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Housing Allowance Ruled Unconstitutional

By Raul Rivera

A District Judge for the Western District of Wisconsin ruled that the housing allowance violated the United States Constitution and then issued an order to the IRS to no longer enforce section 107(2) of the Internal Revenue Code.  The lawsuit was filed by the Freedom From Religion Foundation claiming that "federal income tax exemptions received by 'ministers of the gospel'  . . . violate the establishment clause of the First Amendment."  The ruling issued by Judge Barbara B. Crabb stated that the housing allowance was unconstitutional "because the exemption provides a benefit to religious persons and no one else . . . " She further went on to state that if a statute imposed a tax or granted an exemption without a secular intent, it would violate the Constitution.  I will explain later.

How it impacts our taxes in 2013

As of right now, there is no need to do anything different than before.  While the judge ruled the housing allowance to be unconstitutional, she also ordered the government to no longer enforce or allow ministers to claim a housing allowance.  However, she also issued a stay to her order, to allow the government time to appeal the case.  The case will be appealed to the 7th Circuit Court in Chicago, IL.  If the appeal fails, it will then proceed to the United States Supreme Court.  It appears that for now tax year 2013 and most likely 2014 will not be affected by this ruling. 

Parsonage vs. housing allowance

Many ministers are not aware that the law describing the housing allowance is broken up into parts.  These parts are sections 107(1) and 107(2).  Part one describes the parsonage owned by the church that is provided to the minister as part of his/her compensation.  Part two describes salary paid to the minister so that he/she can use the money to cover home expenses. The judge ruled that part two is unconstitutional, but did not rule on part one because the plaintiffs dropped that part of the case.  Most ministers that either own or pay rent for their homes benefit from part two because the salary they receive from the church as housing allowance is exempt from federal income tax.  The impact will be felt all across America if this ruling is not overturned.

What to do if the appeal fails

Because part one of the ruling was not affected, many churches need to consider converting their housing allowance programs from a part two to a part one program.  If the church already owns the home, there will be no need to make any changes.  However, if the minister has signed a lease to pay for his/her own home, the best way to handle this will be for the church to take over the lease by going to the landlord and rewriting the lease so that the church is the renter.  Additionally, the church will need to set up all utilities in the name of the church and then provide it to the minister as a parsonage.  This will be 100% within the law and allow most ministers to continue to enjoy the benefit.  What if the minister owns the home?  In the case where the minister already owns his or her own home, it becomes significantly tricky.  We are currently analyzing part one of the section 107 to see if there are applicable legal strategies that could work.  As soon as we (or if we) come up with a workable solution, we will make it known. 

Will the ruling get overturned?

Many of our customers have asked us if the courts ruling will get overturned?  I believe that there is a slightly greater than 50% chance that it will be overturned.  However, I am also fully aware that our court system is highly unpredictable.  Having said that, let me give you my reasons as to why I believe there is a greater than 50% chance that it will be overturned.  While the reasons are many, I will narrow it down to just a few.

 

1.     The judge said plaintiffs had standing to sue because it was clear from "the face of the statute that plaintiffs are excluded from an exemption."  That exclusion alone was enough to satisfy her requirement that they suffered an injury created by the law. However, in a 2011 Supreme Court case, the court ruled "when the government declines to impose a tax, by contrast, there is no such connection between dissenting taxpayer and alleged establishment.  Any financial injury remains speculative" (ARIZONA CHRISTIAN SCHOOL TUITION ORGANIZATION v . WINN et al.).  In my opinion, the plaintiffs did not suffer any harm simply because the law chooses not to tax certain types of income.  If that were true, the courts would have to rule that the entire tax code would be outside of the Constitution because it gives tax credit to some that are not available to others while giving exemptions to some that are not available to others.

2.    The judge rejected a defense argument that the lawsuit was "premature because plaintiffs have never tried to claim the exemption."  In case law an injury has not occurred until the plaintiff has exhausted all available remedies available to him or her.  In this case, the Freedom From Religion Foundation paid two of their employees a housing allowance, but they never tried to claim housing allowance exclusion.  Therefore, the defense said they did not suffer an injury because they never tried to get the benefit.  That argument makes sense and is reasonable.

3.    The judge ruled that a law that does not have a secular reason would violate the Constitution.  She failed to recognize that government could place a secular value on the contributions a church makes to society without any regard to its doctrine or beliefs.  Studies like the ones conducted by Partners for Sacred Places and the University of Pennsylvania School of Social Policy and Practice have pioneered a quantitative approach that gives us an understanding on how churches impact local economies.   By assessing over 50 different factors, they studied 12 churches in Philadelphia and concluded that on average each of those churches contributed 4.3 million dollars to the local economy.  The economic impact ranged from builders, plumbers, daycares, and job placement programs, to environmental benefits, crime reduction, and youth tutoring programs.  Thus, in reality, government has a secular interest in creating an exemption that gives churches a greater chance to exist because of the additional benefits those churches bring to the community, therefore reducing a government burden.  This alone is enough to conclude that it does not violate the Establishment Clause of the Constitution because the exemption is not establishing a state-sponsored religion.  Instead, the exemption stays out of the way of religion by allowing churches the ability to exist with little government intrusion. 

What this case means to the world

If anything, this case is going to reveal to the world how important it is for churches to exist in every community.  While churches are making highly valuable contributions to society, The Freedom From Religion Foundation is hard at work involving itself in things that do not matter.  No one will remember their fight to free the world of religion, but everyone will remember the pastors that fought long and hard, with little to no pay, to bring down the crime rates, pray for the sick, restore families, hold marriages together, educate children, serve the poor, feed the hungry, and care for the elderly.  Regardless of what happens in this case, the mission of the church is not compromised.  In fact, it will be strengthened.


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