“It is declared that 26 U.S.C. § 107(2) violates the establishment clause of the First Amendment to the United States Constitution.”
-- Judge B. Crabb, Federal District Court of Western Wisconsin regarding the clergy housing allowance (November 20, 2013).
Will the tax exemption for the clergy housing allowance survive the recent federal decision to strike it down? At this point, the answer is not clear. One thing is certain, however, the United States Department of Justice (“DOJ”) believes Judge Crabb got it wrong. In its appellate brief, the DOJ argues that the exemption in no way violates the Establishment clause, as the lower court ruled.
The implications for American religious institutions and clergypersons are enormous. Some estimate that the clergy will lose more than $2.3 billion if the appeal fails. Given the broad interest in this case, we provide the following update to the litigation, including a summary of the DOJ’s recent brief.
1. 26 U.S.C. Section 107 and Why It Matters
At the heart of the controversy is 26 U.S.C. Section 107, which dates back to 1921 (1954 in its present form). Based upon this section of the Code, ministers, rabbis, Imams and other clergypersons have long enjoyed exemption from federal income tax for portions of their compensation related to housing. The statute is divided into two parts:
Subsection (1) excludes from the clergyperson’s gross income the rental value of a church-owned home provided as part of compensation. This is commonly known as the parsonage exemption. Subsection (2) concerns the familiar housing allowance. It excludes from taxation (with certain restrictions) allowances paid to the clergyperson to provide a home. In this case, only the housing allowance is at issue; the complaint concerning the parsonage has been dismissed.
2. The Controversy. Is the Housing Allowance Constitutional?
Appellees, Freedom from Religion Foundation, Inc., Annie Laurie Gaylor, and Dan Barker contend that the housing allowance violates the Establishment Clause because it is only available to “ministers of the Gospel.” At first blush, Appellees’ argument seems compelling: Why should religious leaders enjoy a tax break when the rest of us have to pay so much to Uncle Sam? Isn’t that a clear expression of the government’s endorsement of religion, which violates the First Amendment? If religious leaders enjoy the exemption, why shouldn’t secular employers be permitted to grant similar allowances to employees that will be similarly exempt? Judge Crabb certainly agreed with Appellees’ arguments, ruling that the exemption violated the Establishment Clause of the First Amendment.
3. The Government’s Response
The DOJ’s brief before the Seventh Circuit comes out swinging. “In striking down the law,” the DOJ argues, “the District Court erred. It failed to come to grips with the reasons Congress enacted § 107 in the first place.” Brief for the Appellants at 28, Freedom from Religion Foundation, Inc., et al v. Jacob J. Lew, et al, Case. No. 14-1152 (7th Cir. 2014) (“Brief”).
The government’s argument has two prongs: First, that Appellees do not have standing to sue, and second, that the statute has a secular purpose as required under the Establishment clause.
A. First Argument: Appellees do not have standing to sue.
In its Brief, the DOJ first notes that Appellees (Freedom from Religion Foundation, Inc., et al) lack standing to challenge the statute. Standing is a concept stemming from Article III of the Constitution. The idea is that unless a plaintiff has suffered an actual injury, she does not have standing to bring a lawsuit. In other words, individuals may not sue out of “mere interest in a problem or a grievance shared in common with the public.” (Brief at 26). A prospective plaintiff must have suffered an actual injury that may be redressed through the litigation. Only in such circumstances is there sufficient standing to sue.
In this case, though Appellees Gaylor and Barker received a housing allowance from the Freedom From Religion Foundation, they never claimed the exemption on their tax returns. Instead, they complained that, according to the plain language of the statute, under no circumstances could they have been eligible.
According to the government’s brief, Appellees’ “would haves” and “could haves” don’t matter. What counts is an actual injury, and there is no actual injury in this case. If the Seventh Circuit agrees with the DOJ, it may elect not to address whether the housing allowance violates the Establishment Clause.
B. Second Argument: The statute has a secular purpose
If, however, the Seventh Circuit does not decide the case based on standing or simply chooses to consider the case on the merits as well, the government further argues that the housing allowance has secular purposes. To begin with, the housing allowance is for the employer’s benefit. The government also argues that the housing allowance prevents discrimination between various religious groups.
Under Section 119 of the Internal Revenue Code, meals and lodging provided to employees for the convenience of the employer have long been considered exempt from taxation. Seamen living aboard ships, workers living in camps, and hospital employees were some who benefitted from the “convenience to the employer” exemption.
Clergypersons were granted a similar exemption in 1921 in Section 107. Houses of worship provided housing that was usually very close to, or attached to, worship facilities. The law positioned clergypersons similarly to other employees receiving housing for their employer’s benefit. Like the housing described in Section 119, the housing provided to clergy was for the convenience of the employer and was thus exempt from taxation.
The addition of the housing allowance was intended to eliminate discrimination between those groups able to provide such housing facilities and those too small or too poor to provide similar benefits to their clergy. In this way, the housing allowance was intended to put all religious groups on equal footing. All religious groups would have access to the same tax benefits.
Such prevention of discrimination, according to the government, is a secular purpose. Religious groups may benefit from the statute, but only incidentally so. Accordingly, the DOJ argues, the statute does not violate the establishment clause.
4. Where Are We, and What’s Next?
On January 24 of this year (2014), the DOJ filed its notice of appeal. In the coming weeks, Appellees will file their response to the government’s brief, possibly followed by additional pleadings. Moreover, the government has requested oral argument. The final determination of the suit is at least months away.
In the meantime, the ministerial housing allowance is still deductible. Judge Crabb’s order enjoins the IRS from enforcing her ruling until all appeals are finished. So, until all such appeals are concluded, religious groups and clergypersons may enjoy the benefits of the exemption.