The ministerial housing allowance case currently pending before the Seventh Circuit Court of Appeals in Chicago involves a lawsuit filed in the Western District of Wisconsin (Federal District Court). The suit was brought by the Freedom From Religion Foundation (FFRF), claiming that the ministerial housing allowance violates the 1st Amendment to the Constitution (Establishment Clause). In late November 2013, District Court Judge Crabb held in favor of the FFRF – and declared the housing allowance unconstitutional. (It should be noted that the Judge ruled that the FFRF did not have “standing” to bring suit about the parsonage allowance but that they could sue on the housing allowance issue. So this lawsuit does not address parsonages – but only cash given or paid for ministerial housing.)
Since the housing allowance is a part of the Tax Code (Section 107), the IRS was actually the defendant in the FFRF lawsuit. With the IRS defending the housing allowance issue, Judge Crabb ruled in favor of the FFRF.
On the last possible day, the IRS filed an appeal with the Seventh Circuit Court of Appeals, requesting that the appellate court reverse Judge Crabb’s ruling. The matter is now before the Seventh Circuit, where it has been pending since late January 2014, and the court is currently taking briefs on the case. By the current court order (which is subject to be extended), all briefs have to be filed by the middle of May. The government’s brief, filed on behalf of the IRS and in support of the Tax Code and the housing allowance, was filed earlier this week. All 230 pages of the brief can be reviewed by clicking here. A detailed history on the housing allowance can be found beginning on page 175 of the government’s brief.
The Church of God Benefits Board, as well as the Church of God denomination, will be joining in a “friend of the court” brief that is being filed on behalf of other denominations and pension funds. That brief is set to be filed on April 8, 2014. We currently anticipate that 30 or more major denominations (Assemblies of God, Southern Baptist, United Methodist, Presbyterians, Episcopals, Lutherans, and others) will be listed on the friend of the court brief being filed in support of the ministerial housing allowance. Interestingly enough, both the IRS and the FFRF have agreed to allow our jointly filed brief to be submitted into the court records.
It is anticipated that if the Seventh Circuit does not request oral arguments, a decision could be handed down as early as very late summer. If oral arguments are requested, as the government has proposed, the decision will not come until late in the year or maybe next year. However, once the briefs are all in, the court will most likely signal when a decision should be expected.
If the Seventh Circuit upholds the lower court’s ruling of unconstitutionality, the housing allowance would be immediately taxable in the three states (Wisconsin, Illinois, and Indiana) covered by that Court. The greater concern is, that to maintain uniformity, the IRS could adopt the opinion of the Seventh Circuit and basically change their audit requirements to say that the housing allowance is unconstitutional (and thus taxable) in all fifty states. That would be a devastating blow to both active and retired ministers.
Legal scholars differ on whether the US Supreme Court would take this matter up if the Seventh Circuit ruled against the housing allowance. Most seem to think that with the current makeup of the Court, the Supreme Court would be highly unlikely to take the case for reconsideration. If the Supreme Court did review it, it is expected that the court would most likely rule 5 to 4 – and no one is willing to put money on which side will win.
For both active and retired ministers, this is a matter of serious concern.However, until the appeals process concludes and the Seventh Circuit issues a ruling, the suit will have no effect on ministers who currently receive a housing allowance.
Please “stay tuned in” for additional developments.