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Housing Allowance Ruling Saves More Than You Think

By Raul Rivera

For well over a decade, the Freedom From Religion Foundation (FFRF) has been filing lawsuits against the constitutionality of housing allowance in Section 107 of the Internal Revenue Code. 

Finally, on March 15, 2019, the United States Court of Appeals for the Seventh Circuit ruled that the housing allowance under Section 107 is constitutional. 

This ruling is exceptionally impactful because it does more than save the housing allowance. If the court were to accept the FFRF’s argument against the housing allowance, then it could have conceivably also ruled that churches cannot be tax-exempt and therefore must pay income tax, sales tax, and property tax. Additionally, it could have led to the revocation of over “2,600 federal and state tax laws (that) provide religious exemptions.”

The FFRF claimed that the tax exemption violates the Establishment Clause of the Constitution. In essence, this clause, which is part of the First Amendment, prohibits the government from passing laws that establish religion or that favor one religion over another.

In this case, the FFRF argued that the ministers’ housing allowance is establishing religion because it gives an exemption to ministers that is not available to other taxpayers. However, the IRS (government) and other intervening defendants defended the law by providing a myriad of evidence that passed constitutional muster.  

Let’s take a look at how the court came to its conclusion.

Two important tests

The court’s 29-page ruling relied on two important tests to determine the constitutionality of the housing allowance. The first one is known as the Lemon Test and the second is the Historical Significance Test. These tests are useful guides that courts rely upon when considering religious freedom cases.  

In the Lemon Test, the court states that a law is constitutional if it passes all the prongs outlined below. 

  1. Secular legislative purpose: The court stated that when one reads the text of housing allowance, it appears that the law was created to favor religion. However, the court noted that there are many parallel provisions which “show an overarching arrangement in the tax code to exempt employer-provided housing for employees with certain job-related housing requirements.” In other words, ministers are not the only ones who get a tax-free housing allowance benefit.

    Many other statutes in the Internal Revenue Code also give housing allowance exemptions to many secular professions. Simply put, the court referred to the housing allowance as one of many “convenience-of-the-employer provisions” that exempt income for employer-provided housing.

  2. The primary effect cannot advance or inhibit religion: The second prong of the Lemon Test requires that a statute have a “principal or primary effect... that neither advances nor inhibits religion.”

    The FFRF argued that tax exemption for a religious organization is identical to a government subsidy for religion. However, the Supreme Court has already ruled that granting a “ exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state."

    This part of the ruling is significant because had the court ruled to the contrary, it would have led to the end of tax-exempt status for churches under section 501(c)(3).

  3. Avoids excessive entanglement with religion: The key to defining excessive entanglement is to first acknowledge that some entanglement is unavoidable and at times necessary.

    For example, the housing allowance statute avoids government entanglement by allowing the church and minister to decide how and what type of housing will be provided, but it still requires the IRS to determine who qualifies as a minister eligible for the exemption.

    This concluded the third prong of the Lemon Test by stating that Congress made a valid attempt to avoid excessive entanglement and the housing allowance has a secular legislative purpose; its principal effect neither endorses nor inhibits religion. 

Lastly, the court looked at the Historical Significance Test. The Supreme Court has held that the Establishment Clause of the Constitution must be interpreted in light of historical practices and understanding. 

One good example is a 2012 Supreme Court ruling on the definition of a minister within the context of employment law. To form its decision, the court examined the history of church-state relations in the United States and England dating back to the Magna Carta. 

Let’s take a look at how the Historical Significance test was applied in this ruling.

The Historical Significance Test

When evaluating the constitutionality of the statute that involves the Establishment Clause, the test used must acknowledge a practice that was accepted by the Framers and has withstood the critical scrutiny of time and political change. 

The FFRF argued that the housing allowance has never had a real history that could be acknowledged by the Framers of the Constitution because it was not created until 1921; it was later amended in 1954, and its only real purpose was to subsidize religion.

Even so, the government and intervenors provided substantial evidence of a long tradition of tax exemptions for religious organizations, particularly for church-owned properties. For over two centuries, the states have implemented church property tax exemptions in various forms. The court viewed such exemptions as analogous to the housing allowance tax exemption. The court ended its opinion by stating “We conclude §107(2) is constitutional.”

What should my church do?

Many church leaders reading this blog may ask, “What should our church do now concerning the housing allowance?” The first thing we should all do is recognize that the housing allowance provision in the tax code is an extremely important benefit that every church should fully implement.  

When I was a young pastor, my small salary was barely enough to cover my cost of living. Without the proper implementation of the housing allowance, I would not have been able to remain working full-time at the church.

Moreover, when my housing allowance went through a correspondence audit, I was able to come out of it successfully because my housing allowance was done correctly. Housing allowance will continue to be challenged, but it will continue to withstand the challenges. So go ahead, implement it and keep good records. That is good stewardship.

If you are curious to learn more about having a housing allowance, I encourage you to call us today at 877-494-4655, and ask one of our specialists for more information. We would be honored to serve you.

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