Clergy Housing
Allowance Upheld
Section 107(2) of the Internal
Revenue Code provides, inter alia,
that housing allowances provided to members of the clergy (sometimes referred
to as the “Parsons Exemption”) are exempt from income taxation. In recent years
there have been a number of challenges to this exemption, asserting that it
constitutes an unconstitutional endorsement of religion. In this most recent
decision, the Seventh Circuit Court of Appeals held that the Parsons Exemption
is constitutional. Gaylor v. Minuchin,
No. S. 18-1277 and 18-1280 (6th Cir. March 15, 2019).
In this case, the Freedom From
Religion Foundation brought suit claiming that section 107(2) of the Internal
Revenue Code violates the Establishment Clause. The District Court agreed. In
this appeal, the Seventh Circuit Court of Appeals phrased the question as:
We must
decide whether excluding housing allowances from ministers’ taxable income is a
law “respecting an establishment of religion” in violation of the First
Amendment.
Generally speaking, housing
provided to employees for the employer’s convenience, examples being sailors aboard
ship, workers in camps, and hospital employees, does not give rise to taxable
income. In reaction to a 1921 decision of the Treasury Department that would
tax ministers on the fair rental value of the parsonages, Congress quickly
reverses that decision. Under the current statute, both the fair rental value
of provided housing or payments made towards housing are, with respect to a
minister, exempt from classification as income.
The Seventh Circuit considered
this exemption in the context of the broader exemptions from income
classification, particularly those that likewise relate to housing provided for
the convenience of the employer. In addition, the blanket exemption of
parsonage, whether in-kind or in cash, prevents inappropriate IRS investigation
into religious beliefs. “The categorical nature of §107(2) also avoid excessive
entanglement by providing ministers and their churches certainty as to whether
there housing allowances will be exempt from tax.” Slip op. at 20.
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