Most cities, counties, and states would not contest whether in any recognized and established denomination or church a parsonage owned by the local church inhabited by a Youth Minister would be a tax exempt residence. Indeed, most would not do discovery over whether a Youth Minister was really a “minister” whether ordained or not. Most would not have the courage to delve into whether religious doctrine permitted women to serve in ministry. Most courts would not allow such inquiries and would treat them as barred by the Ecclesiastical Abstention Doctrine and the Ministerial Exception. However, when courts snore, justice remains truly blind and ineffective.
In Trustee of the New Life in Christ Church v City of Fredericksburg, 595 US ___, Slip Op., Dissent of Denial of Certiorari (Gorsuch, Justice) (2022), the City of Fredericksburg conducted all the inquiries described in the introductory paragraph. The City of Fredericksburg declared that no local church in the Presbyterian Church in America could have a Youth Minister that was not ordained, that no woman could be “ordained” in that denomination, and that only “ordained” ministers residing in parsonages could qualify the church owned parsonage for tax exemption. The City took the position that “a church’s religious rules are “subject to verification” by government officials.” The trial court did not reverse the City or otherwise refuse to enforce its edict. On appeal to the Virginia Supreme Court, that court declined to review the judgment. The church sought certiorari to the United States Supreme Court but that court refused to hear the case. The dissent by Justice Gorsuch followed.
On the revenue side, cities, counties, and other levels of government are more like vampires than tax umpires. Only very brave and dedicated elected officials can stop such nonsense. The strange thing about the reported case was that as soon as the city government’s obvious effort to rule upon “church rules” became apparent, the local church should have sought, but did not, federal relief in a proceeding based upon §1983 or even the Religious Freedom Restoration Act.
Generally, the “parsonage” is an obsolete tool of compensation because most ministers with families came to understand in the 20th century that home ownership was the largest and best investment working people could make. Parsonages were useful to some churches with high ministerial turnover and as an in-kind compensation tool. Nevertheless, some churches still use parsonages for a variety of good reasons.
In West Michigan Annual Conference of the United Methodist Church v City of Grand Rapids, Slip Op. (Mich. App. 2021), the city was so desperate for revenue it decided to deny parsonage status, and therefor exemption from ad valorem taxes, to the parsonage inhabited by the District Superintendent over 91 churches. The assessed value was under $100,000. The city argued the District Superintendent was an ordained minister but did not supervise a particular church making the parsonage ineligible. The Court of Appeals affirmed the appeals board of the city in holding that the statute did not require that the minister be “over a particular church” and contained no such qualifying language.
Churches faced with a rogue local government attempting to impose taxation without justification or legal basis should not challenge the taxation without counsel. A lawyer with a little experience with the local government in question can save a church a lot of money and consternation. It is very rare that such questions arise and are litigated to this extent. But, sometimes, even stupid lawsuits take on a life of their own and are impervious to common sense.
Many church and parachurch organizations have both observable religious and secular operations, missions and facilities. Many such have also found that secular income can fill in gaps that volunteer donations, such as tithing, offerings, and gifts, sometimes cannot. Viable churches that can raise enough money to pay a small staff and keep a facility are usually doing all their members will support. Thus, secular income may become a lifeline, which is why many churches also own daycare centers and other businesses. Of course, there are some churches and parachurch organizations that seem more about their secular business interests than their religious.
In the Matter of the Application of the Holy Spirit Association for the Unification of World Christianity, Petitioner, 2019 NY Slip Op 31678 (U), the non-profit religious organization, which seemed from the opinion to be at the same time a church and a parachurch organization, owned a corporation that owned a hotel in Manhattan. Permission was sought for a $20 million mortgage, $18.5 million to be used to buyout union employment contracts with the hotel and the transaction costs. The purpose of the buyout was to improve the profitability of the hotel. The New York Attorney General objected to the application because the AG did not believe the mortgage was in furtherance of a religious purpose. The Petitioner set about proving it was a church owner of secular businesses by proving it was a church holding worship services, employing a pastor, and conducting a seminary in some of its space. Also, some space was leased to other non-profit organizations. It also claimed $5.7 million in annual donations from congregants. The Court granted the petition for approval holding that the Court had to accept the representations of the church petitioner as long as it did not appear on its face to be a sham or proven by the AG to be a sham. The AG did not attempt to do so.
While the legal proceeding described above would never occur in most states, these issues most often emerge when the issue of tax exemption arises. Churches and parachurch organizations with dual identities should not assume their religious identity is obvious and be prepared to document it. Corporate records like board minutes that memorialize votes on religious mission efforts as well as secular business management are probably dispositive. Such church organizations can also organize and own trusts that then in turn own their secular business interests for the benefit of the church.
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.