The Parsonage Allowance is a Go

Old Dutch Parsonage, Sommerville, NJ. By Zeete. CC BY-SA 4.0

On October 24, 2018, the Seventh Circuit heard an appeal in Gaylor v. Mnuchin, the parsonage allowance case. I’ve written several times about this case over the last six or so years (some links in this post), and I checked the Seventh Circuit’s website for the decision incessantly.

And eventually, it released its opinion. Two and a half weeks ago. I’ve been meaning to blog about it, but haven’t had time to do it justice. And I still haven’t, but wanted to at least flag its conclusion and suggest where it may go from here. Maybe sometime in the future I’ll have time to really engage the opinion here.

A quick summary/reminder: the case dealt with the constitutionality of section 107(2) of the Internal Revenue Code. Section 107(2) says that a “minister of the gospel” can exclude from gross income (and thus not pay taxes on) a housing allowance paid by his or her employer. In essence, it represents a religion-specific exception to the general rule that amounts an employee receives from her employer constitute income subject to tax.[fn1]

The Freedom From Religion Foundation challenged the constitutionality of the parsonage allowance, arguing that it violated the Establishment Clause. They won at the district court level, but the case was dismissed for lack of standing at the Seventh Circuit. Essentially, to have standing for tax purposes, you have to have the tax assessed against you, and FFRF hadn’t done anything to meet that.

So FFRF went back and provided a housing allowance to two of its executives, who excluded it as a parsonage allowance. When the IRS disallowed the exclusion, they filed suit and again won at the district court.

At the Seventh Circuit, though, they lost. The Seventh Circuit opinion largely accepts a framework proposed by Becket Law, which says that the parsonage allowance is part of a framework of “convenience of the employer” exceptions. (Basically, if your employer provides housing, requires you to live in it, and the housing is provided for noncompensatory reasons, you don’t have to include it in gross income.) It’s beyond the time I have today to explain why, but that significantly misreads both the legislative history and the way these various exemptions function, but in a way that, if you’d been at the oral arguments, would be entirely unsurprising.

So what happens now? It depends. FFRF has until mid-June to appeal to the Supreme Court.[fn2] Will they do it? I don’t know. It seems unlikely, at best, that the Supreme Court would grant their petition for cert. This is the only Court of Appeals decision dealing with the constitutionality of the parsonage allowance; there’s no circuit split, and if the Supreme Court doesn’t act, the status quo remains. Moreover, while the Court’s Establishment Clause jurisprudence is kind of chaotic, there’s at least a decent chance that the Supreme Court would uphold the Seventh Circuit, and could crystallize Establishment Clause  jurisprudence in a manner FFRF isn’t a fan of.

Alternatively, other organizations could follow FFRF’s lead in other circuits. Americans United for Separation of Church and State seems to be headquartered in Washington, D.C. It could designate a portion of its executives’ compensation as a parsonage allowance, and launch the same challenge that FFRF did in the D.C. Circuit. Other church-state watchdog groups organized and headquartered in other circuits could do the same thing. It’s possible that one circuit would find the parsonage allowance unconstitutional, setting up a circuit split that could attract the Supreme Court’s attention.

There’s also always lobbying. Even if the parsonage allowance doesn’t violate the Establishment Clause, as I’ve argued in God and the IRS, it’s bad tax policy. And the Supreme Court has been very clear that there are no mandatory religious tax accommodations, so Congress could change the rule if it wanted.

Will any of those things happen? I don’t know. But, for the present, “ministers of the gospel”—including Mormon General Authorities–will continue to be permitted to exclude designated housing allowances from their gross income.

[fn1] Like, seriously. Gifts, for example, are not generally includible in gross income. But gifts from employers to employees are an exception to that general rule, and must (under most circumstances) be included in gross income.

[fn2] I suppose they could also petition for an en banc rehearing by early May, but that strikes me as unlikely.


  1. J. Stapley says:

    Thanks Sam. I’ve enjoyed following your coverage on this. It is far more fascinating an issue with your help along the way.

  2. Interestingly, social security and medicare taxes have to be paid on parsonage allowances so, unless their income is above the limits, those claiming the allowance aren’t getting off scott-free.

  3. Sam, thanks for keeping up on this and posting. Once long ago I spent real time thinking about the parsonage allowance. But for years now my attention has been limited to about the time it takes to read your posts.

    I’m interested in what more you have, when time permits. I’ve probably said this before, but I am mulling over the Establishment Clause arguments, thinking that once you put parsonages (the real thing) into the “convenience of the employer” box, extending the exception to cash is bad tax policy and bad history, but arguably not a sufficiently added benefit to religion that it implicates the Establishment Clause. At least that’s a direction I would be interested in discussing.

  4. Old Man says:

    Do any authorities receive a housing allowance from the church? Do any General Authorities exclude housing allowances from their gross income?

  5. Old Man, yes. There’s evidence that the church allocates part of at least paychecks of members of the Q12 as a housing allowance. And it would be crazy if the church didn’t do that for any employees that qualify as ministers of the gospel.

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