Federal District Court in Wisconsin Rules Parsonage Allowance to Clergy is Unconstitutional

Federal District Court in Wisconsin Rules Parsonage Allowance to Clergy is Unconstitutional

The United States District Court for the District of Wisconsin in Freedom from Religion Foundation, Inc. v. Lew, 112 AFTR 2d ¶ 2013-5565 (D. Wis. 2013) has held that the clergy housing parsonage allowance pursuant to Code Sec. 107(2) is unconstitutional. It issued an injunction ordering the Commissioner of Internal Revenue to stop allowing the exclusion to gross income.  The Order is not to take effect until the conclusion of any appeals (sure to be) filed by the Government.  FFRF is a non-profit organization that advocates for the separation of church and state that brought the action against the Treasury Department and Internal Revenue Service. 

Pursuant to Code Sec. 107, in the case of a minister of the gospel, gross income does not include:

(1) The rental value of a home furnished to him, or the cost of utilities paid for him, as part of his compensation; or

(2)  The rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The Internal Revenue Service has previously ruled in Rev. Rul. 70-549, 1970-2 CB 16 that the parsonage allowance exclusion only applies to a duly ordained, licensed, or commissioned member of the clergy.

The case is legally fascinating on many levels.  The suit sought a declaration that the parsonage allowance violates the equal protection clause of the Fifth Amendment and the Establishment Clause of the U.S. Constitution.  FFRF had a couple of hurdles to climb. 

First, FFRF needed to show it had standing to sue and it successfully accomplished this by claiming that it was – in fact – injured because its owners were denied the exemption that the clergy receives.  Second, FFRF needed to show that the parsonage allowance violates the establishment clause. The District Court here agreed with FFRF and relied upon Texas Monthly, Inc. v. Bullock, (Sup Ct 1989) 489 U.S. 1 (1989) which held that a state statute exempting religious writings from sales tax was unconstitutional.  

In developing its reasoning, the District Court stated that a reasonable observer would view the parsonage allowance as an endorsement of religion.  Stay tuned as this landmark decision will be most certainly appealed through the appellate court and most likely the Supreme Court and Congress may be asked to weigh in and perhaps redraft the parsonage allowance in a way that does not violate the Constitution.