District Court enjoins enforcement of the parsonage allowance exclusion

Tax Hot Topics newsletterThe District Court for the Western District of Wisconsin in Gaylor v. Mnuchin (No. 16-cv-215) has enjoined the enforcement of Section 107(2) after previously holding the statute as unconstitutional, but the injunction is not effective until 180 days after the conclusion of any appeals. For the time being, ministers may still exclude parsonage allowances from income.

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 Stated 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 v. Mnuchin 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 v. Mnuchin, 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.

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

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

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.