Originally published on Forbes.com April 10th, 2014
There is a certain irony in the litigation surrounding the “parsonage exclusion”, which allows mega-pastors to excluded mega housing allowance for their mega houses. The Joint Committee on Taxation estimates that Code Section 107, which excludes from taxable income housing provided for “ministers of the gospel” either in-kind or by means of a tax-free cash housing allowance, costs $700 million in lost revenue. The estimate does not break down the revenue loss between in-kind (107(1)) and cash allowances (107(2)). In the last few decades, cash allowances have been more common, so that ministers would not lose out on the guaranteed wealth increase that home ownership provided. Judge Barbara Crabb only ruled that 107(2) is unconstitutional, so let’s call it a half-billion being at stake.
The irony is that the government attorneys are fighting to keep the government from collecting the half-billion. The taxpayers suing, officers of the Freedom From Religion Foundation, did not trouble themselves to request that the IRS allow them to exclude the housing allowances that FFRF paid them. They assume that they would not qualify and they want to get equal treatment by having the exclusion denied to those that do.
The Seventh Circuit Suddenly Has Lots Of Friends Among The Clergy
The latest development is that the government has filed its appellate brief. The amicus briefs supporting the government’s appeal have also started flowing. The Alliance Defending Freedom has 624 pastors and churches signed onto its brief. The Jewish Commission on Law and Public Affairs and several other groups representing the interest of Orthodox rabbis and cantors filed a brief that emphasizes the special requirement that rabbis have to live near the temple.
The Ethics & Religious Liberty Commission of the Southern Baptist Convention probably has more skin in this game than anybody, but it gracefully allowed pride of place in the brief it signed to The Diocese of Chicago and Mid-America of the Russian Orthodox Church Outside of Russia. This was a remarkably ecumenical group also including The International Society for Krishna Consciousness and The Islamic Center of Boca Raton. Their brief includes an interesting bar graph on page 50 showing other housing allowances (most notably Section 134 covering the military) representing billions and billions towering over 107’s dinky $0.7 billion.
The biggest disappointment to me was the brief by the Church Alliance. Included in its list was the Unitarian Universalist Association. I really have a hard time conceiving of how a UU minister can explain to a member of her congregation who earns a similar salary, why it is right that she should pay less income tax. William Schulz, former President of the UUA, had told me that he would vote to eliminate the housing allowance, although that did not stop him from taking advantage of it. I was hoping for a coalition of liberal clergy (UU minsters, Episcopal priests, Reform rabbis) to file a brief supporting FFRF and asking that they be taxed like everybody else. We’ll see. We have to wait for FFRF’s brief before their amici start in.
The Argument
The government leads with the “standing argument”, which is pretty lawyerly. Essentially, the idea is that you can’t sue because the government is cutting somebody a special break. You have to show that you are being harmed. They also drive home the point that a tax exemption is not the same thing as a government expenditure. At least in the eyes of the Supreme Court.
On the constitutionality of the exclusion, the argument goes something like this. The predecessor of Section 107 was originally passed in 1921 to treat ministers the same as others who received employer-provided housing for the convenience of the employer – a concept now codified under Section 119. In 1954, cash allowances were excluded in order to create equal treatment among ministers of different denominations, some of which did not provide parsonages.
In 1954, Congress resolved the dispute by codifying the prevailing judicial view in § 107, which excludes compensatory housing furnished to ministers in cash as well as in kind. In doing so, Congress sought to remove “discrimination” against ministers who were paid cash allowances, as the House and Senate Reports explained. H.R. Rep. No. 1337, at 15 (1954); S. Rep. No. 1622, at 16 (1954).
The bill that introduced the proposed amendment reiterated that one of the purposes of § 107 was to “accommodate the differing governance structures, practices, traditions, and other characteristics of churches through tax policies that strive to be neutral with respect to such differences.”
The other concern was that the “convenience of the employer” standard could cause the IRS to do too much poking around in the internal affairs of churches.
In addition to preventing discrimination, § 107 was also designed, according to this legislative history, to avoid “intrusive inquiries by the government into the relationship between clergy and their respective churches” entailed by the generally available convenience-of-the-employer doctrine codified elsewhere in the Code.
Experts Weigh In
The government brief and several of the amici cite the work of Professor Edward Zelinsky of Yeshiva University. Professor Zelinsky has written that Section 107(2) is constitutionally permissible although not necessarily good tax policy. I asked him for his thoughts on the government brief and he responded.
On the merits, the government’s brief is correct: As a constitutional matter, Section 107 separates rather than subsidizes. Few relationships entangle as much as the relationship between the taxpayer and the tax collector. Exempting from income taxation clerical housing allowances is a constitutionally permitted (though not constitutionally compelled) way to manage the church-state tensions which are inevitable under the federal income tax.
On the standing issue, the government’s brief correctly de-emphasizes the argument advanced in the District Court that FFRF’s personnel might qualify as “ministers of the gospel” for purposes of Section 107. This was never a credible argument and the government is right to have essentially shelved it.
In its place, the government’s brief instead argues that, for standing, all taxpayers, including the FFRF plaintiffs, must demand income tax refunds and either be denied such refunds or allow six months to pass before suing. This is a plausible argument but one which merely postpones the litigation since the FFRF plaintiffs could easily comply with these requirements by demanding a refund and then restart their litigation again.
