Housing Allowance Survives Legal Challenge

By Raul Rivera

On November of 2014, the Seventh Circuit Court of Appeals reversed a federal district court's decision that ruled the housing allowance as unconstitutional. To give you a quick recap from our previous blog pertaining to this case (Housing Allowance Ruled Unconstitutional), the Freedom from Religion Foundation filed a lawsuit claiming that "federal income tax exemptions received by 'ministers of the gospel'...violate the Establishment Clause of the First Amendment." Judge Barbara Crabb of the Western District Court of Wisconsin issued a ruling stating that the housing allowance was unconstitutional "because the exemption provides a benefit to religious persons and no one else..." Since the housing allowance is a federal statute, the federal government asked the court to dismiss the lawsuit on the basis that the plaintiffs lacked "standing" to continue their claim in federal court.

The court's decision

In the initial ruling in 2013, Judge Crabb stated that the plaintiffs had standing to sue because it was clear from "the face of the statute that plaintiffs are excluded from an exemption." Now, for us to better understand the court's current ruling, it is important to understand what the term "standing" refers to in a legal context. Legal actions cannot be pursued simply because an individual or group is displeased or unhappy with a particular law or government action. In other words, the plaintiffs have to show that they suffered some direct injury as a result of a particular law.

In the initial lawsuit, the plaintiffs claimed that they had standing based on the ground that (as atheists) they would have been denied the housing allowance exclusion if they had tried to use it on their tax returns. However, the federal appeals court concluded, "Only a person that has been denied such a benefit can be deemed to have suffered a cognizable injury. The plaintiffs here have never been denied the parsonage (or housing allowance) exemption because they have never requested it; therefore, they have suffered no injury." Therefore, the federal court dismissed the initial ruling that deemed the ministers' housing allowance unconstitutional.

What we learned from this ruling

While we are currently able to celebrate and rejoice at the court's most recent decision regarding the housing allowance, it is safe to say that the Freedom from Religion Foundation will not back down anytime soon. What we have seen from this recent decision is that the plaintiffs' initial standing was overruled because they had never attempted to claim a housing allowance on their tax return. Simply speculating that they would have been denied is not enough to support their standing claim. Now, the ruling claimed that had the plaintiffs actually filed their tax returns claiming housing allowances that were then denied or rejected by an IRS audit then the plaintiffs may have had standing.

What to expect moving forward

Since the legality of the housing allowance remains valid for now, it is safe for churches to move forward designating housing allowances for their ministers. If your church has not properly designated a 2015 housing allowance for the pastor(s), it is important to do so as soon as possible. This is because the housing allowance only operates prospectively and not retroactively. So then, as an example, if your board of directors has not yet designated a housing allowance for the pastor this year, you will not be able to include the month of January. You will only be able to include the remaining months of the year.

As previously stated, we believe that the fight over the legality of the housing allowance is not over.  The Freedom from Religion Foundation will keep trying.  I predict that if the housing allowance battle ends up in the Supreme Court, the likelihood of the court ruling it as an unconstitutional benefit to ministers is very low.  I suspect this because of an earlier ruling by the court in ARIZONA CHRISTIAN SCHOOL TUITION ORGANIZATION v. WINN et al.  In this 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."

Conclusion

At StartCHURCH we fully understand ministers' taxes and the importance of the housing allowance exemption to both you and your ministry. Stay tuned to the StartCHURCH Advisor for updates on this topic as it progresses through the legal system. I also want to invite you to one of our upcoming Ultimate Church Structure Conferences where we will strategically teach you how to use the housing allowance to achieve the largest tax savings possible.