Section 107 of the federal tax code exempts from federal income tax (1) the fair rental value of a church-owned parsonage provided to a minister as compensation for ministerial services, and (2) 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).
Section 265(a)(6) of the federal tax code allows a minister of the gospel to claim itemized deductions for residential mortgage interest and property taxes, even though the money used to pay such amounts was received from a church or other employer in the form of a tax-exempt housing allowance.
The Freedom from Religion Foundation (“FFRF”) and several other plaintiffs have filed a lawsuit in a federal district court in California asking the court to rule that sections 107 and 265(a)(6) of the federal tax code violate the Establishment Clause of the First Amendment to the United States Constitution. The lawsuit alleges:
Sections 107 and 265(a)(6) of the Revenue Code…violate the Establishment Clause of the First Amendment, in part, because they provide tax benefits only to “ministers of the gospel,” rather than to a broad class of taxpayers.
Sections 107 and 265(a)(6) subsidize, promote, endorse, favor, and advance churches, religious organizations, and “ministers of the gospel,” and they discriminate 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.
There are several considerations that support the constitutionality of the parsonage exclusion and housing allowance, including the following:
- In Walz v. Commission, 393 U.S. 664 (1970) the United States Supreme Court concluded that “the grant of a tax exemption is not sponsorship.” Further, the Court noted, “an unbroken practice of according the exemption to churches, openly and by affirmative state action, not covertly or by state inaction, is not something to be lightly cast aside.” The Court quoted Justice Oliver Wendell Holmes’ aphorism that “if a thing has been practiced for two hundred years by common consent, it will need a strong case for the Constitution to affect it.” This is a compelling argument. Section 107 has been with us since 1921. Not covertly but by action of Congress. As one law professor has noted, “The parsonage exclusion has a remarkably ‘unambiguous and unbroken’ history of acceptance.” There has not been a single case in which its constitutionality has been challenged.
- The courts have consistently upheld the constitutionality of state and federal grants that flow to clergy and ministerial students attending seminaries. Why? Because the beneficiary is the individual, not “religion.”
- Section 119 of the tax code exempts from income tax free lodging that is provided to an employee for the “convenience of the employer.” This benefit applies to all, regardless of profession or faith, and the same concept underlies section 107. So, the FFRF lawsuit is wrong in asserting that section 107 singles out clergy. The fact is that section 119 extends a very similar benefit to everyone.
While not a constitutional argument, it should be noted that an elimination of the housing allowance would have an immediate and, in some cases, catastrophic financial effect on hundreds of thousands of ministers who have purchased a home and secured a mortgage loan in reliance on the housing allowance. Many of these ministers no longer would be able to afford their mortgage loan payments, and would be forced to sell their home in a severely undervalued real estate market. Any federal court decision invalidating the housing allowance would have the effect of punishing countless ministers for justifiably relying on a nearly century-old tax benefit.
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