On November 22, 2013, federal district court judge Barbara Crabb of the District Court for the Western District of Wisconsin (a President Carter appointee) struck down the ministerial housing allowance as an unconstitutional preference for religion. The ruling was in response to a lawsuit brought by the Freedom From Religion Foundation (FFRF) challenging the constitutionality of the housing allowance and the parsonage exclusion.
Judge Crabb stayed the decision, pending an appeal to the Seventh Circuit Court of Appeals in Chicago. As this issue went to press, it is unclear whether an appeal will occur, but one seems likely. If one is filed, but the Seventh Circuit affirms Judge Crabb's decision, churches and clergy in Illinois, Indiana, and Wisconsin will be affected.
The implications on a nationwide scale remain unclear. From a judicial perspective, the ruling would only become a national precedent if it is affirmed by the United States Supreme Court, but this is an unlikely outcome. However, the Internal Revenue Service has discretion to follow, or not follow, the ruling nationwide, and may be inclined to follow it to promote consistency in the application and enforcement of federal tax law.
Here are 10 things church leaders should note about this ruling.
Section 107(1) of the federal tax code exempts, from federal income tax, the fair rental value of a church-owned parsonage provided to a minister as compensation for ministerial services. Section 107(2) exempts the amount of a minister's compensation that is designated in advance as a housing allowance to the extent that the allowance represents compensation for ministerial services, is used to pay housing expenses, and does not exceed the fair rental value of the home (furnished, plus utilities).
In 2009, the Freedom From Religion Foundation and several other plaintiffs filed a lawsuit in a federal district court in California challenging the constitutionality of the parsonage exclusion and housing allowance. The lawsuit alleged:
Section 107 … of the Revenue Code … violates the Establishment Clause of the First Amendment, in part, because it provides tax benefits only to "ministers of the gospel," rather than to a broad class of taxpayers.
Section 107 … subsidizes, promotes, endorses, favors, and advances churches, religious organizations, and "ministers of the gospel," and discriminates against secular organizations, including nonprofit organizations such as FFRF that promote atheism, humanism, secularism, and other non-religious worldviews, as well as their employees and members … .
The [housing allowance] has the effect each year of excluding hundreds of millions of dollars from taxation, and this exclusion is available only to ministers of the gospel. The tax preferences granted to ministers of the gospel under the Internal Revenue Code … also enables churches and other religious organizations to reduce their salaries and compensation costs. The employees of secular organizations such as FFRF are not allowed these tax preferences, and FFRF and other secular organizations incur comparatively greater compensation costs than they would if their employees could be considered "ministers of the gospel."
The tax preferences afforded ministers of the gospel constitute a subsidy that results in tangible and direct economic injury to FFRF, and to its members and employees, who cannot claim these benefits.
The FFRF's lawsuit asked the court to rule that section 107 of the federal tax code violated the Establishment Clause of the First Amendment to the United States Constitution, which prohibits any governmental establishment of religion.
The federal government, which defended the constitutionality of the housing allowance (since it is a federal statute) asked the court to dismiss the lawsuit on the ground that the FFRF lacked "standing" to pursue its claim. Standing is a requirement of any plaintiff in a federal case. It has been described by the United States Supreme Court as follows:
The party who invokes the power [of the federal courts] must be able to show not only that the statute is invalid, but that he has sustained or is immediately in danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers in some indefinite way in common with people generally. Doremus v. Board of Ed. of Hawthorne, 342 U.S. 429 (1952).
The California district court ruled that the FFRF had standing, so it denied the government's request to dismiss the case. But FFRF's challenge to the constitutionality of the housing allowance was dealt a setback by a 2011 decision of the Supreme Court. Arizona Christian School Tuition Organization v. Winn, 131 S.Ct. 1436 (2011). The Supreme Court ruled that a group of Arizona taxpayers lacked standing to challenge the constitutionality of a state law involving tax credits for contributions to "school tuition organizations" that provided scholarships to students attending private schools, including religious schools. It noted that the courts have consistently ruled that standing cannot be based on a plaintiff's status as a federal taxpayer because the "injury" is too remote or speculative.
The Court acknowledged a limited exception to taxpayer standing in cases challenging legislation on the basis of the First Amendment's nonestablishment of religion clause. Taxpayers have standing in such cases to challenge direct transfers of tax revenue to religious organizations since "the taxpayer's allegation in such cases would be that his tax money is being extracted and spent in violation of specific constitutional protections against such abuses of legislative power."
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