June 22, 2014

Whither the Parsonage Allowance? Will It Survive the Most Recent Attack?

Religion has had a favored place in our society from its earliest inception. In fact, many of the original colonies were established by individuals intent upon finding a place where they could worship as they chose. When the Constitution was proposed, a majority of states insisted that the Bill of Rights be adopted to assure that certain rights would continue to be recognized. At the top of the list is freedom of religion – the government is prohibited from establishing a religion, or interfering with the free exercise thereof. 

Many laws have been passed over the years to assure that individuals have the right to worship as they see fit. This has included provisions in the Internal Revenue Code, which has given special consideration to houses of worship and to clergy. Because, at the time the Code was adopted, the most common religion was the various Christian churches (in fact, at that time the differences commonly recognized between "religions" were between the Presbyterians, Lutherans, Catholics, Baptists, etc.), it is doubtful that anyone gave real thought to the fact that more generic language would be appropriate. As a result, the language in the Code contains references to "churches" and "ministers of the gospel." Having said that, however, these terms have been clearly applied to all types of religions, and "church" includes synagogues, mosques, temples and the like, and "ministers of the gospel" has been interpreted to also include rabbis, monks, imams, etc. Although referring to a Jewish rabbi as a "minister of the gospel" is somewhat incongruous, the fact remains that the application of these terms has not favored one religion over another. 

One benefit that has been in existence for years is the parsonage allowance. Contained in Section 107 of the Code, there are two parts to this allowance. Section 107(1) provides that the rental value of a home provided by the house of worship to its clergy shall not be included in income. However, it was ultimately determined by Congress that this resulted in discrimination between the houses of worship that were able to provide a home, and those who required their clergy to find their own housing. Therefore, Section 107(2) was added, allowing the clergy to exclude from income, that portion of their compensation that was actually used to provide a home. 

What is the justification of this provision? Based on the personal experience of the authors, the homes of most clergy are routinely used for meetings and other community functions. This includes study groups, board meetings, and the like. In fact, in many orthodox Jewish communities, much of the celebration of the Sabbath actually occurs in the home of the principal rabbi. The "convenience of the employer" doctrine (which dates back to 1919) would appear to be applicable to this type of situation. According to this doctrine, the value of employer-provided housing is excluded from taxable income on the rationale that housing should not be viewed as compensation if it is provided by the employer to do his or her job properly. However, in 1921, after the Treasury Department refused to apply this to church-provided parsonages, Congress passed the statute that was the predecessor to Section 107(1), and some years later, in 1954, extended the benefit to “less-established and less wealthy religions” that were “not able to provide housing for their spiritual leaders,” by allowing the same exemption for housing allowances. 

It could be argued that the parsonage might not be used entirely for religious purposes. However, rather than having the IRS involved with a determination of what percentage of the activities are religious, it is clearly less invasive and violative of religious liberty to simply exclude the entire value of the parsonage from income, whether or not furnished directly by the church. 

Going back to the idea of freedom of religion, it has been established that the freedom to believe also includes the freedom not to believe. Clearly the law protecting religious freedom should provide the same protection to those who have established houses of "antiworship" and their leaders. 

Unfortunately, at least some of those who believe that religion has no place in civil society have also taken a position that any laws that would give special preferences to houses of worship and clergy or that protect religious liberty should be done away with. Their position appears to be that any law that is designed to protect religious liberty is a violation of the Establishment Clause, as it prefers belief over unbelief. 

In one of the latest challenges to the constitutionality of the Code section allowing the parsonage allowance to be excluded from income, Freedom from Religion Foundation, Inc. v. Lew, a Wisconsin federal judge, after finding standing, ruled that the exemption violates the Establishment Clause using essentially this argument. The judge based her decision primarily on Texas Monthly v. Bullock, in which the U.S. Supreme Court ruled that Texas’ sales tax that only provides exemption for religious periodicals violated the Establishment Clause because it “directs a subsidy exclusively to religious organizations that is not required by the Free Exercise Clause.” 

In relying on Texas Monthly, the court acknowledged that preferential treatment for religious groups may be permissible if it “remov[es] a significant state-imposed deterrent to the free exercise of religion.” The court found, however, that the treasury secretary and IRS commissioner had not identified “any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses.” 

