A federal judge ruled last week that the Internal Revenue Service provisions that allow clergy to avoid taxes on housing allowances is unconstitutional.
U.S. District Court Judge Barbara Crabb ruled on November 22, 2013 that Section 107(2) of the tax code violates the Establishment Clause of the First Amendment of the U.S. Constitution (“Congress shall make no law respecting as establishment of religion…”), based in her belief that the Section 107(2) “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”
A complaint was also made in opposition to Section 107(1) of the tax code which allows clergy to live in church owned parsonages without paying taxes on that portion of their compensation. Judge Crabb dismissed that complaint as part of her order.
The suit was filed by the Freedom From Religion Foundation(FFRF), based in Wisconsin. In their complaint they asserted that the housing allowance violated the separation of church and state, and that the principle of equal protection should allow any non-profit to likewise receive the same exemption.
The provision for a tax benefit for clergy and others living in employer owned housing dates back to the 1920’s. That benefit was extended to cash allowances in with the enactment of the Internal Revenue Code of 1954. In 2002 Congress clarified the provisions by adding language limiting the amount of the allowance to the fair market rental value of the home.
The trend in recent years has been to move clergy from church-owned parsonages to housing allowances as a means of allowing clergy to purchase their own homes and build equity.
While the judge has ruled Section 107(2) unconstitutional, no actual changes are happening at this time as she has delayed the implementation of that decision until any appeals which may be filed by the government are concluded. The government has 60 days to appeal the decision, and while some observers wonder if there will be no appeal to prevent the ruling from having nationwide impact, most observers believe an appeal is likely.
“This is nothing to panic about,” said Jim Allen, treasurer of the Tennessee Annual Conference. “This is something to keep on the radar, but there’s still a long way to go.”
The General Council on Finance and Administration of The United Methodist Church (GCFA) agrees. “If an appeal is filed,” said GCFA in a statement released earlier today, “it is certainly conceivable that this case could take several more years to be finally decided.”
GCFA said that they will be monitoring the case as it develops, and will take actions to represent the interests of The United Methodist Church as needed. However, they believe that it is “…too early to fully understand the impact of this case, or to predict the chances for this decision to be reversed.”
According to Peter J. Reilly in an article at www.forbes.com, the cost of the allowance exclusion to the U.S. government is approximately $700,000,000 per year. Part of the argument made by FFRF in their complaint is that this allowance for religious clergy represents an increase in taxation for non-religious persons.
This ruling has no impact on the Social Security/self-employment status of United Methodist clergy.
Do you want to know more? The following sites have good information on this ruling and issue:
- Religion News Service: Federal judge: Clergy tax-free housing allowance is unconstitutional
- FFRF v Geithner – Parsonage Exemption — Complete ruling by Judge Crabb
- Forbes.com: Clergy Housing Tax Break Declared Unconstitutional — Everything You Wanted to Know and More
- Freedom From Religion Foundation: FFRF, Gaylor, Barker overturn ‘parsonage exemption’ clergy privilege