The Freedom From Religion Foundation has won a round in litigation on the tax free housing allowances of “ministers of the gospel”. Although the fight over the exemption has not been followed that closely by the media, I believe that the fallout from this case has the potential for creating a constitutional crisis. There are quite a few people who could be affected by the outcome of this case and in the aggregate they are a pretty influential group. According to the Hartford Institute for Relgion Research, there are 600,000 clergy serving various denominations in the United States. Not all of them receive tax free housing allowances, but the effect goes beyond the individual clergy. The average salary and housing package of a Protestant minister serving a small congregation – the prototypical “minister of the gospel” that was probably in the mind of Congress when they enacted the provision – is around $31,000. Having much, often virtually all, of that be income tax free probably affects the viability of some small parishes.
The law that FFRF is challenging is Internal Revenue Code Section 107 which provides:
In the case of a minister of the gospel, gross income does not include—
(1) the rental value of a home furnished to him as part of his compensation; or
(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
You can tell from the lack of gender neutrality and the Christian religious language that the provision has been around for a while. The law has been interpreted broadly and applies inter alia to women ministers, rabbis and basketball coaches at certain colleges.
The Freedom From Religion Foundation argues that the provision is unconstitutional. Up until now, the Government has been successful in keeping this question away from the courts. Richard Warren had excluded an $80,000 housing allowance, which the IRS had found to be in excess of the rental value of his home. The question of whether there was such a limitation went to the Ninth Circuit. The Ninth Circuit surprised everybody by asking the parties to start briefing on whether Code Section 107 was constitutional and appointing an amicus, Professor Erwin Chemerinsky, to make the argument that it was not. Congress passed the Clergy Housing Allowance Clarification Act of 2002 and Warren and the IRS agreed to withdraw the case. Professor Chemerinsky wanted to continue but it was determined that he had no independent right to intervene.
The problem with bringing a challenge to Code Section 107 is one of “standing”. Basically you generally don’t have the right to challenge a tax break that somebody else is getting. FFRF found an elegant solution to the standing problem. It is paying some of its officers a housing allowance and they are suing along with FFRF because of the unequal treatment they are receiving. The Government tried to argue that in order to show that they have really been damaged that the parties should go ahead and claim an exclusion and then sue when the IRS said they were not entitled to it. Who knows maybe they would qualify ? The US District Court for the Western District of Wisconsin, in ruling against the government’s motion to dismiss, indicated that those were unnecessary hoops to force FFRF and the other plaintiffs to jump through, since there was no plausible theory under which they would qualify as “ministers of the gospel.”
The Scientology Connection
Scientologists are allowed to deduct the amounts that they pay for “auditing sessions” under a closing agreement that was entered into with the IRS in 1993 – after the IRS had won a case to deny the deductions as quid pro quo in the Supreme Court. Michael Sklar thought the principles of that agreement should allow him to deduct at least some of the payments made for his children to attend religious schools. The Ninth Circuit ruled that Sklar’s tuition payments were not that similar to Scientology auditing charges, but went on to observe:
we would not hold that the unlawful policy set forth in the closing agreement must be extended to all religious organizations.
In a recent guest post Scott Pilutik suggested that the independent Scientologists might be the key to unlocking the agreement between IRS and Scientology. I could see someone who had paid an independent scientologist for auditing getting standing to challenge the agreement through the same technique that FFRF has used in this case.
This might have far reaching effects because the apparent reason that Scientology received the treatment that it did was to avoid opening a quid pro quo can of worms involving other religions. Probably the most severely affected would be Mormons, who are not admitted to the temple without approval of their bishop. Among the requirements for admission is being found to be a full tithe payer.
Will We Be Hearing From The Candidates On This ?
Somehow I doubt it. If the Obama administration really wanted to create some excitement it could take the same position it has with DOMA and declare that the constitutionality of Section 107 is indefensible. The firestorm that would create would highlight some rather embarrassingly large tax free housing allowances. Of course it would not just be Republican clergy that would be affected, so I don’t think that such a move is at all likely.
Will We Be Hearing From My Guest Posters On This ?
I sure hope so. I will be inviting them to weigh in on this development, possibly once again turning my cute little tax blog into a First Amendment forum. I particularly want to thank Robert Baty, retired IRS appeals officer and bane of the basketball ministers for alerting me to this decision.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on August 30th, 2012