To some extent, this may have been the result of the rather odd fact that no ministers who claim the benefits of the parsonage exemption are actually parties to the case. The plaintiffs are the co-presidents of the Freedom from Religion Foundation and the foundation itself. The court found that the co-presidents (a portion of whose salaries the foundation had designated as a housing allowance) had standing as persons who could not claim the housing allowance under the applicable Internal Revenue Code Section (26 U.S.C. § 107(2)), which is statutorily limited to “ministers of the gospel.” Having found that the co-presidents had standing, the court found that the foundation had standing too. 

There are a number of items of interest in this case. It should not be overlooked, for example, that the court explicitly distinguished the income tax exemption for the rental value of a home provided by the religious organization, which is set forth in 26 U.S.C. § 107(1), on the grounds that the co-presidents lacked standing to challenge the rental value exemption. The co-presidents had not been provided housing – they had been provided a housing allowance. So the parsonage exemption for the value of housing provided by the religious employer stands. Ironically, Section 107(2), which the court found to be impermissible, originated as an effort to eliminate discrimination against less wealthy religious organizations, while Section 107(1), which benefits clergy employed by better-off faith communities, remains untouched. 

Another important point is that the co-presidents have not actually attempted to make use of the exemption; they have simply alleged that, because the Code refers to "ministers of the gospel," they would not qualify. The court agreed that this was a correct interpretation of the statute based on the plain language of the Code, despite the fact, as noted earlier, that the language has been interpreted to include leaders of all types of faiths (or non-faith). There was absolutely no discussion of whether either of the individual plaintiffs would meet the requirements imposed by the IRS in order to be entitled to a housing allowance – e.g., the allowance is limited to reasonable compensation paid to ordained, licensed, or commissioned religious leaders of all faiths, for the services rendered as a religious leader. 

The IRS has found services rendered as a religious leader include performing sacerdotal functions (marrying and burying people, serving communion, and similar religious ceremonies), conducting religious worship, and controlling, conducting, and maintaining religious organizations. The Freedom from Religion opinion sees that test as part of the problem, concluding that it prevents the exemption from being applied, for example, to leaders of atheist organizations because they do not lead worship or perform “sacerdotal functions,” without any findings of fact that the IRS would actually exclude those who are employed to lead a non-religious or atheist organization composed of a community of individual members. (In fact, the court did recognize that one of the individual plaintiffs clearly has performed services that could be considered to be "sacerdotal" in nature). 

According to the defendants (secretary of the Treasury Department and commissioner of the Internal Revenue Service), both Section 107(1)’s exclusion of a parsonage’s rental value and Section 107(2)’s exclusion of a cleric’s housing allowance are permissible as simply the equivalent for religious professionals of Section 119’s exclusion of the value of on-premises housing provided to secular employees. The Freedom from Religion court disagreed, finding that Congress’ enactment of Section 107(2) violated the Establishment Clause because it lacked both a secular purpose and a secular effect. “A desire to assist disadvantaged churches and ministers is not a secular purpose and it does not produce a secular effect when similarly disadvantaged secular organizations and employees are excluded from the benefit.” It would have been another matter, the court noted, had Congress expanded Section 119’s convenience of the employer exemption to allow exclusion of housing allowances, not just exclusion of the value of on-premises employer-provided housing, for secular and religious employees. It would also have been another matter too, according to the court, had Congress made it possible for secular employees to claim a housing allowance exemption under Section 107(2). 

To counter the argument that Section 107(2) is constitutionally flawed because it exempts housing allowances for clergy only, defendants pointed out that Congress has enacted exclusions for other types of housing allowances. Members of the military may exclude any “qualified military benefit,” including a housing allowance, from their gross income under 26 U.S.C. § 134. U.S. citizens living abroad may deduct a portion of their housing expenses under 26 U.S.C. § 911. Finally, certain federal employees may deduct “foreign area allowances,” which may include housing expense allowances, from their gross income under 26 U.S.C. § 912. 

