In a lawsuit that was brought by the Freedom From Religion Foundation (FFRF), Judge Barbara Crabb of the U.S District Court for the Western District of Wisconsin ruled this past Friday that the clergy housing allowance for those living in their own homes is unconstitutional: “Freedom from Religion Foundation, Inc. v. Lew”
Crabb claims that the exemption “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.” Furthermore, Crabb concludes that no reason was given by the defendants that proved this tax on housing allowance for clergy was more burdensome for them than most others who must pay taxes on income used for housing expenses.
Although it is undoubtedly true that taxes impose a burden on ministers, the same is true for all taxpayers. Defendants [referring to the Federal Justice Department] do not identify 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. In any event, the Supreme Court has rejected the view that the mere payment of a generally applicable tax may qualify as a substantial burden on free exercise.
This would have a significant impact on clergy, certainly including those serving vocationally in ministry in our local EFC churches. Below I include a round-up to get you “up to speed” on the decision, the history and some of the possible implications. I conclude with a summary.
Sarah Pulliam Bailey, Religion News Service, “Federal judge: Clergy tax-free housing allowance is unconstitutional”
A federal judge has ruled that an Internal Revenue Service exemption that allows clergy to shield a portion of their salary from federal income taxes is unconstitutional.
The clergy housing exemption applies to an estimated 44,000 ministers, priests, rabbis, imams and others. If the ruling stands, some clergy members could experience an estimated 5 to 10 percent cut in take-home pay.
The suit was filed by the Wisconsin-based Freedom from Religion Foundation on grounds that the housing allowance violates the separation of church and state and the constitutional guarantee of equal protection. The group’s founders have said that if tax-exempt religious groups are allowed a housing subsidy, other tax-exempt groups, such as FFRF, should get one, too.
Katelyn Beaty, Christianity Today, “Judge Strikes Down Housing Tax Break for Pastors”
One of the most important tax breaks available to American pastors is unconstitutional.
At least, according to a federal judge’s assessment of an atheist group’s complaint that the IRS’s clergy housing allowance—which will save pastors $700 million this year in income taxes—violates the establishment clause of the First Amendment.
On Friday, U.S. District Judge Barbara Crabb of Wisconsin ruled that the second part of IRS Code Sec. 107, which exempts clergy from paying income taxes on compensation considered a housing allowance, “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”
“The significance of the benefit simply underscores the problem with the law, which is that it violates the well-established principle under the First Amendment that ‘[a]bsent the most unusual circumstances, one’s religion ought not affect one’s legal rights or duties or benefits,'” wrote Crabb in a ruling first reported by the Wisconsin State Journal.
Richard R. Hammer, “Five Takeways from Friday’s Housing Allowance Ruling” I include two of his key takeways.
Third, a ruling by a federal district court judge in Wisconsin is not binding on other courts, and does not apply to minsters in other states. If the ruling is appealed and affirmed by the Seventh Circuit Court of Appeals, it will apply to ministers in that circuit (Illinois, Indiana, and Wisconsin). It would become a national precedent binding on ministers in all states only if affirmed by the United States Supreme Court (an unlikely outcome). As a result, churches should continue to designate housing allowances for ministerial employees for 2014, and church pension plans should continue to designate housing allowances for retired ministers.
Fifth, the financial impact of this ruling will be significant, especially for ministers who purchased homes in reliance on the continuing availability of the housing allowance. This impact would be mitigated if Congress eliminates the treatment of ministers as self-employed for Social Security. Most ministers are employees for income tax reporting, but the tax code treats all of them as self-employed for Social Security. This is sometimes referred to as the “dual tax status” of ministers. The financial impact can be significant, since self-employed persons pay the “self-employment tax” which is 15.3 percent of net earnings, while employees and employers split the Social Security and Medicare (FICA) tax rate of 15.3 percent, with each paying 7.65 percent. There is little Congress can do to overturn a federal district court’s interpretation of the Constitution, but it can materially reduce the financial impact of the district court’s ruling on ministers, which in many cases will be substantial, by revoking their mandatory self-employed status for Social Security.
Evangelical Council for Financial Accountability (ECFA), “Federal District Court Rules Clergy Housing Exclusion Unconstitutional”
The district court’s decision on the clergy housing exclusion may be appealed to the Seventh Circuit. Since the case was filed over two years ago, attorneys for the federal government have defended the constitutionality of the clergy housing exclusion and have argued that FFRF lacked legal standing to bring the challenge in the first place.
ECFA, “Judge Declares Clergy Housing Exclusion Unconstitutional”
In a decision that is sending shockwaves across the religious community, a federal district court judge has declared a portion of the statue unconstitutional, leaving many ministers wondering what the impact of this case will be.
[If it stands] this ruling in effect would force clergy of nearly every religion across America to pay additional taxes, regardless of faith or creed. This will either force congregations to increase clergy compensation to offset these taxes or require pastors to dig deep to see if they are able to absorb these taxes. In most cases, this will lead to several thousand dollars in additional taxes each year for clergy.
Joe Carter, “Federal Judge Declares Clergy Housing Exemption To Be Unconstitutional”
The parsonage exemption, for instance, provides a preference for institutional churches whose ecclesiastical properties are owned by a central governing body (e.g., Roman Catholic). Smaller, independent, local churches often have less money to provide a parsonage. It also presents a bias in favor of wealthy, established churches over younger congregations and church startups. For instance, how could a congregation that can’t even afford a church building afford to buy a parsonage?
Both the parsonage and pastor housing exemption are part of a legal tradition that serve to prevent the entanglement of the state in ecclesiological concerns. By her decision, though, Judge Crabb has — albeit unintentionally — incorporated a form of denominational favoritism into the tax code. In her attempt to prevent an imaginary violation of the Establishment Clause she has inadvertently created a real infringement.
The Ethics and Religious Liberty Commission of the Southern Baptist Convention, “ERLC And Guidestone united in protecting pastor’s housing allowance”
The Ethics & Religious Liberty Commission and GuideStone Financial Resources stand together in opposition to a ruling issued by U.S. District Judge Barbara Crabb of the Western District of Wisconsin, who ruled unconstitutional a provision in US tax code that allows for ministers to deduct their housing allowance.
Russell D. Moore, president of the Ethics and Religious Liberty Commission of the Southern Baptist Convention, reacted to the ruling:
“The clergy housing allowance isn’t a government establishment of religion, but just the reverse. The allowance is neutral to all religions. Without it, clergy in small congregations of all sorts would be penalized and harmed.”
- This decision by Judge Crabb in Wisconsin is not binding on other states.
- Appeals will prolong a decision.
- If Judge Crabb’s ruling is appealed and affirmed by the Seventh Circuit Court of Appeals, then clergy serving in States of the circuit would be affected – Illinois, Indiana and Wisconsin.
- This ruling would become national law affecting all clergy only if it is appealed all the way to the United States Supreme Court and they were to affirm the decision, which Hammer notes, is “an unlikely outcome.”
- In 2014 the housing allowance exclusion will continue as it has. Hammer recommends that “churches should continue to designate housing allowances for ministerial employees for 2014, and church pension plans should continue to designate housing allowances for retired ministers.”