Seventh Circuit holds challengers to parsonage exemption lack standing

The Seventh Circuit unanimously rejected a challenge to the parsonage exemption brought by the Freedom From Religion Foundation, concluding that the Wisconsin-based, nontheistic group lacked the legal ability to challenge the statutory exception granted to “minister[s] of the gospel.” Because the Seventh Circuit concluded the plaintiffs did not have standing, it did not reach the question of whether the parsonage exemption runs afoul of the First Amendment. The opinion reverses a decision of the U.S. District Court for the Western District of Wisconsin that held the provision unconstitutional as violating the Establishment Clause of the First Amendment. (You can listen to the very interesting oral argument here.*) 

The parsonage exemption, found at 26 U.S.C. § 107, excludes the value of employer-provided housing benefits from the gross income of any “minister of the gospel.” In other words, it allows clergy to receive tax-free housing from their religious employers. These benefits include both in-kind housing as well as allowances. Nonclergy are only eligible for similar tax benefits when they meet much narrower criteria, including that the employee accepts lodging “on the business premises of [the] employer as a condition of [the] employment.” 26 U.S.C. § 119.

Freedom From Religion’s two copresidents, who were coplaintiffs with the organization, receive housing allowances as part of their salaries but pay income tax on that portion because they are not clergy. Since they do not receive in-kind housing benefits, the plaintiffs agreed that they didn’t have standing to challenge the in-kind exemption. So the decision only considered the allowance.

The Court pointed to one fact that doomed the plaintiff’s claim: the I.R.S. never actually denied the plaintiffs a parsonage exemption. The reason? The plaintiffs never asked for a parsonage exemption. Without that request, the “claim amounts to nothing more than a generalized grievance.” And generalized grievances don’t support standing. “In other words,” the Court explained, “the mere fact that the tax code conditions the availability of a tax exemption on religious affiliation does not give a plaintiff standing to challenge that provision of the code.”

Religious leaders were extremely unsettled at last year’s district-court decision. (E.g., here.) The ability to pay clergy a substantial portion of their salary tax free provides religious organizations a tremendous benefit—an estimated $2.3 billion over a five-year period. Although the Seventh Circuit’s decision means the exemption will live to see another day, it also means that the provision’s constitutionality has not yet been tested in a federal appellate court. If the U.S. Supreme Court were to take the case, the argument will likely focus on the procedural question of standing rather than the constitutional merits. While religious leaders can count on the availability of the exemption for the time being, it remains unclear how long the exemption will survive.

Next the Freedom From Religion Foundation may either ask for a hearing from all judges on the Seventh Circuit or skip that step and ask the United States Supreme Court to review the case. Either court could decline further reconsideration. The organization’s press release did not indicate its next step, but used forceful language, calling the decision as based on “cavalier assessment that [the group’s leaders] have suffered no concrete injury."

Should the Freedom From Religion Foundation ultimately lose in this case based on a lack of standing, its leaders would likely ask for the exemption on their tax returns. At that time, the I.R.S. will need to determine if they qualify as “ministers of the gospel” and either grant or deny the exemption. Only if the I.R.S. denies the exemption would the organization be able to file a second lawsuit to challenge the statute’s constitutionality.

*Listen for a reference to work on the history of the parsonage in the United States by James Hudnut-Beumler, who served as dean of Vanderbilt Divinity School while I was a student there. It’s around the 8:00 mark.


See the previous post to the feeds just after the oral argument here:

• 7th Cir. considers standing to sue at oral argument on ministerial-housing allowance Analysis here.

Have a question about legal issues affecting religious organizations? Let me know at questions@lawmeetsgospel.com or @LawMeetsGospel.