United States: District Court Strikes Down Rental Allowance Tax Exemption For Ministers

A federal court recently declared unconstitutional Internal Revenue Code Section 107(2), which excludes from gross income a rental allowance paid to a "minister of the gospel" as part of his or her compensation, on the grounds that it violates the Establishment Clause of the U.S. Constitution.  Religious institutions offering such allowances should closely monitor further developments in this area of the law and consider alternative compensation strategies if federal courts in their jurisdiction adopt similar holdings.

The U.S. District Court for the Western District of Wisconsin recently declared unconstitutional Section 107(2) of the Internal Revenue Code ("Code"), which excludes from gross income rental allowances paid to ministers as part of their compensation, on the grounds that it violates the Establishment Clause of the First Amendment to the Constitution of the United States.  Although the decision is only binding in the Western District of Wisconsin, similar challenges to Code Section 107(2) are likely in the aftermath of this decision.  Religious institutions that provide rental allowances to their ministers should closely monitor any appellate review of this decision, as well as developments with respect to Code Section 107(2) in other jurisdictions, to ensure that they remain legally compliant and that their compensation strategies reflect the current state of the law.  Religious institutions with clergy in the Western District of Wisconsin, which includes Madison, La Crosse and Eau Claire, who benefit from Code Section 107(2)'s exclusion should be aware of this decision and should discuss its implications with their legal counsel and tax advisors. 

Background

Code Section 107(2) excludes from gross income a rental allowance paid to a "minister of the gospel" as part of his or her compensation.  Its companion provision, Code Section 107(1), exempts from gross income the rental value of a home directly provided to a minister as part of his or her compensation.  Taken together, these provisions permit religious institutions to include tax-free housing as part of the aggregate compensation offered to their ministers.

District Court Holds Section 107(2) Unconstitutional

On November 22, 2013, the U.S. District Court for the Western District of Wisconsin held in Freedom from Religion Foundation, Inc. v. Lew that Code Section 107(2) violates the Establishment Clause of the First Amendment to the U.S. Constitution. 

The plaintiffs in the case consisted of the Freedom from Religion Foundation (the Foundation), an organization devoted to educating the public regarding nontheistic beliefs, and its two co-presidents.  The defendants were Jacob Lew (Secretary of the Treasury) and Daniel Werfel (Acting Commissioner of the Internal Revenue Service) in their official capacities.

The district court first ruled that, despite the government's objections, the plaintiffs had standing to bring the suit.  The co-presidents of the Foundation receive rental allowances as part of their compensation from the Foundation, but are ineligible for the Code Section 107(2) tax exemption because they are not "ministers of the gospel," as Code Section 107(2) requires.  To qualify as a minister of the gospel, an individual must meet specific criteria set out in U.S. Department of the Treasury Regulations §§ 1.107-1(a) and 1.1402(c)-5.  As a result, the district court ruled that they suffered an injury caused by the denial of the tax exemption available only to ministers of the gospel.

Next, the district court assessed the merits of the plaintiffs' claim that Code Section 107(2) is unconstitutional.  In reviewing Code Section 107(2), the district court relied heavily on the Supreme Court of the United States' decision in Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989), which it identified as the only case in which the Supreme Court has addressed the constitutionality of a tax exemption granted solely to religious persons.  In Texas Monthly, the Supreme Court held that a statute exempting religious periodicals from state sales tax violated the Establishment Clause on the grounds that it did not have a secular purpose or effect and was not necessary to alleviate a significant burden on the free exercise of religion.  The district court reasoned that the Supreme Court's holding in Texas Monthly compelled its holding that Code Section 107(2) is unconstitutional, finding that Code Section 107(2) violated the Establishment Clause for similar reasons. 

The district court rejected the government's argument that Code Section 107(2) should be upheld because the Supreme Court has upheld a statute that provides tax exemptions to property used for "religious, educational or charitable purposes."  The district court stated that that holding was inapplicable because the property tax exemption that the Supreme Court upheld benefited not merely religious persons, like Code Section 107(2), but benefitted a wide variety of nonprofit enterprises, some of which happened to be religious organizations.

The district court also rejected the government's argument that Code Section 107(2) should not be viewed as solely benefiting religious entities because nothing in the statute would preclude an atheist from receiving the rental allowance exemption if the atheist qualified as a "minister of the [atheist] gospel."  The district court noted that no reasonable interpretation of Code Section 107 would include atheists in its purview and, even assuming for the sake of argument that atheist ministers were eligible for the rental allowance exemption under Code Section 107(2), the statute would still discriminate against secular individuals who espouse neither the tenets of atheism nor those of any other religious sect.

Notably, the district court did not assess the constitutionality of Code Section 107(1), which is the companion provision to Code Section 107(2) and grants a tax exemption on the rental value of a home directly provided to a minister as part of his or her compensation.  Thus, religious institutions that rely on Code Section 107(1) to provide tax-exempt housing to their ministers are not directly affected by the district court's decision. 

Additional challenges to the constitutionality of both Code Sections 107(1) and 107(2) are likely in the wake of the district court's decision, especially given the Foundation's ongoing challenges to what it claims are violations of the Establishment Clause.  Religious institutions that currently provide tax-exempt housing to their ministers under either provision should closely monitor developments in this area of the law and act now to assess alternative compensation strategies that may be implemented if courts in their jurisdiction adopt similar holdings.  At a minimum, religious organizations should use this Western Wisconsin development to consider adjusting their compensation packages to the extent possible, perhaps shifting to Section 107(1)-type benefits.  Religious institutions should consult with their legal and tax advisors to confirm that their ministers meet the definition of a minister of the gospel and to adequately document the housing allowance benefits provided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Ralph E. DeJong
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.