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7th Circuit Says Parsonage Allowance Is Constitutional

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By William Vogeler, Esq. on March 19, 2019 4:00 PM

Clergy are entitled to an income tax break for housing expenses, a federal appeals court ruled.

In Gaylor v. Mnuchin, the U.S. Seventh Circuit Court of Appeals said the 65-year-old tax exemption is constitutional for historical and legislative reasons. The allowance is "simply one of many" tax exemptions for work-related housing, the appeals panel said.

For a while, however, the "parsonage allowance" was not so simple. One judge in the case has been saying it is unconstitutional for five years.

Parsonage Allowance

Under 26 U.S.C. Section 107(2), clergy may exclude from their income compensation they receive for rental payments, utilities, and other housing-related expenses. The law has been around since 1954, and it applies to a "minister of the gospel."

In 2017, Judge Barbara Crabb said it violated the Establishment Clause of the First Amendment.

"Congress retains wide discretion in adopting tax laws that further its legitimate policies," she said. "What Congress may not do is single out religious persons for preferential treatment without a secular basis for doing so, as it has done in §107(2)."

The judge had said it before in 2013. The Seventh Circuit vacated her opinion that time, and reversed it the second time around.

Vacated, Then Reversed

The appeals court said Congress has given tax exemptions to religious organizations since 1802, and more than 2,600 federal and state tax laws exempt religious organizations today.

Luke Goodrich, how represented clergy intervening in the case, said hundreds of thousands of nonreligious workers receive tax exemptions for housing. Clergy generally use the exemption to pay for housing near their churches.

"The court rightly recognized that striking down the parsonage allowance would devastate small, low-income houses of worship in our neediest neighborhoods and would cause needless conflict between church and state," he said.

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