Argument For The Constitutionality Of The Parsonage Exclusion

One of the issues that I have been following since the beginning of my blogging days is the Freedom From Religion Foundation's quixotic seeming quest to have the parsonage exclusion (Code Section 107) declared unconstitutional.  My devotion to this issue has reaped a huge dividend as it now provides a distinguished guest post. 

Edward Zelinsky is the Morris and Annie Trachman Professor of Law at the Cardozo School of Law at Yeshiva University.

I asked Professor Zelinsky to comment on The Parsonage Exemption by Adam Chodorow, which I am covering on forbes.com. His comments were a little too extensive to incorporate in the post, so I am reproducing them here.
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Prof. Chodorow’s article helpfully highlights the areas of disagreement between those who conclude that Internal Revenue Code Section 107 is unconstitutional and those of us who conclude otherwise. Speaking for myself, I see in this area debatable trade-offs and plausible choices where others tend to see absolutist decisions.

     Consider, for example, the relationship between Section 107, limited to “ministers of the gospel,” and Code Section 119 which provides a general income tax exclusion for employer-provided housing. I have argued that striking Section 107 will not eliminate the church-state entanglement about which critics of Section 107 complain. If Section 107 is stricken, much of the controversy will migrate to Section 119 as churches shift from providing cash parsonage allowances to furnishing in-kind housing.

      Section 119 raises “similarly entangling questions” as does Section 107. Among these entangling inquiries under Section 119 are determining whether a minister is an “employee” eligible for Section 119's housing-based exclusion, whether housing is provided to the clerical employee for the church’s “convenience,” what is the church’s “business” for purposes of Section 119 and what constitutes the church’s “premises.” Since both Sections 107 and 119 raise “similarly entangling questions,” it is plausible (though not compelled) for Congress to prefer the church-state entanglement inherent in Section 107 over the similar church-state entanglement flowing from the application of Section 119 to clergy and church-provided housing.

     Prof. Chodorow now writes that I have gotten this subject “exactly backward,” that Section 119 is “far less” entangling than is Section 107.

     In contrast, I see no easy metric for determining whether the church-state entanglement inherent in Section 107 is greater than or less than the entanglement flowing from the application of Section 119 to church-furnished housing. The entanglement is similar which is why the ultimate decisionmakers in this area should be democratically-elected legislators, balancing the offsetting concerns.

     I likewise have noted that the argument that Section 107 unconstitutionally entangles implies that other provisions of the Code also unconstitutionally entangle church and state. In particular, the regulatory standards for determining who is a clergywoman are the same under Section 107, FICA and the ACA. If those standards entangle unconstitutionally in the context of Section 107, they similarly entangle in the context of FICA and the ACA.

     Prof Chodorow seeks to distinguish ACA and FICA from Section 107 on the grounds that the FICA and ACA religious exemptions “are purportedly necessary to ensure that government does not force people to take actions that violate their religious beliefs.” But this characterization of the FICA and ACA exemptions does not address the issue of entanglement: If it is too entangling to define a “minister of the gospel” under Section 107, it is also unacceptably entangling to undertake the same inquiry under FICA and ACA.

     One of the pleasures of being a law professor is that I spend my days debating important issues with my colleagues. Prof. Chodorow’s paper helps to clarify the issues involved in the constitutional status of Section 107. At the end of the day, I respectfully conclude that Section 107 is a constitutionally-permitted, though not constitutionally-compelled, means of managing the church-state tensions which are inevitable when the modern government meets the modern church.

     As a matter of tax policy, I conclude that cash parsonage allowances should be taxed. However, as Chief Justice Burger noted in Walz, under the First Amendment, there is “room for play in the joints” to manage the relationship between contemporary tax systems and the contemporary church. Within that room, Congress can constitutionally adopt Section 107 and its income tax exclusion for church-provided housing and housing allowances.

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I actually think that not too many people really care all that much about things being constitutional.  Activists and advocates use the Constitution like a drunk uses a lamppost - more for support than illumination.  You can tell Professor Zelinsky cares, because of his nuanced view.  He believes that excluding cash housing allowances is both a bad idea, as a matter of tax policy, and constitutionally permissible.

Peter J Reilly loves guest posts.  Why don't you send one in?

    

            

Senator Tom Coburn v. IRC 107

Here is an other guest post from Robert Baty.  Bob is a retired IRS Appeals Officer.  He has something of an obsession with an obscure Revenue Ruling from 1970.  Revenue Ruling 70-549 allows colleges affiliated with the Church of Christ to provide faculty and administration with Section 107 cash housing allowances as "ministers of the gospel" regardless of what their position is. When I think of Bob Baty and Revenue Ruling 70-549, I'm reminded of Ahab and Moby Dick

Ahab's a little more easy going.  You can call me Ishmael.

Did you see it?

