Kentucky Court’s Ruling Favors Churches, Clergy

Judge’s opinion may shed light on how Wisconsin housing allowance appeal may go.

A federal district court in Kentucky on Monday dismissed a lawsuit brought against the Internal Revenue Service by three different atheist groups that challenged various church and clergy tax provisions.

The dismissal may be a sign of things to come on a clergy housing allowance challenge in Wisconsin that gained steam late last year.

The American Atheists Inc., Atheists of Northern Indiana Inc., and Atheist Archives of Kentucky Inc. claimed churches and religious organizations receive unconstitutional preferential treatment. The defense and the court identified five specific tax provisions that would fit under the groups’ claim, including church exemption from filing a Form 1023 to receive tax-exempt status, church exemption from filing annual Form 990s, and the clergy parsonage allowance.

The groups said they suffered “unconstitutional discrimination and coercion arising from their inability to satisfy the IRS test to gain classification to secure the same treatment as religious organizations or churches…” However, the groups said they never actually tried to become 501(c)(3) religious organizations, explaining that such attempts to do so would violate their beliefs.

The court dismissed the case, saying the atheist groups lacked standing—because they never attempted to file as religious organizations, they never suffered direct injuries, and any possibility of injuries was “mere speculation.” “(I)njury for standing purposes must be an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical,” the court’s opinion said, citing a 1992 case, among others, related to standing.

A sign of things to come?

Although this ruling only pertains to Kentucky, it may shed light on another high-profile lawsuit brought by the Freedom From Religion Foundation (FFRF) in Wisconsin. Last November, a federal judge there ruled the clergy housing allowance exclusion in her district was an unconstitutional preference for religion. In January, the U.S. Department of Justice appealed. The benefit remains unaffected until the Seventh Circuit Court of Appeals issues a ruling.

Its decision isn’t expected until later this year, but the Kentucky federal court’s ruling may be a preview of how the Seventh Circuit will rule. According to Richard Hammar, senior editor of, the Kentucky case “has direct relevance to the housing allowance appeal, due to the Kentucky court’s handling of the technical issue of standing.”

In the Kentucky ruling, the court said neither the three atheist groups nor FFRF in Wisconsin sought the types of exclusions they were protesting. The judge in the Kentucky case made a direct reference to the Wisconsin court’s ruling in the FFRF case, calling it “unpersuasive and not applicable.” (Sister publication Christianity Today provides more details from the Kentucky court’s opinion).

The Evangelical Council for Financial Accountability issued a statement Tuesday on the Kentucky ruling’s connection to the Wisconsin case, stating,

In reaching this conclusion, the court took the opposite approach of another federal district court in Wisconsin that recently ruled Freedom From Religion Foundation (FFRF) and its co-presidents had standing to challenge the clergy housing allowance exclusion, although its leaders never actually tried to claim a tax-free housing allowance with the IRS.

If the Seventh Circuit affirms the Wisconsin federal judge’s clergy housing allowance ruling, then ministers in Illinois, Wisconsin, and Indiana will lose their housing allowance benefit, meaning they will pay taxes on the portions of their salaries set aside to pay for housing.

Clergy who live in church-owned parsonages would be unaffected, but the number of those who do so has dwindled in recent decades. The 2014-2015 Compensation Handbook for Church Staff shows 87 percent of full-time senior pastors receive housing allowances, while only 11 percent live in church-owned parsonages. Religion News Service estimates a possible 5- to 10-percent cut in take-home pay for ministers were the housing allowance benefit to disappear.

An affirmed decision also would hold larger implications for the rest of the United States. The IRS has discretion to follow, or not follow, an affirmed ruling to promote consistency in the application and enforcement of federal tax law.

Should the Seventh Circuit reverse the decision, then the benefit remains intact for ministers in Illinois, Wisconsin, and Indiana.

FFRF also filed a separate lawsuit against the IRS in 2013, claiming 501(c)(3) tax code provisions make it easier for churches to obtain and maintain tax-exempt status than other nonprofit organizations. The organization filed the lawsuit in the same federal district court in Wisconsin that ruled on the clergy housing allowance.

FFRF noted its own requirement to complete a Form 1023 and pay a fee to obtain tax-exempt status, plus file annual Form 990s that require detailed information.

The case is still pending, but the court already has concluded that FFRF “satisfied the standing requirement since the FFRF was asserting a direct injury,” Hammar wrote in the November 2013 issue of Church Finance Today.

Richard Hammar will provide further analysis on the Kentucky federal court ruling in the July/August issue of Church Law & Tax Report. He also will continue to monitor the clergy housing allowance appeal and the Form 990 case in Wisconsin and provide updates as they become available.

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