Church considering IRS parsonage-exemption court case

By Mary Frances Schjonberg
Posted Jan 29, 2014

[Episcopal News Service] In the wake of the U.S government’s decision to appeal a federal district judge’s decision that the Internal Revenue Service’s clergy parsonage exemption is unconstitutional, members of the Episcopal Church’s Office of Government Relations, in collaboration with the Presiding Bishop’s Office, are considering whether the church should lend its voice to the appeal and, if so, how that might best be done.

It is expected that a number of religious groups will file amicus curiae (friend of the court) briefs with the 7th U.S. Circuit Court of Appeals in Chicago. Episcopal Church staff members will be discerning which of those briefs, if any, most strongly presents the voice of the religious community on the issue, Office of Government Affairs Director Alex Baumgarten told ENS. They will also consider how other denominations and inter-denominational organizations plan to respond, and they will consult the bishop and chancellor of the Diocese of Milwaukee in which the case arose, he said.

Meanwhile, the Church Pension Group has posted a statement on its website saying that it is monitoring the case and noting that U.S. District Court Judge Barbara Crabb specified in her Nov. 21 ruling that the decision would not be effective until all appeals were resolved in favor of the plaintiffs.

“And, we expect [the ruling] to be appealed to the Court of Appeals and then to the Supreme Court,” CPG said in its statement.

The federal government filed notice Jan. 24 that it would appeal Crabb’s ruling to the 7th Circuit Court of Appeals in Chicago.

The Church Alliance – a coalition of 38 church benefit programs that serve mainline Protestant denominations, two branches of Judaism and Catholic dioceses, schools and institutions – plans to file an amicus curiae brief, M. Colette Nies, managing director of communications for the United Methodist Church’s General Board of Pension and Health Benefits, told ENS in a Jan. 28 e-mail.

The Church Pension Fund is also a member of the group and will participate in the brief, Nancy Fisher, Church Pension Group senior vice president of communications, told ENS.

“We will also continue to coordinate our efforts with representatives of DFMS,” she said, referring to the Domestic and Foreign Missionary Society, the corporate name of the Episcopal Church.

The case, originally titled Freedom from Religion Foundation v. Geithner and Shulman, was filed in September 2011 in U.S. District Court for the Western District of Wisconsin. The original suit named then-U.S. Treasury Secretary Timothy Geithner and IRS head Douglas Shulman. The notice of appeal replaced those defendants with their successors, John Lew and John Koskinen.

Freedom from Religion Foundation leaders Annie Laurie Gaylor, Anne Nicol Gaylor and Dan Barker claimed that the so-called IRS “parsonage exemption” violated the U.S. Constitution by providing preferential tax benefits to those the agency defines as “ministers of the gospel.”

The three plaintiffs said in their complaint that they received housing allowances from the foundation. They objected to not being able to claim the related expenses under the parsonage exemption because they were not deemed “ministers of the gospel.” Both Gaylors are lay people, but Barker, the foundation’s public relations director, is an ordained minister who the foundation says “gradually outgrew his religious beliefs.”

“The clergy and churches have become accustomed to privileges and prerogatives from our secular government which are not only unconstitutional, but which don’t play fair,” Annie Laurie Gaylor said after the government filed its notice of appeal. “The rest of us should not have to pay more taxes, because clergy don’t pay their fair share.”

The three plaintiffs claimed that the parsonage exemption is unconstitutional because it violates the provisions of the First Amendment’s establishment clause and the 14th Amendment’s equal-protection clause.

The court’s decision does not apply to clergy who live in church-owned housing, such as rectories. Those clerics can continue to exclude the fair rental value of that home from their income for tax purposes under Section 107(1) of the Internal Revenue Service Tax Code.

Crabb, senior judge of the U.S. District Court for the Western District of Wisconsin, said that Section 107(1)’s tax exemption is similar to ones allowed to all U.S. employees whose employers provide them with a home to enable the employees to do their job properly. That exemption has been on the books since the Revenue Act of 1921.

However, Crabb said, clerics who live in other housing should not be able to deduct from their taxable income the housing allowance they receive from their employer to cover the costs of maintaining their home, as allowed in Section 107(2). Those expenses include things such as furnishings, maintenance and repair, and certain supplies.

The employers of most but not all clerics who do not live in church-owned housing designate a portion of a cleric’s salary as a housing allowance. However, if such clerics plan to seek the IRS-allowed parsonage exemption, they must have their employers officially declare (by way of a resolution passed by the organization’s governing body) a specific amount of money that the cleric intends to claim on his or her taxes in the following year. As long as the cleric can later document the amount of eligible expenses, he or she may deduct them from their taxable income.

For instance, if the enabling resolution sets the amount at $10,000 but the cleric can only document $9,000 in allowed expenses, then only the smaller amount can be deducted. If the cleric had $11,000 in allowed expenses, only $10,000 can be deducted. There is no tax penalty for overestimating the parsonage allowance.

More information about how parsonage allowances work is available in the annual CPG tax guide on pages 11-14.

When the U.S. Congress passed the 2002 Clergy Housing Allowance Clarification Act (to make clear that the exemption allowed in Section 107(1) was limited to the fair rental value of the church-owned housing), the bill’s sponsor, Rep. James Ramstad, R-Minnesota, estimated that Section 107 would relieve ministers of $2.3 billion in taxes over the coming five years, Crabb noted.

Congress’ Joint Committee on Taxation estimates that the exclusions allowed to ministers for housing costs will amount to $3.8 billion between 2013 and 2017.

Christianity Today’s publication “Managing Your Church” reports that the average base salary of a full-time senior pastor in 2012-2013 ranges from $33,000 to $70,000. Eighty-four percent of senior pastors surveyed said they also received a housing allowance, which accounted for $20,000 to $38,000 in added compensation. And the higher a cleric’s overall compensation, the higher his or her marginal tax rate is, thus making the parsonage exemption of greater value.

