The clergy housing allowance is safe for now. Last week, the Seventh Circuit Court of Appeals reversed a Wisconsin federal district court, which struck down the venerable clergy housing allowance. As a result of the Seventh Circuit’s decision, clergypersons who serve churches, synagogues, mosques, and other worshipping groups, may continue to exempt certain parts of their compensation from federal income tax.
The news comes as welcome relief to worshipping groups and clergypersons. Last November, for the first time, a federal district court held 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 Department of Justice appealed to the Seventh Circuit. On appeal, the case brought together diverse religious groups, who filed three amicus curiae (friend of the court) briefs in support of the government’s appeal. These briefs represented more than ninety American religious groups, including Jewish, Protestant, Islamic, and Catholic groups. The groups all understood the fundamental importance of the district court’s path-breaking decision: had it been upheld, the financial implications to these worshipping groups and their clergy would have been severe., The Seventh Circuit’s decision upholding the housing allowance has thus provided a reprieve.
Worshipping groups should note that this reprieve could be temporary. In its decision, the court did not reach the question of constitutionality, but rather held that the plaintiffs did not have standing (the right to sue). The plaintiffs were atheist leaders who claimed that professionally they were similarly situated to professional clergy. But because they were not pastors or other ordained religious leaders, the benefit of the housing allowance was not available to them by law. This, they claimed, was an unconstitutional governmental endorsement of religion, in violation of the First Amendment’s Establishment Clause. The Wisconsin District Court agreed.
On appeal, however, the Seventh Circuit made much of the fact that Plaintiffs never formally claimed the benefit. In other words, they had never tried to claim a housing allowance benefit on their income tax returns. The lower court did not see this as problematic, since the court reasoned there was no way Plaintiffs would have been granted such exemption had they actually applied. But in the Seventh Circuit’s reasoning, such speculation by Plaintiffs (and the lower court) was a fatal flaw. The Seventh Circuit explained, “the plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance about [the exemption’s] unconstitutionality, which does not support standing” (emphasis added). Because the plaintiffs lacked standing to sue, the court held for the defendants and never reached the substantive legal question of the exemption’s constitutionality.
The Seventh Circuit ruled that because the plaintiffs did not ask for the clergy housing allowance, they cannot now claim “foul.” Accordingly, it would seem that they just need to ask, and then they should be in good shape for a new legal challenge. Not so fast: the Seventh Circuit’s decision reflects a much sounder basis than this deceptively simple procedural flaw.
First, the well-established judicial doctrine of “standing” has long prevented taxpayer challenges such as presented here, where the taxpayer is only tangentially impacted – but not directly adversely affected – by tax-related legislation. The Seventh Circuit’s decision is thus far from controversial; in contrast, the district court’s decision was quite novel.
Second, to the extent the plaintiffs try again to establish the requisite standing (i.e., concrete, individualized injury), they will need to perform some serious mental gymnastics. Per the Seventh Circuit’s decision, they must ask for the housing exemption based on claimed clergy status. But the plaintiffs are atheists who, by definition, disavow any religious beliefs. Further, they will need to assert that they are religious leaders. Again, that seems far-fetched, even impossible. In addition, to the extent they ask for such housing allowance as clergy members of the requisite “religious institution,” the IRS just may grant their request. In that case, any judicial challenge on their part will be legally moot – that is, there will be nothing to litigate.
Not Necessarily Safe
This is not to say that a cleverly structured and argued complaint could not be drafted to pass standing muster. Indeed, given the recent proliferation of this kind of challenge, the eventual drafting of such a complaint is certainly within the realm of possibility. Nonetheless, to get past the standing threshold, a prospective plaintiff will have to tread carefully.
In addition, the path remains open – as always – for opponents to seek legislative relief rather than victory through the court system. Such approach would not run afoul of the judicial standing bar, since legislation is typically general in nature and no individualized injury is necessary to pursue it. (Whether the housing allowance would ever be repealed is another question altogether.)
For now, worshipping groups and qualified clergypersons may structure clergy compensation arrangements to utilize the housing allowance exemption. Keep in mind, however, the exemption remains a very nuanced area of income tax law. Worshipping groups and clergypersons should understand the laws and restrictions associated with the exemption. Qualified legal and tax counsel should be able to assist worshipping groups and clergypersons to understand their obligations under the law.