A constitutional challenge to the tax-free housing allowances and parsonages provided to thousands of American pastors is over after the plaintiffs who filed the original lawsuit voluntarily requested its dismissal Friday in a California district court.
But the battle is far from over. More legal challenges from opponents of the provision are promised, while a federal commission reviewing the benefit has been asked to determine whether it needs additional protections.
A leader from the Freedom From Religion Foundation, the group that led the latest charge against the decades-old tax benefit for clergy, said her organization will continue its fight to bring an end to these allowances, which it believes violate the First Amendment's Establishment Clause and endorse religion.
Friday's request for dismissal was FFRF's "only option at this time" after a U.S. Supreme Court ruling in April on a separate Arizona taxpayer case undermined the grounds for its case in California, said Annie Laurie Gaylor, co-president of the Madison, Wisconsin-based organization.
The group is evaluating its next options to challenge the benefit. "We plan to pursue it in a slightly different manner," Gaylor said. "We're sorry about (the California case)—we think the Ninth Circuit already indicated that it believed the law was unconstitutional. We believe it's an unconstitutional law."
Gaylor said it was too early for her to identify specific next steps or the next legal strategy FFRF will try.
Since 1921, the rental values of church-provided parsonages have been excluded from the gross incomes of ministers. In 1954, Congress enacted a benefit through section 107(2) that allows a pastor to designate part of his or her income as a tax-free allowance for housing not provided by the church. A high-profile challenge to the housing allowance involving Pastor Rick Warren in 2000 led to the passage of the "Clergy Housing Allowance Clarification Act of 2002," (CHACA) in Congress. The Act limits an allowance to the fair rental value of the housing provided.
Since it's a federal statute, the Internal Revenue Service and Franchise Tax Board served as defendants in the California case. Last month, the Pacific Justice Institute successfully appealed to also intervene in the defense on behalf of a Sacramento pastor.
With Friday's filing, "the bottom line is the housing allowance is safe," said Kevin Snider, chief counsel for PJI, a nonprofit legal defense group specializing in religious freedom and civil liberty cases. His California-based organization is bracing for "subsequent challenges," he said.
That the allowance remains safe for now appears to be a victory in and of itself. Until recently, the FFRF's case in California was considered a legitimate threat, on course for trial after a defense request for dismissal was denied in May 2010.
But momentum quickly shifted this past April, after the Supreme Court ruled a group of Arizona taxpayers lacked standing in a constitutional challenge to tax credits for school tuition organizations. Attorney Richard Hammar, writing shortly after the Arizona decision on Christianity Today International's ChurchLawAndTax.com and in the Church Law & Tax Report newsletter, considered it a likely "lethal blow" to FFRF's California case:
... FFRF argued that the taxpayers had standing because the Arizona tax credit was, in essence, a governmental expenditure for religion. The Court disagreed, noting that there is a fundamental difference between granting a tax credit to taxpayers, and using tax dollars to directly benefit religion.
... The Supreme Court's ruling in the Arizona case may well spell the end of the constitutional challenge to the housing allowance, since a housing allowance, like the Arizona tax credit, involves no direct transfer of tax revenue for religious purposes.
Had the Supreme Court not ruled in Arizona, many observers, including Hammar, weren't optimistic about the defense's chances in the FFRF case because the Ninth Circuit isn't considered sympathetic to religious groups or causes.
Snider said he doesn't believe the Ninth Circuit had tipped its hand yet in the FFRF's most recent challenge. Gaylor's comment about the court's possible support, he said, more likely was in reference to past activity, specifically the Warren case. A staff report released in January by Sen. Chuck Grassley (R-Iowa) suggests as much; in it, staff members said "The sponsors of CHACA explained that the bill was designed to prevent the Ninth Circuit from considering the constitutionality of section 107(2)."
The Grassley staff report identified housing allowances and several other issues in need of further evaluation, based on a three-year review of six media-based ministries. Grassley asked the Evangelical Council for Financial Accountability to head a special commission addressing those issues (Editor's Note: Hammar, senior editor of the Church Law & Tax Report and ChurchLawAndTax.com , is a member of the commission).
"The legislative history of the 2002 CHACA evidences particular concern for clergy of modest means ministering to small and rural churches," the Grassley report noted. "… The parsonage allowances provided by small rural churches … are generally not the ones that attract the attention of the media and the public. The ones provided by churches with denominational or similar oversight also do not attract attention."
Among the staff's questions for the special commission to consider: "To withstand further constitutional scrutiny, should section 107 be amended to broaden its applicability?"
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