Federal District Court rules clergy housing exclusion unconstitutional

On Nov. 21, 2013, a Federal trial court in Wisconsin declared that the clergy housing exclusion — often referred to as the minister’s parsonage allowance — is unconstitutional for clergy providing their own homes.

This startling decision from a Federal District Court is sending shockwaves through the faith community.  The name of the case is Freedom From Religion Foundation v. Lew, No. 11-CV-626 (W.D. Wis.). You can read the text of the decision

Judge Crabb’s 43-page ruling held that the most important tax benefit available to ministers under section 107 of the Internal Revenue Code was unconstitutional because it violates the constitutionally mandated prohibition against using Federal dollars in the “establishment of religion.” In the language of the Court, the order stated that: “It is DECLARED that 26 U.S.C. Section 107 (2) violates the establishment clause of the First Amendment to the United States Constitution.”

In the court’s opinion, the law violates the Establishment Clause because it lacks a secular purpose and effect. The ruling does not impact clergy living in congregational-provided housing.


Clergy in the United States have enjoyed a special housing exclusion from federal income tax for congregation-owned housing since 1921.

  • This IRS rule allows clergy to avoid paying taxes on a part of their income designated as a housing allowance.
  • This provision was extended to clergy-owned housing in 1954.
  • In 2002, Congress amended the law to provide that the exclusion is limited to the fair rental value of the minister’s housing.
  • This action by Congress followed a high-profile case in which Purpose Driven Life author and Southern Baptist megachurch pastor Rick Warren deducted his entire $77,663 salary from Saddleback Church in Lake Forest, Calif., as housing allowance. The IRS ordered Warren to pay back taxes on a portion of his income.
  • Warren spent four years in court defending his housing deduction. He eventually won in 2000 when a court struck down the IRS argument which had imposed a limit on the deduction at a “reasonable” amount. The Court accepted Warren’s argument that the amount could be unlimited.
  • The IRS promptly filed an appeal. But, before the decision could be heard by a three-judge panel, Congress passed the 2002 Clergy Housing Allowance Clarification Act to protect the parsonage exemption.  The Act did cap the amount of the deduction at the fair market rental value of a home.

Quick overview of the arguments

1)     Judge Crabb held that since Section 107 of the tax code grants a benefit for “ministers of the gospel,” it’s not available to everyone.

  1. Therefore, this law uses U.S. tax dollars to favor religion over non-religion.
  2. Although this conclusion is subject to vigorous argument, the Judge ruled that granting this benefit only to ministers, in effect, puts the U.S. government into the business of “establishing a religion.”
  3. If true, this would violate the First Amendment of the U.S. Constitution, which prohibits the U.S. government from activities which constitute “establishment of religion.”
  4. Judge Crabb said because a minister’s primary function “is to disseminate a religious message, a tax exemption provided only to ministers results in preferential treatment for religious messages over secular ones.”

2)     Those appealing the Judge’s ruling argue that:

  1. The Freedom From Religion Foundation lacked legal “standing” — technical jargon for the rule that they’re not in the class of people who are allowed to bring this suit.
  2. The allowance is neutral to all religions. Without it, clergy in small congregations of all sorts would be penalized and harmed.
  3. The IRS has interpreted the exemption broadly, taking “ministers of the gospel” to mean not only those who preach from the New Testament, but also applying to thousands of ministers, priests, rabbis, imams and other faith leaders.

The good news?

The Judge’s ruling does not take effect until after the conclusion of all appeals. That means what some commentators have called “the most important tax benefit available to ministers” is safe, for now.

Where did it happen, and why does this matter?

Judge Barbara Crabb is a senior federal district court judge originally appointed by President Jimmie Carter. She sits as a trial court judge in the Western District of Wisconsin, which is part of the 7th Federal Circuit. This Circuit includes Illinois, Indiana and Wisconsin. There are 10 Federal Circuit Courts of Appeal, so this decision is of limited precedent value.

