Is the religious housing allowance constitutional or not? The exemption for both church-provided housing and an allowance for clergy-owned housing is deeply rooted in our country’s tax history, and more concretely, found in Section 107 of the Internal Revenue Code. For the second time in the last four years, however, Wisconsin federal district court Judge Barbara Crabb has ruled the latter clergy-owned housing allowance unconstitutional, raising enormous religious liberty ramifications as well as extremely significant potential financial implications for many religious institutions. Specifically, the court held that Section 107(2) “violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.”
The ruling has been stayed for now, but the battle lines are well marked and controversy surrounding the issue surely will continue. What’s different between Judge Crabb’s two rulings, and what can religious organizations expect next?
Scorecard – Round 1
District Court: Housing Allowance Unconstitutional
Court Appeals: Reversed – No Standing to Consider the Issue
Outcome: Housing Allowance Survives
In September 2011 plaintiffs Freedom From Religion Foundation, Inc., Annie Laurie Gaylor, Dan Barker, and Anne Nicol Gaylor filed their original complaint challenging the constitutionality of Sections 107(1) and 107(2). Section 107(1), which provides exemption for the rental value of a home furnished to the minister as part of his compensation (i.e., a parsonage), was not applicable to the facts of this case, so that part of the complaint was dropped. Regarding Section 107(2) which applies to minister-owned housing, the plaintiffs argued that “ministers of the gospel” receive a religion-based tax benefit unavailable to plaintiffs. According to plaintiffs, such exemption is a prima facie government endorsement of religion in violation of the First Amendment (notwithstanding similar employment-related housing exemptions, such as for the military and other “employer convenience” contexts).
In its November 2013 decision, the district court agreed and ruled Section 107(2) unconstitutional. On appeal however, the Seventh Circuit reversed based on a lack of standing by the plaintiffs (discussed below). The Court wrote, “[Plaintiff’s argument] fails, however, for a simple reason: the plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial.”
Why the Plaintiffs Lost Round 1 – Standing
Generally, standing is the “capacity of a party to bring suit in court.” The Supreme Court of the United States has held that plaintiffs filing lawsuits must allege the following three things:
- Plaintiffs must allege they suffered an “injury in fact,” meaning that the injury is of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent;
- A causal connection must exist between the injury and the conduct brought before the court; and
- It must be likely, rather than speculative, that a favorable decision by the court will redress the injury.
Under the standing doctrine, a plaintiff must meet all the above criteria to prevail. It is not enough to sue a company claiming, “Company X has unfair hiring practices.” The claim must state how Company X’s hiring practices has specifically injured the plaintiff. Without a particular injury, there is no standing. This was the nature of the defect with the plaintiffs’ argument in Round 1. As the Seventh Circuit noted, plaintiffs never actually attempted to claim the exemption, so they could not state how the housing allowance statute injured them. Without that concrete, particularized, and redressable injury, the Seventh Circuit dismissed the case for lack of standing.
Importantly, this means that the core issue – whether the housing allowance is unconstitutional – was never considered by the court.
Round 2 – Scorecard
District Court: Housing Allowance Unconstitutional
Court Appeals: ?
In the instant case, much is the same from the previous case: arguments, the defendant (the IRS), most plaintiffs – and even the same judge. What’s changed now is that plaintiffs have now personally and actually claimed the housing allowance, and the IRS has denied them. According to the lower court, this move by the plaintiffs has cured the defect that the Seventh Circuit said doomed the earlier case.
Notably, the parties agree. Whereas in Round 1 the government challenged plaintiffs’ claims on the ground of standing, now they both concede the existence of standing. Judge Crabb, who wrote the district court’s opinion in both cases, stated in this case that plaintiffs have followed the Seventh Circuit’s “road map” for clearing the standing hurdle.
Judge Crabb’s ruling is limited at this point to “declaratory relief” – that is, a court determination that the housing allowance is itself unconstitutional. The court has expressly refrained from granting other relief to the plaintiffs, however, such as a tax refund or injunctive relief more broadly. Rather, the parties have been instructed to provide supplemental briefings on potential remedies and whether any such relief should be stayed pending appeal to the U.S. Seventh Circuit Court of Appeals.
With standing problems behind them, the parties are set for the Main Event – consideration on eventual appeal of whether Section 107(a)(2) of the Internal Revenue Code – the venerable housing allowance – violates the First Amendment of the Constitution.
In the meantime, this ruling should not affect the applicability of Section 107(a)(1), which excludes from a minister’s gross income “the rental value of a home furnished to [the minister] as part of his compensation.” In other words, the court’s ruling should have no effect on pastors whose compensation package includes residence in a church-provided parsonage. Given that the court did not consider this issue in its decision – again due to standing issues –it is likely that this part of Section 107 should remain judicially intact.
In addition, the court is expected to rule that any widespread nullification of Section 107(a)(2) – such as would be granted through injunctive relief – should wait until all appeals have been exhausted. For now, the housing allowance thus remains legally intact.
A key question here is one of Establishment Clause interpretation under the First Amendment – namely, is the government supporting and promoting religion in constitutionally unlawful ways through Section 107(a)(2)’s housing allowance? Or conversely, does the Tax Code’s housing allowance give appropriate constitutional “breathing room” to clergy housing, thereby keeping the government out of impermissible “entanglement” questions (in Establishment Clause parlance) involving a religious institution’s housing needs (as generally comparable to Tax Code Section 119’s provision for “meals or lodging furnished for the convenience of the employer”)? In other words, is the housing allowance constitutionally permissible, or on the other hand is its invalidation constitutionally compelled? Most assuredly, these issues will continue to be addressed at great length, as the litigation continues.
On a more practical level, should churches and other religious organizations plan now to dispense with housing allowances, with corresponding financial adjustments? No – at least not yet. The battle will surely continue and there are plenty of compelling legal arguments for preserving both the parsonage and the housing clergy allowances. Our firm will continue to monitor progress of the case as it moves through the Seventh Circuit and potentially to the U.S. Supreme Court, and we will provide updates as they become available.
 Gaylor v. Mnuchin, No. 16-CV-215-BBC, 2017 WL 4466621, at *2 (W.D. Wis. Oct. 6, 2017).
 Freedom from Religion Found., Inc. v. Lew, 773 F.3d 815, 821 (7th Cir. 2014).
 The court indeed stayed injunctive relief per a subsequent order issued on December 13, 2017.