Back in August, Paul Streckfus in EO Tax Journal 2018-152 surveying the dispute about the tax treatment of clergy housing allowances wrote: “Based on my 45 years of EO tax experience all I can say is that the intersection of taxes and churches is always a train wreck .” This week the trains were crashing in Chicago.
What’s It All About?
The Seventh Circuit heard oral arguments on Gaylor v Peecher on Wednesday, October 24. At stake is the constitutionality of Internal Revenue Code Section 107(2) commonly referred to as the parsonage allowance. Here is all of Code Section 107.
In the case of a minister of the gospel, gross income does not include—
(1)the rental value of a home furnished to him as part of his compensation
(2)the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
Judge Barbara Crabb ruled last year, for the second time, that the exclusion as it relates to cash allowances:
…. violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.
Although defendants try to characterize § 107(2) as an effort by Congress to treat ministers fairly and avoid religious entanglement, the plain language of the statute, its legislative history and its operation in practice all demonstrate a preference for ministers over secular employees. Ministers receive a unique benefit under § 107(2); it is not, as defendants suggest, part of a larger effort by Congress to provide assistance to employees with special housing needs . A desire to alleviate financial hardship on taxpayers is a legitimate purpose, but it is not a secular purpose when Congress eliminates the burden for a group made up of solely religious employees but maintains it for nearly everyone else.
Who Started It?
Although you will see this dispute being framed as one between atheists and the religious, the guy who started all this is a member of the Churches of Christ who was upset about the particularly egregious parsonage shenanigans of his own denomination. (Churches of Christ isn’t exactly a denomination by its own terms, but to those outside of it, it looks like one.)
Robert Baty was an IRS revenue officer when he was asked about the case of a college basketball coach who was excluding part of his income as a housing allowance. The practice traces back to a revenue ruling that the IRS issued under pressure from Congressmen Burleson and Bush to bail Abilene College out of a payroll audit.
The Becket Fund will give you the impression that the parsonage exclusion is directed toward the ministers of struggling inner-city parishes, but its application is much broader.
Section 107(2) also applies to ordained ministers working at colleges controlled by their denomination either as faculty members or in administration, including the basketball coach. Churches of Christ has a priesthood of all believers theology. All members are ministers. So that means that if you were to get on the faculty of Pepperdine you could save taxes by converting to the Churches of Christ. And then there are the televangelists and mega-church ministers with housing allowances running into the hundreds of thousands. Don’t get me started.
Mr. Baty eventually concluded that the travesty of Revenue Ruling 70-549 was symptomatic of the unconstitutional nature of the parsonage exclusion. Retirement from the IRS in 2005, as a GS-13 appeals officer, has allowed him time to pursue his obsession (along with a couple of others) on what seems like a full-time basis. He reached out to the Freedom From Religion Foundation and FFRF picked up the baton.
Freedom From Religion Foundation Starts
The Freedom From Religion Foundation got a ruling from Judge Crabb in 2013 that 107(2) is unconstitutional. The Seventh Circuit overturned the decision in 2014. That ruling was based on standing. They never got to the constitutional issue. FFRF and its officers then started jumping through hoops to get standing. They paid officers housing allowances. The officers asked for tax refunds and then sued when they did not get them. Judge Crabb ruled again that 107(2) was unconstitutional last year as noted above. By all signs, the standing issues has been conceded, so we will most likely be hearing from the Seventh Circuit on the constitutional merits.
Defending The Parsonage Exclusion
The oral arguments are a great listen, although I realize an hour is a large lifespan investment so I will try to give you a summary. But really go ahead and listen yourself. Four attorneys spoke.
The lead-off was Jesse Panuccio. Mr. Panuccio is the Principal Deputy Associate Attorney General of the United States- the third highest ranking official of the Department of Justice, which oversees virtually all non-criminal matters. I have to wonder if this is the Trump Administration showing special solicitude to the evangelicals who helped elect him. According to Adam Smith of the Tampa Bay Times, Panuccio in 2017 was the highest ranking Floridian in the Trump administration. That tempted me to use Florida Man Defends Clergy Tax Abuse as my headline, but that would not be accurate. Defenders of 107(2) focus on the non-abusive aspects of the section.
Panuccio focused on the nuanced arguments for constitutionality of the section that are best explained by Edward Zelinsky
Luke Goodrich of Beckett, a not-for-profit dedicated to religious liberty, spoke for the intervenors. Beckett highlighted Bishop Ed Peecher, who might be viewed as the poster boy for the parsonage allowance as a modest benefit to servants of the community. I’m pretty sympathetic to his story in part because it is the same argument that my minister makes for the allowance.