There are no similar rulings in the other circuits.

None of the important Circuit Courts of Appeal have upheld this position.

This is not a U.S. Supreme Court case.

Thus, this is not a CONTROLLING precedent.

Controversial exemption?

The parsonage exemption is an important tax benefit for many low-paid clergy. Its history has not been without controversy, as we noted above. Even the Evangelical Commission on Financial Accountability (ECFA) extensively studied this issue. The ECFA Commission on Accountability and Policy for Religious Organizations, in its first report issued in December 2012, made these recommendations:

  • To religious and charitable organizations. For the good of our country’s moral fabric, religious organizations and their leaders must represent the best examples of faith and good moral conduct in all areas of financial activity. The vast majority of them do. Religious organizations and their leaders most certainly should not attempt to skirt the law for financial gain. Operating on the high road of integrity includes making reasonable and appropriate determinations as to who is a minister consistent with the polity of each religious organization and making appropriate decisions regarding clergy housing or related allowances. For a religious organization or its leaders to intentionally abuse the law is shameful and damaging to its mission and to the religious community as a whole.

On the other hand, when individual organizations and leaders set their bar high — and even raise the bar — it inspires others to do the same. We encourage all religious organizations and their leaders to help raise the bar of reasonable and ethical conduct in this area.

  • To IRS/Treasury. Given the dual tax status of many members of the clergy (for example, the common circumstance in which a minister is an employee for income tax purposes but subject to the self-employment tax for Social Security purposes), and the fact that the clergy housing exclusion applies to income tax but not to Social Security tax, much confusion exists among members of the clergy regarding the applicability of the exclusion under current tax law.

Accordingly, the IRS should improve the tax forms, worksheets and educational guidance for members of the clergy in connection with the clergy housing exclusion.

  • To Congress. Congress should not apply a dollar limit to the clergy housing exclusion under Section 107 of the Internal Revenue Code because attempting to do so would create more challenges than it would solve.

Although the impact of Judge Crabb’s order will be slow in coming due to the delayed enforcement until appeals, we know that ministers are facing daily financial challenges. This ruling adds another layer of uncertainty to their daily lives, even while the Courts and Congress continue to wrestle with the tension between Church and State in a climate where all sources of revenue are under scrutiny.

Note that the ECFA will continue to post updates on this important issue in the “In the News” section of its website.

Because of the specific, technical requirements which must be met to qualify for this exemption, assuming that the Judge’s ruling does not stand, we highly recommend that you receive professional accounting or legal advice prior to attempting to claim it.

Stay tuned for this issue — there’s a lot more to come!

Clergy housing exemption under attack! Status report on Freedom From Religion Foundation v. Lew


LegalRealities_book2Robert Erven Brown is an attorney licensed to practice in Arizona. He and his nonprofit practice group work with nonprofits and churches helping them manage key operations connected with their missions, visions and causes. As permitted by local Rules of Ethics, they collaborate with attorneys who are licensed in states other than Arizona. Bob is author of Legal Realities: Silent Threats to Ministries, which describes his Campus Preservation Planning© initiative — a comprehensive program designed to manage the wide array of risks facing non-profit organizations. He can be reached by email or by calling 602.744.5748. RHL is located at 201 North Central Ave., Suite 3300, Phoenix, AZ 85004.

This publication is offered as a public service by the Nonprofit Practice Group at Ridenour, Hienton & Lewis (RHL) for general educational purposes to provide accurate and authoritative information on general principles of law. It is not intended to provide, and may not be relied on as, legal advice. The publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, then services of a competent professional person should be sought. “From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.” This article may not be used as a substitute for competent legal advice from a licensed professional attorney in your local jurisdiction. No “informal” legal advice will be provided by telephone. Simply sending an e-mail to Mr. Brown will not create an attorney-client relationship. A formal attorney client relationship will not be established until a conflict check is completed and an engagement letter has been signed by both the attorney and the client.

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