(RNS) A federal judge has ruled that an Internal Revenue Service exemption that gives clergy tax-free housing allowances is unconstitutional.
The exemption applies to an estimated 44,000 ministers, priests, rabbis, imams and others. If the ruling stands, some clergy members could experience an estimated 5 to 10 percent cut in take-home pay.
U.S. District Court Judge Barbara Crabb ruled on Friday (Nov. 22) in favor of the Freedom From Religion Foundation, saying the exemption violates the establishment clause because it “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”
The case, decided in the District Court for the Western District Of Wisconsin, will likely be appealed to the the 7th Circuit, which could reverse the decision. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana. Earlier this month, the 7th Circuit barred the enforcement of the contraceptive mandate, a church-state issue being considered by the Supreme Court.
If the court decision stands, it could have a significant impact on clergy income. Clergy that earn an average of $50,000 per year, may receive another a third of income, or $16,000, from a tax-free housing allowance, essentially earning $66,000. The cut in taxes ($4,000 in this case), would mean an 8 percent cut in salary.
The Hosana-Tabor v EEOC case decided last year that a teacher could be considered a “minister,” so the exemption could extend beyond traditional members of the clergy.
The exemption is worth about $700 million per year, according to the Joint Committee on Taxation Estimate of Federal Tax Expenditure.
Judge Crabb ruled that the law provides that the gross income of a “minister of the gospel” does not include:
“the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
The ruling addresses the housing allowance while parsonages are still exempt. The law’s tax exemption has been contested since a decade-old dispute between the IRS and the Rev. Rick Warren, a megachurch pastor in California.
In 2002, the IRS attempted to charge Warren back taxes after he claimed a housing allowance of more than $70,000. He eventually won the federal court case and that led Congress to clarify the rules for housing allowances. The allowance is limited to one house, either the fair market rental value of the house or the money actually spent on housing. “May we say hallelujah! This decision agrees with us that Congress may not reward ministers for fighting a ‘godless and anti-religious’ movement by letting them pay less income tax,” said Annie Laurie Gaylor and Dan Barker co-presidents of the Freedom From Religion Foundation.”The rest of us should not pay more because clergy pay less.” The Southern Baptist Convention’s Ethics and Religious Liberty Commission and GuideStone Financial Resources plan to fight for the exemption. “The clergy housing allowance isn’t a government establishment of religion, but just the reverse,” said Russell Moore, president of ERLC. “The allowance is neutral to all religions. Without it, clergy in small congregations of all sorts would be penalized and harmed.” Church housing has been a hot topic in recent months as the Southern Baptist pastor of one of the fastest-growing churches in the U.S., is building a 16,000-square-foot gated estate near Charlotte, N.C. The tax value on the 19-acre property owned by Steven Furtick of Elevation Church is estimated to be $1.6 million. Earlier this year, the federal government offered the Freedom From Religion Foundation a tax break it rejected. Atheists are challenging non-profit tax-exempt statuses in a Kentucky court. Judge Crabb, who decided the housing allowance case, also ruled in 2010 that the National Day of Prayer was unconstitutional.