The Freedom from Religion court rejected this argument, however, on the ground that no “overarching secular purpose” justifies Section 107(2) along with these other exemptions. The treasury secretary and the IRS commissioner did contend that all of these housing allowance recipients have “unique housing needs,” but according to the court the defendants “never identify how the needs of ministers who do not live in employer housing are different from those of any other taxpayer.” The defendants also argued that all of these exemptions involve “[p]eople whose housing is dictated by their work,” but the court labeled this argument “disingenuous because it applies only to § 170(1), which is not at issue in this case.” 

It is at precisely this point that the court erred, in assuming that religious employers only place job-related and housing-related demands on clergy who live in parsonages, whereas they do not place those expectations on clergy who rent or purchase their own homes with their housing allowances. Interestingly, the court seems to have placed the burden of proof on the defendants to salvage Section 107(2) by showing “an overarching secular purpose,” rather than on the plaintiffs to show such a purpose lacking. There is no reference to any such showing by the plaintiffs. The unique aspect of clergy housing – that their employers expect to use that space for job-related functions – has not been shown to be limited to the typical situation of a parsonage next door to a church, on church-owned property. 

This brings up another odd aspect of the decision: the court granted summary judgment to the plaintiffs on the defendants’ motion for summary judgment. The decision was based on the defendants’ evidentiary submissions, not on evidence submitted by plaintiffs to carry the burden of proof that is theirs to carry. 

In the absence of any clergy as parties to the case, it appears that insufficient attention was given to the unique nature of clergy housing – whether provided in the form of a home or in the form of money to rent housing. In the end, perhaps it is not surprising that a case between non-clergy parties was resolved without any in-depth examination of the unique features and circumstances of clergy housing. But, as the Freedom from Religion court did acknowledge, the Establishment Clause problem is solved if the exemption is needed to accommodate the free exercise of religion. Faith communities commonly carry out their activities in the homes of their clergy. Greater attention should be given as this case proceeds on appeal to the impact on the free exercise rights of clergy and their employers of ruling that clergy may not deduct the cost of obtaining the housing to which their employers routinely avail themselves, as a matter of course in the life of these faith communities. 

The district court’s November 2013 decision has been stayed until the conclusion of the appeal by the defendants, the secretary of the treasury, and the commissioner of the Internal Revenue Service, to the Seventh Circuit Court of Appeals. Numerous religious organizations have filed amicus briefs on appeal. The involvement of the religious organization amici will no doubt allow the Seventh Circuit to examine the unique features of clergy housing that were ignored in the Freedom from Religion opinion. 

Finally, it should be noted that the direction taken by the Wisconsin court has yet to be followed by other courts. Most recently, on May 19, 2013, a federal district court in Kentucky dismissed a lawsuit by three atheist organizations (American Atheists, Atheists of Northern Indiana, and Atheist Archives of Kentucky) which challenged the housing allowance exclusion, along with other benefits contained in the Code for houses of worship and clergy. The case was dismissed on the basis of standing, finding that the atheist groups did not suffer any particular injury. Specifically, the court found that none of the plaintiffs had actually sought recognition from the IRS as a religious organization, or were denied any benefits. The Kentucky court found the opinion in the Wisconsin case to be unpersuasive. American Atheists v. Shulman, No. 2:12-CV-00264 (E.D. Ky. May 19, 2014). 

Ultimately, any decision concerning the constitutionality of the parsonage allowance exemption should be decided by courts that are fully informed about and cognizant of the actual practice of religious institutions. Both the establishment clause and the free exercise clause were found by our forefathers to be necessary to preserve our rights as a free people, to believe (or not believe) as we choose. In the opinion of the authors, the need to balance both clauses in making a decision concerning religious organizations has not changed.

Additional Resources

For other materials on this topic, please refer to the following. 

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Guide to Representing Religious Organizations

The Guide to Representing Religious Organizations addresses critical issues and risk factors of concern for religious organizations ranging from formation and governance, to taxes, fundraising, and employment issues, and property rights. It outlines the general requirements of applicable law and highlights areas in which religious organizations receive special consideration under the law. The Guide's topical discussions are well organized for ease of reference. This book will assist attorneys who are asked to represent religious organizations as well as provide general information for religious leaders faced with a legal challenge.