As reported herein in October 2017, the United States District Court in Wisconsin ruled unconstitutional the housing allowance tax exemption for ministers in the federal income tax code, 26 USC §107, because that court held it violated the Establishment Clause. Gaylor v Mnuchin, 278 F Supp 3d 1081, 1104 (WD Wis. 2017). The challenge to the statue was brought by a non-profit advocacy group called “Freedom From Religion Foundation.” The IRS and intervenor churches appealed. Indeed, the IRS complained that the “survival of many congregations hangs in the balance.”

In Gaylor v Mnuchin, Slip Op., ___ F3d ___ (7th Cir. 2019), the United States Court of Appeals for the 7th Circuit reversed the Wisconsin trial court’s ruling.

The 7th Circuit upheld the constitutionality of the statutory housing allowance for ministers applying two constitutional tests: the Lemon Establishment Clause test and the “historical significance test.” Lemon v Kurtzman, 403 US 602 (1971); Town of Greece v. Galloway, 572 U.S. 565, 576 (2014). The Lemon test is probably controlling because the “historical significance test” has a checkered history according to the 7th Circuit. The Lemon test included three prongs: 1) secular legislative purpose; 2) primary effect of advancing or inhibiting religion; 3) excessive entanglement with religion. If the statute “fails any of Lemon’s three prongs, it violates the Establishment Clause.” Gaylor, 7th Cir. at 10.

The secular purpose may not always be reliably gleaned from the legislative history. Statements of motive in hearings before the Congress are not official statements of that body. In order to violate the secular legislative purpose test, the statute must be “motivated wholly by religious considerations.” Because it appeared the statute, passed in the 1950’s in its present form and in other versions immediately after income tax became constitutional for the first time in 1913, merely brought ministers in line with other “convenience of the employer” statutes (e.g., sailors, construction crews, etc.), among other things, it had a secular purpose. Persons seeking the tax exemption still had to meet the five part test to be eligible.

The 7th Circuit reprised the holding that the “grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.” Walz v Tax Comm. of City of N.Y., 397 US 664, 675 (1970). Thus, there was no “primary effect of advancing” religion.

Finally, the third prong of the Lemon test was “passed” because the statute, while requiring the IRS to determine eligibility, i.e., whether the applicant is actually a minister, did not require the IRS to become entangled with religious questions by determining whether the minister’s home was used for religious purposes. The “convenience of the employer” aspect of the housing allowance made it no different than similar tax exemptions.

The “historical significance test” was “passed” because tax exemptions for church property and income began as early as 1802 when the Congress exempted church property from property tax in the County of Virginia, which at that time was under federal control. “Today, more than 2,600 federal and state tax laws provide religious exemptions.” The Congress passed the first housing income tax exemption for ministers as soon as the Sixteenth Amendment permitting income taxation was passed.

The 7th Circuit decision may be persuasive but it is not definitive in the other circuits. Only the United States Supreme Court could finally decide the issue. However, for the foreseeable future, the matter is decided.

• Housing Allowance