Religious Institutions Update: December 2013

Nathan A. "Nate" Adams IV is a Partner in our Tallahassee office.

Timely Topics

A federal district court has ruled unconstitutional one of the most important tax benefits available to ministers: the minister's housing allowance. A summary of the case follows. The ruling threatens to have a dramatic effect on how churches compensate ministers. An estimated 44,000 ministers, priests, rabbis, imams and others use this allowance. The tax exemption permits them to exclude eligible expenses from income for federal income tax purposes, up to the fair rental value of the home when designated in advance as a housing allowance. Eligible expenses for homeowners include mortgage payments (principal and interest), property taxes and insurance, utilities, appliances and furniture (purchase or rental cost and repairs), and structural repairs and remodeling. Alternatively, eligible rental expenses include rent, furnishings, utilities and insurance. In aggregate, the after-tax benefit is worth an estimated $700 million per year. The average impact on ministers is disputed, but may be in the range of five to ten percent of their income. It is too soon to know whether the Obama administration will appeal the ruling. While keeping a close eye on this case, religious institutions should continue to designate housing allowances for ministerial employees for 2014. For related questions, please feel free to contact qualified counsel.

Court Strikes Ministerial Housing Allowance Exemption

In Freedom from Religion Foundation v. Lew, No. 11-cv-626-bbc, 2013 WL 6139723 (W.D. Wis. Nov. 22, 2013), the court ruled in violation of the Establishment Clause and enjoined at the conclusion of all appeals Internal Revenue Code Section 107(2), which excludes from gross income a minister's "rental allowance paid to him as part of his compensation." The court found that the plaintiffs, who are atheists, had standing to file a facial challenge to section 107(2) because they are excluded from the exemption as "ministers of the gospel" as not performing "sacerdotal" functions, conducting "worship," or acting as "spiritual" leaders under the authority of the "church." Relying primarily upon Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989), the court determined that a tax exemption granted solely to religious persons is unconstitutional.

The court ruled that the tax exemption lacks a secular purpose, results in preferential treatment for religious over secular messages and conveys a message of religious endorsement. The court rejected the defendants' argument that the exemption is merely an accommodation of religion on the grounds that the mere payment of a generally applicable tax does not qualify as a substantial burden on free exercise. "Defendants do not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses." The court also rejected the theory that a mere tax exemption does not implicate the same constitutional concerns as a subsidy.

Last, the court was unimpressed with the defendants' argument that the exemption actually eliminates discrimination because it was intended to balance a different exemption (§119) benefiting ministers who live in parsonages and the "convenience of the employer doctrine" benefiting military members, seamen and others. The court ruled that assisting a subset of religious persons is not constitutional either.

Key Cases

Court of Appeals Enjoins Contraceptive Coverage Mandate

In Korte v. Sebelius, Nos. 12-3841, 13-1077, 2013 WL 5960692 (7th Cir. Nov. 8, 2013), the court of appeals reversed lower district...

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