December 12, 2013

U.S. Federal Judge Strikes Down Law Giving Clergy Tax-free Housing Allowance

A United States federal judge ruled November 22, 2013, that the clergy exemption for paying taxes on income designated for housing is unconstitutional. If upheld, the ruling could affect the compensation package of tens of thousands of clergy in the country, including many Seventh-day Adventist pastors.

An attorney for the General Conference of Seventh-day Adventists said the church is likely either to file its own brief or to join another filing opposing the decision when it is appealed.

In her decision U.S. district court judge Barbara Crabb, of the U.S. District Court for the Western District of Wisconsin in Madison, said the law, known as the “parsonage exemption,” benefits “religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”

The exemption for clergy, she wrote, violated the establishment clause of the First Amendment, which prohibits Congress from making a law “respecting an establishment of religion.”

Crabb said her ruling would not be enforced pending appeal.1534news p12EXEMPTION OVERTURNED: The parsonage of First Methodist Church, Monroe, Wisconsin. A judge of the U.S. District Court in nearby Madison, Wisconsin, ruled November 22, 2013, that clergy’s exemption from paying taxes on housing is not constitutional. Supporters of the exemption, which covers an estimated 44,000 ministers, priests, rabbis, imams, and other clergy, promise to appeal." class="img-right" style="float: right;">

Her decision is the result of a suit brought by the Wisconsin-based Freedom From Religion Foundation, which advocates for the separation of church and state. The foundation sued the U.S. Treasury secretary and Internal Revenue Service commissioner over the exemption, which was passed by Congress in 1954. Section 107 of the Internal Revenue Code permits a “minister of the gospel” to designate some compensation as a housing allowance and exempt it from income tax.

“This ruling is a huge deal because it would have a dramatic impact in how the church compensates its ministers,” said Tom Wetmore, associate general counsel for the Seventh-day Adventist Church. “We have long depended on this tax benefit for the compensation package for our clergy in North America.”

The after-tax benefit to Adventist ministers is estimated between 5 and 10 percent of their total compensation package, he said.

Wetmore said the ruling also raises questions about other aspects of the tax status of ministers and other unique tax rules for churches, such as exemptions from reporting revenue activities and church benefit plans.

The case is expected to be appealed to the 7th U.S. Circuit Court of Appeals in Chicago. If so, Wetmore said the Adventist Church would likely file an amicus curiae(friend of the court) brief, or join an amicus brief brought by other groups.

Judge Crabb, who decided the housing allowance case, also ruled in 2010 that the National Day of Prayer was unconstitutional. That ruling was later struck down on appeal when a three-judge panel of the Chicago-based 7th U.S. Circuit Court of Appeals unanimously ruled that the Freedom From Religion Foundation—also the plaintiff in the 2010 case—lacked legal standing to file suit over the matter. n

—with additional reporting by Adventist Review staff