tax, to the extent used to provide a home, including furnishings and utilities. For many pastors, the housing allowance is half of their income. In 1966, the Tax Court of the United States interpreted the exemption to reach “the equivalent of ministers in other religions” and it has since been applied to clergy of all faiths.

The statute dates back to 1921. Churches have historically received tax exemptions for their real property. Until the 20th century, most pastors lived in a parsonage provided by the church. Housing was a traditional form of non-cash payment. In 1921 (in the early days of the income tax) Congress exempted the rental value of the parsonage from the gross income of clergy for tax purposes.

By the mid-20th century, most pastors and ministers lived in their private houses, and so in 1954 Congress expanded the tax exemption to cover that portion of their income used for housing. The purpose of the statute was to give pastors living off church property the same benefit as those living in a parsonage. The legislative history of the bill reveals a secondary purpose of the statute, which was to show the American government’s full support for religious institutions in the face of the Soviet Union’s loud pronouncements of atheism (1954 was also the year that the words “under God” were added to the Pledge of Allegiance).

The Freedom from Religion Foundation (“FFRF”) is recognized by the IRS as a charitable educational organization, whose members are mostly atheists, and is itself a member of the Atheist Alliance International. Its stated purpose includes challenges to what it believes to be violations of the First Amendment prohibition of government establishment of religion. High on its target list is the favored status that religious institutions have under the tax code.

The Freedom from Religion Foundation set up its legal challenge by voting a housing allowance to two of its officers of $15,000. The Foundation then sued in the United States District Court for the Western District of Wisconsin because the housing allowance is not tax exempt for its officers, while housing allowances for church officers are exempt. The case was heard by Judge Barbara Crabb, the same Federal judge who in 2010 (and in another case brought by the FFRF) declared the National Day of Prayer unconstitutional, and was reversed by the Seventh Circuit Court of Appeals.

Judge Crabb declared the tax exemption for the housing allowance unconstitutional in that it favors religious organizations over secular non-profit organizations. Her decision relied primarily on the Supreme Court’s 1989 ruling in the case Texas Monthly, Inc. v. Bullock, where religious books were exempted from State sales taxes. The Supreme Court had said that every tax exemption constitutes a subsidy that affects nonqualifying taxpayers, forcing them to become indirect and vicarious donors. In the words of Justice William Douglas in another case: one of the best ways to “establish” one or more religions is to subsidize them, which a tax exemption does.

The Government appealed Judge Crabb’s decision to the Seventh Circuit, which has now reversed and ordered the case to be dismissed. It did so without consideration or discussion of whether the Minister’s Housing Allowance violates the Constitution; but rather on the grounds that the FFRF did not have standing to bring the suit and challenge the law.

“Standing” is a perquisite to a constitutional challenge of any statute. To establish standing (as explained by the Seventh Circuit), a plaintiff must show that he or she has suffered “a concrete and particularized injury in fact” that is traceable to the challenged statute. In other words, the courts will not hear a constitutional challenge “based solely on being offended by the government’s alleged violation of the Establishment Clause.

The FFRF thought that it had standing because its officers had received a housing allowance, but had not received the favored tax treatment. The Seventh Circuit disagreed because neither of the individuals who received the housing allowance had sought to exclude the income on their tax returns, and neither had filed a claim for a refund after payment: “the plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance…”

The FFRF argued that it was absurd to think that their officers could possibly have received the exemption, as it would have to be determined that officers of an atheist organization are “ministers of the gospel” under Section 107(2) of the Internal Revenue Code. The Court agreed that it was “unlikely” that they would be allowed the exemption, but still it was “important to allow the IRS and the Tax Court to interpret the boundaries of a tax provision before we assess its constitutionality.”

This decision leaves the housing exemption valid for the immediate future, and there is no need for any church or ministry to change how or what it pays to its ministers.

The Court has not given any indication of whether the exemption would be constitutional if a valid challenge is raised. The Government argued in its brief that the exemption is constitutional as part of a benefit historically given to religious and secular employees by not taxing housing provided by an employer. Eight different organizations filed Amicus Briefs (unsolicited briefs written by non-parties to assist the Court) setting out a variety of arguments supporting the tax law – some noting that a pastor’s compensation is a strange hybrid of employment income (for income tax purposes) and self-employment income (for social security purposes), and the housing allowance is part of a whole tax structure that impacts a unique group in American society.

It is unlikely that the Supreme Court will take up the issue, or that Congress will make changes to the statute. But it is also unlikely that the issue will go away. The FFRF has quickly issued a statement calling the Seventh Circuit “timid” and stating its intention to challenge what it calls “this indefensible favoritism for religion in other forums until the issue cannot be circumvented.” It appears that the FFRF will again declare a housing allowance for its officers, have them claim the exemption from income, and (if denied) renew the challenge.

At stake is more than $700 million a year that will be taken from church and ministry budgets for the payment of taxes now saved through the housing allowance. Further, if it is indeed “the establishment of religion” to give a tax exemption to religious organizations not given to secular non-profit groups, then the exemption from local property taxes given to churches could be the next challenge. Expect to see a new constitutional challenge filed in 2015.