Under current IRS regulations (26 USC § 107) churches can pay “ministers of the gospel” a non-taxed separate allowance for housing and associated expenses. Last year a federal judge in Wisconsin found that this exemption was unconstitutional because it violated the Establishment Clause (https://dd1.f06.myftpupload.com/7th-cir-to-decide-whether-ministerial-housing-exemption-is-constitutional.html)
On September 10, the 7th Circuit Court of Appeals heard oral argument in Freedom from Religion Foundation (FFRF) v. Lew. The judges focused on whether FFRF had standing to bring the case. In 2006, the U.S. Supreme Court had ruled 5-4 in Hein v. Freedom from Religion Foundation that citizens did not have standing as taxpayers to bring an Establishment Clause challenge against President Bush’s Office of Faith-Based and Community Initiatives which was a program that allowed religious charitable organizations to compete with non-religious organizations for federal funding.
Although Hein was not mentioned at oral argument, the 7th Circuit panel spent considerable time questioning how FFRF could claim to be harmed by a tax benefit given to a completely separate category of organizations.
If FFRF represented a church that had been denied the ministerial allowance perhaps they could argue that the program was underinclusive but as it stood, FFRF was simply making an external attack on the program without an actual demonstration how FFRF was harmed. In response, FFRF argued that under this scenario, the only organizations that could go to court to oppose the regulation would be those who simultaneously received direct benefit from the tax-exempt allowances. In response, the judge proposed that there might be a legislative remedy, even though it is very unlikely that any politician who valued his or her career would seek to reverse the allowance provision by statute.
It is noted that the Hein case also came through the Seventh Circuit which had ruled in favor of FFRF before that decision was reversed by the Supreme Court.
In this reviewer’s opinion, the only fallback position that the FFRF could have is that they have taxpayer standing by showing this situation is different from Hein. However, whereas Hein actually involved government spending money, the ministerial exemption involves the government not collecting tax revenue. FFRF’s position in this case is that much weaker.
Whether such an exemption is a violation of the Establishment Clause or not may never be tested by the courts as FFRF is likely to lose on standing. The moral of the story may be that the IRS has broad discretion to provide tax breaks so long as it does not discriminate between organizations that would otherwise qualify regardless of whether the tax break has a side-effect of promoting religion.