Written by Don Byrd
Reversing a ruling by a federal district court judge in Wisconsin, the 7th Circuit Court of Appeals last week upheld the longstanding tax exemption for ministerial housing allowances as constitutional. The court rejected arguments made by the Freedom From Religion Foundation that the exemption amounts to a religious subsidy in violation of the Establishment Clause. In fact, the court emphasized, far from being a special benefit, the tax exemption (found in Section 107(2) of the Internal Revenue Code) merely places ministers on an equal footing with secular employees entitled to a housing exemption if they meet certain rules established in Section 119(a)(2).
In its analysis, the court explained that the tax exemption serves a valid secular purpose by guarding against excessive church-state entanglement. That’s because inquiring into whether ministers meet the 119(a)(2) rules would require the government to intrude on matters of religion.
Here is an excerpt from that section of the opinion:
[T]he application of § 119(a)(2) to ministers would entangle church and state far more than under § 107(2). For example, to determine what constitutes the business premises of the employer under § 119(a)(2), the IRS would have to determine what the “business” of the church is and where and how far the “premises” of the church extend. To do so, the IRS would need to interrogate ministers on the specifics of their worship activities, even determine which activities constitute “worship.” Such government inquiries into the internal affairs of churches to determine their eligibility for tax relief have been rejected as excessive entanglement.
Worse, if subject to § 119(a)(2), congregations might alter their religious activities to attempt to conform with its requirements. Congress enacted § 107(2) in part to avoid that. And congressional action “to minimize governmental interference with the decision-making process in religions … does not violate the Establishment Clause.”
The categorical nature of § 107(2) also avoids excessive entanglement by providing ministers and their churches certainty as to whether their housing allowances will be exempt from tax. In Amos, the Supreme Court held “it is a significant burden on a religious organization to require it, on pain of substantial liability, to predict which of its activities a secular court will consider religious.”
Recognizing the potentially excessive entanglement threatened by the application of § 119(a)(2) to ministers, Congress enacted a less-entangling tax exemption [in 107(2)].
The appeals court also found that the exemption does not improperly advance religion. Quoting the U.S. Supreme Court in a 1970 case, Walz v. City of New York, the panel wrote, “The grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.”
Lastly, the court held that the tax exemption also passes the “historical significance test” set forth in Town of Greece v. Galloway, as it continues a long tradition of exempting church resources from taxation.