The bottom line for me is that, as a matter of tax policy, excluding from income taxation cash parsonage allowances is not compelling since such cash income is easily valued and gives the clergyman receiving it the liquidity to pay tax. However, under the First Amendment, the contrary policy embodied in Section 107(2) is a permissible way of separating clergymen from the IRS. On this fundamental point, the government brief is correct.
Professor Zelinsky has commented that when taxation meets religion, you are always going to have a problem either from the tax authorities looking into the religious organization or from them policing the boundary of the exemption. I am really grateful to Professor Zelinsky for clarifying that. I happen to think that the boundary problem is much more constitutionally troublesome, since it involves the IRS in deciding who is or is not a “minister of the gospel”. More on that when I get to my final expert.
Professor Adam Chodorow of Arizona State University is more in FFRF’s corner and really tore into the government brief.
1) The SCT in Winn distinguished between tax benefits and direct spending, and the Gov’t’s brief relies on this for the argument that religion is not being supported. The SCT’s claim that tax benefits are different from direct spending is specious at best. While it may be the law of the land, it is clearly wrong and results oriented. I wouldn’t want to have to depend on such a flimsy and clearly improper distinction.2) I don’t buy the claim that the purpose of (a)(2) is to accommodate different ways of organizing a church. It misses the entire theory underlying the exemption of on-site housing in the first place. Fringe benefits are taxable as a form of compensation. The whole idea behind exempting on-site housing is that it is not clear whether the benefit is meant as compensation or rather is a benefit to the employer. For instance, a hotel manager might rather live off-site, but the owner requires an on-site manager. Hence, the housing is not meant as compensation, and it seems wrong to tax it as such. Ministers living in a parsonage on-site fit the bill. Ministers living in their own homes somewhere else don’t fit within the justification for the exclusion. Simply put, how is that convenient for the employer? Sometimes differences matter, as is the case here. The notion that all ministers should be treated the same regardless of their different situations seems far fetched to me. The claim at p. 49 that giving this benefit to ministers alone doesn’t single out religion for a benefit seems silly. If the quote is meant to say that it isn’t unconstitutional, that assumes the answer.3) I’m also suspicious of the claim that we don’t want to get the government involved in church business. I think the argument proves too much. Why not exempt all compensation? Subjecting ministers to taxation involves the government in deciding whether their claimed unreimbursed business deductions are allowable. This is precisely the same as wading into the claimed exclusion of housing were 107 not to exist. The same is true with other fringe benefits. By allowing some to be tax exempt and others not to be, we’re creating incentives for churches to organize one way or another to take advantage of tax rules. Should we say we’ve discriminated against those who decide not to or that we’ve interefered with church practices?4) The claim that minister’s houses will be used for some church purposes is also true for CEO’s homes. Even though that may be “for the convenience of the employer,” we don’t allow funds for housing to CEO’s to be tax exempt.5) The discrimination complained of reflects different circumstances. The government is trying to sway the reader by using the term because discrimination is bad. However, if one goes back to the theory underlying the exemption, the different treatment is completely justified. In other words, the “secular” purpose is unhinged from any logical tax policy. And, the claims of interference/entanglement in church ring hollow.6) The claim on p. 71 that these tax benefits are similar to 119 except that they are modified to apply to ministers falls flat. They are different from 119 because they allow cash payments for living off-site.
Finally, I heard from Bob Baty. Bob is a retired IRS appeals officer who is mightily upset at about abuses of the housing allowance. The government brief seems to imply that the cash housing allowances all go to parish ministers who are living in the general neighborhood of a church and serving a congregation. They don’t mention basketball coaches. As Bob writes
In my opinion, the Government left out a substantive case study regarding the history of IRC 107 and its administration, and I can only hope the FFRF takes the opportunity to explain to the Court the history of the Jerry Jobe case and Revenue Ruling 70-549. It’s all a matter of public record, however, obscure, and its a history that needs to be presented to the Court as an example of how IRC 107 has UNconstitutionally entangled the Government in affairs of the church.
Jerry Jobe was the head basketball coach of Oklahoma Christian College. You can read his Tax Court petition to get the full story, but essentially Oklahoma Christian College is considered an integral part of the Church of Christ. The Church of Christ has a priesthood of all believers theology, so everybody who is on the faculty or administration, who is a member of the church, qualifies for a tax-free housing allowance. This started in the early seventies when Omar Burleson pressured the IRS to get Abilene Christian College out of a payroll tax audit.
Professor Chodrow commented on the basketball minister phenomenon.
For churches that organize in ways that everyone is a minister, everybody gets it. The convenience of the employer argument for allowing an exemption disappears entirely here, which is why on-site should be the touchstone. This is just a giveaway to religion. We’re promoting tax fraud in the name of God from the people who are supposed to be the most moral among us.
Should The Preachers Uncircle Their Wagons?
Reverend Frank Benson Jones in his “Stop The Prosperity Preachers” argues that the unlimited tax-free housing allowance is bad for religion. He believes that if you take the profits out of the church only prophets will be left. Reverend William Thornton has written quite a bit about the “religious racketeers” whose mega-houses are matched by mega-influence in the Southern Baptist Convention. SBC has the most skin in this game. It is the second-largest denomination in the country in terms of members, but the largest by far in terms of clergy serving congregations. No one at a high level in any of these organizations seems to be willing to call out the egregious abuse of what to most clergy is a fairly modest benefit.
Gallup in 2013 noted that the most trusted profession in America is nursing. The poll noted that the clergy has been sliding in the trust department and hit a new low in 2013. Putting a lot of their dwindling moral capital into fighting for special tax treatment that mainly benefits the richest among them is probably not going to help.
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