
James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Author: James F. McDonough
Date: May 13, 2014

Of Counsel
732-568-8360 jmcdonough@sh-law.comIn the 1990s, an Orange County California minister and the Internal Revenue Service (IRS) battled over the amount of his parsonage or housing allowance. The IRS claimed that the allowance, which is tax-free to the minister, was overstated and that some portion of the allowance should have been reported as income. The case proceeded to court and was appealed to the Circuit Court of Appeals for the Ninth Circuit in San Francisco. There, the Court appointed a law professor to write a brief on whether the parsonage allowance was constitutional. Congress took immediate action passing a law granting the exemption but limiting the parsonage allowance to the fair market value of the residence. This statute was a concession to clergy and IRS. The Court dismissed the case because there was no longer an issue to decide although the law professor believed the issue should be briefed, debated and ruled upon.
In 2013, this very same issue appeared in two cases. In Freedom From Religious Foundation v. Lew, a Federal District in Wisconsin held that the parsonage allowance was unconstitutional and that the allowance was an endorsement of religion. That case is on appeal to the Circuit Court of Appeals for the Seventh Circuit in Chicago and enforcement of the decision was stayed. The same issue was litigated in American Atheists v. Schulman, where a Federal District in Kentucky decision is pending. The Kentucky case would also be appealed to the Seventh Circuit.
The impact of a decision adverse to the parsonage allowance may not be limited to housing for ministers. One argument made by atheists is that because churches pay nothing, citizens pay more and that this is unfair. They claim governments could collect 71 billion in tax revenue if the allowance was halted. They also raise an argument that atheist organizations are unable to compete with churches because churches are not subject to the same qualification process. Finally, there is a challenge to the extension of favorable treatment to churches, clergy, religious organizations and non-church organizations that advance religion. They argue equal protection and the establishment clauses claiming that the favorable treatment is without secular purpose and rational explanation in law or fact.
Striking down the parsonage allowance would have a dramatic impact upon real estate property taxation. If other favorable treatment was revoked, the tax-exempt area and religious areas would be dramatically impacted. There has always been tension between church and state throughout history. Once again, it appears, albeit in a slightly different form.
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