Once Again, Judge Says Tax-Free Housing for Religious Leaders Is Illegal October 7, 2017

Once Again, Judge Says Tax-Free Housing for Religious Leaders Is Illegal

For years now, the Freedom From Religion Foundation has been in a legal battle to end the “Parsonage Exemption.” That’s the loophole that allows ministers to deduct the cost of rent for their church-owned houses from their taxable income. (Christianity Today says 84% of senior pastors receive this exemption and it’s worth $20,000-$38,000 on top of their base salary.)

It’s undoubtedly a great perk. And FFRF believes it shows preferential treatment by the government for religious leaders.

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In order to challenge the law, FFRF’s own board paid co-presidents Dan Barker and Annie Laurie Gaylor $15,000 each as part of their housing allowance… but because they didn’t qualify as “ministers of the gospel,” the law didn’t apply to them. That’s when they sued.

And in a stunning 2013 decision, U.S. District Judge Barbara B. Crabb agreed with them. She wrote that the exemption was unconstitutional.

the exemption 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.

… Some might view a rule against preferential treatment as exhibiting hostility toward religion, but equality should never be mistaken for hostility.

Although it is undoubtedly true that taxes impose a burden on ministers, the same is true for all taxpayers. Defendants do not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses.

Crabb even laughed off the idea that Barker and Gaylor should be considered “ministers.”

Although defendants devote a substantial amount of their briefs to this argument, it is difficult to take it seriously. Under no remotely plausible interpretation of § 107 could plaintiffs Gaylor and Barker qualify as “ministers of the gospel.

Defendants cite no persuasive evidence that either Gaylor or Barker is ordained, that they perform “sacerdotal” functions or conduct “worship” services, that anyone in the foundation considers Gaylor and Barker to be “spiritual” leaders or that the foundation is under the authority of a “church.”

A bit of history is helpful here: This whole battle has been over Internal Revenue Code section 107, which states:

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 and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

That section was written by Congressman Peter Mack (D-IL) in 1953. As was the case with several pieces of legislation from that era, Mack introduced it to stand against those “godless Communists”:

Certainly, in these times when we are being threatened by a godless and anti-religious world movement we should correct this discrimination against certain ministers of the gospel who are carrying on such a courageous fight against this. Certainly this is not too much to do for these people who are caring for our spiritual welfare.

It has always been about advancing religion and keeping atheism down.

And Judge Crabb finally righted that wrong. Sure, it came nearly 60 years after the law first went into effect, but tradition alone wasn’t a good reason to continue bad policy.

Pastors, no doubt, would argue that they deserve the exemption — they provide an important service for others and their salaries are (usually) pretty modest. But then again, teachers and cops and social workers could say the same thing, and they’re not getting the tax break.

Not surprisingly, there was an appeal. In September of 2014, the Seventh Circuit Court of Appeals heard arguments to overturn Crabb’s ruling. According to people present that day, though, the focus was really on whether FFRF had standing to sue:

[Justice Department attorney Judith] Hagley… argued taxpayers do not have the right to litigate the tax liabilities of others. Since this is a tax issue that does not apply to the plaintiffs, she argued they should not even have standing for this case.

In other words, even if the pastors were getting an unfair tax break, who the hell were these atheists to complain about it? (Then again, if FFRF couldn’t fight this battle, who could?)

Sadly, the Appeals Court ruled against FFRF, overturning Crabb’s decision and leaving the Parsonage Exemption in place.

If there was any silver lining, it was that the ruling was based entirely on standing, not the merits of their argument. As the judges said,

… the plaintiffs here are members of a group (in this case, the non-religious) that is allegedly suffering illegal discrimination. But the mere fact that discrimination is occurring is not enough to establish standing, absent being “personally denied equal treatment”… Allowing members of discriminated-against groups who have not suffered a particularized injury to bring suit would not only be unconstitutional, it would also create practical difficulties by opening the door to constitutional challenges to any tax exemption that a given individual suspects he may not be entitled to — without first giving the IRS and the Tax Court the opportunity to determine the proper construction and application of the law.

In essence, the Court ruled that if FFRF wanted to change the Parsonage Exemption, they would need to speak with a member of Congress and get a new law passed, because suing wasn’t a viable option.

Unless they obtained standing another way…

FFRF could just apply for the tax credit themselves (something they didn’t do the first time around), get rejected, and then sue all over again. That would require calling themselves “ministers” of atheism, so to speak, but it would finally give them the foundation for a lawsuit.

And that’s precisely what they did.

In April of 2016, FFRF filed a federal lawsuit against Jacob Lew (the U.S. Treasury Secretary) and John Koskinen (IRS commissioner).

Accordingly, Barker and Gaylor sought refunds last year, as did FFRF’s president emerita, Anne Gaylor, whose retirement payout included a housing allowance. The IRS refunded the housing allowance to the married couple for the year 2013, but denied the refund request for 2012. Similarly, the IRS held up the refund request for the senior Gaylor, who subsequently died in June. Ian Gaylor, her son, is additionally named as a plaintiff in the lawsuit on behalf of the Anne Nicol Gaylor estate.

