Seventh Circuit: Clergy Housing Allowance Is Constitutional

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The following article is published by permission from Church Law & Tax.  Church Law & Tax, and its website ChurchLawandTax.com, is a resource for clergy and churches that provides comprehensible, searchable, and easily accessible information on legal, tax, financial, and risk management matters. The original article can be found on their website here

The US Court of Appeals for the Seventh Circuit in Chicago ruled on March 15, 2019 that the clergy housing allowance is a constitutionally permissible tax benefit.

The Seventh Circuit reversed a 2017 decision by a federal district judge in Wisconsin, which favored leaders of the tax-exempt atheist organization Freedom From Religion Foundation (FFRF). The FFRF leaders brought the lawsuit after their efforts to claim housing allowances were denied by the Internal Revenue Service. In light of that rejection, they argued the housing allowance exclusively benefits ministers, violating the Establishment Clause of the First Amendment.

The 2017 decision jeopardized the benefit for clergy in Illinois, Indiana, and Wisconsin—the three states covered by the Seventh Circuit—and many predicted similar consequences nationwide, were the Seventh Circuit to affirm the decision on appeal. Such an outcome would have delivered a financial blow to houses of worship and their leaders who qualify for the benefit. That’s because the benefit is the most valuable one available to qualifying clergy, estimated to be worth nearly $700 million a year, according to the congressional Joint Committee on Taxation.

But with Friday’s opinion, authored by Circuit Judge Michael Brennan on behalf of a three-judge panel, the court reversed, concluding the 65-year-old benefit—established through Section 107(2) of the Tax Code—does not offend the First Amendment.

It is the first time a federal court of this stature has evaluated the constitutional merits of the clergy housing allowance.

“FFRF claims Section 107(2) renders unto God that which is Caesar’s,” Brennan wrote. “But this tax provision falls into the play between the joints of the Free Exercise Clause and the Establishment Clause: neither commanded by the former, nor proscribed by the latter.”

Whether FFRF will petition the US Supreme Court to review the decision remains to be seen. The Supreme Court each year receives about 8,000 petitions, but accepts only 80. Ted Batson, a tax attorney and partner at CapinCrouse, said the prospects of a Supreme Court review should be known “within the next 90 days or so.”

In a statement, FFRF urged Congress to take the opportunity and intervene by repealing Section 107(2). In a tweet, the Associated Press said FFRF is “reviewing options.”

Church leaders, attorneys, and CPAs who serve churches nationwide applauded the decision.

“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,” said Sally Wagenmaker, an attorney with Wagenmaker & Oberly in Chicago and president and chairperson of the Christian Legal Society.

Added Noel Sterett, an attorney with Dalton & Tomich in Chicago who has argued other cases before the Seventh Circuit: “The ruling is a significant victory for religious freedom. Secular workers of all different kinds, be they teachers, nurses, or prison wardens, receive tax-exempt housing when it is for the convenience of their employers. Affording religious leaders and their ministries a similar tax benefit is not preferential treatment but equal treatment.”

Others cautioned leaders to take a wait-and-see approach, despite Friday’s outcome favoring churches.

“This news comes as a relief to churches and clergy across America,” said CPA Michael Batts, an editorial advisor for Church Law & Tax. “Of course, given the possibility of further consideration and appeals, we’re not quite to the point in the story where we can say ‘and they all lived happily ever after.’”

A comprehensive analysis

Section 107(2) of the Tax Code allows ministers who rent or own their own homes to receive an annual housing allowance from their employing church—and not pay federal income taxes on the designated amounts. The provision was adopted by Congress in 1954 after clergy from a variety of faith traditions indicated there was unequal tax treatment for those who were not provided a parsonage from their employing house of worship. Since 1921, clergy who live in parsonages receive federal income tax exemptions for housing-related expenses through Section 107(1) of the Tax Code.

