Federal Judge Strikes Down Ministerial Housing Allowance

On November 22, 2013, federal judge Barbara Crabb from the Western District Court of Wisconsin (a President Carter appointee) struck down the ministerial housing allowance as an unconstitutional preference for religion. The ruling was in response to a lawsuit brought by the Freedom From Religion Foundation (FFRF), challenging the constitutionality of the housing allowance and the parsonage exclusion.

Churches and ministers should know the following about the rulings.

First, the ministerial housing allowance is set forth in section 107(2) of the federal tax code. This section exempts from federal income taxation that portion of a minister’s compensation that is designated in advance by an employing church as a housing allowance to the extent that it is used for housing expenses and does not exceed the home’s fair rental value. Section 107(1) exempts from income taxation the rental value of a parsonage provided by a church to a minister as compensation for ministerial services. Since only section 107(2) was challenged, the rental value exclusion is unaffected.  Further, the court “stayed” the ruling until the conclusion of appeals, meaning that the ruling won’t take effect, if at all, until all appeals are suggested.  Since the IRS code is presumptively valid, the ruling reflects the court’s own concern that her ruling will not be upheld.  Further, this ruling is not binding outside the State of Wisconsin, since it is from a Federal District Court judge in that state.

In its ruling, the court concluded that the housing allowance under section 107(2) was an unconstitutional “preference for religion” since the same benefit is not provided to other taxpayers. The court ostensibly relied on a 1989 decision by the United States Supreme Court in which the Court ruled that a Texas statute exempting from the state sales tax periodicals and books “published or distributed by a religious faith” was an unconstitutional preference for religion. In fact, in that case the Supreme Court concluded that tax exemptions that include religious organizations “must have an overarching secular purpose that equally benefits similarly situated nonreligious organizations.” For example, the exemption of church property from taxation is constitutionally permissible because state laws exempt a wide range of non-religious properties from taxation. In contrast, the housing allowance applies only to ministers.  Nonetheless, the Wisconsin court conceded that there are other provisions in the tax code that recognize housing allowances.  The ruling itself is built on the faulty logic, espoused by many progressives, that the Establishment Clause requires that religion itself (except for the religion of secular humanism) be eliminated from public life.  This radical view is not supported by the best Supreme Court jurisprudence.

Nonetheless, the financial impact of this ruling could be significant, especially for ministers who purchased homes in reliance on the continuing availability of the housing allowance. If the ruling stands, the impact could be mitigated if Congress eliminates the treatment of ministers as self-employed for Social Security purposes. Most ministers are employees for income tax reporting, but the tax code treats all of them as self-employed for purposes of Social Security. This is sometimes referred to as the “dual tax status” of ministers. The financial impact can be significant, since self-employed persons pay the “self-employment tax”, which is 15.3 % of net earnings, while employees and employers split the Social Security and Medicare (FICA) amount, with each paying 7.65 percent. Such Congressional action could reduce the financial impact of the district court’s ruling on ministers, which in many cases will be substantial, by revoking their mandatory self-employed status for Social Security.