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The parsonage allowance and standing in the state courts

In Freedom From Religion Foundation, Inc. v. Lew, the US Court of Appeals for the Seventh Circuit recently dismissed a constitutional challenge to the parsonage allowance provisions of the Internal Revenue Code (Code). Under Section 107(2) of the Code, a “minister of the gospel” need not pay income taxes on the housing allowance received by the minister as part of his or her compensation. According to the plaintiffs in this case, the income tax exclusion established by Code Section 107(2) violates the Establishment Clause of the First Amendment because the exclusion is available only to clergy, not to individuals who receive cash housing allowances from their secular employers.

In dismissing the case brought by the Freedom From Religion Foundation (FFRF), the appeals court did not reach the substantive merits of this constitutional claim. Rather, the Seventh Circuit dismissed the case on the basis of standing or, to be precise, the plaintiffs’ lack of standing. In procedural terms, the appeals court ruled, the FFRF plaintiffs never asked the IRS for tax-free treatment for their housing allowances:

[T]he plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance of about Section 107(2)’s unconstitutionality, which does not support standing. (Emphasis in the court’s original).

The Seventh Circuit’s decision is consistent with the trend, encouraged by the US Supreme Court, to narrow taxpayer standing in the federal courts. As I recently argued in the Hastings Constitutional Law Journal, the corollary of this formalistic trend is that First Amendment lawsuits like FFRF’s challenge to the income tax exclusion for clerical housing allowances will increasingly occur in the state courts which are generally more receptive than the federal courts to claims of taxpayer standing.

FFRF has announced its intention to press its constitutional objections to Section 107. It is thus likely that these objections will be addressed in one or more state courts with more liberal procedural rules for standing.

First Church Parsonage Windsor CT by Grondemar. CC-BY-SA-3.0 via Wikimedia Commons.
First Church Parsonage Windsor CT by Grondemar. CC-BY-SA-3.0 via Wikimedia Commons.

The US Constitution empowers federal courts to hear “Cases” and “Controversies.” Over the years, the federal courts have elaborated the Constitution’s “case or controversy” test to require what has become known as “standing.” Among other elements, such standing necessitates that a plaintiff have experienced “personal and individual” injury rather than a generalized grievance shared with others.

In dismissing the FFRF challenge to the parsonage allowance provisions of the Internal Revenue Code, the Court of Appeals for the Seventh Circuit held that the plaintiffs did not meet this exacting standard of personalized injury. As a procedural matter, the plaintiffs had not asked the IRS to exclude from their respective gross incomes the housing allowances paid to them by their secular employer. Hence, in formal terms, the plaintiffs had no individualized injury and thus no standing to pursue their lawsuit.

The FFRF plaintiffs can now ask the IRS to exclude their housing allowances from their gross incomes and, when refused such favorable treatment, can commence their litigation again in the federal courts. Alternatively, FFRF can restart this litigation in the state courts where the tests for standing are generally more liberal than in the federal courts.

FFRF originally began its challenge to the Code’s parsonage allowance provision as a federal case in the US District Court for Eastern District of California. FFRF then refiled its litigation in the US District Court for the Western District of Wisconsin, where the FFRF plaintiffs prevailed on the merits. From there, the case went to the US Court of Appeals for the Seventh Circuit which has now ordered the case dismissed for lack of standing.

In terms of statutory law and case law, the standing rules for California’s state courts are among the most liberal in the nation. The case law of Wisconsin similarly opens the door to that state’s courts in contrast to the less welcoming standing tests of the federal courts.

California’s and Wisconsin’s respective income taxes include benefits for clerical housing allowances identical to Code Section 107. Thus, any constitutional deficiency of the federal exclusion also applies to the equivalent state income tax exclusions of parsonage allowances. So why didn’t FFRF start its litigation against the parsonage allowance in the California or Wisconsin state courts in the first place, rather than resorting to the federal courts located in those states?

Perhaps the FFRF litigants thought that a state court’s constitutional invalidation of that state’s parsonage allowance exclusion would be insufficiently influential. Or perhaps FFRF’s lawyers concluded that elected state court judges would be less receptive to their challenge than life-tenured federal judges.

In any event, FFRF says that its procedural defeat in the Seventh Circuit will not deter additional litigation concerning the alleged unconstitutionality of the favorable tax income treatment extended to parsonage allowances. Whatever the reason the FFRF lawyers chose to proceed in the federal courts, they must now be considering the advisability of litigating their concerns in the state courts, with more generous tests for standing.

On the substantive merits, I disagree with FFRF that the income tax exclusion for clerical housing allowances violates the First Amendment. As I have discussed in the Cardozo Law Review, that exclusion has both secular purpose and secular effect: In constitutional terms, Code Section 107 is a permissible (though not required) attempt to minimize the church-state entanglement which would result from taxing such allowances. While there are strong tax policy arguments against Section 107(2), those arguments don’t make that section unconstitutional.

In light of FFRF’s determination to keep litigating, it is likely a matter of time before this substantive constitutional issue will be addressed in one or more state courts with more liberal procedural rules for standing.

Recent Comments

  1. RLBaty

    As I recall the 7th Circuit noted that the U.S. Supreme Court had not actually ruled on “standing” in a case such as this.

    I think the U.S. Supreme Court should be given the opportunity, in this case, to make such a ruling.

    It is also noted that the 9th Circuit’s attempt to consider the constitutionality of IRC 107 on its own motion and Judge Crabb’s specific ruling as to the UNconstitutionality of IRC 107(2) remains a matter of record and, in my opinion, good indications that, in fact, IRC 107 is UNconstitutional.

  2. RLBaty

    In light of your article today, I have contacted my freshman state representative, Jeni Arndt, about immediately initiating state legislation to require “ministers” to add in their tax free housing for state tax purposes.

    Such legislation would not suffer from any constitutional defect and the state and my representative could profit by getting in on the issue early.

    Also, I managed to find a reference I have mentioned a number of times and which is reflected below.

    Jews, like others, have often come out on the short end of the IRC 107 stick. This is another example, though I will not go into all of that here.

    I think the reference shows why the FFRF executives should not be required to file a claim on an original or amended return; any Court would likely “punt” and declare they need not consider the constitutional issue.

    I think the FFRF executives, as Judge Crabb decided, should be allowed “standing” without the need for a frivolous claim.

    Your further comments on this would be appreciated. Here’s the reference:

    (Begin reference excerpts)

    58 United States Tax Court Reports

    Marc H. Tannenbaum and Helga Tannenbaum,


    Commissioner of Internal Revenue,

    Docket No. 4666-68
    Filed April 4, 1972


    Respondent concedes that the petitioner was, and is,
    an “ordained minister”.

    However, respondent contends that (1) the American
    Jewish Committee is a secular organization and (2)
    the services rendered by petitioner to the American
    Jewish Committee are not ordinarily the duties of a
    minister of the gospel “in the exercise of ministry…”

    We agree with the respondent.

    In the alternative, the petitioner contends that the
    Commissioner’s regulations are discriminatory in
    denying to him the exlcusion solely because his
    religious faith has no established hierarchy.

    Consequently, he contends that such regulations are
    unconstitutional as a violation of the “equal protection”
    clause of the United States Constitution.

    We need not decide this question.

    We would deny the petitioner the exclusion in this case
    irrespective of the regulations.

    (End reference excerpts)

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