Separately, parts of the Tax Code provide similar tax exemptions for other types of employer-employee housing arrangements.

During oral arguments regarding the appeal last October, the Seventh Circuit justices focused on which legal test should be used to evaluate Section 107(2) in light of the First Amendment. One approach involves the Supreme Court’s holding in Town of Greece v. Galloway. Another involves the Supreme Court’s three-prong test from Lemon v. Kurtzman.

With Friday’s decision, Brennan and the other judges opted to take a comprehensive approach. “Because the Supreme Court has not clarified which should take precedence, we evaluate FFRF’s claims under both tests and associated case law,” Brennan wrote.

The Seventh Circuit found the housing allowance satisfied all three prongs from Lemon. Under the first prong, Section 107(2) maintains a secular legislative purpose, Brennan said. “Parallel provisions” exempt employer-provided housing for employees in other job sectors, he noted. Also, Congress passed Section 107(2) to ensure equal treatment among all ministers, since only those who served at churches providing parsonages could receive the tax break under Section 107(1). And, Brennan said, Section 107(2) provided a method of administering housing allowances for ministers that avoided concerns of “excessive entanglement” by the government that would arise, were other Tax Code provisions pertaining to housing arrangements involving secular entities applied to churches.

Under the second prong of Lemon, determining whether the statute advances or inhibits religion, Brennan cited the Supreme Court’s decision in Walz v. Tax Comm. of City of N.Y., concluding the tax exemption made possible by the housing allowance statute was not synonymous with a government subsidy. And Section 107(2) met Lemon’s third prong since, as noted under the first prong, excessive entanglement concerns would arise were the government to administer tax-exempt housing for ministers using the same methods as applied to secular employers and employees.

Turning the court’s attention to Town of Greece, and that case’s “historical significance test,” Brennan said “(t)he government and intervenors, and amici curiae supporting their position, have provided substantial evidence of a lengthy tradition of tax exemptions for religion, particularly for church-owned properties.” In contrast, Brennan noted, “FFRF offers no evidence that provisions like [Section] 107(2) were historically viewed as an establishment of religion.”

What this means for churches and clergy

The Seventh Circuit’s decision keeps the housing allowance intact for churches and clergy in Illinois, Indiana, and Wisconsin. Churches and clergy nationwide also continue to enjoy the benefit. Congregations should make sure they have designated allowances for 2019, and should continue to do so annually until further notice.

However, leaders also must watch to see how this storyline continues to unfold.

FFRF may attempt to petition the Supreme Court, and were the Court to agree to review the case, its decision—potentially affirming or reversing the Seventh Circuit’s decision—would become precedent nationwide.

Alternatively, FFRF’s leaders—or the leaders of another like-minded organization—could decide to make the same challenge with a different federal court elsewhere in the country, all in the hopes their efforts could reach a federal appellate court that is more sympathetic than what the Seventh Circuit ultimately proved to be. But this assumes these leaders would be able to achieve the same actual financial injury (denial of a housing allowance claim) in such a jurisdiction, and land a favorable decision from another federal district judge before progressing through the appeals process. As Friday’s outcome shows, such an effort involves years of effort and financial cost—with no guarantee of success. Also, other federal courts are not bound by the Seventh Circuit’s ruling, but they will evaluate it—and possibly find it persuasive—were they to face a similar case later.

Lastly, as FFRF indicated in its statement, efforts to lobby members of Congress to repeal Section 107(2) also are a path.

With the possibility of future challenges still very real, churches and clergy should still evaluate and adopt contingency plans were the housing allowance benefit ever to go away. Those plans can help navigate the financial strain that would arise under such a scenario.

For now, though, such a scenario remains just that—a scenario.

“The housing allowance is constitutional. Churches may continue designating a housing allowance as they have been doing historically,” said attorney and CPA Frank Sommerville, a Church Law & Tax editorial advisor. “While this decision is not final, the pressure is off of church budgets.”