The Freedom From Religion Foundation today renewed its court challenge against a housing allowance in the tax code that uniquely privileges clergy.
FFRF, a national state/church watchdog based in Madison, Wis., filed the federal lawsuit in the Western District of Wisconsin, naming as defendants Jacob Lew, U.S. secretary of the treasury, and John Koskinen, IRS commissioner.
The clergy allowance is not a tax deduction but an exemption—allowing housing allowances paid as part of clergy salary to be subtracted from taxable income. Rep Peter Mack, the sponsor of the 1954 law that put this allowance into place, argued that ministers should be rewarded for "carrying on such a courageous fight against this [a godless and anti-religious world movement]."
The plaintiffs are FFRF itself, as well as FFRF Co-Presidents Dan Barker and Annie Laurie Gaylor, who've been allocated a housing allowance by FFRF as part of their salary. In 2013, U.S. District Judge Barbara Crabb ruled in FFRF's favor.
"Some might view a rule against preferential treatment as exhibiting hostility toward religion, but equality should never be mistaken for hostility," Crabb wrote. "It is important to remember that the establishment clause protects the religious and nonreligious alike."
Crabb's finding sent "shockwaves through the religious community," according to the Evangelical Council for Financial Accountability, which bitterly fought the ruling.
"We call this our David vs. Goliath challenge," said Annie Laurie Gaylor, because virtually all major denominations and many minor congregations—including Unitarians, Muslim and Jewish groups—weighed in with amicus briefs against FFRF's challenge to religious privilege.
In November 2014, the 7th U.S. Circuit Court of Appeals threw out that victory—not on the merits but on the question of standing—arguing that Barker and Gaylor hadn't yet sought a refund of their housing allowance from the IRS.
Accordingly, Barker and Gaylor sought refunds last year, as did FFRF's president emerita, Anne Gaylor, whose retirement payout included a housing allowance. The IRS refunded the housing allowance to the married couple for the year 2013, but denied the refund request for 2012. Similarly, the IRS held up the refund request for the senior Gaylor, who subsequently died in June. Ian Gaylor, her son, is additionally named as a plaintiff in the lawsuit on behalf of the Anne Nicol Gaylor estate.
The benefit of the tax exemption to the clergy is huge. The congressional Joint Committee on Taxation has reported that the exemption amounts to $700 million a year in lost revenue. Religious News Service calculated the allowance reduces the take-home pay of some pastors by up to 10 percent. This is because churches benefit, since tax-free salaries lower their overhead. Christianity Today found that 84 percent of senior pastors receive a housing allowance of $20,000 to $38,000 in added (but not reported) compensation to their base salary.
"The manner in which our housing allowance has been used borders on clergy malpractice," William Thornton, a Georgia pastor and blogger, told Forbes magazine in 2013. "A growing subset of ministers who are very highly paid and who live in multimillion dollar mansions are able to exclude hundreds of thousands of dollars from income taxation."
Clergy are permitted to use the housing allowance not just for rent or mortgage, but for home improvements, including maintenance, home improvements and repairs, dishwashers, cable TV and phone fees, paint, towels, bedding, home décor, even personal computers and bank fees. They may be exempt from taxable income up to the fair market rental value of their home, particularly helping well-heeled pastors. The subsidy extends to churches, which can pay clergy less, as tax-free salaries go further.
FFRF is asking the court to rule unconstitutional IRS 26 U.S.C. §107 as administered by the IRS and the Treasury Department because it provides preferential and discriminatory tax benefits to ministers of the gospel. FFRF's complaint alleges that the section "directly benefits ministers and churches, most significantly by lowering a minister's tax burden, while discriminating against the individual plaintiffs, who as the leaders of a nonreligious organization opposed to governmental endorsements of religion are denied the same benefit."
The case was filed on behalf of FFRF by litigator Richard L. Bolton. Gaylor et al v. U.S. Treasury has case number 3:16-cv-00215.