FFRF is asking the court to rule unconstitutional IRS 26 U.S.C. §107 as administered by the IRS and the Treasury Department because it provides preferential and discriminatory tax benefits to ministers of the gospel. FFRF’s complaint alleges that the section “directly benefits ministers and churches, most significantly by lowering a minister’s tax burden, while discriminating against the individual plaintiffs, who as the leaders of a nonreligious organization opposed to governmental endorsements of religion are denied the same benefit.”

It was always a long shot. FFRF even called it their “David vs. Goliath” case. But at some point, they deserved a clear answer to their question: Wasn’t it illegal for the government to give religious pastors a tax break that non-religious people couldn’t get?

In December, The Becket Fund for Religious Liberty (now just known as Becket), filed a response to the lawsuit. They represented a group of clergy members who wanted the entire lawsuit dismissed at the District court level.

… for the Intervenors [the clergy members], losing the parsonage allowance would restrict, minute for minute, dollar for dollar, the modest resources that they have to carry out their religious missions.

Intervenors have no stand-alone claim against FFRF; their only interest is in keeping FFRF from obtaining its stated goal of forcing the IRS to stop allowing ministers and churches like them from utilizing the parsonage allowance.

… Intervenors would suffer harms that a subsequent refund could never repair: Bishop Ed and Chicago Embassy Church would have to cut back on their crucial community ministries; Holy Cross would face a risk of closure; and priests in the Diocese would be forced to obtain additional secular employment. Money cannot repair the spiritual and temporal harm that may befall their parishioners in their priests’ absence.

Their sob story was compelling, no doubt. And it would’ve been wrong to argue, as I’m sure some atheists would be tempted to do, that this was all an exaggeration. These pastors weren’t rich and they’ve come to rely on these tax breaks.

That’s why Becket asked the judge for summary judgment, basically saying the facts weren’t in dispute here and the law was on their side, so just rule in our favor and let’s be done with this.

This past April, FFRF responded to them with a brief rebutting all of the arguments on the other side and telling the judge not to grant the summary judgment because the interpretation of the law really needed to be settled. They also reiterated why their case was so important:

Untaxed housing payments to clergy are estimated by Congress’ Joint Committee on Taxation to amount to $800 million per year. Pastors paid a housing allowance may deduct not just mortgages, rents and property taxes but most money spent on home improvements, including “furnishings, utilities, garage, etc.” Ministers, retired ministers and many others, such as Jewish cantors or even parochial school basketball coaches with ordinations, may fully deduct from taxable income the amount of their salary designated as a “housing allowance.”

This is big business, they argued. Either atheists who provide many of the same services as pastors should be able to claim the same exemption, or no one should be able to.

It’s a fair argument. Pastors have gotten an unfair advantage for decades that they never should have received in the first place, and it was time to level the playing field again. The government shouldn’t be giving religious leaders a financial reward just for believing in a higher power.

And yesterday, Judge Crabb once again handed FFRF a legal victory.

As I noted in the earlier lawsuit, “there is no reasonable interpretation of the statute under which the phrase ‘minister of the gospel’ could be construed to include employees of an organization whose purpose is to keep religion out of the public square.”

In reaching this conclusion, I do not mean to imply that any particular minister is undeserving of the exemption or does not have a financial need for one. The important point is that many equally deserving secular employees (as well as other kinds of religious employees) could benefit from the exemption as well, but they must satisfy much more demanding requirements despite the lack of justification for the difference in treatment.

Crabb added that Barker and Gaylor had standing to pursue this case, so an Appeals Court would have to decide the case on its merits this time around.

The best part of her decision? The thinly-veiled rebuke to prosperity gospel preachers like Joel Osteen. Crabb wondered why he deserved a Parsonage Exemption for his mansion, when it clearly didn’t advance his religious interests, while atheists who provided valuable services couldn’t catch a break at all.

As long ago as 1984, the Department of the Treasury acknowledged that one result of § 107(2) is to give “a disproportionately greater benefit to relatively affluent ministers, due to the higher marginal tax rates applicable to their incomes”… Thus, an evangelist with a multimillion dollar home is entitled under § 107(2) to deduct the entire rental value of that home, even if it is not used for church purposes… (“Joel Osteen lives in a $10.5 million home and is entitled to exclude the fair rental value of that home so long as he spends that money on the home and his church allocates that amount to housing.”). If Congress were concerned about lessening the tax burden on poor Americans, it could have tied the exemption to income and made it generally available to any employee who qualified rather than to all ministers who receive a housing allowance.

You can bet this will be challenged, but at least this time, the Appeals Court won’t toss it out on a technicality. If FFRF succeeds, either atheists will be eligible for these housing exemptions… or religious leaders everywhere will lose theirs.

There’s a lot at stake. And you can bet every Christian Right group in the country will be advocating to keep the exemptions just as they are now.

(Image via Shutterstock. Large portions of this article were published earlier)

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