Editor’s Note: Last Friday, Judge Barbara Crabb of the District Court for the Western District of Wisconsin struck down the ministerial housing allowance as an unconstitutional preference for religion. Senior Editor Richard R. Hammar offers five takeaways from this ruling, which churches and clergy nationwide should note now:
1. First, let me note some of the language used by Judge Crabb in the opinion. Specifically:
The housing allowance violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion. Although defendants try to characterize [the housing allowance] as an effort by Congress to treat ministers fairly and avoid religious entanglement, the plain language of the statute, its legislative history and its operation in practice all demonstrate a preference for ministers over secular employees. Ministers receive a unique benefit . . . that is not, as defendants suggest, part of a larger effort by Congress to provide assistance to employees with special housing needs. A desire to alleviate financial hardship on taxpayers is a legitimate purpose, but 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. Under my view . . . that type of discriminatory treatment violates the establishment clause.
Perhaps of most interest was Judge Crabb’s suggestion that the tax code be amended to expand the availability of a housing allowance to taxpayers “who work for tax exempt organizations under § 501(c)(3) and are on call at all times.” Such an amendment would cover most clergy, but few enough employees of secular charities to be feasible as a matter of tax policy.
2. Judge Crabb stayed (or suspended) the enforcement of her ruling until the end of October 2017 so that the parties can submit briefs on appropriate remedies for the plaintiffs. It is likely, though not certain, that when the issue of remedies is resolved, the judge will do what she did in her earlier decision in 2013 and stay or suspend enforcement of the ruling pending an appeal. But, this is not certain and so ministers and churches should be alert to developments. Note that a ruling by the Seventh Circuit Court of Appeals would apply to ministers in that circuit, which includes the states of Illinois, Indiana, and Wisconsin. It would become a national precedent binding on ministers in all states if affirmed by the United States Supreme Court--an unlikely outcome because the Supreme Court accepts less than 1 percent of all appeals. Note, however, that the IRS would have the discretion to follow or not follow an eventual ruling by the appeals court nationally to promote consistency in tax administration.
3. Churches should continue to designate housing allowances for their ministers for 2018 and future years until the housing allowance is conclusively declared unconstitutional by the appeals court or the Supreme Court, and in the case of a ruling by the appeals court is applied nationally by the IRS.
But ministers should understand that claiming a housing allowance exclusion while this litigation is pending poses a risk that the exclusion may be disallowed and an amended tax return will need to be filed. Ministers should be prepared for this outcome, though it is unlikely that the housing allowance will be declared unconstitutional retroactively. Again, be alert to future developments.
4. Judge Crabb’s ruling does not apply to parsonages, since the Freedom From Religion Foundation’s officers were not provided free housing and so lacked standing to challenge the parsonage exclusion.
5. In conclusion, ministers and churches should be aware that the housing allowance is under attack. Judge Crabb’s ruling may be affirmed on appeal and applied nationwide by the IRS. Should that occur, there are two actions that will need to be implemented quickly.
First, many ministers will experience an immediate increase in income taxes. As a result, they should be prepared to increase their quarterly estimated tax payments to reflect the increase in income taxes in order to avoid an underpayment penalty. Note that there will be no effect on self-employment taxes for which the housing allowance is not tax-exempt.
And second, many churches will want to increase ministers’ compensation to offset the financial impact. Such an increase could be phased out over a period of years to minimize the impact on the church.
I will be monitoring all future developments, and will keep you posted as they occur.
To stay current on all of the most recent developments regarding the clergy housing allowance case, sign up for the free Church Law & Tax Update eNewsletter. For further analysis and guidance regarding the tax effects of this ruling—and any subsequent ones—check out the 2018 Church & Clergy Tax Guide and the January/February 2018 issue of Church Law & Tax Report.
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