Pastors’ Housing Revisited

The Chicago Temple First United Methodist Church may have the coolest parsonage anywhere.

Not quite three years ago, and again not quite two years ago, I wrote about a Freedom From Religion Foundation lawsuit against the IRS. In the suit, the FFRF argued that section 107 of the Internal Revenue Code was unconstitutional.

Quick refresher: in general, when your employer gives you something, that thing you receive is income to you. And it doesn’t matter if what you receive is cash, is property, or even is services. To the extent your employer gives you something of value, that’s income to you.

Congress has carved out a handful of exceptions to the general rule, though. Maybe most importantly, employer-provided health insurance is not treated as income. So those of us lucky enough to have health insurance provided by our employers don’t have to pay taxes on its value. Similarly, all kinds of fringe benefits are excluded. 

And in 1921, Congress amended the tax law to add the predecessor to section 107. Under the 1921 law, “ministers of the gospel”[fn1] didn’t have to include the value of housing provided by their church employer in gross income. In 1954, for an array of reasons, Congress added to the exclusions and, since then, ministers of the gospel also don’t have to include in income cash they receive that the church designates as a housing allowance even if they own their own home.[fn2]

Several years ago, FFRF challenged the constitutionality of this parsonage allowance, and the district found it unconstitutional. The Court of Appeals, though, found that FFRF didn’t have standing to challenge the provisions, because its executives had never tried to claim it. (For a more details on the whole standing thing, you can look at my two prior posts on the subject, or, for a lot of depth, you can always look at a real academic article I wrote that dealt with the subject.)

Recently, the FFRF refiled, following the map the Court of Appeals suggested would give them standing. Two executives filed amended returns, claiming the parsonage allowance on their taxes and requesting a refund. The IRS denied the refund.

Last week, Forbes blogger Peter J. Reilly gave me a head’s-up that FFRF has passed one significant hurdle: the government does not contest that FFRF and its executives have standing to sue over the cash housing allowance.[fn3] (The government doesn’t concede that FFRF has standing to challenge the constitutionality of ministers’ excluding in-kind housing and, I suspect, if FFRF pursues that part of the provision, that part of the suit will ultimately be dismissed for lack of standing.)

What does that mean? It means we’ll (eventually, at least) get a ruling on the constitutionality of the cash parsonage allowance.

And what will that ruling be? As I said to Reilly, at the district court level, I suspect it will be ruled unconstitutional. At the Court of Appeals level, I still think it’ll be found unconstitutional. At the Supreme Court? It’s anybody’s guess. Establishment Clause jurisprudence is a hot mess, and I’m not sure what cues we can take from the past. (From a tax policy perspective, though, I think this particular allowance is indefensible.)

And is there a Mormon connection? Probably. The church almost certainly either provides in-kind housing or designates a housing allowance for General Authorities who draw a salary from the church. Those General Authorities almost certainly qualify as “ministers of the gospel.” The parsonage allowance lowers the cost of employing them, and it would border on malpractice[fn4] if the church didn’t take advantage of the parsonage allowance.

[fn1] The IRS has read “minister of the gospel” broader than merely Christian minister; essentially, according to the IRS, MofG means any religious leader who exercises certain sacerdotal functions, including cantors and imams.

[fn2] There are limits to the cash allowance. Specifically, the minister in question can’t exclude more than the fair rental value of her house.

[fn3] It’s in footnote 2, page 2, of the government’s brief.

[fn4] (Slight hyperbole alert.)