When the allowance goes to ministers who are actually working as, you know, ministers it is in effect a subsidy to the ministry and many if not most church ministries provide important public service. This video gives you pretty much the Beckett spin on the whole story.
If situations like this were the only application of the parsonage exclusion, it would probably still be a violation of the establishment clause, but not being a constitutional purists myself, I wouldn’t care. The problem, as I see it, is that the biggest beneficiaries of the parsonage exclusion – housing allowances of hundreds of thousands of dollars – are what the Reverend William Thornton refers to as religious racketeers. That did not come up in the oral arguments.
I asked Adam Chodorow about that and he wrote me:
One of the problems is that each person got 15 minutes, and you have to pick and choose which of the many arguments to hit. I agree that the abuses are appalling and demonstrate how this is just a subsidy, but the courts will focus on the constitutional test. The good news is that it is all in the briefs.
Luke Goodrich’s discussion of “spousal counselling” offered by ministers led to some questions and comments by Judge David Anthony Manion, that provide us with the only clue as to how one of the judges might be leaning. He doubled down in the next section so let’s move on.
Defending Judge Crabb’s Decision
The next half hour was for those who think 107(2) is unconstitutional. Adam Chodorow was speaking for a group of law professors who submitted an amicus brief to that effect. There was a brief from other law professors to the opposite, but there were fewer of them. The argument is pretty straight-forward. The benefit is just for ministers. As he notes the language of the statute “ministers of the gospel” makes it unconstitutional on its face unless you believe. as some do that the United States was founded explicitly as a Christian country. There is a treaty in 1796 that suggests otherwise.
As the government of the United States of America is not in any sense founded on the Christian Religion ,-as it has in itself no character of enmity against the laws, religion or tranquility of Musselmen,-and as the said States never have entered into any war or act of hostility against any Mehomitan nation, it is declared by the parties that no pretext arising from religious opinions shall ever produce an interruption of the harmony existing between the two countries.
Just saying. Regardless, Professor Chodorow noted that the IRS dodged that problem by allowing the exclusion to rabbis, cantors and imams and the like.
Judge Manion weighed in pretty heavily in this section on the secular good that ministers do.
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, the 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?”
He was unimpressed by the professor’s suggestion that Congress could provide the benefit to a broader class including, for example, psychologists and counselors noting that “They cost a lot of money”.
It struck me that Judge Manion had swallowed Beckett’s line whole, but Professor Chodorow had a different take when he wrote to me.
It is not that he has swallowed the Beckett line that there are plenty of other housing provisions and this is part of a broader category that includes ministers, but that he seemed to think that it was OK to given ministers a benefit unavailable to others so long as they were providing secular services. I’m pretty sure that that is not what the 1st Amendment is actually about.
Rich Bolton, attorney for FFRF was the clean-up hitter. He also caught it from Judge Manion. He had to explain the process that FFRF went through for standing and Judge Manion wanted to know more about FFRF. “Were they ministering doing something?” – “ Do you have a constituency that gather together and talk about atheism or whatever you call it ?” It seemed like attorney Bolton was thrown off a bit – “You look a little bit askance that Freedom From Religion Foundation could be providing [something] socially useful” They gave him a little extra time, but I’m not sure that did the trick.
I reached out to Beckett and they sent me their press release and a link to a presentation outside the courthouse.
LIVE from the Court of Appeals in Chicago: Oral argument just ended in Gaylor v. Mnuchin https://t.co/pbhEVgtoS9
— BECKET (@BECKETlaw) October 24, 2018
“Today I asked the court to protect our ability to serve our South Side Chicago community – our youth, our single mothers, our homeless, our addicted, our lost, and all those who seek a church family,” said Pastor Chris Butler of the Chicago Embassy Church. “I hope the court will keep letting religious leaders like me not only preach from the pulpit, but live among the people we serve.”
Professor Samuel Brunson, author of God And The IRS, wrote me:
There really weren’t any surprises at the hearing. Becket and the government focused on the idea that the parsonage allowance is one part of a broader web of “convenience of the employer” exemptions for housing, and the idea that courts need to defer to Congress if they can infer any secular purpose.
The Freedom From Religion Foundation and Professor Chodorow, on the other hand, pointed out how the provision is a “pocketbook provision”; that is, it represents a subsidy to ministers.
The three-judge panel did little to tip its hand. Based on their questions, it could go either way. I’m afraid we’re going to have to wait for the opinion to come out.
Adan Chodorow gave me this as his evaluation.
Both sides did a great job presenting their case. The judges did not ask too many questions so it is difficult to knowThe direction they are leaning. There are many issues in the case, and it didn’t turn on any one of them.
