Clergy Housing Allowance Upheld

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 (6^th 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.