The parsonage allowance, codified in 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, which can be excluded from gross income on tax returns.
The 1954 law applies to a “minister of the gospel,” which the IRS has interpreted to apply to certain religious leaders of Christianity and other faiths.
U.S. District Judge Barbara Crabb ruled Friday that the parsonage 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.”
The Freedom From Religion Foundation Inc., or FFRF, challenged the law in a federal complaint, claiming the tax break discriminates against secular employees in violation of the First Amendment’s establishment clause and the equal protection provision of the Fifth Amendment.
The defendants are the United States of America, Treasury Secretary Steven Mnuchin and IRS Commissioner John Koskinen.
FFRF officers had filed a similar complaint in 2013 and Judge Crabb ruled in their favor then, but the Seventh Circuit vacated her decision on the ground that the plaintiffs did not have standing to sue.
Nevertheless, Crabb reached the same conclusion in her decision Friday.
“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,” the judge wrote in a 47-page decision.
The ruling ends a nearly 65-year precedent and threatens churches across the county with nearly $1 billion in new taxes, according to Becket Law, which represents a group of churches and pastors that intervened in the case in January.
The FFRF is a nonprofit membership organization dedicated to the separation of church and state. The group’s two co-presidents filed the latest lawsuit in April 2016.
The IRS previously accepted a tax return filed by the pair in March 2015 without explanation, but that same month rejected their amended partial tax return request for 2012.
“They stated that they are ‘not clergy’ and that their ‘employer is not a church,’ but they believed ‘it is unfair that ministers can exclude housing while we cannot,’” according to Judge Crabb’s ruling.
The IRS rejected that claim.
In her decision, Crabb noted the “unique benefit” that ministers receive under the parsonage allowance.
“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,” she wrote.
The judge gave the parties until Oct. 30 to file supplemental briefs regarding whether additional remedies are appropriate and whether her order should be stayed pending appeal.
“It seems unlikely that it would be appropriate for the court to issue an injunction directing the IRS to extend the scope of the exemption because… there are multiple ways that the statute could be rewritten, a task generally left for Congress,” Crabb wrote. “I am reluctant to make a definitive determination regarding the appropriate remedy because none of the parties developed an argument in favor of a refund, a particular injunction or both or otherwise developed an argument regarding what the court should do in the event that it concludes that § 107(2) is unconstitutional.”
The FFRF did not immediately respond to an email request for comment Monday.
IRS spokesman Anthony Burke declined to comment on the ruling.
Becket Law said in a statement that the churches it represents will appeal the decision to the Seventh Circuit.
“It’s not unconstitutional for the federal government to treat faith leaders the same as other secular employees in their housing allowances. In fact, treating them differently would be discrimination against religion, pure and simple,” Hannah Smith, senior counsel for the religious liberty law firm, said in a statement.