Various reports suggest that clergy employers often pay their clerics less because the ministers will receive a large tax break on some of that salary. It is predicted that elimination of Section 107(2) will mean either that employers will pay their ministers more or that those ministers who qualified for the parsonage exemption will effectively face a substantial cut in their spendable income. Employers could still give clerics money to cover their household expenses if Crabb’s ruling prevails, but clergy would not be able to deduct that money from their taxes.

Crabb rejected the government’s argument that the parsonage exemption, enacted in 1954, was meant to end discrimination against ministers whose employers could not afford to provide them with housing. Those clerics thus could not claim the existing exemption for ministers who lived in church-owned housing.

Rather, because only ministers are eligible for the Section 107(2) exemption, the rule “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,’” Crabb wrote in her opinion, quoting a previous U.S. Supreme Court case.

“A reasonable observer” would see the exemption as “an endorsement of religion” by the government, she said.

“Some might view a rule against preferential treatment as exhibiting hostility toward religion, but equality should never be mistaken for hostility,” the judge wrote.

Crabb also rejected the government’s suggestion that it was conceivable that, given previous IRS rulings, atheists such as the plaintiffs could qualify as “minister of gospel” under the terms of Section 107(2). She said that argument was difficult to take seriously.

Because Crabb found that Section 107(2) violated the First Amendment, she said she did not have to address the plaintiffs’ 14th Amendment challenge.

Some of the documents filed prior to Crabb’s ruling are here.

This was not the first time the foundation challenged the parsonage exemption. A 2009 effort filed in federal court in California was later withdrawn by the foundation after what it saw as an unfavorable U.S. Supreme Court ruling in another religious tax code issue. At the time, the foundation promised to “refile and reconfigure the lawsuit”.

The 35-year-old Madison, Wisconsin-based Freedom from Religion Foundation, as its name implies, continually challenges what it sees as governmental attempts to impose religious practices on nonbelievers and to subsidize those practices with the public’s money. The foundation’s pursuits have found their way into Crabb’s courtroom at least once before. In April 2010, she agreed with the foundation that it was wrong for Congress to allow the president of the United States to call for a National Day of Prayer because it amounted to a call for religious action. Crabb’s decision later was overturned by a three-judge panel of the 7th Circuit Court of Appeals that said the foundation had not shown how it was harmed by the presidential proclamations.

— The Rev. Mary Frances Schjonberg is an editor and reporter for the Episcopal News Service.


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Comments (7)

  1. Jack H Haney says:

    Small pension [;us small social security and never owned a home, I can rent without worry. Loss of parsonage exemption would critically inhibit me financially.

  2. Linda M. Maloney says:

    I don’t see any mention in this article of the fact that clergy are not “employed” by their churches, but must file as “self-employed,” thus paying the full 15.6% SECA. The housing allowance is intended to balance that. If the plaintiffs in this case would prefer to pay an extra 8% in SECA in lieu of having the FICA tax paid by their employers, they can be my guests and they would be welcome to a houseing allowance in return!

  3. Linda M. Maloney says:

    I don’t see any mention in this article of the fact that clergy are not “employed” by their churches, but must file as “self-employed,” thus paying the full 15.6% SECA. The housing allowance is intended to balance that. If the plaintiffs in this case would prefer to pay an extra 8% in SECA in lieu of having the FICA tax paid by their employers, they can be my guests and they would be welcome to a housing allowance in return!

  4. (Reposted with full name as required)

    Local “ministers” are common-law employees of the organizations that employ them.

    That, for accounting purposes, they report their Social Security tax using the SECA instead of FICA is quite unrelated to the tax free benefit under IRC 107.

    It is also somewhat misleading to propose that employees don’t pay the full Social Security tax, even if, for accounting purposes, it looks like the employer pays half.

    There are perhaps millions of folk who pay their Social Security usuing the SECA instead of FICA, and they don’t get any IRC 107 tax free benefit. The reason for that is because they aren’t “ministers” and that is what makes IRC 107 UNconstitutional.

    I don’t see any discussion of the million dollar “ministers”, those who get millions in tax free benefits under IRC 107, or all of those basketball coaches, and others, at places like Pepperdine University who sign up as “minister” and claim the benefit.

    Maybe as the case proceeds there will be legitimate, public, investigative reporting on what is really going on with IRC 107 and why Judge Crabb’s ruling, in my opinion, should be sustained by the 7th Circuit and by the U.S. Supreme Court.

  5. George Waite says:

    Even “Progressives” don’t mind subsidies from “Caesar”? I’m shocked-why, you’d think they were just talking the talk and pretending to be “edgy” and “relevant”!

  6. Rev Jennifer Phillips says:

    Pastors of little and mission churches without rectories, like mine, (whose clergy are also at the bottom of the salary scale or working full time in part time paid positions) would not be able to pay a salary to cover housing expenses, and I think many would close their doors – and for we who have spent our ministries serving such struggling churches, our retirement prospects would be greatly diminished.

  7. Rev Jennifer Phillips says:

    For many clergy of small churches, the parsonage is an extension of the office – clergy work in its study, hold meetings in its living room, use its telephone for work calls, take in to its guest room people who have emergencies for overnight shelter, have its doorbell rung at all hours by passers-by needing assistance, shovel snow off its and the church’s walks, have its furniture mauled by parish children visiting with their families, have hospitality events at its dinner table, house its library resources. Often the parsonage is right next door to or even connected to the church building and the clergy have no choice but to live there if they are to take the job. So the relation of workplace to residence is unusual – though some academics have a similar situation on their campuses and also receive housing allowances.

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