A U.S. district court in Wisconsin struck down the long-standing exclusion from gross income under Sec. 107(2) of a housing allowance paid to ministers as violating the Establishment Clause of the First Amendment. However, the court stayed its injunction of enforcement of Sec. 107(2) pending appeal of the case. The issue of the constitutionality of Sec. 107(2) has never been decided by a federal appeals court or the Supreme Court.
The plaintiffs, Freedom From Religion Foundation Inc. (FRF) and its two co-presidents, brought suit against the government, claiming that the income exclusion violates the Establishment Clause of the First Amendment, which states, “Congress shall make no law respecting an establishment of religion.” Analyzing the statute under a modified version of a test formulated in Lemon v. Kurtzman, 403 U.S. 602 (1971), the court agreed, finding that it lacks a secular purpose or effect and that a reasonable observer would view it as endorsing religion.
Sec. 107(2) excludes from gross income a rental allowance paid to a “minister of the gospel ... as part of his compensation,” to the extent used to provide a home and by the home’s fair rental value, including furnishings, plus the cost of utilities.
The government argued the defendants did not have standing to sue because they had not claimed the exemption and been denied it by the IRS. The court, however, found that the plaintiffs had standing because they were excluded from claiming an exemption granted to others and thereby suffered an injury the court could redress.
The suit originally challenged Sec. 107(1) as well, which allows a minister to exclude from gross income the rental value of a home, or “parsonage,” furnished to him or her, but the plaintiffs dropped that claim in their response to the government’s motion for summary judgment.
The government noted that the legislative history of Sec. 107(2) showed it was intended to provide equal treatment of ministers who could not claim the existing Sec. 107(1) exclusion. Both provisions are based on the “convenience of the employer doctrine,” the government argued, which holds that housing should not be viewed as compensation if it is provided by the employer to enable the employee to do his or her job properly. Rejecting these arguments, the court found that because Sec. 107(2) “does not include any limitations on the type or location of the housing … it cannot be described as being related to the convenience of the employer doctrine.” The court also noted that the sponsor of the 1954 statute told a congressional committee hearing that the measure was necessary “in these times when we are being threatened by a godless and anti-religious world movement.”
The court cited the Supreme Court’s holding in Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989). Though Texas Monthly concerned a state sales tax exemption for religious literature, it established that a tax exemption provided only to religious persons violates the Establishment Clause when it results in preferential treatment of religious messages, the court held. It concluded that because the primary function of a “minister of the gospel” is to disseminate religious messages, a housing exclusion provided only to ministers treats religious messages preferentially over secular ones.
Freedom From Religion Foundation, Inc. v. Lew, No. 11-cv-626-bbc (D. Wis. 11/21/13)
By Alice A. Upshaw, CPA, instructor of accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.