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Not For Profit/Exempt Organizations Blog

Will it Take a Constitutional Miracle to Save the Parsonage Exclusion?

Posted in Religious Organizations

When we last blogged about the “seemingly innocuous five line tax benefit” in Section 107 of the Internal Revenue Code, a District Court judge in California was reviewing a complaint filed by the Freedom From Religion Foundation, a nonprofit membership organization challenging this 90 year old provision.

Over the years, there have been a number of challenges to the parsonage tax exemption based on church and state separation constitutional grounds.  In 2002, the Ninth Circuit sua sponte in Warren v. Commissioner asked the taxpayer and the government to brief the constitutional issue. The Court also asked Professor Erwin Chemerinsky of the University of Southern California to write an amicus brief, which concluded that the provision was unconstitutional.

Congress, with lightning speed, passed the Clergy Housing Allowance Clarification Act of 2002, which amended the housing allowance exclusion in Section 107 and in effect, mooted the case, leading to dismissal of the issue by the Ninth Circuit and putting off the constitutional issue for another day.

Eight years after President Bush signed the new law on May 20, 2002, Judge Shubb of the Eastern District of California (on May 21, 2010) declined to dismiss the latest challenge to the parsonage exemption.

The court wrote that “plaintiffs have alleged sufficient facts which, if accepted as true, ‘leave open the possibility’ that an objective observer would determine that §107 goes too far in aiding and subsidizing religion by providing ministers and churches with tangible financial benefits not allowed secular employers and employees . . . In sum, the court believes that plaintiffs have sufficiently alleged that a reasonable and objective observer would perceive §107 as endorsing religion and as having a predominately non-secular effect.”

Judge Shubb wrote that a statute like Section 107 is unconstitutional if it fails to satisfy any prong of the famous 1971 Supreme Court Lemon opinion.  In Lemon, Chief Justice Burger set forth a three pronged test:

1. The statute must have a secular legislative purpose;

2. The principal or primary effect must be one that neither advances nor inhibits religion; and

3. The statute must not foster an excessive government entanglement with religion.

The district court found that the plaintiffs sufficiently alleged that the parsonage exemption has the unconstitutional effect of advancing religion, thereby failing to satisfy the second Lemon prong, and refused to summarily dismiss the case.

The court also refused to dismiss the constitutional challenge to the California parsonage exemption.  In an interesting footnote, the court noted that, unlike the federal parsonage exemption, California’s exemption is not limited to fair rental value.  This fact, according to the court, “would strengthen plaintiffs’ claims that California is impermissibly benefiting religion.”

While this case has not received wide-spread publicity, a finding of unconstitutionality can cost clergy billions of dollars in tax over the next few years.  This burden would likely be passed on to the religious institutions that employ clergy.

As was done in 2002, religious organizations should monitor this case closely and be ready to intervene and file papers as amicus to help preserve this significant and hoary exemption.