Originally published on Forbes.com.
Tax news of interest to clergy has been drowned out by coverage of the Tax Cuts and Jobs Act. Last week on December 13, Judge Barbara Crabb issued her promised ruling on how her earlier decision that Code Section 107(2) – the parsonage exclusion – will be implemented. The ruling is not surprising, but clergy may be relieved that their cherished tax break is safe – probably for a couple of years , particularly since a Congress desperate for revenue raisers to pay for massive tax cuts for the job creators along with some crumbs for the working class did not even threaten to touch parsonage.
The House did threaten a different housing exclusion. Code Section 119 allows the exclusion of housing provided for the convenience of the employer. The House bill proposed a $50,000 cap on that exclusion. I don’t know if it is a coincidence but that is in the ballpark of the housing allowance that those serving in the military get to exclude (It varies by region and rank – more by region. You can check it out here). That would also seem to be a reasonable cap for “ministers of the gospel” particularly given what the inspiration for the predominant religion in this country had to say on the subject of housing.
Foxes have holes, and birds of the air have nests; but the Son of man hath not where to lay his head.
The Latest Ruling
The ruling is short enough to reproduce in full, but I am trimming it just a bit and am omitting references.
All parties agree that the court should not seek to expand § 107(2) in an attempt to make it constitutional. As I stated in the summary judgment decision, I also do not think it would appropriate for the court to issue either an injunction expanding the scope of § 107(2) or an order directing the Internal Revenue Service to do so, because there are multiple ways that the statute could be rewritten and that task should generally be left for Congress. .
Additionally, all parties agree that invalidating § 107(2) does not require the court to invalidate § 107(1). I agree, particularly because a statute similar to § 107(1) existed without § 107(2) for more than 30 years.
With respect to injunctive relief, both plaintiffs and defendants state that the court should enter an injunction nullifying § 107(2) prospectively. In contrast, the intervenors argue that the court should not enter an injunction because declaratory relief would be least disruptive and would permit the government to continue applying the statute. The intervenors’ position is not persuasive, as they are essentially arguing that the government should be permitted to continue allowing ministers to take advantage of § 107(2), despite the court’s holding that the statute is discriminatory and unconstitutional.
Next, plaintiffs ask that the IRS be ordered to partially refund taxes they paid but which would have been reduced if they had been permitted to claim a housing allowance as an exclusion of income under § 107(2). I am denying this request. I have determined that § 107(2) is unconstitutional and should be nullified. Therefore, plaintiffs were not entitled to claim a housing allowance under § 107(2) and they are not entitled to receive a refund of taxes they paid because they were denied the allowance. Because plaintiffs cite no other basis for receiving a refund beyond § 107(2), they have not shown they are entitled to a refund.
Finally, all parties agree that any injunction should be stayed pending resolution of any appeals. Defendants and intervenors ask that injunctive relief be stayed for 180 days after the resolution of any appeals, while plaintiffs argue that the injunction should be enforced immediately upon resolution of any appeals. I agree with defendants and the intervenors that in light of the substantial changes to tax policy and administration that will occur upon enforcement of the injunction, it is appropriate to stay injunctive relief until 180 days after the final resolution of all appeals. The additional time will allow Congress, the IRS and affected individuals and organizations to adjust to the substantial change.
Thinking Long Range
The way I read all that and the planning implications are as follows.
In-kind housing is safe. Traditional parsonages went out of favor for a couple of reasons. One was that it denied ministers the chance to participate in the automatic appreciation of home values that was seen as a fundamental truth in the last century. Another reason is that living in a parish owned house can be pretty miserable for the preacher’s family, particularly the spouse. There would sometimes be an obnoxious committee critiquing home decorating decisions.
In my view, there is no need for the church to actually buy a house for the minister to live in to work the arrangement into 107(1) in-kind. They could rent something for the pastor and the employment contract could make it clear that it is a home for the pastor’s family that the parishioners will not interfere with. Church leadership looking long term might want to consider this option.
Don’t panic. Nothing will change until six months after the Supremes are done which will not be for a couple of years. Unless Congress acts, which is extremely improbable.
Expert Comments
Professor Edward Zelinskky, author of Taxing the Church: Religion Exemptions, Entanglement and the Constitution wrote me:
While I disagree with Judge Crabb on the merits, her remedial decision is persuasive. Judge Crabb delayed the effect of her injunction until 180 days after the U.S. Court of Appeals for the Seventh Circuit rules on this case. This properly shifts the forum to the Court of Appeals where I expect Section 107 to be upheld as constitutional.
Professor Zelinsky has a nuanced view that can probably madden both sides of the argument. He thinks that 107(2) is constitutional and bad tax policy. I tend to think that constitutional purists are few and far between and that people confuse “unconstitutional” with “bad idea”. Activists and advocates use the Constitution like a drunk uses a lamppost – more for support than illumination.
Robert Baty, my most constant commenter and bane of the basketball minister, wrote me:
It seems to me there is a noticeable lack of interest this time around, despite how the matter should have fit in with all the goings on regarding the tax bill taking up so much of your time.
A provision to repeal IRC 107 should have been included in the tax bill at some point, whether it would have passed and been included in the final draft or not. There is no good reason why it should not have been introduced in light of Judge Crabb’s second ruling back in October.
