IRS Clergy Parsonage Allowance Exclusion
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The Clergy Tax Free Parsonage Allowance Exclusion under IRS Section 107(1) and 107(2) which has provided tax free rental exclusions to the preachers of the Gospel for almost 100 years has been saved by the 7th Circuit Court of Appeals in a dramatic reversal of Judge Barbara Crabb’s November 21, 2013 ruling in Wisconsin Federal District Court. So if you are a minister or preacher of the Gospel and are planning to take advantage of the Parsonage Exclusion in 2015, stay tuned to TaxView with Chris Moss CPA Tax Attorney to hear about the exciting conclusion of the 7th Circuit’s November 13, 2014 Opinion in Freedom From Religion vs Jacob Lew, Sec of the Treasury and John Koskinen, Commissioner of the IRS, on Appeal from No.11-cv-06260 Freedom From Religion, Gaylor, and Barker vs Jacob Lew Secretary of the US Treasury (2013) Barbara B Crabb, Wisconsin District Judge presiding.
Recapping from a previous TaxView, Tax Free Housing Allowance for Clergy, by Chris Moss CPA Tax Attorney, let’s first look at what Section 107 is all about. Simply stated if you are a preacher of the Gospel you get to exclude from your income the fair rental value of the home or what the church pays you for the home, whichever is less. Section 107(1) excludes the value of your housing provided by the Church. Section 107(2) excludes direct cash compensation paid to the preacher for housing that the preacher pays for. Further regulations added requirements that the Allowance be officially approved by the Vestry or similar church Board See IRS Ministers’ Compensation and IRS topic 417. Various tax court rulings, including US Tax Court Driscoll v IRS imply that Congress had viewed the relationship between a Church and its ministers in a similar manner as they viewed the relationship between an Employer and its Employees. Congress reasons that if Employees were exempted on housing provided for the convenience of their employer, then why not have the Clergy exempt on similar housing allowance income when they would travel to a new Church to preach the Gospel. Interestingly, while the US Tax Court has ruled for or against the clergy over the years for abuse of the Exclusion, the Court has never before challenged Section 107 on Constitutional grounds that is until now.
Judge Crabb’s Opinion argues that her invalidation of the Allowance on Constitutional grounds does not mean that the US Government is powerless to enact tax exemptions that benefit religion. Indeed Judge Crabb concludes that Congress can enact legislation for granting the Exclusion that would be based on secular rather than religious grounds. Unfortunately until Congress acts Judge Crabb opines, the Allowance is an unconstitutional violation of the separation of Church and State as found in the US Constitution.
However the 7th Circuit Judges Flaum, Rovner and Hamilton reversed Crabb in a most dramatic ruling, not deciding the case on the merits but rather on procedural grounds. Judge Joel Flaum gave his Opinion that the Plaintiffs, Freedom From Religion, Gaylor and Barker, “lacked standing” before the Federal Court system to challenge Code Section 107(2). The Court did not therefore reach the issue of the Constitutionally of the parsonage exemption.
The facts upon which this reversal were based were relatively simple in that Freedom From Religion’s co-Presidents Annie Gaylor and Dan Barker received a portion of their salary in the form of a housing allowance which was taxable to Gaylor and Barker. Gaylor, Barker and Freedom From Religion brought suit in the Western District of Wisconsin claiming that Section 107 violated their First Amendment rights because it had given a tax benefit to preachers of the Gospel but not to them. The District Court agreed with Gaylor and Baker and ruled Section 107 unconstitutional. The Secretary of the Treasury and the IRS appealed to the 7th Circuit arguing that Gaylor and Barker did not have standing to bring the suit.
Gaylor and Barker argued before the 7th Circuit as they successfully argued before the District Court that they did indeed had standing because they were denied a tax exemption for their own employer provided housing allowance that was conditioned on them preaching the Gospel which of course they didn’t do. The 7th Circuit reversed the District Court concluding that Barker and Gaylor were never denied the parsonage exemption because they never asked for it.
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The 7th Circuit reasoned that without a request by Barker and Gaylor there could be no denial. And absent any personal denial of the tax benefit, Gaylor and Barker’s claim amounted to nothing more than a generalized grievance about 107(2)’s unconstitutionality, which does not support standing before the Federal Court system. Citing Lujan v Defenders of Wildlife 504 US 555 (1992), the Court agreed argued that a Plaintiff raising only a generally available grievance about government does not state a Constitutional Article III case or controversy.
But Gaylor and Barker argued further that they are in fact similarly situated to preachers of the Gospel receiving the 107(2) exemption because they too receive a housing allowance from the company they work for. The only reason they argue that they cannot take advantage of 107(2) is that they are not ministers of the Gospel but executives who are employed by Freedom From Religion. The 7th Circuit rejected this reasoning because there was still no injury to Gaylor and Barker since they had never tried to take advantage of 107(2). The preachers of the Gospel actual had claimed the exemption, but Gaylor and Barker did not. Being similarly situated is simply not enough to give standing opines Judge Flaum.
Finally, Gaylor and Barker argue as they did successfully before the District Court that for the 7th Circuit to require Gaylor and Barker to “claim the exemption” and wait for the IRS to deny their claim would serve no useful purpose and only delay the inevitable outcome in the case citing: Freedom from Religion Foundation, Inc. v. Lew, 983 F. Supp. 2d 1051, 1055–56 (W.D. Wis. 2013). The 7th Circuit however disagreed with District Court concluding that the US Constitution does not allow Federal Courts to hear suits filed by plaintiffs who lack standing, and standing is absent here with Gaylor and Barker because they have not been personally denied the parsonage allowance. Finally, because the Plaintiffs did not have standing to challenge the parsonage exemption, the 7th Circuit, remanded the case back to Judge Grabb instructing her to dismiss the complaint for lack of jurisdiction,.
So what does this mean for all you Preachers of the Gospel out there? Since there has not yet been an Appeals Court ruling on the merits of this case, you can be sure there will be further attempts by Freedom From Religion type organizations to have the Parsonage Exemption ruled unconstituational. Until then, please have your tax attorney continue to exclude your parsonage allowances from your taxable income under IRS Code 107 with written contemporaneous explanations included in your personal tax return before your file with reference to the ongoing Constitutional issues. Finally as these cases ultimately wind their way up to US Supreme Court for a final Constitutional determination enjoy the tax free benefit in my view you so rightfully deserve as preachers of the Gospel. God bless you all. Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney
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