Appeals court upholds constitutionality of housing allowance exclusion for ministers

Tax Hot Topics newsletter The 7th Circuit Court of Appeals held in Gaylor v. Mnuchin (Nos. 18-1277 and 18-1280) that the parsonage allowance exclusion under Section 107(2) is constitutional, reversing an earlier decision by the U.S. District Court for the Western District of Wisconsin. The lower court had held that the provision violated the Establishment Clause of the First Amendment, which states that Congress shall make no law respecting an establishment of religion, because it conditions a tax benefit on religious affiliation.

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.

The 7th Circuit referenced multiple factors supporting the constitutionality of the Section 107(2) exclusion. For one, if the Section 107(2) exclusion was held to be unconstitutional, ministers would have to rely on the Section 119 convenience-of-the-employer requirements. Because Section 119 has more stringent requirements for determining whether employer-provided housing is excludable from employee income, the IRS would have to determine what the nature of business is for religious organizations, the specifics of worship activities, and which activities constitute worship in order to substantiate the exclusion from income for ministers. The Court felt that this level of government involvement would create too much entanglement between government and religion.

Additionally, Congress provided for multiple exclusions for employer-provided housing under the tax code in order to simplify the application of the convenience-of-the-employer doctrine for certain occupations. Some of these exclusions include housing provided to employees during business travel, housing provided to military members, and housing provided to U.S. citizens or residents living abroad for work. Therefore, the exclusion of housing for ministers does not give preferential treatment to religion because Congress enacted these exclusions to ease the overall administration of the convenience-of-the-employer rules. The 7th Circuit ultimately concluded that Section 107(2) does not violate the Establishment Clause because it found that similar exclusions were not historically viewed as an establishment of religion, and that the exclusion has a secular legislative purpose, does not advance or inhibit religion, and does not create excessive entanglement of government with religion.

Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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