The U.S. Seventh Circuit Court of Appeals released their opinion in Gaylor v. Mnuchin, No. 18-1277, slip op. (7th Cir. Mar. 15, 2019) and Gaylor v. Peecher, No. 18-1278, slip op. (7th Cir. Mar. 15, 2019), holding that the Internal Revenue Code income exemption for religious housing, 26 U.S.C. §107, does not violate the Establishment Clause of the First Amendment.
26 U.S.C. §107, enacted in its current form in 1954, states that, "[i]n 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."
A religious leader employed by a church will often be paid a housing allowance for the costs of obtaining and maintaining a home. In any other profession, this allowance would be considered gross income to the employee subject to federal income taxes. Assuming the housing allowance does not exceed reasonable pay, the "minister of the gospel" is permitted to exclude from gross income the lesser of one of the following:
- The amount paid in advance explicitly designated as a housing allowance;
- The amount actually used to provide or rent a home; or
- The fair market rental value of the home including furnishings, appurtenances and utilities.
The phrase "minister of the gospel" appears to be a Christianity term, but U.S. courts have maintained this definition includes persons who are "ministers" equivalents in other religions such as a Muslim imam, Jewish rabbi or Hindi swami. The U.S. Tax Court has interpreted "minister of the gospel" to include some religious leaders not specifically ordained, but excludes those people who are merely self-appointed ministers. The IRS created guidelines to spell out the criteria for this classification:
- A minister of the gospel is "a duly ordained, commissioned, or licensed minister of a church or a member of a religious order (other than a member of a religious order who has taken a vow of poverty as a member of such order) is engaged in carrying on a trade or business with respect to service performed by him in the exercise of his ministry or in the exercise of duties required by such order..." 26 CFR § 1.1402(c)-5(2).
- "Examples of specific services the performance of which will be considered duties of a minister... include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries." 26 CFR § 1.107-1(a).
The U.S. Tax Court held that a cantor of the Jewish faith met the criteria to benefit from 26 U.S.C. §107 for his ecclesiastical functions even though he did not have the authority of a full rabbi. Salkov v. Commissioner, 46 T.C. 190 (1966). A licentiate of the Presbyterian Church was also determined to benefit from 26 U.S.C. §107 where, although not formerly ordained as a minister and not able to administer all sacraments, he conducted worship services, preached, performed funerals, tended to the needy and was considered a leader by the congregation. Knight v. Commissioner, 92 T.C. 199 (1989). However, the U.S. Tax Court excluded an educational minister from 26 U.S.C. §107 where, although commissioned by the Baptist church for a tax purpose, he did not officiate services, perform sacraments or even receive a formal ordination. Lawrence v. Commissioner, 50 T.C. 494 (1968).
Freedom From Religion Foundation ("FFRF"), a non-profit organization that challenges government endorsement or promotion of religion, was the prime mover in the lawsuit against 26 U.S.C. §107. They sued the Treasury Department and argued to the federal court that the parsonage allowance exclusion conditions a tax benefit on religious affiliation in violation of the First Amendment. The U.S. District Court agreed and found that the tax exclusion did not have a secular purpose as required by the Establishment Clause, so the statute was unconstitutional. The Internal Revenue Service and the other defendants appealed.
The Seventh Circuit Court of Appeals found that, by itself, 26 U.S.C. §107 appears to provide a government benefit exclusively to religious leaders. However, in the broader context of the Internal Revenue Code, 26 U.S.C. §107 is one of many statutes that provides a tax exemption to employees with work-related housing requirements (e.g. 26 U.S.C. §132 excludes housing for an employee away on business for less than a year, 26 U.S.C. §134 excludes housing for former or current military members, and 26 U.S.C. §911 excludes certain housing expenses for citizens living abroad). The parsonage exclusion is merely one provision of a large body of law providing benefits for employment housing allowances at the convenience of the employer.
Furthermore, the FFRF's argument that 26 U.S.C. §107 favors one religion over another in violation of the Establishment Clause does not stand up to current case law. As indicated before, the term "minister of the gospel" encompasses a broad class of religious leaders beyond the Christian faith. Providing a tax exemption does not amount to a sponsorship, financial support or active involvement of the government in religious activity. A tax exemption is not the same as a subsidy. This provision does not amount to the government advancing religion, but rather allows churches to advance religion by retaining more financial resources. Since the statute stays within the parameters of the Free Exercise Clause and the Establishment Clause of the First Amendment, it is held to be constitutional and remains good law.
The parsonage tax exclusion is still controversial in some legal circles, but it is the law of the land and provides a powerful tax benefit to qualifying religious leaders. No one should have to pay more income tax than required by law, and every taxpayer has an absolute right to take advantage of every deduction, credit or exclusion allowed by statute. If you have questions about the parsonage exclusion or whether you qualify as a "minister of the gospel" for the purposes of 26 U.S.C. §107, then do not hesitate to contact the tax attorneys at Kershaw, Vititoe & Jedinak PLC today.