A federal judge has ruled that the provision of the Internal Revenue Code (26 U.S.C. § 107(2)) that grants clergy the benefit of declaring a portion of their salary as a tax-free housing allowance violates the Establishment Clause of the United States Constitution.
Under the section ministers, priests, imams, and rabbis could set aside a portion of their gross income and avoid paying income tax on that income if it is used to provide housing:
“[T]he rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
The section dealing with in-kind allowances remains intact since the court ruled that the plaintiffs lacked standing to bring the suit. This means that clergy who are provided with a house as part of their compensation will not be liable for tax on the fair rental value of the house despite its providing part of their compensation.
The exclusion of clergy from being liable for the value of housing that forms apart of their compensation dates from 1921. In 1954 the exclusion was extended to include not only in-kind but cash allowances.
The rule was further clarified after a lawsuit involving Baptist mega-church minister Rick Warren. Warren contended that the entirety of his salary could be designated as a housing allowance thereby reducing his income tax liability to zero. In 2002 in response to the litigation, the rule was altered by Congress to comply with the Tax Court ruling: “to the extent such allowance does not exceed the fair rental value of the home.”
The Friday decision could have significant financial ramifications for priests, pastors, imams and rabbis across the country. Annie Laurie Gaylor, co-president of the Freedom from Religion Foundation, Inc and one of the plaintiffs in action framed the issues as one of fairness. She and her co-plaintiffs objected to the government extending a benefit to religious professionals exclusively on the basis of their religious vocation and, further, in the absence of any burden the benefit was designed to alleviate.
It’s estimated that the exclusion causes the treasury to forego about $700,000,000 in tax revenue per year. That’s a fairly insignificant amount in the grand scheme of the U.S. economy compared to, say, the home mortgage interest deduction, which annually costs the government $100 billion in tax revenue.
Now that the cash allowance provision has been struck down, and assuming it is neither not appealed or appeals fail, it is unlikely that the immediate effect will be a surge of cash to the treasury.
In all likelihood there will be a significant increase in churches that purchase a manse and provide it to their pastor as part of compensation, still permissible and tax-free. The main reason for the expansion of the exclusion to include cash allowances was due to the decades-long real estate boom. Clergy who were housed by their parishes potentially missed out on the wealth-building tool of home ownership. Once again living in the manse appears to be the most appealing option.
The legal rationale underlying the decision is not particularly well developed. Most of the discussion centers on whether or not the plaintiffs have standing to bring the suit in the first place.
The defendants claimed that since the plaintiffs were not harmed by the benefit they had no legal right to pursue the suit. The court held that since the Freedom From Religion Foundation had elected to designate a portion of their co-presidents’ salary as housing allowance and had not received a tax benefit from it (on the basis of their not being clergy)—even though the IRS has yet to actually deny the exclusion—they had standing to bring the suit because they had suffered harm from the provision of the code. The Court agreed.
In a bizarre twist the government argued that the plaintiffs could potentially be able to receive the housing allowance since their work was religious. They performed “de-baptisms,” for example, to help people renounce their Christian faith.
The decision examines this question of atheist “ministers of the gospel,” and concludes that even if there could be such a thing the co-presidents of the Freedom from Religion Foundation could not be categorized as such. In order to be considered clergy a person must satisfy five conditions including 1) performing sacerdotal functions under the tenets of their religion, 2) conducting services of worship, 3) perform their duties under the authority of a church denomination, 4) be ordained, commissioned, or licensed, and 5) be considered a spiritual leader by his denomination. Despite their work being related to religion (i.e., its eradication from the public sphere) neither Barker nor Gaylor satisfied these conditions.
The ruling enjoins the IRS from allowing the exclusion to be claimed and goes into effect either when all appeals of the matter are exhausted or, should the defendants choose not to appeal, by the deadline for that appeal to be filed.
It’s unclear whether or not the government will choose to appeal the trial court decision. The Obama administration has a history of failing to enforce laws it does not agree with. For example, the Justice Department refusing to litigate any matters related to the Defense of Marriage Act. Any litigation defending the act was paid for and provided by Congressional Republicans. What is clear, however, is that the decision will make life considerably more difficult for clergy of all faiths, the vast majority of whom are not remunerated lavishly and for whom the clergy housing allowance was a benefit that made their lives and the lives of their parishes considerably easier.
Text of the decision: http://www.scribd.com/doc/186404063/FFRF-v-Geithner-Parsonage-Exemption