“Play Between the Joints” and Tax Theory: Reflections on Seventh Circuit’s Clergy Housing Allowance Ruling

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On March 15, 2019, the Seventh Circuit issued its Gaylor v. Mnuchin ruling, upholding the clergy housing allowance’s constitutionality.  This decision astutely recognizes that the fundamental questions in this case fall in a jurisprudentially gray area, or within the “play in the joints” between the First Amendment’s Free Exercise and Establishment clauses.  Between these two foundational pillars of our liberal democracy, the Court’s constitutional interpretation rightly respects the independence of institutions for a free society, particularly as applied to the clergy housing allowance.  Such deference further implicates the interplay between tax subsidy theory and religion. 

The Road to the Seventh Circuit’s Ruling

The litigation began in 2011, when the Freedom from Religion Foundation challenged the constitutionality of the housing allowance contained in Section 107(2) of the Internal Revenue Code, claiming that the provision endorses religion in violation of the Establishment Clause.  FFRF’s initial effort was dismissed for lack of standing, since its representatives had not actually claimed any clergy housing allowance.  The FFRF plaintiffs then cured this procedural defect and renewed their constitutional attack.  

On October 26, 2018, oral arguments in the case were heard before a three-judge panel of the federal Seventh Circuit Court of Appeals, a court just below the U.S. Supreme Court.  Attorneys from the U.S. Department of Justice (DOJ) for the U.S. Treasury Secretary and the IRS Commissioner, as well as a group of religious intervenors, urged the court to uphold the exemption, defending its basis in the Constitution and related religious liberty jurisprudence.  Interest in this case has been both broad and intense, causing consternation among clergy of all religions, scrutiny and commentary by tax professors on both sides of the aisle, and a plethora of voices chiming in on this tax issue. Ten amici curiae (“friends of the court”) briefs were filed, including a brief on behalf of eighteen states, another on behalf of representatives of Congress, and several others by religious organizations representing tens of thousands of worshipping bodies and millions of adherents.  (For further background, see our previous blog here).

The Seventh Circuit’s Ruling

The Court’s unanimous decision was authored by Judge Michael Brennan, who was confirmed by the Senate to his current post less than a year ago.  The ruling holds that when a religious leader (“minister” under the Code) receives a housing allowance as a portion of compensation, such income is properly excluded for purposes of calculating the leader’s income tax liability.  

Religious Context Warrants Bright-Line Tax Provision 

The Court’s opinion is well-reasoned and deeply encouraging. The Court appropriately started with the housing allowance’s history as highly relevant, noting that the present-day Section 107(2) of the Tax Code resulted from the 1913 imposition of income tax (per the Sixteenth Amendment) and is consistent with the Section 119 “convenience of the employer” income tax exclusion for certain employee housing.  Against this historical backdrop, the Court recognized “an overarching arrangement in the tax code to exempt employer-provided housing for employees with certain job-related requirements.” Indeed, “ministers often use their homes as part of their ministry.” Religious leaders’ homes commonly serve as safe havens to counsel troubled souls, forums for spiritual development, additional facilities for religious use, and a myriad of other purposes that benefit  their communities.

Rather than inviting a fact-intensive determination of whether a clergy member’s housing is sufficiently “ministerial” in the government’s eyes, the clergy housing allowance exemption thus “eases the administration of the convenience-of-the-employer doctrine by providing a bright-line rule.” In other words, Section 107(2) essentially allows the government to respect the independence of the religious sphere in light of the First Amendment, rather than establishing or favoring religion, as FFRF contended.

Recognizing this inherent “play between the joints” of the Free Exercise Clause and the Establishment clause, and out of an apparent abundance of caution, the Court then applied two different constitutional tests for this Establishment Clause challenge through a detailed analysis (leaving it for the U.S. Supreme Court to decide which of the two tests should be used).

Clergy Housing Allowance Passes Applicable Constitutional Tests

First, the Court carefully evaluated Section 107(2) through the lens of the long-standing “Lemon” constitutional test using three related prongs. Finding no violation, the Court initially determined that Section 107(2) has a secular legislative purpose: essentially to “integrate ministers into an existing tax system,” so that secular and religious employers can be on equal footing when it comes to job-related housing. In addition, the Court rejected that the underlying tax exemption constituted a “tax subsidy” that impermissibly advances religion.  In doing so, the Court quoted the venerable U.S. Supreme Court’s 1970 Walz property tax exemption decision: “The grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.” The Court then turned to the last prong of the Lemon test, which asks whether the action results in excessive entanglement between the government and religion.  The Court determined that “some level of church-state interaction [is] unavoidable” but that eliminating this exemption would actually result in more entanglement.  Specifically, the IRS would then need to rely on § 119(a)(2) which is far more invasive and likely to involve unconstitutional state inquiries seeking, for example, who qualifies as an eligible minister and who is an ineligible minister.  Section 170, then, actually reduces the amount of government involvement, making any contact merely incidental, rather than inching towards the “excessive” side of the entanglement spectrum.

