Pastor’s Housing Allowance Found Constitutional

| April 9, 2019
Since 1954, pastors have been able to receive an annual Housing Allowance from their churches that is not subject to income tax. It is the most important tax benefit available to ministers and clergy, which the U.S. Treasury Department estimates saves $1 billion in taxes each year.
The Freedom from Religion Foundation (FFRF) actively challenges Federal and State laws that it believes favor religious organizations. Thus violating the First Amendment of the United States Constitution, which prohibits “an establishment of religion.”
For years, it has taken aim at Internal Revenue Code §107. Under this code the rental value of a home (or the rental allowance paid) to a “minister of the gospel” is not counted as part of the minister’s gross income.  To do so, it had voted a “housing allowance” to some of its officers. These officers claimed the benefit on their income tax, which was denied by the IRS.  This set the legal challenge in motion.

Arguments for and against the Housing Allowance

In 2017, a Federal District Court in Wisconsin declared the housing allowance unconstitutional. The United States Justice Department appealed the decision to the Seventh Circuit, one step below the Supreme Court.  This was to be the highest court to ever consider whether the housing allowance was constitutional.
The argument of the FFRF (and those agreeing with it) was straightforward.  A “minister of the gospel” (which term has long been understood to include clergy of any religion) gets a tax break that an officer of a secular charitable organization does not.  This is a benefit to religion, and therefore is constitutionally prohibited.
The Justice Department (and the many religious organizations that filed amicus briefs) argued that tax laws have long recognized that housing made available to an employee for the benefit of the employer is not taxable, whether religious or secular. This includes housing provided to employees away on business, housing provided to those in the military, housing provided to government employees living abroad, as well as housing for ministers.
The FFRF responded that the benefits available to ministers are better than those available to secular employees. And that the real purpose of the statute was obviously to benefit religious institutions.

The Seventh Circuit makes a decision

The Seventh Circuit heard oral arguments on October 24, 2018. They issued a unanimous decision on March 15, 2019. This decision reversed the decision of the District Court and found the housing allowance constitutional. The 29 page opinion discussed the history of the housing allowance and the legal standards by which the law is to be judged. Most importantly, the Court deferred to the Congress, beginning with a presumption that its actions are constitutional.  The standard to strike down an act of Congress as unconstitutional is a high one.  To be the establishment of religion, the law must have “the ostensible and predominant purpose of advancing religion.”  The statute is unconstitutional “only when … there [is] no question that the statute … was motivated wholly by religious considerations.”
The Seventh Circuit decided that “we will defer to a government’s sincere articulation of secular purpose, so long as the plaintiffs have not proved that articulation of purpose is a sham.”

The articulation of secular purpose

The Court found that there was a secular purpose to the law. That pastors and ministers used their homes for church purposes, in study, in hospitality, in counseling, and other matters. The sweeping housing allowance was in fact justified by Congress. The government now would be kept out of a case by case determination of a pastor’s activities.
It was concluded by the Court: “FFRF claims Section 107(2) renders unto God that which is Caesar’s. But this tax provision falls into the play between the joints of the Free Exercise Clause and the Establishment Clause: neither commanded by the former, nor proscribed by the latter.”
The open question now is what the FFRF will do. It could petition the Supreme Court for review of this decision.  It could accept the decision and lobby Congress to repeal or limit the housing allowance.

Victory but not without responsibility

Without question, this is a great relief to thousands of small churches throughout America.  Congregations and clergy nationwide will continue to enjoy the benefit of Section 107, and should be careful to make sure their documentation is in place to annually designate the allowance.
But also without question, there are abuses of the law. There are massive benefits to some religious leaders that go far beyond the “benefit to the employer” for study, hospitality, or counseling.  The Evangelical Council for Financial Accountability called such abuse “shameful and damaging to [the church’s] mission and the religious community as a whole.”  The ECFA has proposed reforms in the Clergy Housing Allowance that would be good steps in remedying the abuses, so that we may (as in all things) commend ourselves to every man’s conscience in the sight of God (II Corinthians 4:2)

Category: Law

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Email | Website | Thomas Schetelich is a founding principal in the law firm of Ferguson, Schetelich & Ballew in Baltimore, Maryland, and a member of the United States Supreme Court Bar. He heads both the firm’s corporate/ business law practice and its personal legal services department. He is an AV rated attorney awarded for highest standards of professional skill and ethical practice. Mr. Schetelich devotes much of his practice to assisting charitable and religious organizations, and is the President of The Christian Professional Network. He is a frequent speaker on Biblical and legal matters throughout the United States.