Originally published on Forbes.com Nov 23rd, 2013
The Freedom From Religion Foundation has won a stunning victory in the United States District Court For The Western District Of Wisconsin where Judge Barbara Crabb has ruled that a substantial tax benefit enjoyed by many thousands of clergy – ministers, priests, rabbis, imams and others – is unconstitutional. Code Section 107(2) provides that the gross income of a “minister of the gospel” does not include:
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.
The Christian terminology, lack of gender neutral language and brevity indicate that this has been part of the Code for a while. The exclusion for in-kind housing for “ministers of the gospel” 107(1), which remains untouched by the decision, goes back to 1921. The exclusion was extended to cash allowances in 1954. In 2002, the limitation “to the extent such allowance does not exceed the fair rental value of the home ……..” was added.
How Big Is This?
Judge Crabb’s ruling will not solve the deficit. According to the Joint Committee on Taxation Estimate of Federal Tax Expenditure the exclusion is worth about $700,000,000 per year. The estimate is not broken down between in-kind, which remains intact, and cash, declared unconstitutional. Over the decades, churches have moved away from owning parsonages to paying cash allowances, so I would hazard a guess that more of the lost revenue comes from the cash allowance. We might be talking half a billion or so until we get into “dynamic scoring”, since it is likely that there will be a resurgence in the popularity of providing housing in-kind. One of the reasons that in-kind housing went out of favor was that ministers were missing out on the practically automatic wealth increase that came with home ownership. Those were the days.
How Does Something Unconstitutional Stay Around For So Long?
The question of how something that is unconstitutional can survive for decades is an interesting one. It is also pretty lawyerly and I am a mere CPA, but I will do my best. It is about “standing”. It is hard to sue about somebody else’s tax break, since the answer will be, in effect – “Hey, it’s no skin off your nose”. To have access to the courts, you generally need to show that you, specifically, are being harmed. Most of the discussion in the decision is about standing.
What the Freedom From Religion Foundation did to get standing was to start paying some of their officers housing allowances. Since the officers were clearly not ministers that gave them and FFRF standing. The argument got a little bizarre as the government in order to kill the case argued that perhaps the FFRF officers might qualify for the exemption. There is some interesting discussion about whether atheists could qualify as “ministers of the gospel”. Apparently, nobody read my blog posts that show there are avowed atheists collecting tax-free housing allowances. Who knows? Maybe it will come up on appeal.
Parsonage Exclusion A Modest Benefit Much Abused
I’m not much of a constitutional purist myself, so I would have liked to have seen the parsonage exclusion capped at some reasonable amount, not indexed for inflation, which would have the effect of gradually phasing it out, since so many small congregations might be rocked by having their minister’s take-home pay knocked back by a few thousand dollars. The “religious racketeers” that my blogging buddy, Reverend William Thornton, talks about will be able to adapt. Most likely mega-church ministers will shift to their “ministries” owning their multi-million dollar homes. What some of them need to be scared of is FFRF’s other lawsuit that would make churches subject to the same level of financial transparency that applies to other not-for-profits.
Will There Be An Appeal?
Dammit Jim, I’m a tax blogger, not a political analyst. The Obama administration determined that the constitutionality of DOMA was indefensible and stopped defending it. Might the same thing happen with 107? For whatever it is worth Presidential Candidate Jill Stein indicated that she might have dropped defense of the parsonage exclusion.
On reflection that is probably not worth that much. I think it is safe to assume that there will be an appeal.
What Will Congress Do?
The last time there was a threat to the parsonage exclusion, Congress acted with alacrity. The IRS was at odds with mega-church minister Rick Warren over whether his housing allowance should be limited based on the value of his house. The Ninth Circuit questioned whether the housing allowance was constitutional and appointed Erwin Chemerinsky to serve as amicus curiae (I’m wondering if the ministers might have thought of him as advocatus diaboli). Congress amended the Code to conform with the IRS interpretation thereby mooting the case.
I’m not sure what Congress could do in this instance. There is strong clergy influence on both sides of the aisle though, so there is a good chance that Congress will at least try to make it look like it has done something.
Thanks To My Most Constant Commenter
Robert Baty is a retired IRS Appeals Officer who has been complaining about abuses of the clergy housing allowance for decades. He gave me the heads up on this decision which has not yet attracted much notice. It goes without saying that FFRF is rather pleased with itself and has issued a celebratory statement
“May we say hallelujah! This decision agrees with us that Congress may not reward ministers for fighting a ‘godless and anti-religious’ movement by letting them pay less income tax. The rest of us should not pay more because clergy pay less,”
The only commentary I have seen so far is this post The New Civil Rights Movement site.
You can follow me on twitter @peterreillycpa.
Followup – A commenter kindly noted that I did not state the grounds that the judge used to declare the allowance unconstitutional. Here it is:
It is DECLARED that 26 U.S.C. § 107(2) violates the establishment clause of the First Amendment to the United States Constitution.
In the introduction Judge Crabb wrote:
With respect to the merits, I conclude that § 107(2) violates the establishment clause under the holding in Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989), because the exemption provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.