Second, the Court held that the Section 107(2) passes constitutional muster under the “historical significance” test as articulated in the U.S. Supreme Court’s 2014 Town of Greece ruling, which concerned legislative prayer.  In doing so, the Court referenced other Supreme Court cases critical of the Lemon test because it ignores “the strong role played by religion and religious traditions throughout our Nation’s history.”  More specific to the clergy housing allowance, the Court focused on our country’s “lengthy history of tax exemption for religion,” particularly property tax exemption cases that have withstood Establishment Clause challenges.  

Of Tax Subsidies, Tax Exemptions, and Religion

The Court’s sound reasoning highlights the contorted mental gymnastics needed in order to rely on the dubious “tax subsidy” theory as the sole justification of tax-related exemptions – here, the exclusion from taxable income for a religious leader’s designated housing allowance. The plaintiffs in this case argued that such tax benefit equates to a tax subsidy for religion. At best, the good faith argument is based in an optimistic zero-sum view of the government, whereby the failure of some taxpayers to pay their “fair share” results in the rest of the taxpayers to make up the difference. Of course, that presumes that the government is entitled to those funds in the first place.

Thus, in a far less favorable light, the Freedom from Religion Foundation’s theory may be seen to contend that exemptions from taxes are granted by fiat, and by the grace of the state, as a reprieve from the government’s rightful imposition of coercive force and taxes. By establishing such merciful areas of relaxed enforcement, the state thereby “subsidizes” whatever organizations it deems can eke out an existence in that shaded spot of government-granted fertility. The jurisprudential starting point here is with the manifest authority of the state, and the narrative is one of reprieve from a default stance of state oppression.

This is not to say, of course, that the state’s collection and imposition of taxes is impermissible. Rather, as the Court indicates, the important distinction lies between those areas that the government is entitled to tax, and those areas over which the government ought not exert control—using the language of “exemption.” The Court’s pithy statement sums it up: “FFRF claims Section 107(2) renders unto God that which is Caesar’s.” In rejecting this framework, though, it recognizes that Section 107(2) seeks to render unto Caesar only that which is Caesar’s, and that Caesar should not seek to collect that which is not his.

The argument against tax subsidy theory within the context of the instant case puts the Court’s “historical significance” test in its proper place, as being descriptive of the norms set forth in Lemon. Lemon sets out the jurisprudential principles recognizing the important pre-political influences of the various religious institutions and the religious sphere in general. These wise principles of political theory, then, are borne out through historical practice, which are described through the practical test set forth in Town of Greece and its related cases. Without indicating which test should apply, the Seventh Circuit aptly demonstrates that the two can go hand in hand, with one describing the practical out-workings of the other’s normative principles.

Is this case representative of a perpetual conflict? Hopefully not. In fact, tax subsidy theory may very well make sense within certain contexts where the state’s imposition of taxes is well-established and defensible. Those areas are potentially far greater in number than the various institutions of society which require the state to take a subsidiary role in order to promote human flourishing.

What may be needed, then, is grace and understanding among our society’s members. In those institutions where the state is the primary actor and mover of culture, exemption from its own taxes may well incentivize and support action. But in other institutions, the state should not try to impose a one-size-fits-all framework. Indeed, this top-down approach does not lend itself to a liberal and pluralistic society, such as the one we have in the United States, and certainly is not demonstrative of creating structures necessary for a free society.  Further, one could thus question to what degree as FFRF’s contentions, as reflected in its self-identified moniker as a “nonprophet nonprofit,” are consistent with such values.

Summing Up

The Court’s decision leaves the clergy housing allowance wholly intact.  Will the case be further appealed to the U.S. Supreme Court?  Perhaps. In that case, one can hope that our highest court in the land will similarly affirm the central importance of our country’s religious heritage to legitimate religious freedom.  As the Seventh Circuit rightly decided, clergy members enjoy the housing (and parsonage) allowance not because they are somehow unfairly favored, but because such approach reflects sound tax policy consistent with limited government interference with religion, a level playing field for housing-related tax benefits, and appropriate deference to the role of religious institutions within our country.