Clergy Housing Tax Break Lands in Seventh Circuit

CHICAGO (CN) – Churches and the IRS joined forces Wednesday before a sympathetic Seventh Circuit panel to argue that a 65-year-old income tax housing exemption for clergy members does not violate the Constitution’s Equal Protection Clause.

“The court has to take history into account,” said attorney Luke Goodrich of the nonprofit law firm Becket, a public-interest firm representing the churches and pastors. “Tax exemptions for parsonages predate the founding [of the U.S.].”

The U.S. tax code grants “ministers of the Gospel” an exemption on income tax for the portion of their wages spent on housing.

26 U.S.C. § 107(2) allows for a payment separate from a pastor’s salary that is used for paying mortgages, utility bills and other housing-related expenses to be excluded from gross income on tax returns.

The IRS has interpreted the 1954 law to apply to religious leaders of all faiths, not just Christian ministers.

In 2016, the Freedom From Religion Foundation Inc., or FFRF, challenged the housing allowance in a federal complaint after two members of its board of directors applied for the housing exemption as leaders of an atheist organization, but were denied.

The FFRF claims the law discriminates against secular employees in violation of the First Amendment’s establishment clause and the equal protection provision of the Fifth Amendment.

Last year, U.S. District Judge Barbara Crabb in the Western District of Wisconsin ruled that the housing allowance “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.”

Associate Attorney General Jesse Panuccio, representing the IRS, told the Seventh Circuit on Wednesday that Judge Crabb was “at pains to explain away any secular purpose” of the tax code. He argued the housing exemption is necessary to avoid government entanglement in religious affairs.

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?”

Professor Chodorow responded that if Congress wanted to support people that provide benefits to society, it could do so in a constitutional way, such as providing a similar housing allowance to psychologists or counselors.

“But they cost a lot of money,” Judge Manion said.

“So they do,” Chodorow replied. “But the government shouldn’t be in the business of supporting ministers because counselors are expensive.”

FFRF attorney Richard Bolton told the panel that “what we have here is an unjustified preference for religion.”

However, he was forced to defend his organization when Judge Manion cast doubt on whether FFRF’s directors can be compared to ministers for purposes of claiming a tax exemption.

“You have a constituency that gets together and talks about atheism or whatever?” Judge Manion asked Bolton in a skeptical tone of voice.

The clergy interveners – Pastor Chris Butler and Bishop Edward Peecher of Chicago Embassy Church, Father Patrick Malone of Holy Cross Anglican Church, the Diocese of Chicago and Mid-America of the Russian Orthodox Church Outside of Russia – claim Judge Crabb’s ruling threatens churches with almost $1 billion in new taxes each year.

“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,” Pastor Butler said in a statement. “I hope the court will keep letting religious leaders like me not only preach from the pulpit, but live among the people we serve.”

U.S. Circuit Judges Michael Brennan and William Bauer also served on the three-judge panel. All three judges are Republican appointees.

A decision in the case is expected early next year.

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