Tag: church taxation


There may not be any housing tax exemption for pastors.  Such an exemption has existed since 1954.  Most pastors lived at the “parsonage” owned and provided by the church.  As churches became more affluent, the involuntary vow of poverty became less appealing.  Pastors wanted to build up equity and own their own home.  The parsonage began to slip into history.  To aid pastors in acquiring a home churches turned to the “housing allowance.”  The “housing allowance” began to form a significant part of the compensation of pastors.  The allowance allowed the minister to buy a home near enough to the church to allow rapid access to the church but not owned by the church.  The “housing allowance” was not included in taxable income.  The “housing allowance” will remain a viable tax exemption for anyone, including pastors, that are required to live at a certain place by their employer just like any other secular employee.  But, the “housing allowance” may not continue in the absence of the employer’s mandate if this decision stands.

In Gaylor v Mnuchin, Opinion and Order (WD Wis. 2017), 26 USC §107(2) has again by the same federal court been held to be in violation of the Establishment Clause.  The Court held that the statute discriminates against secular employees because they cannot qualify for the exemption.  The Court held the exemption does not have a secular purpose.  The argument that the statute was enacted to implement the constitutional entanglements clause was rejected.  The Court held the legislative history indicated the motive behind the statute was a preference for ministers over secular employees.  The Court noted that taxes have been held to be neutral and not a burden on free exercise of religion, otherwise every tax would have to be inapplicable to employees of religious organizations.  Housing allowances for pastors required to live on church grounds will not be effected because that is governed by a different section of the statute.  The opinion of the Court runs to 47 pages.

Tax preparers that try to apply this decision should be cautioned that the Court expressly omitted from its ruling the other sections of the statute.  Only 26 USC §107(2) is the subject of the decision.  The practical loss of the housing allowance will only occur in those situations in which the housing allowance is used to shelter part of the income of the pastor.  It will not be lost under this decision if the religious organization requires its pastor to live in a certain location or in a church owned parsonage.  Any housing allowance that would be permitted to a secular employer’s employee will still be allowed for a religious organization employee.

No doubt this decision will be appealed as it has been in the past.  Ultimately, the issue will be decided by a federal appellate court and possibly someday by the US Supreme Court.  Several if not many tax years will come and go before then.  Technically, the reach of this decision is not outside of the Western District of Wisconsin.  But, the IRS could chose to insist it be followed nationally.


In the typical church, fund raising to achieve an objective is not always successful.  To raise enough money to build a fellowship hall, or a youth facility, or some other adjunct facility is often started and not finished.  If insufficient money is collected to achieve a stated purpose what happens to the money that is collected can be a source of angst.  Returning the money may present administrative problems like identifying exactly who gave what because many donations are “anonymous.”  Most churches have a church treasurer sworn to secrecy but donations that have to be documented for tax purposes may make anonymity sometimes illusory.  Also, most churches do not have clear policies regarding whether donative intent is binding and if it is, for how long.  Also, if the money is returned to identified givers, must the money be returned with an IRS form 1099 requiring the church to have or obtain the donor’s social security number?

Rogers v St. John United Methodist Church, Slip Op., (unpublished) (Mich. App. 2017) was the reversal of a trial court’s grant of a Motion to Dismiss.  In most jurisdictions, obtaining a dismissal by motion based on the pleadings is problematic at best.  Also, at that stage, without discovery or a trial, the factual evidence is often not complete or cannot be considered.  However, it seems the donation for a new fellowship hall was probably not enough to build and additional fund raising was apparently not successful or for some other reason leadership decided not to build.  After a passage of time, the donors sought a refund.  Apparently the donors were sufficiently well identified and the money sufficiently segregated that it was identifiable as to amount.

The opinion of the court, again based on and reversing a trial court’s dismissal founded only on pleadings, was that “resolution of plaintiffs’ claims does not require a court to analyze questions of religious doctrine or ecclesiastical polity” and for that reason the trial court received the case back on remand for further proceedings.  In other words, the court was holding donative intent could be determined without considering religious considerations.

