Mirror of Justice

A blog dedicated to the development of Catholic legal theory.
Affiliated with the Program on Church, State & Society at Notre Dame Law School.

Tuesday, May 1, 2018

The Costs of Invalidating the Housing-Allowance Exclusion

In Gaylor v. Mnuchin, the Seventh Circuit is reviewing a district judge's ruling that the Establishment Clause invalidates section 107(2) of the IRS Code, the provision that allows ministers/clergy (of all faiths) to exclude an employer-provided housing allowance from income for federal tax purposes. (Section 107(1), which allows exclusion of the value of an employer-provided parsonage, is not challenged.)  Becket, which represents clergy intervening in the case to defend the provision, has a case page on its website. A brief summary of the argument on the merits in Becket's opening brief (at 6):

Section 107(2) takes the longstanding convenience-of-the-employer doctrine, which [excludes employer-provided housing from income if the employee--religious or secular--uses it for the employer's convenience], and applies it to ministers in a way that reduces entanglement and discrimination. [From TB: It reduces entanglement in the sense that otherwise the IRS would have to make religiously sensitive inquiries inquire into what constitutes meaningful use of the minister's home for the church. And it reduces discrimination in the sense that limiting the exclusion only to church-provided parsonage favors those churches that are old, established, or wealthy enough to have an existing parsonage or be able to make a down payment on a new one.]

Several amicus briefs filed support the government and the clergy-intervenors. Our Religious Liberty Appellate Clinic at St. Thomas helped draft a brief laying out the serious consequences for ministers and churches if 107(2) is invalidated. Using a variety of national surveys, we document these conclusions (from our summary of argument, pp. 3-4):

      A. Housing allowances excludable under § 107(2) are deeply embedded in our national life—that is, widely used in ministerial compensation structures. [Citing the "deeply embedded" standard from the Court's approval of tax exemptions in the Walz case.] Figures in studies indicate that anywhere from 61 to 81 percent of congregations rely on housing allowances (as opposed to church-owned parsonages) to give their ministers housing benefits.

      B. Invalidating § 107(2) would significantly disrupt the activities of ministers and congregations that have relied on the provision. The effects are evident in simple hypothetical examples involving a congregation of around the median-size budget, which is a modest $85,000. Solo ministers in that range receiving the median base salary—a modest $35,000—and a median housing allowance could see their federal tax liability nearly triple. To keep their ministers or preserve their financial stability, congregations would have to offset the added tax liability, including increased state income taxes. And the added compensation to accomplish that offset must significantly exceed the added taxes, since the new compensation is itself subject to federal and state income tax and federal self-employment tax. Calculating these effects in a simple hypothetical for a median-sized congregation shows how disruptive the invalidation of § 107(2) would be for congregations that have little cushion to absorb the effects.

We also present evidence that invalidating 107(2) "would disproportionately harm smaller congregations and those that must rely on a housing allowance as a means of structuring clergy compensation," and that it "would especially retired ministers and those nearing retirement."

St. Thomas 3L student Kacie Phillips (about to graduate!) did outstanding work on the review of studies and on the initial drafting of the brief.


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