Pastors’ Housing, Take 2

ParsonageHarpersLast week, almost a year after a district court in Wisconsin declared the parsonage exemption unconstitutional, the Seventh Circuit has reversed her decision. And thus ends a (brief) chapter in the religious culture wars.

Or not . . .

I wrote about the district court’s decision a year ago; now I’ll take a look at the Seventh Circuit’s decision. But first, a little context:

The Breadth of the Income Tax

Generally speaking, we’re taxable on our gross income, less certain adjustments. And gross income is a broad category. Among other things, it includes compensation we receive for work we perform. And it doesn’t matter if we receive that compensation in cash or in some other form: either way, we include it in our gross income. Unless the tax law provides for an explicit exception.

Employer-provided housing is generally included in gross income. Assume, for example, that you negotiate with your employer to be paid $75,000 a year. Rent where you work costs $2,000 a month.[fn1] You might be willing to accept a deal where your employer pays you $51,000 cash, and lets you live rent-free in an apartment owned by your employer. As long as you’re fine with the apartment, you should be indifferent—you’re getting $75,000 worth of value.

And you’ll pay taxes on $75,000.[fn2] Even though you only get $51,000 cash. Because the non-cash benefit increases your well-being by $24,000 a year.

But there is a broadly-applicable exception: if you are required to accept the housing as a condition of your employment, you live there for the convenience of your employer, and the housing is on the business premises of the employer,[fn3] the employee doesn’t have to include the value of the housing in her gross income.

Pastoral Housing

The exclusion is even broader if you’re a “minister of the gospel.”[fn4] In that case, you can exclude from gross income (a) the rental value of housing provided by your employer (whether or not you’re required to accept it, and whether or not it’s on the church’s premises), or (b) a cash rental allowance paid as part of your compensation.

Freedom From Religion Foundation Suit

The FFRF and two of its executives challenged the second provision—the cash rental allowance—as being an unconstitutional establishment of religion, and the district court found in their favor.

The appeals court reversed.

Don’t Celebrate (or Despair) Yet

But the court didn’t rule on the constitutionality of the parsonage exemption. Rather, it dismissed the case for lack of standing.[fn5]

I can already see your eyes glazing over, but stay with me: the Constitution only allows courts to hear cases where the litigants are party to a controversy. In the tax world, that basically means that the IRS has disallowed a deduction or credit (or something) that you have claimed.

Here, the plaintiffs admitted to never having attempted to claim an exemption under section 107. The district court excused them because, in her opinion, such a claim would have been pointless. Clearly, there’s no definition of “minister” under which the heads of an atheist organization could be called ministers.

Even if that’s true, though, as the Seventh Circuit pointed out, the standing requirement is a constitutional requirement. It may be less sexy than the Establishment Clause, but it’s just as important, and where the plaintiffs have no standing, courts cannot adjudicate their case.

Which means the case isn’t necessarily over yet: the Seventh Circuit pointed out (in footnote 3) that the plaintiffs would have standing if they had claimed the parsonage exemption in their returns and had them denied, or if they had filed amended returns claiming the exemption which the IRS proceeded to deny or ignore.[fn6]

With that said—and recognizing that I’m a tax, not a constitutional, law professor—the FFRF did not lose on the merits of the case. I suspect that, in fact, the parsonage exemption is unconstitutional and, if the FFRF manages to qualify for standing, the courts will hold it unconstitutional. But for now, constitutional or not, it continues to be part of the tax law.

Mormon Connection

Like I said a year ago, there’s no formal Mormon connection here. That said, I suspect that some portion of the compensation paid to the First Presidency and the Quorum of the Twelve (and very likely whichever other General Authorities are compensated) qualifies for the parsonage exemption. In fact, it would be inexcusable if their tax advisers didn’t recommend that they take advantage of the parsonage exemption.

That said, and back to an earlier discussion of mission president finances, mission presidents almost certainly cannot take advantage of tax-free housing. Pastoral housing is exempt only where it is furnished “as part of his compensation”; the church is extremely clear that the reimbursements paid to mission presidents is not compensation, and that no employment relationship exists between the church and its mission presidents.

Cross-posted to What We Pay for Civilized Society.

[fn1] Note that I live and work in Chicago; the $2,000 estimate is low for here. It may be outrageously high for other places.

[fn2] Ignoring, for simplicity’s sake, all sorts of adjustments.

[fn3] There’s some ambiguity in all of these requirements, but it’s not relevant for this blog post.

[fn4] It’s not clear what, exactly, the scope of “minister of the gospel” is. It’s clearly broader than merely Christian clergy. And it may be broader than clergy: at least some faculty at at least some Christian schools claim the exemption (though I think that their position wouldn’t stand up under audit).

[fn5] For what it’s worth, that’s the outcome I expected a year ago.

[fn6] Of course, it’s not necessarily that easy: there’s no guarantee that the IRS would notice the claim to deny it and, even if the IRS did notice it, there’s no guarantee that the claim would be denied. And without denial, the FFRF would continue to lack standing to challenge the provision’s constitutionality.


  1. Truly love religious tax wonkiness on the blog! Very informative. Thanks!

  2. One of the few bright spots in the Bloggernacle this week! Thanks, Sam. And I love a good “dismissed for lack of standing” as much as anybody.

  3. Thanks, john and Mark!

  4. Last Lemming says:

    When I was writing a paper on the SECA tax a few years ago, I used language straight out of IRS publications to describe the exemption for “ministers.” My Jewish boss objected on the grounds that it applied to non-Christians who did not refer to themselves as “ministers” (much less ministers of “the gospel”–a term that has virtually no currency outside of Christianity). We ended up using “members of the clergy.”

    Anyway, it occurs to me that this might offer another way to assert standing. A rabbi (or imam, or whatever) could claim that having to identify himself as a “minister of the gospel” in order to get the exemption requires him to implicitly embrace Christianity and thus violates his religious freedom. But apparently acceding to that language to get a tax benefit is a compromise non-Christian members of the clergy are willing to make.

  5. Last Lemming, in the district court case, the IRS argued that, in fact, the presidents of FFRF could potentially qualify as “ministers of the gospel” for purposes of the parsonage excemption, and that, as a result, they needed to try to claim the exemption before they could have standing. The district court rejected the assertion as absurd (which, in a plain meaning way, it clearly is), but at the very least, claiming it probably wouldn’t be so frivolous as to attract penalties.

  6. With John and Mark, I’m really happy to have this religious tax wonkiness on the blog. Thanks, Sam!

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