The opinion was silent about the law of donations in general, i.e., whether once donated the donor retains any authority over the use of proceeds.  The opinion was silent about the bylaws of the church.  Often well drafted bylaws clearly state a policy that donative intent is not binding on leadership and that no return of donated funds can occur even if a donative intent cannot be fulfilled.  Bylaws often also make donations religious by reciting Scriptural edicts regarding donations.

Thus, the opinion of the appellate court in Rogers should be viewed as provisional and not viewed as a general statement of law.  That intent could be determined may have been a projection based on the what the court had before it.  As the case proceeds, if it does, that intent may not be so easily determined.


It is amazing how much ink has been used to explain those four words and those that follow in the First Amendment.  Added to the Constitution by amendment in 1789, the First Amendment was intended to enshrine the fundamental law of a free society in an open democracy.  Nevertheless, curtailing free speech has often been the focus of the federal government.

 On May 4, 2017, the President entered an Executive Order requiring repeal or amendment of regulatory pronouncements limiting freedom of expression which included:

 “In particular, the Secretary of the Treasury shall ensure, to the extent permitted by law, that the Department of the Treasury does not take any adverse action against any individual, house of worship, or other religious organization on the basis that such individual or organization speaks or has spoken about moral or political issues from a religious perspective, where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign on behalf of (or in opposition to) a candidate for public office by the Department of the Treasury.”

 Underlying statutes, of course, cannot be repealed by Executive Order.  But, enforcement based solely on “participation or intervention in a political campaign” of a type that has not been previously treated as such for other entities would seem to reduce enforcement to instances where the non-profit or church was actually and directly financially involved in a material way, rather than simply when a speaker expresses a political opinion or donation of money.  Advocacy is the least profitable endeavor.

 On this subject, urban legend has ruled, and was far more interesting than fact.  Even finding a case in which the IRS threatened tax exempt status over any political activity is challenging.  Thus, the Executive Order might not have much practical impact.

 Nevertheless, regardless of the lack of numerosity of published cases, the chilling effect cannot be calculated and there the Executive Order might have an effect.  Most church lawyers have at least once been asked about the extent to which political activity or commentary is permitted before tax exempt status is at risk.  The answer should have been simply “Congress shall make no law… .”  The Executive Order might be a step back to 1789.



While most people want everyone to pay their fair share of taxes, however that may be defined, most people do not want government anywhere near the church or anything that belongs to the church.  Indeed, for centuries in the United States we have forbidden taxation of churches.



But, if the tax is not called a “tax,” but is called a “special assessment,” well then, that is different is it not?  Apparently, in Minnesota, that is the law.  In Bryant Avenue Baptist Church v City of Minneapolis, Slip Op. (MN Civ. App. 2017), the Court explained why a church of about 80 members was the proud recipient of a “special assessment” for street repairs in the amount of $31,191.30 to be paid off in five annual installments.  The Court was convinced that the state constitution did not exempt churches from “special assessments” for civic improvements even though cemeteries and other types of entities were exempt.



The Court solved the 1st Amendment entanglement issue by pretending it did not exist.  Indeed, there is no mention of it in the opinion.  It is possible the church did not raise the 1st Amendment as a defense, but that seems unlikely, and even so, most courts would inquire into their own jurisdiction to hear a matter obviously touched by a fundamental federal right.  Apparently, there is no prohibition of entanglement with religion in the Minnesota constitution.

“History is particularly compelling in the present case because of the undeviating acceptance given religious tax exemptions from our earliest days as a Nation.  Rarely if ever has this Court considered the constitutionality of a practice for which the historical support is so overwhelming.”  Walz v. Tax Comm’n of City of New York, 397 U.S. 664, 681 (1970) (Brennan, J., concurring).