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Taxation and religion in 2018

2018 will be an interesting year for those concerned about the intersection of taxation and religion. Two important issues – the constitutionality of the parsonage allowance and the future of the Johnson Amendment – are primed for further controversy in the year ahead.

As to the parsonage allowance, Judge Barbara B. Crabb, of the US District Court for the Western District of Wisconsin, has teed up for appellate review of Gaylor v. Mnuchin. In that case, Freedom from Religion Foundation, Inc. (FFRF) challenges the constitutionally of Internal Revenue Code Section 107(2). Section 107(2) excludes from clerical incomes cash housing stipends, colloquially characterized as parsonage allowances.

Several months ago, Judge Crabb agreed with the FFRF that Section 107(2) is unconstitutional. Judge Crabb has now enjoined the IRS from enforcing Section 107(2) but has delayed the effect of her injunction until 180 days after the US Court of Appeals for the Seventh Circuit renders a final decision in Gaylor v. Mnuchin.

I disagree with Judge Crabb on the merits and conclude that Section 107(2) is a constitutionally reasonable (though not compelled) choice to manage the inevitable entanglement which occurs whether the state taxes or exempts churches and other religious personnel. On the other hand, Judge Crabb’s remedial decision – to enjoin enforcement of Section 107(2) but delay the impact of the injunction until the Seventh Circuit rules – is a sensible approach. This now shifts the controversy about the constitutionality of the parsonage allowance exclusion to the US Court of Appeals.

The Johnson Amendment is the provision of the Internal Revenue Code which prevents tax-exempt institutions including churches from participating in political campaigns. The version of the Tax Cuts and Jobs Act passed by the House of Representatives would have excused from the restrictions of the Johnson Amendment statements by all organizations which are tax-exempt under Internal Revenue Code Section 501(c)(3), provided that such statements were “made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purposes.”

The internal communications of churches should be removed from IRS scrutiny. However, the House’s proposal to modify the Johnson Amendment was simultaneously too broad and too narrow. The House provision would have broadly applied to all tax-exempt institutions, not just churches. However, the compelling concern is protecting internal church discussions from entanglement with the IRS. Statutory relief from the Johnson Amendment should be tailored to this concern and thus should be granted only to churches to guard their internal discussions from IRS scrutiny.

On the other hand, the test proposed by the House legislation is too narrow and would continue to entangle church and state. Under this test, the IRS would need to monitor and evaluate churches to determine their “regular and customary activities.” This would be a very entangling enterprise.

The final version of the Tax Cuts and Jobs Act passed by Congress did not contain the House provision modifying the Johnson Amendment. Procedurally, the opponents of the Johnson Amendment must now restart their efforts. However, in tactical terms, those opponents have now demonstrated that a majority of representatives support their efforts. In 2018 the challenge for the critics of the Johnson Amendment will be to obtain enough Democratic support in the Senate for proposed modification of the Johnson Amendment to pass that body.

2018 thus promises to be an interesting year, in the courts and in the Congress, for those concerned about the interaction of the tax system and churches.

Featured image credit: Taxes by John Morgan. CC-BY-2.0 via Flickr.

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