The U.S. Court of Appeals for the Seventh Circuit, reversing a district court’s decision, has ruled that the Internal Revenue Code provision excluding housing allowances from ministers’ taxable income does not violate the First Amendment and is not unconstitutional.
The Parsonage Allowance
After the Sixteenth Amendment to the U.S. Constitution was ratified in 1913, authorizing Congress to levy an income tax, Congress enacted the federal income tax. Thereafter, the Treasury Department adopted the “convenience-of-the-employer” doctrine in connection with the definition of taxable “income.” Under that doctrine, housing provided to employees for the convenience of their employer is exempt from the employees’ taxable income.
The convenience-of-the-employer doctrine, however, was not made available to ministers and, in 1921, the Treasury Department announced that ministers would be taxed on the fair rental value of parsonages provided as living quarters.
In response, Congress enacted a statute to exclude church-provided parsonages from the taxable income of ministers. The Treasury Department interpreted this statute to apply only to housing provided in-kind; cash housing allowances were included in income.
This continued for decades until several ministers successfully challenged the limitation to in-kind housing in the 1950s. Congress then enacted 26 U.S.C. § 107, which provides:
In the case of a minister of the gospel, gross income does not include—
(1) the rental value of a home furnished to him as part of his compensation; or
(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home. . . .
Section 107(1) reauthorized the in-kind parsonage exemption in place since the 1920s. Section 107(2) authorized the Internal Revenue Service also to exempt cash allowances from ministers’ taxable income.
It has been estimated that of the United States’ 384,000 congregations, 200,000 to 300,000 provide a housing allowance to their ministers within the meaning of Section 107(2).
Several years ago, the Freedom from Religion Foundation and a number of its executives sued the Treasury Department, claiming that Section 107 violated the First Amendment because it conditioned a tax benefit on religious aﬃliation.
The U.S. District Court for the Western District of Wisconsin held that Section 107(2) violated the Establishment Clause of the First Amendment, and the dispute reached the Seventh Circuit.
The Seventh Circuit’s Decision
The Seventh Circuit reversed.
In its decision, in Gaylor v. Mnuchin, the circuit court examined whether Section 107(2) violated the Establishment Clause under the so-called Lemon test. To be upheld under this test, the Seventh Circuit explained, Section 107(2) had to have a secular legislative purpose, Section 107(2)’s principal or primary eﬀect had to be one that neither advanced nor inhibited religion, and Section 107(2) could not foster an excessive government entanglement with religion.
The circuit court then determined that Section 107(2) met all three prongs of the Lemon test.
First, the Seventh Circuit upheld the government’s contention that there were several valid secular purposes for Section 107(2): to eliminate discrimination against ministers, to eliminate discrimination between ministers, and to avoid excessive entanglement with religion.
The circuit court then ruled that Section 107(2) did not have the primary effect of advancing or inhibiting religion, reasoning that providing a tax exemption did not “connote sponsorship, financial support, and active involvement of the [government] in religious activity.” The Seventh Circuit declared that the primary eﬀect of Section 107(2) was not to advance religion on behalf of the government, but to “allow churches to advance religion, which is their very purpose.”
Next, the Seventh Circuit decided that Section 107(2) did not foster an “excessive government entanglement with religion.” Among other things, the circuit court pointed out that Section 107(2) avoided government inquiry into the use of a minister’s home.
Finally, the Seventh Circuit ruled that Section 107(2) also was constitutional by reference to “historical practices and understandings,” finding no evidence that provisions such as Section 107(2) were historically viewed as an establishment of religion. Indeed, the Seventh Circuit noted, there was a “lengthy tradition of tax exemptions for religion, particularly for church-owned properties” – and for over two centuries, states have implemented church property tax exemptions in various forms.
Accordingly, the Seventh Circuit concluded, the parsonage allowance in Section 107(2) was constitutional.