On Friday, a federal judge in Wisconsin found that a tax statute that only permits members of theclergy to receive a tax-free housing allowance violates the Establishment Clause of the First Amendment to the United States Constitution.
265 U.S. Code § 107 describes the tax exemption as follows:
In the case of a minister of the gospel, gross income does not include—
(1) the rental value of a home furnished to him as part of his compensation; or
(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
Although the Code might initially appear to apply only to Christian ministers, this has been more broadly interpreted to include those who perform “substantially all of the religious functions” of ordained ministers regardless of faith.
Freedom from Religion Foundation, Inc. (FFRF), and individual officers of the organization filed suit to challenge this exemption claiming it discriminated against secular employees while also violating the establishment clause and the equal protection clause of the Fifth Amendment.
In her 47-page ruling in Gaylor v. Mnuchen, Judge Barbara Crabb granted summary judgment in favor of FFRF concluding that section 107(2) violates the establishment clause because it (1) does not have a secular purpose and effect and (2) a reasonable observer would view the statute as an endorsement of religion.
The judge found that the statute, its history, and its practice “all demonstrate a preference for ministers over secular employees.” She noted that although it is a “legitimate purpose” for Congress to attempt to alleviate financial hardship on taxpayers, “it is not a secular purpose when Congress eliminates the burden for a group made up of solely religious employees but maintains it for nearly everyone else.”
The court requested the parties prepare briefs on whether the remedy is to either block enforcement of the allowance or, in the alternative, to extend it to non-religious claimants.
While the court has left this door open, it seems more probable that the court will merely block enforcement of the statute, as extending it to other non-religious organizations would be a judicial overstep. If the judge finds that the allowance is unconstitutional, the decision will be appealed, and Congress could decide to expand the range of housing tax-exemption beneficiaries.
As to the code itself, section 1 refers to employee housing owned by churches. Section 2 refers to money separately provided to clergy to pay for housing which is not reported as taxable income. Section 2 permits a member of the clergy to buy and furnish a home as well as pay for utilities with tax-free income. There is no requirement that the ministers live within a certain distance of their churches or communities that they serve.
The Becket Fund, which filed a brief in opposition to FFRF, noted that under 26 U.S. Code § 119, meals or lodging furnished for the convenience of the employer could be deducted. While the Becket Fund brief implies that this is for nonreligious employers, and somehow discriminates against clergy, there is nothing within 119 which would prevent it from applying to members of the clergy. Tax-deductible living expenses include meals and lodging “on the business premises of the employer,” and lodging in “certain camps” located in foreign countries or on, or in the proximity, of a campus of an educational institution, among other scenarios. More likely than not, these would be more analogous to 107(1) than to 107(2) of the subject code.
Clergy might also be able to apply a “home office” tax exemption for those portions of the home used exclusively for ministry-related purposes.
Although an earlier form of the case was rejected by the 7th Circuit for lack of standing, FFRF attempted to cure the defect. Once the supplemental briefs requested by the judge are in and the case is ruled upon, it is expected to be appealed where its impact will grow. It could have broad financial implications for members of the clergy who are dependent on tax-exempt housing allowances.
As to the constitutional argument, it is difficult to envision a scenario in which a tax-exemption provided only to members of the clergy who can perform “substantially all the functions” of ordained clergy but excludes people who operate non-profit soup kitchens, hospitals, or even church staff members would pass muster under the Establishment Clause.
However, church-state relations have taken some interesting turns in recent years. In the ERISA cases, the Supreme Court found that religious hospitals can be exempt from regulations that provide for adequate pension funding, closely-held for-profit corporations with religious owners were able to be exempt from general healthcare provisions in Hobby Lobby, and churches can have their playgrounds resurfaced with tax money under Trinity Lutheran. So while it may not seem that the Establishment Clause would permit a tax benefit given only to church ministers, given the current political and legal climate, all bets are off the table.