Will the clergy housing allowance stand? Members of the clergy continue to receive mixed signals. Two federal district courts in Kentucky and Wisconsin have considered the question – with very different outcomes. The Wisconsin case is now on appeal before the Seventh Circuit Court of Appeals. The venerable housing allowance stands in the balance. Hundreds of thousands of clergypersons could be impacted by outcome of the appeal. We therefore provide this update and some insight on how the divergent outcomes might impact the Seventh Circuit’s decision.
1. Backdrop: November 2013, Wisconsin federal district court strikes down housing allowance and rules non-clergy have standing to sue.
Last November, for the first time, a federal district court found the federal exemption from income tax for clergy housing allowances unconstitutional. See Freedom from Religion Found., Inc. v. Lew, 11-CV-626-BBC, 2013 WL 6139723 (W.D. Wis. Nov. 22, 2013). The court made two major determinations: First, the court ruled that plaintiffs had standing to challenge the allowance. Second the court agreed with the plaintiffs’ underlying claims that the federal statute granting tax exemption for the clergy housing allowance was unconstitutional. The court enjoined the IRS from permitting members of the clergy to claim the exemption. That order was stayed, however, until the exhaustion of all appeals.
2. IRC Section 107(2) – The Housing Allowance
At issue is Internal Revenue Code (“IRC”) Section 107(2), which provides that, “In the case of a minister of the gospel, gross income does not include… (2) 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.” On the basis of this section of the IRC, members of the clergy have historically enjoyed substantial tax savings, which often offsets the lower base salaries received by many such clergypersons.
3. Two Central Issues: Standing and Constitutionality
The federal courts considering Section 107(2) are examining plaintiffs’ claims from two angles. The first concerns the plaintiffs’ standing (their right to bring the lawsuit). The second concerns the constitutionality of the statute in question.
Article 3 of the United States Constitution requires that a plaintiff havestanding to properly file a federal lawsuit. To have standing, plaintiffs must allege violation of a legally protected interest. The invasion must be concrete and particularized. It must also be actual or imminent, not hypothetical. Furthermore, it cannot be a generalized grievance.
To illustrate, I cannot sue the federal government simply because I object to its taxation policies. My proposed claim is too generalized, lacking any harm particular to myself. Either I have to have suffered, or I must represent a particular subset of the population that has suffered the injury.
In the cases involving Section 107(2), standing has been the threshold question. Without standing, a federal court will generally dismiss a claim at the initial stages. It will not reach the underlying arguments and merits of a case.
Congress may not pass any law it pleases. All American laws must be consistent with the rights and responsibilities of citizens and their government as articulated in the United States Constitution. The First Amendment protects, among other things, citizens’ freedoms with regard to their religious beliefs and practice.
Accordingly, the First Amendment prohibits the government’s infringement upon an individual’s free exercise of religion. The First Amendment also prohibits the federal government’s establishment of any religion, or any favoritism of one religion over another.
Plaintiffs in both the Wisconsin case and the Kentucky case allege that Section 107(2) violates the prohibition against the government’s establishment or favoring of a religion. Plaintiffs note that the housing allowance enjoyed by clergy is not available to non-clergy. Employers may offer employees allowances for housing, but only clergy may exclude such allowances from their taxable income. Therefore, according to Plaintiffs, the state is endorsing or establishing religious beliefs through Section 107(2).
4. The Wisconsin Federal Court – Section 107(2) Is Unconstitutional
The Wisconsin court agreed that the plaintiffs, leaders of an atheist organization, had Article III standing (see 3(a), above). Defendants disputed this, claiming that because Plaintiffs had not filed an income tax return, attempting to claim the minister of the Gospel exemption, and been denied, they could not properly allege they had been injured. The court disagreed, reasoning, “Under no remotely plausible interpretation of § 107 could plaintiffs Gaylor and Barker qualify as “ministers of the gospel.” According to the court, because they were atheists, even if they had applied, there is no way they could have been granted the clergy exemption.
The court then turned to the merits and further found Section 107(2) to be unconstitutional (See 3(b), above). The court reasoned that a tax exemption provided only to ministers resulted in preferential treatment for religious messages over secular ones, even though doing so was not necessary to alleviate a special burden on religious exercise.
The court’s conclusion is a novel one. The housing allowance has previously been challenged in federal court. But until this case, no federal court has ruled that the provision of exemption for a clergyperson’s housing allowance is unconstitutional. See e.g., Freedom From Religion Found., Inc. v. Geithner, 715 F. Supp. 2d 1051 (E.D. Cal. 2010).
5. Kentucky Federal Court Casts Doubt on the Wisconsin Decision and Raises Interesting Questions
Six months after the Wisconsin decision, a Kentucky federal district court considered a similar case. See Am. Atheists, Inc. v. Shulman, CIV.A. 2012-264 WOB, 2014 WL 2047911 (E.D. Ky. May 19, 2014). Like the Wisconsin case, the plaintiffs in Am. Atheists, Inc. v. Shulman challenged Section 107(2) among other provisions of the Internal Revenue Code. However, unlike the Wisconsin case, the court dismissed Plaintiffs’ complaint finding that Plaintiffs did not have standing.
The Kentucky court noted that the case had no named individual plaintiffs and no individuals who claimed they could qualify for the clergy housing allowance under the Internal Revenue Code. In other words, there was no individual injury. For this and other reasons, the Kentucky federal court concluded that the plaintiffs did not have standing to bring the suit. As a result, unlike the Wisconsin case, the Kentucky federal court never reached the merits of the case and the central issue: whether the clergy housing allowance violates the Establishment Clause of the First Amendment.
Although the Kentucky federal court did not reach the merits, it did comment on the reasoning of the Wisconsin federal court’s decision. The court stated that it did not find certain portions of the Wisconsin decision concerning the Internal Revenue Code to be “persuasive or applicable.” In particular, the Kentucky court questioned the Wisconsin conclusion that there is no way in which atheists could be construed as “ministers of the gospel” under the statute.
The court’s comments suggest a possible legal and philosophical divide on an interesting question: “Can atheism be considered a religion?” The current Internal Revenue Code typically contemplates religion in traditional sacerdotal terms, with definitions involving traditional religious symbols and activities. The Kentucky decision, however, suggests a potentially broader understanding and definition of what a religion actually is.
6. Next Stop – The Seventh Circuit Court of Appeals (and Possibly the Sixth Circuit, Too)
As discussed above, the Seventh Circuit Court of Appeals will likely hear arguments an appeal of the Wisconsin case later this year. Though the Seventh Circuit’s decision on the Wisconsin appeal will likely not be until late this year or early 2015, the divide between the federal district courts suggests that the Wisconsin district court’s ruling against the housing allowance is by no means the end of the story.
Should the Kentucky Plaintiffs appeal their dismissal, the Sixth Circuit Court of Appeals would hear such appeal. That scenario raises the intriguing possibility of a potential Circuit split, which could pave the way for an appeal to the United States Supreme Court.
Whether or not such a split materializes, the legal issues before the Seventh Circuit are important and manifold: Can atheism legally be considered a religion? How far must a plaintiff go to demonstrate harm? Do the plaintiffs have standing? Does the clergy housing allowance of Section 107(2) violate the Establishment Clause of the First Amendment? If the Wisconsin decision is upheld on appeal, the decision could mark the end of arguably the single greatest financial benefit enjoyed by members of the clergy. On the other hand, the Seventh Circuit has an opportunity to affirm the constitutionality of the housing allowance and potentially write important new law on the legal nature of religion and its importance in our time.
Click here to read our previous posts on the clergy housing allowance exemption.