I think, for reasons I have previously explained, that the Appeals Court could “punt” again and nix the judge’s ruling without reaching the constitutional issue and without denying “standing”. It hasn’t come up in the filings, but I see it as a “sleeper” issue that could again thwart the FFRF effort.
However, the FFRF wins, in cases like this, even when it loses, because of the attention it brings to important public issues; such as what is wrong with IRC 107.
I hope I am wrong and the Appeals Court upholds Judge Crabb’s ruling.
I will then hope the Supreme Court does likewise without latching on to the “sleeper” issue.
Another matter that I continue to be disappointed with is the failure of the media, or even the FFRF, to do what they typically do and develop the story behind the FFRF case. Because of the course the litigation has taken, summary judgments, the Court never really developed the 70-549 issue and the Bush-Burleson connection to the case which, it seems to me, is an excellent case study as to what is wrong with IRC 107 and its “entangling” characteristics
And then there is the “human interest” story that typically follows FFRF cases but not in this case. That is, what are the details as to how the FFRF came to be involved and take up the issue where Chemerinsky failed “us”? For instance, the feds grilled Annie Gaylor in her deposition in the earlier case about who she had been talking to and she finally outed me. What I found curious about that was how the interrogator stated that “they were familiar with me”.
The “sleeper issue” reference had me puzzled. He clarified it this way.
The federal court is to consider “cases and controversy”.
What is the controversy in the current FFRF case?
A claim was filed for the ministerial housing allowance?
Sure, that bestowed unmistakable “standing” as to Annie and Dan, but “standing” to do what?
To have the controversy resolved?
……the Court may simply conclude that the controversy is whether or not the allowance is allowed to Annie and Dan without having to decide the constitutional issue (if one agrees that “standing” to challenge the constitutional issue was rightly denied last time).
I’m not going to try to explain the rest of Bob’s references at this point. They have been discussed in other posts on the issue. One thing I like about parsonage developments is that they take Bob’s mind off Kent Hovind for a brief period. I declared and end to L’affaire Kent Hovind being forbesworthy over two years ago, but the shenanigans of Doctor Dino and his merry band continue to be of interest to a core group of Hovindologists, Bob Baty being the most dedicated. If you miss the good Doctor in these pages you can check out my alternative tax blog, which by now has a readership numbering in the scores.
Jean-Marc Favreau of Peer Gan & Gisler LLP wrote me:
I’m getting the sense that a lot of clergy members are panicking because they see the “injunction” part of the order and the thought of losing parsonage becomes very real. But nothing has really changed from a practical standpoint. The judge is giving plenty of time for the issue to work its way through the courts before implementing the change. Whatever side of the issue you fall on, it’s encouraging that the judge recognizes that, if upheld, her ruling will have a significant impact on the IRS and the people affected by the ruling.
About the Freedom From Religion Foundation
I really admire FFRF’s principled stand on church state issues, but this time of year they get a little under my skin. I wish they could find other things to do besides playing Grinch. Here is their version of greetings for the season- Away with the manger – in with the Solstice.
Christmas is a relic of sun worship. For all of our major festivals, there were corresponding pagan festivals tied to natural events. We’ve been celebrating the Winter Solstice, this natural holiday, long before Christians crashed the party. For millennia, our ancestors in the Northern Hemisphere have greeted this seasonal event with festivals of light, gift exchanges and seasonal gatherings.
The Winter Solstice is the reason for the season. This Winter Solstice heralds the symbolic rebirth of the Sun, the lengthening of days and the natural New Year
We nonbelievers are quite willing to celebrate the fun parts of anybody’s holidays. We just want to be spared the schmaltz, the superstition — and the state/church entanglements.
I swear it makes me want to round up a bunch of Trump supporters and stand outside their office shouting Merry Christmas. The birth narratives from the Christian scriptures are woven into our culture and letting people put up hokey nativity scenes on the town common is not going to lead to the Spanish Inquisition. Regardless, I wish them all a happy Solstice since that is their preference, but I am not afraid to say Merry Christmas to the heavily atheist crowd that will be at my house on Monday and none of them seem to mind.
Other Coverage
Partrick Hornbeck on Religious Dispatches got a little hysterical with Clergy May Soon Find Tax Soaring As Result Of An Under-The-Radar Ruling. I guess it all depend on how you define “soon”.
Roy Hahurst of Baptist Press took it more calmly with Housing allowance order stayed for now; appeals likely. He quoted Russell Moore of the Southern Baptist Convention Ethics & Religious Liberty Commission who indicated that removing the housing allowance tax break “would disproportionately harm clergy in small congregations across the country”. I spoke with Reverend Moore back in 2013 and tried to shake him on the small congregation argument, but that’s his story and he is sticking with it. Quoting my pre-medicare self:
Reverend Moore pretty much insisted that the mega churches with their mega housing allowances are such a tiny minority of SBC congregations that they are not even worth discussing in this context.
SBC is the second largest Christian denomination, but it has the most skin in the parsonage game with a disproportionate share of both tiny congregations and megachurches.
Frank Spencer at The Presbyterian Outlook also counsels calmness.
Cross this off your active worry list. We are vigilant and hopeful on your behalf. Besides, ministers have more important things to do.