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Legal Alert: Court of Appeals Dismisses Atheist Group’s Challenge to Ministerial Housing Allowance

This time last year, a federal judge in Wisconsin ruled that the ministerial housing allowance, which gives ministers a tax break on funds they receive from their congregation for use on housing, was unconstitutional. Co-presidents of the atheist organization Freedom from Religion Foundation (FFRF) brought the lawsuit, claiming that the law is discriminatory and unlawfully favors religion. The case, Freedom from Religion Foundation, Inc. v. Lew, was appealed by the Internal Revenue Service to the Seventh Circuit Court of Appeals, who overturned the lower court’s decision last week and dismissed the suit for lack of standing (i.e. plaintiff’s had no right to sue).

The ministerial housing exemption of 26 U.S.C. §107 has two parts: (1) the parsonage exemption, which allows ministers to exclude the fair rental value of housing provided by their congregation, and (2) the housing allowance, which involves funds provided to ministers for rental or other housing expenses. Early on in litigation, the plaintiffs conceded that they did not have standing to challenge the parsonage exemption, §107(1), as their organization did not provide them with a “parsonage” or in-kind housing. As a result, their challenge to the parsonage exemption was dismissed, and only the challenge to the housing allowance proceeded forward.

The plaintiffs received a housing allowance from FFRF, and argued that the law permitting ministers to exempt the value of the housing allowance was unconstitutional because (1) it discriminated against them and other non-religious persons, and (2) the law violated the Establishment Clause by favoring religious entities. The Court of Appeals held, however, that because the plaintiffs never claimed the exemption on their tax returns, and therefore did not suffer injury via denial of the exemption, their argument that the law is discriminatory and unconstitutional is merely speculative. A court will not entertain a claim on speculation alone; there must be an injury to the plaintiff in order for the plaintiff to have a right to sue. Because there was no injury, the Seventh Circuit determined that they could not hear the case, and dismissed it.

However, this is not the end of the road for this issue. We can expect that FFRF leadership, or another party wishing to challenge the exemption, will soon file with the IRS to claim the ministerial housing exemption under 26 USC §107(2). If they are denied the exemption, they will bring a lawsuit challenging the exemption’s constitutionality again, but this time, they are far more likely to have standing to sue, and the court will make a ruling on whether the tax law is constitutional. Simms Showers will continue to provide you with up-to-date legal analysis on this developing issue as expected challenges make their way through the courts.

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