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District Court rules parsonage allowance exclusion is unconstitutional

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District Court rules parsonage allowance exclusion is unconstitutional The District Court for the Western District of Wisconsin ruled in Gaylor v. Mnuchin, No. 16-cv-215 (W.D. WI) on Oct. 6 that Section 107(2) is unconstitutional. Section 107(2) excludes from the gross income of a “minister of the gospel” the rental allowance paid to the minister as part of his or her compensation to the extent used by the minister to rent or provide a home, including utilities and other housing-related expenses. This allowance is often referred to as a parsonage allowance.

In ruling in favor of the plaintiff, which includes the Freedom from Religion Foundation, Inc., the district court found that Section 107(2) violates the establishment clause of the First Amendment of the United States Constitution. In the court’s opinion, Section 107(2) violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.

The Freedom from Religion Foundation challenged Section 107 in 2013, and the same district court ruled that it violated the First Amendment. However, the Seventh Circuit Court of Appeals vacated the judgment because the plaintiff did not have standing. It is likely that the district court’s ruling in Gaylor will be appealed to the Seventh Circuit, and this time, assuming the court rules the plaintiff has standing, the Seventh Circuit will have the opportunity to consider the constitutionality of Section 107(2).

Even if Section 107(2) is held to be unconstitutional, the value of housing provided by a religious organization to a clergy member may still be excludible from the clergy member’s gross income. As the district court points out in Gaylor, Section 119 excludes from an employee’s gross income the value of housing provided to the employee for the convenience of the employer if the employee is required to accept the housing on the business premises of the employer as a condition of employment.

Contact: Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1526


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