Dear Reverend, a Tax on All Your Houses: Special Tax Benefit for Clergy Ruled Unconstitutional

A United States district court in Wisconsin has held that the tax allowance for clergy housing (a "parsonage") is unconstitutional. It also enjoined the government from enforcing it or, in other words, ordered the government to stop allowing it. However, the injunction is not to take effect until the conclusion of any appeals filed by the government or the expiration of the government's deadline for filing an appeal, whichever is later.

Here's how it works: A clergyman can exclude from gross income the rental value of a home furnished to him, or the cost of utilities paid for him, as compensation for carrying out his duties, or a rental allowance paid to him as compensation, to the extent he uses it to rent or provide a home and to the extent the allowance doesn't exceed the fair rental value of the home. This is a long standing rule meant to allow churches and synagogues to give tax free housing to clergy.  Other employers would have to report the value of housing furnished to the IRS and the employee would pay tax.  To qualify, the recipient of the housing must be a duly ordained, licensed, or commissioned member of the clergy.

Here's the new case:  Freedom From Religion Foundation, Inc. (FFRF), a non-profit organization that advocates for the separation of church and state, filed an action against Timothy Geithner, as Treasury Secretary, and Douglas Shulman, as IRS Commissioner (now succeeded by Treasury Secretary Jacob Lew and Acting IRS Commissioner Daniel Werfel), seeking a declaration that these clergy exclusions violate the Establishment Clause of the United States Constitution and the equal protection component of the Fifth Amendment.

The court ruled that the plaintiff is right: the exclusion violates the Establishment Clause. Here, the court looked to the holding in Texas Monthly, Inc. v. Bullock to resolve that issue. In that 1989 case, the Supreme Court held that a state statute that exempted religious writings from sales tax was unconstitutional. Based on Texas Monthly, the court found the establishment clause violation. While the current case involves an income tax and Texas Monthly involved a sales tax, the court said that the various opinions in that case placed no particular importance on the type of tax involved, and the defendants in the current case did not provide any grounds for distinguishing the two tax types.

The court rejected the defendants' arguments and held the exclusion does not have a secular purpose or effect and that a reasonable observer would view it as an endorsement of religion.

While the court concluded that the exclusion violates the establishment clause and must be enjoined, it said that this didn't mean that the government is powerless to enact tax exemptions that benefit religion. The court said that if Congress believes that there are important secular reasons for granting the exemption, it is free to rewrite the provision in accordance with the principles laid down in Texas Monthly so that it includes ministers as part of a larger group of beneficiaries.  Presumably, this is why a deduction for contributions to a church is constitutional - the rule applies to many different types of charities.  The housing exclusion, by definition, applies only to religious organizations.

The district court is the lowest federal court, so there will be at least one appeal.  We could see this one in the Supreme Court in a year or so.