Federal District Court Judge Holds Clergy Housing Allowance Exemption Unconstitutional

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As of last week, religious institutions and the clergypersons who serve them have been put on notice:  Subject to appeal, a Federal statute that provides an exemption for the housing allowance for clergy members has been held unconstitutional.  For now, the holding affects only clergy who receive cash compensation for a housing allowance, not clergy who reside in a parsonage or other accommodations provided for the convenience of the employer. While the decision will likely be appealed, and possibly reversed, religious institutions and the clergy who serve them should plan for a possible future without the exemption. 

On Friday, a Federal District Court judge of the Western District of Wisconsin issued a decision undoing an exemption enjoyed by clergy in American religious institutions for nearly 60 years.  Freedom from Religion Found., Inc. v. Lew, 11-CV-626-BBC, 2013 WL 6139723 (W.D. Wis. Nov. 22, 2013).  The statute at issue, 26 U.S.C. § 107, provides for certain housing-related federal income tax exemptions for “ministers of the gospel.”  Included in § 107 is the venerable housing allowance exemption for professional ordained clergy.  Specifically, § 107(2) “excludes from gross income a minister's “rental allowance paid to him as part of his compensation.” Plaintiffs from the Freedom from Religion Foundation argued that such federal income tax exemptions received by “ministers of the gospel” violated the establishment clause of the First Amendment and the equal protection component of the Fifth Amendment.  The Court agreed.  In her decision, District Judge Barbara Crabb held § 107(2) to be unconstitutional, “because the [housing allowance] 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.”  Id.  Such favoritism on the basis of the religious status of clergypersons was a violation of the Establishment Clause of the First Amendment. 

As a consequence of her holding, in her order, Judge Crabb enjoined the defendants, who represented the Department of Treasury and the Internal Revenue Service, from enforcing § 107(2), thereby instructing the IRS to disallow the exemption.  But this part of her order was stayed until “the conclusion of any appeals filed by defendants or the expiration of defendants' deadline for filing an appeal, whichever is later.” Apparently, Judge Crabb understood the dramatic impact her ruling will have on religious bodies.  She also anticipated that decision will almost certainly be appealed to the Federal Seventh Circuit.  Therefore because of the stay, for the time being the housing allowance exemption exists, at least until such time as it is appealed, and such appeals are concluded.

Despite the stay, the potential impact of Judge Crabb’s decision is obvious.  For decades, churches, synagogues, and other religious institution have relied on the exemption as a substantial benefit to be conferred upon their pastors, rabbis, Imams and other clergy.  The minister’s housing allowance is usually a large part of the minister’s total compensation package.  Small religious bodies, with limited budgets, have depended on the exemption to help make up for their limited ability to pay clergypersons a living wage.  With the potential elimination of the exemption, the potential strain on small church budgets could be severe.

Interested in learning more? Read our continuing coverage on the clergy housing allowance exemption