Wisconsin Court Holds Parsonage Allowance Unconstitutional

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 other circuits.

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