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Federal Court Reverses Ruling That Stripped Tax Exemption From Ministers


Last week, an appeals court protected a Chicago-based pastor and other religious leaders around the country from losing their parsonage allowances, which would have required them and their congregations to pay nearly $1 billion per year in new taxes. In October 2018, attorneys on behalf of Pastor Chris Butler of the Chicago Embassy Church argued that IRS Code Section 107 (2)—which allows churches, mosques, and synagogues to provide faith leaders a tax-free housing allowance to help them live in the communities they serve—did not violate the Establishment Clause.

This came nearly three years in the making after an atheist group, Freedom From Religion Foundation (FFRF), sued the IRS in 2016 claiming the federal tax provision violated the Establishment Clause. In 2017, a district court agreed and Butler appealed.

Religious leaders have eagerly anticipated the ruling of the Chicago-based U.S. Court of Appeals for the Seventh Circuit, which unanimously rejected the atheists’ challenge, ruling that the tax exemption is constitutional. This ruling protects religious freedom and separation of church and state for religious organizations who were at risk of losing this small but essential provision that benefits so many people doing faith-based work.

Many Congregations Depend on This Allowance

The Seventh Circuit ruled that the parsonage allowance “is simply one of many per se rules” that “allow hundreds of thousands of employees (including ministers) to receive tax-exempt housing every year,” and that it is consistent with the nation’s “lengthy tradition of tax exemptions for religion, particularly for church-owned properties.”

Butler was the religious leader at the center of this lawsuit, although several other religious organizations (and the U.S. Treasury Department) intervened as well. In court, they pleaded with the judges to reinstate the exemption, “asserting that the survival of many congregations hangs in the balance.”

Butler heads a predominantly African-American congregation and has devoted his life to mentoring at-risk youth, decreasing neighborhood crime, and caring for the homeless in Chicago’s poorest neighborhoods. Likes many houses of worship, which are funded solely through gifts from their congregations, his church can’t afford to pay him a full salary, so it offered him a small housing allowance. This way Butler can afford to live near his church and the community he has dedicated his life to serving. This is not an uncommon arrangement among ministers of faith.

For more than 60 years, federal law has recognized that housing allowances shouldn’t be taxed as income under the same principle that exempts housing allowances for hundreds of thousands of secular workers, including teachers, business leaders, military members, and many more. This tax exemption also keeps the IRS from becoming entangled in religious matters and explains how the law operates clearly on its IRS web page. In other words, it’s no nefarious loophole.

In a statement, Butler, represented by the Becket Fund for Religious Liberty, praised the ruling. He said, “This ruling is a victory not just for my church but for the needy South Side Chicago community we serve—our youth, our single mothers, our homeless, our addicted, and our victims of gang violence. I am grateful that I can continue serving them and living side by side with them to make our neighborhood a safer, more peaceful place.”

A Controversial Provision

In 2017, Judge Barbara Crabb, a Jimmy Carter-appointed district court judge, said the law, which has been in place since 1954, violated the Establishment Clause of the First Amendment.

“Congress retains wide discretion in adopting tax laws that further its legitimate policies,” she said. “What Congress may not do is single out religious persons for preferential treatment without a secular basis for doing so, as it has done in §107(2).”

Crabb held the same way back in 2013. The Seventh Circuit vacated her opinion in 2013 and reversed it in 2017. Those bringing the suit echoed Crabb’s argument. During arguments last fall, a group of law professors submitted an amicus brief saying the provision violated the Establishment Clause. Their argument was pretty straightforward: The benefit is just for ministers.

Even during arguments, at least one judge seemed to lean toward the ruling they released last week. Judge Manion, one of the circuit court judges, mentioned how much secular good ministers do in their surrounding communities, an argument often presented when the Establishment Clause is at play:

When you get to secular purpose and effect—the effect that I see missing in this discussion is the benefit to society not on religious issues but on the benefit in society that is pervasive. And it seem it is ignored. You go to Concord or whatever and you have all these people together. They’re loving each other and friendly and all the right things. And you say ‘Yeah but, they celebrate the birth of Christ.’ And here we talk about what does a minister do. He’s confidential but often times it’s spousal. It’s all kind of problems. What about that?

The ruling will affect the numerous houses of worship, people who benefit from the provision, and future Establishment Clause jurisprudence. An amicus brief from the University of St. Thomas School of Law in Minnesota estimated that, of the United States’s 384,000 congregations, 200,000 to 300,000 provide a housing allowance to their ministers under the IRS tax code in question.

As for the jurisprudence, the Seventh Circuit incorporated the infamous Lemon test and (Lemon v. Kurtzman) and the “historical significance” test (Town of Greece v. Galloway). The court concluded it had a “secular legislative purpose, its principal effect is neither to endorse nor to inhibit religion, and it does not cause excessive government entanglement.”

As the court concluded in its ruling: “FFRF claims § 107(2) renders unto God that which is Caesar’s. But this tax provision falls into the play between the joints of the Free Exercise Clause and the Establishment Clause: neither commanded by the former, nor proscribed by the latter. We conclude § 107(2) is constitutional.”