Tax-Free Cash Housing Allowance for Parsons Remains the Law

The plaintiff, an atheist organization, challenged as unconstitutional the cash allowance provision of I.R.C. §107(2) that excludes from gross income a minister’s rental allowance paid to the minister as part of compensation for a home that the minister owns.  The trial court determined that I.R.C. §107(2) is facially unconstitutional under the Establishment Clause based on Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989) because the exemption provides a benefit to religious persons and no one else, even though the provision is not necessary to alleviate a special burden on religious exercise.  The court noted that religion should not affect a person’s legal rights or duties or benefits, and that ruling was not hostile against religion.  The court noted that if a statute imposed a tax solely against ministers (or granted an exemption to everyone except ministers) without a secular reason for doing so, the law would similarly violate the Constitution.  The court also noted that the defendants (U.S. Treasury Department) did not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for non-minister taxpayers who must pay taxes on income used for housing expenses.  In addition, the court noted that the Congress could rewrite the law to include a housing allowance to cover all taxpayers regardless of faith or lack thereof.  On appeal, the court vacated the trial court's decision and remanded the case for dismissal because the plaintiff lacked standing.  While the plaintiff claimed that they had standing because they were denied a benefit (a tax exemption for their employer-provided housing allowance) that is conditioned on religious affiliation, the court noted that the argument failed because the plaintiff was not denied the parsonage tax break because they had never asked for it and were denied.  As such, the plaintiff's complaint is simply a general grievance about an allegedly unconstitutional tax provision.  Importantly, I.R.C. §107(1) is not implicated in this litigation and, as such, a church can provide a minister with a parsonage and exclude from the minister’s income the rental value of the parsonage provided as part of the minister’s compensation.  Freedom From Religion Foundation, Inc. v. Lew, No. 14-1152, 2014 U.S. App. LEXIS 21526 (7th Cir. Nov. 13, 2014), vacating and remanding, No. 11-cv-626-bbc, 2013 U.S. Dist. LEXIS 166076 (W.D. Wisc. Nov. 22, 2013).

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