Robert Baty, the cranky old internet warrior pounding on his keyboard when not watching the grandchildren, who started all this, wrote me:
I was impressed with Adam Chodorow, speaking on behalf of the FFRF/Barker/Gaylor and his analysis and redirection after the Government’s opening effort. Rich Bolton was a little slower and took a little longer to make his points, and I was most impressed with his point about there being a real pocket book issue involved (which relates to the “standing” issue). That is, the exclusion denied ordinary folks, and do-gooders of all stripes, results in them paying more out-of-pocket taxes while the “ministers” receive an exclusive benefit because they are “religious” and the obvious intent of the law was to “respect the establishment of religion”.
I was told that cases are won on brief, and that may be the case.
However, I do like the notion of oral arguments and wish they might be extended in cases like this. I would have liked for the entanglement issue involving my cherished “basketball minister” issue to have been considered.
Steve Wolfgang is a Minister at Church of Christ in Downers Grove IL. He observed the hearings and gave me more of a report than I can fit here. Fortunately he also posted it on his own blog. He gives the palm for best presentation to Adam Chodorow
I thought he made the strongest and clearest case possible that IRC 107(2) is should be declared unconstitutional simply by singling out a special class (ministers) to receive a benefit not available to other citizens. Agree with the arguments or not, he made his case clearly and fielded effectively the questions asked him by the Justices.
Lorraine Bailey had a nice piece on Courthouse News – Clergy Housing Tax Break Lands in Seventh Circuit. Judge Manion also made an impression on her.
U.S. Circuit Judge Daniel Manion repeatedly zeroed in on the social benefit of people having a “confidential relationship” with their pastor, a person to whom they can turn to in times of crisis. He called this relationship an “extension of the secular benefit” that serves a social good.
Judge Manion, a Ronald Reagan appointee, asked professor Adam Chodorow, who argued on behalf of a group of amici tax professors who joined FFRF, about the secular benefit arising from “all these people together loving each other… what about that?”
Only tangentially related, but still of interest is this piece in Cook County Record by Carrie Brandon – Kavanaugh assigned to review appeals form Seventh Circuit.
Michael Peabody had a nice summary on ReligiousLiberty.TV.
Black Christian News seems to be following the trend of most of the religious press in leaning towards Beckett’s arguments with Law Firm Says Circuit Court is ‘Highly Receptive’ to Saving IRS Clergy Housing Allowance
Joe Davis, counsel at Becket, told The Christian Post in an interview on Thursday that he believed the “court appeared highly receptive to our arguments.”
“We’re confident that the panel members will understand that the parsonage allowance is fair tax treatment for ministers, not a unique benefit, and that there’s no warrant for imposing crippling new taxes on churches and ministers across the country,” said Davis.
The BCN piece includes the part of the Beckett story that aggravates me the most.
Congressional estimates—for instance the Estimates of Federal Tax Expenditures for Fiscal Years 2016–2020, prepared by the Joint Committee on Taxation—likewise estimate the allowance at nearly a billion dollars annually,” added Davis.
Roy Hayhurst and Tom Strode had a good, if one-sided, summary in Housing allowance defended in appeals court in BRnow.org.
Larry Hansen, a lawyer with Locke Lord LLP, also witnessed the arguments and said, “Attorneys for the government and the intervenors made a convincing argument that the cash housing allowance for ministers is constitutional because it is part of a wider scheme that provides tax-free housing benefits to various classes of individuals.”
Ask An Atheist with Parsonage Exemption Goes To Court had an interview from the other side.
Erica Snow had Religious Groups, Atheists Clash Over Tax-Free Housing for Clergy in the Wall Street Journal, a rare instance of mainstream coverage of the issue. It is pretty balanced. Check out the comments section.
Angie Leventis Lourgos had good balanced coverage in the Chicago Tribune with Should clergy get a housing tax credit? Longtime provision could go away after Freedom From Religion group sues. Except for that headline. It is an exclusion not a credit.
Tony Perkins of the Family Research Council has An Allowance the Left Keeps Raising, which is a moderately annoying headline. Framing this as a left/right issue is probably not necessary. Regardless, Mr. Perkins seems to favor the Beckett argument.
And there’s another irony. Although the Foundation is filing this suit under the guise of helping others, Bishop Peecher notes, it does so “without lifting a finger to help us at all — except to hinder what we do.” Churches are responsible for countless services to the community and are the refuge for “the least of these,” Matthew 25:31-46. The 7th Circuit is expected to make its decision by early next year. We hope the court will make the right choice and uphold this longstanding exemption which is good policy for everyone!