Religious Organizations Rally To Preserve Favorable Tax Treatment Of Clergy Housing Allowances

 

Originally published on Forbes.com.

The challenge to tax-free housing allowances for “ministers of the gospel” (Gaylor v Mnuchin) has entered what I like to call the “good buddy” stage. Amicus briefs are being filed.  The housing allowance under Code Section 107(2) has a lot of amici (That is the plural of amicus, which means friend in Latin.  You and I both know that, but you have to think of the other readers.)  The amici are people that might not have a dog in the fight but want to help the judges make a good decision.  The Seventh Circuit, which now has the constitutionally of Code Section 1o7(2) before it – again – has quite a few friends including seventeen members of Congress.

Background

The big trouble makers in this are are the Freedom From Religion Foundation and its officers.  They think that allowing “ministers of the gospel” to receive cash housing allowances tax free is a violation of the Establishment Clause.  Or in the view, of some, they are just a bunch of atheists who hate religion and want to hit it with a billion dollar tax.

The exclusion for housing allowances is a pretty sweet deal for highly compensated clergy – like televangelists and the mega pastors of megachurches.  Their housing allowances can run into the hundreds of thousands. For people like my blogging buddy Reverend William Thornton, it is a modest benefit.  Many regular pastors would probably just as soon have a FICA match.

The current litigation is not FFRF’s first rodeo on this issue.  They won in District Court with Judge Barbara Crabb in November 2013.  A year later the Seventh Circuit voided the decision based on standing.  Standing is a lawyerly concept that tends to make litigating about other people’s tax benefits difficult.  FFRF and its officers fixed the standing issue by having FFRF pay the officers housing allowances and were back before Judge Crabb who ruled that 107(2) was just as unconstitutional as it was the last time they asked her. That was in October 2017.  Unsurprisingly an appeal was filed in February 2018 and that is bringing out the amici.

Bridging The Gulf Of Theological Differences

The wonderful thing about this litigation is how it brings different faith communities together in their desire to protect their cherished tax benefit. Not yet available is the brief from the following amici – Christian Legal Society, Evangelical Council for Financial Accountability, Union of Orthodox Jewish Congregations, National Association of Evangelicals, Lutheran Church–Missouri Synod, Council of Churches of New York City,  and Queens Federation of Churches.   Last time around there was a brief that included The Ethics & Religious Liberty Commission of the Southern Baptist Commission (Southern Baptists, the second-largest denomination in the United States probably have the most skin in this game) and   The International Society for Krishna Consciousness and The Islamic Center of Boca Raton.

And From Congress – Or Part Of It

First Liberty Institute has prepared an amicus brief signed by seventeen members of Congress.  They are all Republicans.  Ted Cruz leads off, but that is just because it was Senators and then Representatives in alphabetical order.  The name on the list I found most interesting was Congressman Jody Hice, who was the senior pastor of Bethlehem First Baptist Church in Bethlehem, Georgia.  He is really big on religious liberty – except for Muslims.

Islam is Incompatible with America’s Foundation: Our Founding Fathers gave us a nation firmly established upon Judeo-Christian principles. This condition alone describes the major problem with any discussion of Islam and the American way of life. In fact, the system of government the Founders designed would not succeed in any other environment than Christian. If America continues to ‘flirt’ with the erroneous effort toward leniency with Islam, she will eventually fall with no capacity to rise again.

I spoke with Hiram Sasser who was part of the First Liberty team.  He couldn’t tell me how it was that they got to write the brief for the Congresspeople.  He did indicate, however that First Liberty has defended the free exercise rights of Muslims.  He said they were currently working on a case about a cemetery in Texas.  Also as you can see from this story by Reverend William Thornton, my go-to-guy on all matters evangelical, that sort of attitude toward Islam is hardly universal among SBC pastors.

There are those who would have the state classify Islam as some hybrid religion, a geopolitical movement deserving either no state first amendment protections or some limited version of such. My views on church and state are not influenced by a mosque tour and a few free snacks. All religions should have the same rights of free exercise as does mine – Christian, Protestant, Baptist, Southern Baptist.  ….

This Baptist, while wishing and working for the salvation of all who do not follow Christ, favors protecting the religious liberty of all.

Why Cash Housing Allowances Are Constitutional

Mr. Sasser goes as far to say that not having Code Section 107(2) would violate the Establishment Clause.  The predecessor to Code Section 107 goes back to 1921.  The Treasury as a matter of practice was exempting the fair market value of the “housing” provided to seamen and people working in mining camps, but did not think that the same logic applied to parsonages.  Congress set them straight though.  That was in 1921.  Some congregations provided their clergy with cash allowances rather than an actual house.  There was litigation about that.  Ultimately in 1954 Congress added the explicit exemption for cash allowances.  The idea, as Mr. Sasser explains, is that either because of economic circumstances or theological concerns, some denominations did not provide parsonages, so the allowance of cash allowances equalizes those religions.