Tax Decoder
By Senator Tom Coburn (R-OK)
December 2014 - Page 192

(excerpt)

"The parsonage allowance (IRC 107) should be eliminated."

I appreciate the fact that Senator Coburn included the issue in his report, but I am quite disappointed in him, personally, for the way he handled the matter.

Senator Coburn has been in the Senate for many years and I am not aware that he has done anything to actually repeal IRC 107, cure its constitutional defects, or otherwise reign in what most might consider its abuses.

I wonder whether or not Senator Coburn is actually familiar with IRC 107 and the disputes over its constitutionality and abuses.  His report appears to simply copy much of what it has to say from Senator Grassley's earlier report which was a consequence of his investigation into some million dollar ministries.

In the case of Senator Grassley, he farmed out thinking about what to do about IRC 107 to his religious friends and, to no surprise, his religious friends told him, and by implication Congress and the President, to keep hands off of IRC 107.  They did.  They did nothing about IRC 107.

Annie Gaylor and Dan Barker have been litigating the constitutionality of IRC 107 for a number of years.  Last year they were successful in getting Federal District Judge Barbara Crabb to declare IRC 107(2) UNconstitutional, a violation of the Establishment Clause of the 1st Amendment to the United States Constitution.  

What did Senator Coburn have to say about that?
Nothing!
Why wasn't he publicly supporting Annie's and Dan's efforts?

This year, the 7th Circuit was asked to review Annie's and Dan's case and without judging the merits of Judge Crabb's ruling as to IRC 107 simply had the case dismissed because, in the opinion of the 3 judge panel (which gave no indication they actually read and understood Annie's and Dan's position), they did not have "standing" to ask Judge Crabb to decide the IRC 107 issue.

The 7th Circuit panel noted that the U.S. Supreme Court has never considered a "standing" issue such as is presented in Annie's and Dan's case.  The appeal period continues to run.  It is not yet known, at least not by me, whether or not Annie and Dan will ask the U.S. Supreme Court to review the 7th Circuit ruling.  I hope that they do.

Having lived in Oklahoma for the first 55 years of my life, I have a special interest in Senator Coburn and his antics regarding the IRC 107 issue.   Senator Coburn's report names names at times and at other times leaves the names out in rather conspicuous fashion.

For instance, Senator Coburn's report states, in part:

"A prominent California church designated the whole salary of its senior pastor as a housing allowance, prompting an investigation from the IRS. In the midst of that lawsuit, Congress limited the allowance to the fair rental value of the home plus certain expenses – the only time Congress has modified the tax break."

You can form your own opinions as to why Senator Coburn, after naming other names in his report, did not mention that that church was the Saddleback Church and that senior pastor was Rick Warren.  Congress and the President (Bush) was wrong-headed in dealing with that matter and their action was NOT because they were concerned about a problem with IRC 107 but rather they were concerned about helping their religious constituents who wanted to block the 9th Circuit Court of Appeals from taking up, on the Court's own initiative, the constitutional issue regarding IRC 107 (i.e., should Rick Warren get any tax exempt housing allowance simply because he was a "minister"?)

Cute, Senator Coburn, cute.

Another name Senator Coburn doesn't mention is that of one of his constituents, a basketball coach named Jerry Jobe.

Why didn't Senator Coburn mention the case of Jerry Jobe as an example of how successful so-called "ministers" have been in exploiting IRC 107 and the manner in which the politicians have allowed the IRS to administer IRC 107?

Jerry Jobe's case is responsible, in large part, in my opinion, for all of the current, popular, public debate and litigation over IRC 107; even though it was decided 30 years ago.

Never heard of it?
Not surprising, but I would that it was otherwise.

Jerry Jobe had been a coach in public schools for some time when he was hired on by a private school in Oklahoma, what is now Oklahoma Christian University (OC).  In consequence of being hired by OC, Jerry got a letter from his church leaders saying he was ordained and registered it at the courthouse so that he could claim part of his salary for coaching basketball was payment for services of a minister.

The local IRS office in Oklahoma challenged Jobe's housing allowance claim on the basis that OC was NOT an "integral agency of the church".  Apart from the fact the majority of folks who owned and operated OC were church-going folks, there wasn't much going for the proposition that Jobe should get his tax free benefit.  The issue was to be resolved around the question as to whether or not OC was an "integral agency of the church".

Founders of OC are on record of unanimously passing what has been reported to be a "landmark resolution" which included "we believe that such an institution should be kept separate and apart from the church".  For those familiar with what is commonly referred to as the "Church of Christ", that statement will harken back to the historical, theological "college question" controversy.

Historically, OC and similar schools such as Abilene Christian University and Pepperdine University have been owned and operated as private enterprises, though enjoying tax-exempt status as educational institutions, independent of the church while church members owned and operated them consistent with their respective religious beliefs.

