A federal judge recently denied a motion by the U.S. Department of Treasury to dismiss a constitutional challenge to the parsonage exclusion.
The so-called parsonage exclusion comes from Section 107 of the Internal Revenue Code. It allows ministers to avoid taxes on income that is earmarked for their housing. The statute provides that reasonable rental allowances are not included in the income of a “minister of the gospel.”
Anti-religious groups claim that this exclusion favors churches by allowing its employees (ministers) to receive income that is free from tax. It also allows churches to reduce their overall salary costs. These same benefits are not available to secular nonprofits.
The constitutional challenge was brought by the Freedom from Religion Foundation, a nonprofit organization that advocates for separation between church and state and promotes atheism. The complaint claims that the exclusion promotes religious organizations and discriminates against secular organizations that “promote atheism, humanism, secularism, and other non-religious worldviews.”
The complaint further claims that the exclusion promotes excessive entanglement of church and state by requiring the IRS to make fact-sensitive religious inquiries. According to the complaint, these inquiries include:
Whether certain activities constitute “religious worship” or “sacerdotal functions;” whether a member of the clergy is “duly ordained, commissioned, or licensed,” or whether a Christian college or other organization is “under the authority” of a church or denomination.
The lawsuit also challenges provisions of the California Revenue and Taxation Code that contain similar language to the Federal statute.
Judge Shubb of the Eastern District of California has declined to summarily dismiss the suit. His language implies that he believes that the Foundation may have a good case:
[P]laintiffs have alleged sufficient facts which, if accepted as true, ‘leave open the possibility’ that an objective observer would determine that §107 goes too far in aiding and subsidizing religion by providing ministers and churches with tangible financial benefits not allowed secular employers and employees . . . In sum, the court believes that plaintiffs have sufficiently alleged that a reasonable and objective observer would perceive §107 as endorsing religion and as having a predominately non-secular effect.
The issue was last before the courts in 2002, when the IRS disagreed with pastor and author Rick Warren’s claim that all of his housing should be free from tax under the parsonage allowance. Before the Ninth Circuit could rule, Congress passed the Clergy Housing Allowance Clarification Act of 2002 to limit the parsonage exemption to “reasonable rental value.” This made the Warren case moot and took the issue out of the spotlight for the past few years.
Loss of the parsonage exclusion would be detrimental to churches and could cost clergy billions of dollars in tax breaks. The Warren case provides a good roadmap for churches and religious organizations (CLS?) who want to support the exemption: be active, intervene, file amicus briefs. You can bet that the other side will be doing the same.