Another brief by three law professors including Edward Zelinsky makes a similar point with more detail on the history.  They write that Section 107 is “one consistent part of a broader scheme to tailor a general convenience-of-the-employer doctrine to a wide variety of ’employer-employee’ relationships”.

Responses

Professor Zelinsky’s recent book – Taxing The Church – has an extensive discussion of the parsonage exclusion.  His position is that while the exemption of cash housing allowances is constitutional, it is bad tax policy. He wrote me:

Its interesting to read all of the briefs defending Section 107. No one agrees with my position — constitutional but not good as a matter of policy but most of the briefs are nevertheless willing to cite me on the constitutional question.

Samuel Brunson has an even more recent book – God And The IRS – which also discusses the parsonage controversy at some length.  As policy the exclusion for cash housing allowances does not make it through the first gate of the “Brunson Rubric” to evaluate accommodations to religion in the the tax law.  He also believes that Section 107(2) violates the Establishment Clause.  Professor Brunson sent me a critique of the First Liberty brief:

First, a lot of the brief feels like it misunderstands what’s at stake here. It treats the parsonage allowance as part and parcel of a church’s tax exemption—that is, as a benefit that accrues to the church. The benefit arguably accrues to the church, because it allows the church to pay less cash compensation to clergy, but it’s not aimed at churches. Rather, it’s an exemption from tax that applies to individuals (here, specifically, “ministers of the gospel” as ecumenically interpreted by the IRS). While I don’t want to opine on the constitutionality of the provision, this might cut against the amici’s argument that this passes Town of Greece. The tax benefits (again, that accrue to individual taxpayers) probably provide some incentive to individuals to become clergy, since clergy pays less in taxes than similarly-situated (and similarly-compensated) non-clergy.

Adding to the sense of confusion and lack of clarity, the amici (on pages 12-13 of their brief) talk first about how some taxpayers have been exempt from paying taxes on employer-provided housing since the origins of the tax law, and then asserts that Treasury began explicitly exempting clergy. Again, they’re conflating two different things. O.D. 119 exempts clergy from taxation on payments from their religious order provided (a) they’ve taken a vow of poverty, and (b) they turn over any income in excess of their living expenses back to their religious order. That’s interesting (and seems to stand even today), but that’s something entirely different from exempting housing. That is, most clergy doesn’t qualify for that exemption, and clergy that doesn’t qualify (principally because they haven’t taken a vow of poverty) wouldn’t get their housing tax-free. That is, this exemption for vows of poverty is substantively and radically different from the provision of tax-free housing.

The “vow of poverty” discussion is intriguing.  There is case law that when member of religious orders work for secular organizations, they are taxed on the earnings even though they sign them over to their orders.  Different story when it is a church related organization that pays the order.  You will see a note about that in the Form 990 of Loyola University where Professor Brunson teaches.  There does not, however, appear to be any provision to tax members of religious orders who have taken a vow of poverty on the support they receive from their orders.  Be sure not to tell the Freedom From Religion Foundation about that one.  Don’t get them started.

The Stakes

You will see coverage to the effect that the parsonage question is a billion dollar issue.  The Joint Committee on Taxation scores it at $800 million, but that is Section 107 as a whole and only 107(2) – cash allowances is in question.  In-kind is not.  Let’s be generous though and call it $800 million.  If we view it as a tax subsidy to congregations, that would be somewhat significant.  According to a 2016 study in the Interdisciplinary Journal of Research on Religion, the total income of congregations is $84 billion, so we might be flirting with 1%. It is probably not as big a deal as all the people who are not going to be itemizing thanks to the recent tax act.

Some commentary indicates that striking down 107(2) could kill small congregations.  I don’t see that as a strong argument for keeping it.  If your congregation only works because your minister doesn’t have to pay taxes on all of his or her income, there is something a little off.  Arguably that could be an argument for the notion that 107(2) does violate the Establishment Clause.

I actually think that regardless of the constitutional question, religion would be better off with no special tax status for ministers and that the right answer from religious groups should be “Whatever”  when it comes to this litigation.  If the denominations like SBC that purport to be concerned about small congregations would propose a reasonable cap on the tax-free  housing allowance, I would take them more seriously.  What would a reasonable allowance?  Maybe the housing allowance that a military chaplain in that zip code would draw.  You can look that up here, but to save you time, a colonel in 90210 with dependents gets $3,987 per month.