Explainer: The ministerial housing allowance is still constitutional

July 30, 2019

This summer brought an end to the latest legal challenge to ministerial housing allowances. June 13, 2019, was the deadline for Freedom From Religion Foundation (FFRF) to appeal the Seventh Circuit’s decision in Gaylor v. Mnuchin to the Supreme Court, and the atheist group declined to appeal their suit. 

How did we get here? 

In 2016, FRFF sued the IRS claiming that a section of the Internal Revenue Code, 26 USC §107(2) providing housing allowances for ministers, violated the Establishment Clause. The Western District Court of Wisconsin agreed and struck down the housing allowance as unconstitutional. In reaching this conclusion, the district judge used the Lemon test to find that the housing allowance had no secular purpose and gave preferential treatment to religious individuals. For more on the Lemon test, see our Capitol Conversations episode, Supreme Court rules 7-2 for the Bladensburg Cross, for a discussion on how this legal framework was recently in play in a case before the justices.

The U.S. Treasury Department appealed to the Seventh Circuit Court of Appeals. The ERLC, alongside a number of religious organizations including Southern Baptist sister entity, Guidestone, filed an amicus brief in support of the Treasury Department’s appeal in 2018. In a unanimous 3–0 decision, the Seventh Circuit reversed the District Court decision on March 13, 2019, and held that §107(2) violated neither the Lemon test nor the “historical significance” test in Town of Greece

What was the case about?

§107(2) of the IRC provides that cash allowances to ministers used for housing payments be exempt from a ministers’ taxable gross income. This is a continuation of the longstanding practice of exempting employer-provided housing, including church-owned parsonages, and a Congressional response to the shift in clergy housing toward housing stipends. §107(2) allows for churches, mosques and synagogues to provide cash stipends to their faith leaders as an alternative to buying housing property. At stake in Gaylor v. Mnuchin were these cash housing allowances and not housing in kind (church-owned property) benefits.

How did the Seventh Circuit Rule?

FFRF argued that §107(2) grants greater tax exemptions to ministers than the IRS does to secular employees. This, however, is simply not true.

The IRS interprets “ministers of the gospel” to include leaders of other religious faiths. Further, the Seventh Circuit pointed to myriad other Title 26 categorical exclusions for housing benefits in cash or in kind that also lower the requirements to obtain standard §119(a)(2) employer-provided housing exemptions. Other categorical exclusions exempt housing allowances for members of the military, certain government employees, those working abroad and so on. Read in context with these other statutory exemptions, §107(2) is one of many categorical exclusions Congress chose to ease the burden of administering housing exemptions, which the Seventh Circuit held was a secular purpose satisfying the first prong of the Lemon test. The Seventh Circuit also found Congress’s reasoning to provide smaller, independent churches an alternative to buying housing property a valid secular purpose.

Regarding the second prong of the Lemon test, the Seventh Circuit reiterated that a tax exemption does not have the primary effect of advancing religion as “the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.”

On the third prong of the Lemon test on excessive entanglement, the Seventh Circuit rejected FFRF’s argument that  §107(2) requires the IRS to engage in a fact-intensive inquiry into whether a taxpayer is a minister. The Seventh Circuit stated that “[a]ny financial interaction between religion and government—like taxing a church, or exempting it from tax—entails some degree of entanglement. But only excessive entanglement violates the Establishment Clause… the application of § 119(a)(2) to ministers would entangle church and state far more than under § 107(2).” To apply § 119(a)(2), the IRS would have to determine what the “business” of a church is, what is the church “premises” and how far does it go, and what ministry duties the minister performs at home count as part of their employment. In contrast, the categorical nature of §107(2) avoids such difficult inquiries and gives certainty to ministers and their churches that their housing allowances will be tax exempt.

The Seventh Circuit also applied the “historical significance” test from Town of Greece to find that there has been a long tradition of tax exemption for religion and church-owned properties as far back as 1802. The Sixteenth Amendment, authorizing Congress to levy an income tax, was ratified in 1913. Only a few years after income becoming taxable, Congress passed §107(1) for parsonages in 1921 and later §107(2) extended tax exemption to cash allowances in 1954. Given this historical tradition and Congress’s legitimate reasons for enacting the housing allowances, the Seventh Circuit held that §107(2) does not violate the Establishment Clause.

What are the broader implications?

First, the Seventh Circuit’s decision upholds §107(2) for ministers not only in the Seventh Circuit’s jurisdiction, but religious leaders of all faiths in the U.S. 

Second, this decision levels the playing field for ministers of smaller, poorer denominations to be able to meet their religious leaders’ housing needs. Roughly half of the churches in the U.S. have fewer than 80 members. Many smaller, independent, local churches and church plants lack the financial resources to pay their ministers a full-time salary or purchase a property for their ministers to live. Were the District Court’s decision to stand, only churches who could afford to buy property would be able to provide meaningful housing support to their ministers.

Third, as the Seventh Circuit noted with §107(2) still standing, churches will not be pressured to alter their religious activities in an attempt to meet the requirements for employer-provided housing tax exemptions in §119(a)(2), such as the house needing to be on business premises. §107(2) will allow churches, mosques, synagogues and their faith leaders to rest assured that their housing allowances are tax exempt.

What happens next?

Challenges to the §107(2) housing allowance will likely continue. The Seventh Circuit described Gaylor v. Mnuchin as “falling between the joints of the Free Exercise Clause and the Establishment Clause,” a harkening back to the Supreme Court’s language in Locke v. Davey in which the Court addressed the difficulty in harmonizing the First Amendment’s dual prohibitions.  In the present case, the Seventh Circuit states that the housing allowances fall within the “joints,” neither commanded by the Free Exercise Clause nor proscribed by the Establishment Clause. As Establishment Clause jurisprudence continues to evolve, the Seventh Circuit’s decision upholding §107(2) against the “historical significance” test in addition to the Lemon test is a valuable piece of case law. 

The ERLC will continue to monitor future challenges and engage on cases on the housing allowance, working to advocate on behalf of the churches we are privileged to serve, and all those communities of faith in this country who value religious liberty and the flourishing of local communities.

ERLC legal intern Dani Park contributed to this article.