Parsonage Allowance Held Unconstitutional

The Tax Code (Code Sec. 107) allows a minister of the gospel, as well as religious leaders of other faiths, to exclude from gross income the value of housing that’s covered by their religious organization. This is so whether housing is furnishing directly by the religious institution or if a housing allowance is provided to pay for housing costs. A U.S. district court has now decided that housing allowances under Code Section 107(2) are unconstitutional (Gaylor v. Mnuchin, D. WI, No. 3:16-cv-00215).

The law providing housing allowances was challenged by employees of the Freedom from Religious Foundation, Inc., a non-religious organization. The employees filed refund claims for housing allowances they received although they were not “ministers of the gospel”. The IRS refused to issue a refund, and the employees challenged the law in a district court.

The court agreed with the taxpayers that the law violates the Establishment Clause of the U.S. Constitution (… “Congress shall make no law establishing religion”). According to the court, the law does not have a secular purpose and a “reasonable observer” could view it as endorsing religion. The plain language of the law demonstrates a preference for ministers over secular employees who are similarly situated.

The decision is estimated to cost churches and other religious organizations an estimated $1 billion in new taxes, and is likely to be appealed. Stay tuned!