If you are a minister of the Gospel you most likely have heard of the Parsonage Allowance Exclusion or the tax free housing allowance for clergy under Section 107 of the IRS Code. First enacted in 1921 the Allowance excludes the rental value of a dwelling house furnished to a minister from Federal Income tax. Congress kept the Allowance rules substantially unchanged until amendments were added by Congress in 2002 in response to Rick Warren’s battle with the IRS regarding his Allowance from Saddleback Valley Community Church vs IRS The case worked its way up to the US Court of Appeals for the 9th Circuit. However Rick Warren and the US Government suddenly settled out of court and the case was dismissed. But 10 years later in a surprise move that even caught TaxView off guard last year, one provision of the Allowance, 107(2), was ruled unconstitutional by Judge Barbara Crabb on November 21, 2013 in Freedom From Religion v Lew US District Court Wisconsin. In response to Judge Crabb’s ruling, the US Government appealed to the 7th Circuit arguing that the Allowance does not endorse a religious message but merely adapts the IRS Code’s general exemptions for certain types of employer-provided housing to the unique context of a church and its minister. TaxView asks why the Parsonage Allowance is being challenged for the first time in almost 100 years. Stay with us on TaxView for the answer.
Let’s first look at what Section 107 is all about. Simply stated if you are a preacher you get to exclude from your income the fair rental value of the home or what the church pays you for the home, whichever is less. Section 107(1) excludes the value of your housing provided by the Church. Section 107(2) excludes direct cash compensation paid to the preacher for housing that the preacher pays for. Further regulations added requirements that the Allowance be officially approved by the Vestry or similar church Board. See IRS Ministers’ Compensation and IRS topic 417. Various tax court rulings, including US Tax Court Driscoll v IRS imply that Congress had viewed the the relationship between a Church and its ministers in a similar manner as they viewed the relationship between an Employer and its Employees. Congress reasons that if Employees were exempted on housing provided for the convenience of their employer, then why not have the Clergy exempt on similar housing allowance income when they would travel to a new Church to preach the Gospel. Interestingly, while the US Tax Court has ruled for or against the clergy over the years for abuse of the Exclusion, the Court has never before challenged Section 107 on Constitutional grounds, that is until now.
So why now after 100 years was the Parsonage Allowance Section 107(2) ruled unconstitutional by Judge Crabb? How did FFRF manage to persuade the Wisconsin Federal Courts to strike down Section 107(2)? As I see it, the whole of FFRF’s argument revolved around one Supreme Court case Texas Monthly. As you read Judge Crabb’s opinion see if you can spot the 1989 Supreme Court ruling in Texas Monthly. Justice Brennan joined by Marshall and Stevens held that a Texas law that gave tax free status to religions publications was unconstitutional. Justice Brennan concludes “In this case, by confining the tax exemption exclusively to the sale of religious publications, Texas engaged in preferential support for the communication of religious messages.” However Justice Scalia in his dissent joined by Justice Kennedy noted that for “over half a century the federal Internal Revenue Code has allowed “minister[s] of the gospel” (a term interpreted broadly enough to include cantors and rabbis) to exclude from gross income the rental value of their parsonages. In short, religious tax exemptions of the type the Court invalidates today permeate the state and federal codes, and have done so for many years. Justice Brennan shot back, however, that the “fact that such exemptions are of long standing cannot shield them from the strictures of the Establishment Clause and furthermore, no one acquires a vested or protected right in violation of the Constitution by long use, even when that span of time covers our entire national existence and indeed predates it.”
Moreover, Judge Crabb in her own Wisconsin Opinion in FFRF v Lew seems to have totally and completely embraced Justice Brennan’s Opinion in Texas Monthly, noting that because Section 107 does not include the limitations on the type or location of the housing that the private sector exclusion provides, Section 107 has no “secular purpose or effect and that a reasonable observer would view it as endorsing religion.” However the Good News is there is hope. Indeed, Judge Crabb states, that invalidation of the Allowance on Constitutional grounds does not mean that the government is powerless to enact tax exemptions that benefit religion. Thus, if Congress believes that there are important secular reasons for granting the Exclusion, Congress is free to rewrite the provision in accordance with the principles laid down in Texas Monthly so that it includes ministers as part of a larger group of beneficiaries.
In conclusion in my view, regardless of the outcome in the 7th Circuit, this case may be headed for the US Supreme Court for a final showdown. So be warned, if you live outside the 7th Circuit of Indiana Wisconsin and Illinois, be prepared for more challenges from the FFRF closer to home. What does this mean for the Preachers of the Gospel out there? If you are a member of the Clergy and preach the Gospel, unless Congress acts soon, your housing allowance may be just a memory from the 20th Century. If the Allowance is important to you, make sure to let your elected representatives know how you feel.
Thanks for joining Chris Moss CPA on TaxView
See you next time,
Chris Moss CPA