Foundation Challenges Parsonage Exemption

The Freedom From Religion Found­­ation, along with 21 of its California members, has filed a nationally significant federal lawsuit in Sacramento to challenge tax benefits for “ministers of the gospel,” commonly known as “the parsonage exemption.”

Ministers, who are paid in tax-free dollars, also may deduct their mortgage interest and property tax payments. Under both federal and California law, allowances paid to “ministers of the gospel” are not treated as taxable income. “Ministers of the gospel” may uniquely claim these benefits, so the statutes convey a governmental message of endorsement, unconstitutionally favoring religious employees and institutions over all others, the Foundation maintains.

The lawsuit was filed Oct. 16 in California Eastern District Court, Sacramento office. Judge William Shubb will preside over the case. Attorney Richard Bolton, Madison, Wis., with local counsel Michael Newdow, Sacramento, represent the Foundation and its plaintiff members.

The Foundation seeks a declaration that, on their face and as administered, provisions allowing tax benefits for “ministers of the gospel,” provided for by the IRS and Treasury Depart­ment, violate the Establishment Clause of the First Amendment to the U.S. Constitution.

Defendants are Timothy Geithner, U.S. Treasury secretary; Douglas Shulman, Internal Revenue Service commissioner; and Selvi Stanislaus, executive officer of the California Franchise Tax Board, who are all providing tax benefits only to “ministers of the gospel,” rather than to a broad class of taxpayers.

The exemptions permit clergy to deduct from their taxable income housing allowances furnished as part of compensation. The unique benefits to clergy date to 1954, when Congress amended the tax code to permit all clergy to exempt their housing costs from their incomes taxes. U.S. Rep. Peter Mack, author of the amendment, declared:

Certainly, in these times when we are being threatened by a godless and antireligious world movement we should correct this discrimination against certain ministers of the gospel who are carrying on such a courageous fight against this foe. Certainly this is not too much to do for these people who are caring for our spiritual welfare.

Section 107(2) allows ministers to avoid paying taxes on income declared to be a “housing allowance.” The privilege also permits churches to save money on clergy salaries. Most egregiously, clergy may “double-dip,” i.e., deduct their mortgage payments and real estate taxes from income tax, even though they paid for these with tax-exempt dollars, amounting to a government subsidy solely for clergy.

In 2002, Congress acted to protect the exemption, after the IRS sued over an abusive housing allowance taken by Rev. Rick Warren, by limiting deductions in future to “reasonable rental value.”

“All other taxpayers pay more because clergy receive this privileged benefit,” said Annie Laurie Gaylor, Foundation co-president.

“The income taxation of ministers of the gospel under the general rules that apply to other individuals would not interfere with the religious mission of churches or other organizations or the ministers themselves,” the legal complaint maintains. The statutes are not an accommodation of religion, therefore, but a subsidy.

The Supreme Court has previously ruled that a tax benefit given only to religion violates the Establishment Clause (Texas Monthly, Inc. v. Bullock, 1989).
The IRS provisions also create an entanglement between government and church, because they require that a “minister of the gospel” must be “duly ordained, commissioned, or licensed” in order to be entitled to tax benefits. This determination requires the IRS and Treasury to “make sensitive, fact-intensive, intrusive, and subjective determinations dependent on religious criteria and inquiries.”

The government must determine whether certain activities constitute “religious worship” or “sacerdotal functions,” whether a member of the clergy is “duly ordained, commissioned, or licensed,” whether a Christ­ian college is “under the authority” of a church or denomination, etc.

“The actions of all the defendants have the effect each year of excluding hundreds of millions of dollars from taxation,” and this exclusion is valuable only to ministers of the gospel.” These tax preferences “also enable churches and other religious organizations to reduce their salaries and compensation costs.”

Because employees of secular organizations, such as FFRF, are not allowed these tax preferences, secular organizations “incur comparatively greater compensation costs,” placing FFRF and other non-eligible groups at a “competitive disadvantage.”

In 2002, a case went before the Ninth Circuit Court of Appeals when the IRS sued Rev. Rick Warren of Saddleback Valley Community Church, who had claimed all or nearly all of his housing costs for several years as a tax-free parsonage allowance. With the Ninth Circuit poised to rule against Warren, Congress immediately passed the Clergy Housing Allowance Clarification Act of 2002 to moot the case. From 2002 onward, the act restricted the parsonage exemption to “reasonable rental value.”

“We warmly thank our Sacramento-area members for joining our lawsuit, and making this litigation possible by serving as state plaintiffs,” said Gaylor and Foundation Co-President Dan Barker.

Named plaintiffs are: Anthony G. Arlen, Karen Buchanan, Wendy Corby, Charles and Collette Crannell, Kristi Craven, Paul Ellcessor, Billy Ferguson, Kathy Fields, Carey Goldstein, Pat Kelley, Richard Moore, Ken Nahigian, Mike Osborne, Paul Storey, James Morrow, Joseph Rittell, Susan Robinson, William M. Shockley, Debora Smith, Elisabeth Steadman.

Freedom From Religion Foundation