Responding to a lawsuit brought by the Freedom From Religion Foundation (FFRF), the U.S. District Court for the Western District of Wisconsin has ruled the clergy housing exclusion unconstitutional for clergy providing their own homes.
In the court’s opinion, the law violates the Establishment Clause because it lacks a secular purpose and effect. The ruling does not impact clergy living in congregational-provided housing.
Two additional lawsuits filed by FFRF in the same court are awaiting a final ruling. One suit would lift the current church exemption from annually filing Form 990, alleging that the exemption constitutes preferential treatment of churches and other religious organizations, while discriminating against other nonprofit organizations. In the other case, FFRF has sued the Internal Revenue Service over enforcement of the tax code’s campaign prohibition against churches.
Clergy in the United States have enjoyed a special housing exclusion from federal income tax for congregation-owned housing since 1921. This provision was extended to clergy-owned housing in 1954. In 2002, Congress clarified its intent by amending the law to provide that the exclusion is also limited to the fair rental value of the minister’s housing.
After extensively studying the clergy housing exclusion issue, the Commission on Accountability and Policy for Religious Organizations, in its first report issued in December 2013, made the following recommendations:
To Religious and Charitable Organizations. For the good of our country’s moral fabric, religious organizations and their leaders must represent the best examples of faith and good moral conduct in all areas of financial activity. The vast majority of them do. Religious organizations and their leaders most certainly should not attempt to skirt the law for financial gain. Operating on the high road of integrity includes making reasonable and appropriate determinations as to who is a minister consistent with the polity of each religious organization and making appropriate decisions regarding clergy housing or related allowances. For a religious organization or its leaders to intentionally abuse the law is shameful and damaging to its mission and to the religious community as a whole. On the other hand, when individual organizations and leaders set their bar high—and even raise the bar—it inspires others to do the same. We encourage all religious organizations and their leaders to help raise the bar of reasonable and ethical conduct in this area.
To IRS/Treasury. Given the dual tax status of many members of the clergy (e.g., the common circumstance in which a minister is an employee for income tax purposes but subject to the self-employment tax for Social Security purposes), and the fact that the clergy housing exclusion applies to income tax but not to Social Security tax, much confusion exists among members of the clergy regarding the applicability of the exclusion under current tax law. Accordingly, the IRS should improve the tax forms, worksheets, and educational guidance for members of the clergy in connection with the clergy housing exclusion.
To Congress. Congress should not apply a dollar limit to the clergy housing exclusion under Section 107 of the Internal Revenue Code because attempting to do so would create more challenges than it would solve.
The district court’s decision on the clergy housing exclusion may be appealed to the Seventh Circuit. Since the case was filed over two years ago, attorneys for the federal government have defended the constitutionality of the clergy housing exclusion and have argued that FFRF lacked legal standing to bring the challenge in the first place.
ECFA will continue to post updates on this important issue in the “In the News” section of our website, ECFA.org.