Appeals court backs tax-free clergy housing

Retiring at 65 with no home equity and taking out a 30-year mortgage for the first time is a reality for many United Methodist retired pastors like the Rev. Harold Burkett, who lived in a parsonage when he first started his ministry. 

The news of a U.S. federal court ruling assuring clergy can keep getting housing allowances tax-free is a blessing, he said.

Burkett said living in a parsonage meant he had no opportunity to create equity for retirement and while the parsonage wasn’t income, it was considered part of his clergy compensation. He was also required to pay social security tax on the value of the parsonage at the higher self-employed rate.

“The possibility of establishing funds for a retirement home was very limited for some,” he said. “I was blessed to have made a decent wage and could do some saving along the way.” He retired from Sanctuary United Methodist Church in North Wales, Pennsylvania, in 2003.

In a unanimous decision released March 15, three judges on the U.S. Court of Appeals for the 7th Circuit reversed a 2017 federal court ruling. The lower court had found that the tax exemption amounted to an unconstitutional establishment of religion.

The appeals court concluded the 1954 law is constitutional, saying the law “has a secular legislative purpose, its principal effect is neither to endorse nor to inhibit religion, and it does not cause excessive government entanglement.” The ruling also noted that Congress has provided federal tax exemptions for religious organizations as far back as 1802.
 
“The housing allowance helps with this financial burden late in life. We always lived in a parsonage and have been retired for 13 years,” said the Rev. John C. Nesbitt of Myerstown, Pennsylvania.

Two United Methodist agencies — the General Council on Finance and Administration and Wespath Benefits and Investments — were part of an amicus brief filed by the Church Alliance in support of the housing allowance tax exemption. The Church Alliance is an interfaith coalition of the chief executive officers of 37 religiously affiliated benefit programs.
 
In their argument, attorneys for the Church Alliance said ministers who arranged their affairs based on the tax rules would find “their circumstances severely straitened, and their hopes for an adequate retirement jeopardized.”

Wespath general counsel Andy Hendren said the decision brings “much needed security” to thousands of clergy of all faith traditions across America.

“The Church Alliance brief argued that the cash housing allowance for clergy is a constitutionally permitted accommodation of religion. This is particularly true when viewed in the context of the exclusion for in-kind clergy housing, i.e., parsonages, and the exclusion of employer-provided housing from employees’ incomes in numerous secular circumstances,” Hendren said. 

“We were very pleased to see our arguments embraced by the court of appeals,” he added. 

Hendren is treasurer of the Church Alliance and Barbara Boigegrain, top executive of Wespath, is on the steering committee for the organization.

Under the 1954 federal law, a “minister of the gospel” doesn’t pay income taxes on compensation designated as housing allowance. The Internal Revenue Service has traditionally interpreted “minister” broadly to encompass rabbis, imams and other religious leaders.

The Freedom from Religion Foundation, based in Madison, Wisconsin, sued the IRS and argued that the law discriminates against secular employees.

The alliance argued, among other things, that congregations have come to depend on the nearly 65-year-old tax provision.
 
If the law was held unconstitutional, the brief said, “churches that acted in reliance on this statute — and on the century and a half of constitutional jurisprudence that supported it — would be trapped.”

The ruling does not deal with parsonages, which have been tax-free since the United States enacted the federal income tax in 1913.

Nevertheless, the stakes were high for The United Methodist Church. As of 2017, 13,540 United Methodist churches — about 43 percent of the denomination's churches in the United States — paid some amount of housing allowance to clergy, according to General Council on Finance and Administration data.  

This is the second time the appellate court faced a case from the Freedom from Religion Foundation, which has been battling the tax exemption for a decade.

U.S. District Judge Barbara Crabb struck down the housing-allowance tax break as unconstitutional in 2013 and again in 2017.
 
The 7th U.S. Circuit Court of Appeals overturned her earlier ruling in 2014, but at the time, it did not rule on the merits in the case. Instead, the panel ruled that the co-presidents of the Freedom from Religion Foundation did not have standing to sue because they had never tried to claim the exemption on their housing allowance.

This time, the appellate court took up the constitutional questions, deciding it is in line with the U.S. First Amendment.

In its ruling, the court noted that similar tax exemptions apply to more than clergy. 

The Freedom from Religion Foundation argues the law “renders unto God that which is Caesar’s,” the court said in its conclusion. “But this tax provision falls into the play between the joints of the Free Exercise Clause and the Establishment Clause: neither commanded by the former, nor proscribed by the latter.”

Annie Laurie Gaylor, co-president of the Freedom from Religion Foundation and one of the plaintiffs, said after the ruling that the exemption is still discriminatory.

“The housing allowance is so clearly a handout to churches and clergy, and it so clearly shows preferential treatment and discriminating in favor of ministers,” she said in a prepared statement.

The General Council on Finance and Administration also posted a statement about the decision saying, “it is possible, if not likely, that FFRF will ask the United States Supreme Court to review the 7th Circuit’s ruling, but there is no guarantee that such a request would be granted.”

Gilbert and Hahn are multimedia news reporters in Nashville. Contact them at (615) 742-5470 or newsdesk@umcom.org. To read more United Methodist news subscribe to the free Daily or Weekly Digests.