The Sec. 107 exclusion of the rental value of a home or a rental allowance from gross income of clergy members, provided or paid as compensation by their employer, does not violate the Establishment or Free Exercise of Religion clauses of the U.S. Constitution's First Amendment, the Seventh Circuit held.
Rather, the court held, in reversing a district court decision, the exclusion "falls into the play between the joints" of the two clauses; the statute is neither required to ensure free exercise of religion nor prohibited as impermissibly establishing it.
Facts: The Freedom From Religion Foundation (FFRF), which, according to its website, works "to promote nontheism and defend the constitutional separation between religion and government" paid three of its employees a portion of their salaries as a housing allowance. The employees then sued the Treasury Department, claiming that, because Sec. 107 conditions a tax benefit on religious affiliation, it violates the First Amendment. The Seventh Circuit dismissed the suit for lack of jurisdiction because the plaintiffs had not applied to the IRS for an exemption of the allowances from gross income under the statute (Freedom From Religion Foundation, Inc. v. Lew, 773 F.3d 815 (7th Cir. 2014); see "Tax Matters: Seventh Circuit Denies Plaintiffs' Standing to Challenge Parsonage Allowance," JofA, Feb. 2015).
The officials then filed amended tax returns claiming refunds based on exclusion of the housing allowances, some of which the IRS denied or did not act upon within six months. The officials then again sued in the District Court for the Western District of Wisconsin, which found that Sec. 107 violated the Establishment Clause (Gaylor v. Mnuchin, 278 F. Supp. 3d 1081 (W.D. Wis. 2017)). Treasury and minister intervenors appealed to the Seventh Circuit.
Issues: The First Amendment provides that "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof." The Seventh Circuit analyzed Sec. 107 under the tests of Lemon v. Kurtzman, 403 U.S. 602 (1971), and the "historical significance" criterion of Town of Greece v. Galloway, 572 U.S. 565 (2014).
Under Lemon, a statute must: (1) have a secular legislative purpose, (2) in its principal or primary effect neither advance nor inhibit religion, and (3) not foster an excessive government entanglement with religion. Under Town of Greece, the Establishment Clause may be interpreted "by reference to historical practices and understandings" (Town of Greece, 572 U.S. at 575, quoting County of Allegheny v. American Civil Liberties Union, Greater Pittsburgh Chapter, 492 U.S. 573, 670 (1989)).
Holding: The court held that Sec. 107(2) met both the Lemon test and the historical-significance test from Town of Greece and thus did not violate the Establishment Clause.
With regard to the Lemon test, the court concluded that Sec. 107(2) has a secular legislative purpose, its principal effect is neither to endorse nor to inhibit religion, and it does not cause excessive government entanglement. Consequently, the court found there is no genuine nexus between the tax exemption and establishment of religion that violates the Establishment Clause under the Lemon test.
The court found that the Sec. 107(2) exemption also passes the historical-significance test because provisions like Sec. 107(2) have not been historically viewed as an establishment of religion, noting the long and extensive history of religious tax exemptions provided by federal and state governments.
- Gaylor v. Mnuchin, Nos. 18-1277 and 18-1280 (7th Cir. 3/15/19)
— By Paul Bonner, a JofA senior editor.