Last Friday, a U.S. district court judge in the Western District
of Wisconsin ruled that it is unconstitutional for the government
to favor religion by not taxing tax ministers on housing allowances
provided by their churches. This ruling does not take effect until
after any appeals are complete, so it should not affect any
ministers for the time being. Furthermore, the ruling addresses
only cash housing allowances; ministers living in church-provided
housing are not affected. If upheld, however, the ruling could have
serious implications for ministers receiving cash housing
allowances, with other challenges to special treatment for
religious organizations and their employees likely to follow.
Subject to certain limitations, section 107(2) of the Internal
Revenue Code provides that a "minister of the gospel"
does not have to include in his or her gross income "the
rental allowance paid to him as part of his compensation, to the
extent used by him to rent or provide a home." However,
according to the 43-page opinion in Freedom from Religion
Foundation v. Lew, section 107(2) does not have a secular
purpose and thus violates the Establishment Clause by favoring
religious ministers over secular workers. The court therefore
enjoined the IRS from enforcing section 107(2), effectively
requiring the IRS to impose treat the ministers' housing
allowance as fully taxable income.
The injunction does not take effect until after any appeals are
complete. In the unusual event that the government did not file an
appeal, it could take effect in as little as sixty days, but
otherwise it would likely be delayed for over a year or more while
the case makes its way through the appellate courts. Additionally,
even if the injunction is affirmed in the Seventh Circuit Court of
Appeals (covering Wisconsin, Illinois, and Indiana), it is not
clear whether the IRS would follow the court's injunction in
The Freedom from Religion Foundation decision relied
heavily on the Supreme Court decision in Texas Monthly v.
Bullock, 489 U.S. 1 (1989), which struck down a special sales
tax exemption narrowly aimed at religious periodicals, but
reaffirmed earlier holdings permitting the government to extend tax
benefits to religious organizations as part of a broader class. It
noted that Congress could, if it wishes, pass a broader exclusion
not restricted to religious ministers that would pass
constitutional muster. However, the court dismissed the
government's arguments that the law as written today is
nondiscriminatory because it allows for the possibility of
atheistic or nonreligious individuals to qualify as "ministers
of the gospel."
A significant issue in the case was whether the plaintiff
foundation had standing to bring suit. Normally, a person can bring
suit only if he or she is directly harmed by the challenged
conduct. The court held that the Freedom from Religion Foundation
established standing by including as plaintiffs some of its
leaders, who do not receive the same benefits they would receive if
they were ministers of the gospel. If the court's decision is
upheld, it could pave the way for third-party challenges to other
special benefits for religious groups, including section
107(1)'s exclusion for parsonages provided in-kind to ministers
by their churches, and potentially to some special favors outside
the religious context.
This article is designed to give general information on the
developments covered, not to serve as legal advice related to
specific situations or as a legal opinion. Counsel should be
consulted for legal advice.
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One of the most publicized and long-awaited business provisions contained in the Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, 107 Stat. 312 (1993) (the "1993 Act") was section 197 of the Internal Revenue Code of 1986 (the "Code"), which governs the tax treatment of acquired intangible assets. However, section 197 cannot be analyzed in isolation. Since it comes into play whenever there is an allocation of consideration to an amortizable section 197 intangible, a basic understanding of
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