Appeals court: Clergy housing allowance tax exemption rules are constitutional

By Dan Churney | Mar 18, 2019

CHICAGO – A federal appeals panel has reversed a lower court ruling that said tax-free housing allowances for clergy breached the separation between church and state, finding the long history of such exemptions in the United States allows churches, not government, to properly "advance religion."

The March 15 opinion was authored by Circuit Judge Michael Brennan, with agreement from Circuit Judges Daniel Manion and William Bauer of the U.S. Seventh Circuit Court of Appeals. The decision favored the U.S. Treasury Department and Internal Revenue Service in an action brought by the Freedom From Religion Foundation.

The foundation is a nationwide group based in Madison, Wis., that promotes the separation of church and state. The foundation's co-presidents, Annie Gaylor and Dan Barker, as well as a former president, Anne Nicole Gaylor, filed tax returns claiming refunds for housing allowances given them by the foundation. The foundation provided the allowances to challenge the federal tax code that exempts cash housing allowances from the taxable income of religious leaders. The foundation opposed the exemption, saying it wrongly ties a tax benefit to religious affiliation.

The IRS denied the refunds because the Gaylors and Barker were not clerics. The foundation sued the government in U.S. District Court for the Western District of Wisconsin, claiming the IRS was crossing the line between church and state. 

The IRS and an intervening group of pastors from the Chicago area and Wisconsin who receive the exemption moved for summary judgment, contending the exemption does not unduly entangle government with faith. However, District Judge Barbara Crabb ruled the exemption's purpose is to improperly "provide aid to a group of religious persons."

In the appellate decision, Brennan noted tax breaks for churches are nothing new, with Congress giving the first such tax consideration in 1802. Brennan went on to say, partly quoting a 1987 U.S. Supreme Court ruling, the housing exemption is "not to advance religion on behalf of the government, but to 'allow churches to advance religion.'" Brennan further noted another Supreme Court decision from 1970 on the church-state issue said there is "no genuine nexus between tax exemption and establishment of religion."

A number of groups filed friend-of-the-court briefs in support of the exemption, including the Alliance Defending Freedom, Foundation for Moral Law, the Evangelical Council for Financial Accountability, Pacific Justice Institute, and the Congressional Prayer Caucus Foundation.

The pastors and groups that entered the case as intervenors included Bishop Edward Peecher and Pastor Christopher Butler of Chicago Embassy Church; The Rev. Patrick Malone of Holy Cross Anglican Church in Waukesha, Wis.; and the Diocese of Chicago and Mid-America of the Russian Orthodox Church Outside of Russia.

Plaintiffs have been represented by attorney Richard Bolton, of Boardman & Clark, of Madison, Wis.

The federal government is represented by the U.S. Department of Justice. The clerical defendants are represented by lawyers with The Becket Fund, a group based in Washington, D.C., which promotes religious freedom.

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