Federal Court overrules lower court decision that clergy tax-exempt housing allowance is unconstitutional
A U.S. federal court confirmed today that clergy can continue to claim the tax benefit for housing allowance, upholding a Seventh-day Adventist Church-backed appeal against a lower court ruling that would have ended the so-called parsonage allowance.
The 7th Circuit Court of Appeals, located in Chicago, handed down its decision saying the plaintiffs—the Freedom From Religion Foundation—lacked standing to challenge the exemption, meaning that the group had not suffered damage personally.
The Seventh-day Adventist Church had joined an amicus brief—or “friend of the court” brief—for the case in April along with more than 30 other denominations and religious organizations.
The ruling stops what could have been hundreds of millions of dollars of tax increases on clergy and other individuals with tax-exempt status for housing.
Today’s decision was the latest step that began with a 2011 suit by Freedom From Religion Foundation, an atheist and agnostic group based in the state of Wisconsin.
Freedom From Religion had originally sued the top leaders of the U.S. Treasury and Internal Revenue Service over the exemption, which was passed by Congress in 1954. Section 107 of the Internal Revenue Code permits a “minister of the gospel” to designate some compensation as a housing allowance and exempt it from income tax.
A decision last year from a lower court said the parsonage exemption violated the Establishment Clause of the First Amendment, which prohibits Congress from making a law “respecting an establishment of religion.”
Adventist Church Associate General Counsel Todd McFarland said the Church was pleased with today’s decision.
“The Adventist Church has a long history of a commitment to separation of church and state; however, granting pastors this longstanding tax benefit does not violate the ‘Establishment Clause,’” McFarland said. “The government grants tax breaks for all kinds of people and businesses.”
Other exemptions, McFarland said, include teachers and professors working for educational institutions, military personnel, employee lodging for the convenience of the employer, as well as certain taxpayers living abroad.
Many religious organizations have long depended on the tax benefit for the compensation package for their clergy in the United States.
Ivan Williams, Ministerial Department director for the Adventist Church’s North American Division, said that the denomination’s pastors can make a decent living wage on a "base pay" basis, but depending on where they live, their cost of living adjustments are usually drastically behind and not commensurate. The parsonage exclusion gives them the ability to exempt their housing expenses from their taxable income.
Williams said the after-tax benefit to Adventist ministers is estimated between 5 and 10 percent of their total compensation package.
