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Ministers' Housing Allowance Exclusion Does Not Violate First Amendment

(Parker Tax Publishing March 2019)

The Seventh Circuit reversed a district court and held that the exclusion from gross income for housing allowances provided to ministers under Code Sec. 107(2) does not violate the Establishment Clause of the First Amendment. The court found that the statute has a secular legislative purpose, does not either advance or inhibit religion, and does not foster excessive government entanglement with religion. Gaylor, et al. v. Mnuchin, 2019 PTC 86 (7th Cir. 2019).


The Freedom From Religion Foundation (FFRF) is a nonprofit organization that takes legal action to challenge the entanglement of religion and government. One such entanglement in FFRF's view is the exclusion from income under Code Sec. 107 for housing and housing allowances provided to ministers as compensation. Code Sec. 107(1) excludes from gross income the rental value of a home provided as compensation to ministers, while Code Sec. 107(2) excludes rental allowances.

FFRF paid its co-presidents, Annie Gaylor and Dan Barker, a portion of their salaries in the form of a housing allowance, then sued the government claiming Code Sec. 107 violates the First Amendment by conditioning a tax benefit on religious affiliation. FFRF's lawsuit was dismissed for lack of standing. In response, Gaylor and Barker filed amended returns claiming refunds for their housing allowances under Code Sec. 107(2). After six months of IRS inaction, FFRF and its employees sued for the refunds in a district court. The IRS then denied the 2012 refund claims because none of the claimants were ministers.

The district court dismissed FFRF's Code Sec. 107(1) challenge because it found that FFRF's employees never claimed a Code Sec. 107(1) exemption. Later, the district court permitted several pastors to intervene to defend Code Sec. 107(2). The district court granted summary judgment to FFRF and its employees because it found that the statute violates the Establishment Clause of the First Amendment. The government and intervenors appealed to the Seventh Circuit.


The Supreme Court has developed two tests for determining whether government action violates the Establishment Clause; but the Court has not clarified which one should take precedence. The first test, articulated in Lemon v. Kurtzman, 403 U.S. 602 (1971), provides that a statute must meet three requirements: (1) it must have a secular legislative purpose; (2) its primary effect must be one that neither advances nor inhibits religion; and (3) it must not foster an excessive government entanglement with religion. The second test, called the "historical significance test," is found in Town of Greece v. Galloway, 572 U.S. 565 (2014), and requires that the Establishment Clause be interpreted by reference to historical practices and understandings.

The government and intervenors argued that Code Sec. 107(2) has three secular legislative purposes: (1) to eliminate discrimination against ministers, (2) to eliminate discrimination between ministers, and (3) to avoid excessive entanglement with religion. FFRP, on the other hand, argued that Code Sec. 107(2) promotes religious ideas by putting ministers in a better position than secular employees. FFRF also contended that the effect of a religious tax exemption is identical to a government subsidy and said that Code Sec. 107(2) does not avoid entanglement because the IRS must still determine whether a taxpayer qualifies as a minister to qualify for the exclusion.

The Seventh Circuit reversed the district court and held that Code Sec. 107(2) does not violate the Establishment Clause. The court explained that, under Code Sec. 119(a)(2), employee lodging is excluded if certain requirements are met - but those requirements are relaxed for specific types of employees, including employees living in a foreign camp and teachers. In the court's view, Code Sec. 107(2), read in context, is one of many rules that provide an exemption to employees with work-related housing requirements. The statute does not confer a special benefit but simply integrates ministers into the existing tax structure, in the view of the Seventh Circuit.

The Seventh Circuit found no single motive for the enactment of Code Sec. 107(2) in the legislative history and therefore took the government at its word that the statute's purpose was to avoid discrimination among religions. The court also rejected FFRF's entanglement argument, finding that the application of Code Sec. 119(a)(2) to ministers would entangle church and state far more than under Code Sec. 107(2) because the IRS would have to determine what business the church is in and where and how far the church premises extend. In the court's view, the categorical nature of Code Sec. 107(2) avoids excessive entanglement by providing certainty as to whether church housing allowances will be exempt.

The Seventh Circuit also rejected FFRF's contention that a religious tax exemption is identical to a government subsidy. The court cited Supreme Court precedent holding that a tax exemption is not a subsidy since the government does not transfer revenue to churches but simply abstains from demanding that the church support the state. The primary effect of the statute, according to the court, is not to advance religion but to allow churches to do so.

The Seventh Circuit also held that Code Sec. 107(2) did not violate the Establishment Clause under the historical significance test. The court found that FFRF presented no evidence that provisions like Code Sec. 107(2) were historically viewed as an establishment of religion, while the government provided substantial evidence of a lengthy tradition of tax exemptions for religion, particularly for church-owned properties. When challenged on Establishment Clause grounds, such exemptions typically have been upheld, the court said.

For a discussion of the exclusion of the rental value of minister housing allowances, see Parker Tax ¶76,301.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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