As a matter of fact, law, and theology, OC, Abilene, Pepperdine, et al, are NOT "integral agencies of the church".

How then, did Jerry Jobe win his case, and he did win his case?

Jerry Jobe simply waived Revenue Ruling 70-549 in the face of the local IRS litigators who, at the behest of the National Office, were forced to back down.

As it turned out, Revenue Ruling 70-549 was a political plum awarded to the constituents of George H.W. Bush and Omar Burleson who put the squeeze on the IRS in order to bail Abilene Christian University (ACU) out of mess over the housing allowance for ministers where the school had been paying some of its employees in tax free housing.

The IRS tried to hold the line, apply the law, and deny the benefits to the ACU employees, and they were doing OK for awhile.  Then George and Omar showed up to put the squeeze on the IRS at the highest levels and the IRS eventually capitulated and issued Revenue Ruling 70-549.

About that same time, Texas Christian University (TCU), involving the Christian Church, Disciples of Christ, went to court over the "integral agency" issue and lost.  Ronald Flowers was the individual used as the test case for TCU.  The experience changed Ronald Flowers who subsequently indicated he had come to believe IRC 107 is UNconstitutional.  

While TCU went to court and lost, ACU went behind closed doors and got an administrative ruling that allowed them to win.  For those familiar with the historic disputes between the "Church of Christ" and "Christian Church", that outcome may strike you, and properly so, as somewhat backwards.

For those looking for a bonafide IRS scandal, the real story behind Revenue Ruling 70-549 involving George H.W. Bush, Omar Burleson, and the Nixon administration is the one that should be being pursued.  The consequences are burdening us yet and Congress and the President, Senator Coburn, et al, do not appear to be willing to do their job to resolve it, and it could be resolved quite easily for such reasons as Senator Coburn noted in his report.

IRC 107 appears to enjoy considerable special interest support for all the wrong reasons.

I would that it were otherwise.
I hope it will be; sooner rather than later.

Suit Against Parsonage Exclusion Dropped

Originally Published on forbes.com on July 5th,2011

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Most of my posts are based on my own review of original source material, rather than what I read in other blogs.  Since I often spend some time on the developments before I post, I’m usually not the guy to go to for breaking news.  I make exceptions, though, when, well, when I feel like making exceptions.  In this case it is because the parsonage exclusion is something I have been following pretty closely.  My most comprehensive post on the subject was titled “Work, Fight or Pray – Vestige of the Medieval in Our Tax Code” (Pretty catchy eh ?).  So I feel compelled to report this post by Reverend William Thornton.  He pointed me to this story, which indicates that a suit by The Freedom From Religion Foundation has been dropped.  They were maintaining that the parsonage exclusion violates the Establishment Clause of the First Amendment. It appears that the abandonment of the suit is based on the Supreme Court decision on the Arizona tuition tax credit, that holds that for purposes of standing to sue under the Establishment Clause, a tax credit is not equivalent to an expenditure.

The “parsonage exclusion” (Section 107 of the Internal Revenue Code) is one of the shorter sections :

In the case of a minister of the gospel, gross income does not include—

(1) the rental value of a home furnished to him as part of his compensation; or

(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities

You would infer correctly from the non-inclusive language, that the section goes back to the early days of the Code. 

The exclusion of a cash “rental allowance” has been an area of abuse.  I believe the IRS will be appealing the decision that allowed Phil Driscoll to exclude $195,000 in parsonage payments from his music ministry that were attributable to his second home.

Parsonage Exclusion - Shouldn't Enough be Enough?

Originally published on Passive Activities And Other Oxymorons on December 19,2010, this post commences my fascination with the parsonage exclusion - Code Section 107, which provides for an unlimited exemption from income tax of the housing allowances, in-kind or cash , of "ministers of the gospel".  When I did a recap of my coverage on the issue in November 2013, there were over twenty posts and there have been more since.  IRS won on appeal to the Eleventh Circuit in the Driscoll case, but of much greater interest has been Freedom From Religion Foundation's constitutional challenge.  As of this point, FFRF has won in District Court and government has appealed to the Seventh Circuit.

Covering the parsonage issue has made me some of my best blogging buddies including Robert Baty and Reverend William Thornton.
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Philip A. Driscoll, et ux. v. Commissioner, 135 T.C. No. 27

Foxes have holes, and birds of the air nests; but the Son of man hath not where to lay his head.

Robert Harris's book 101 Things Not to Do Before You Die is a fantastic blend of humor and wisdom.  One particular piece of advice which actually caused me to change my regular behavior was:

Don't accumulate nonfunctional pens.

Following the form of most of his advice he describes a person who reaches into a jar of ballpoint pens, tests the pen to see if it works, finds it doesn't  and then puts it back.  What do you say about such a person ? Don't be one of them !

Check your pens and let go of the ones that no longer serve you - even if it is painful.  Keep only the ones that you can reach for with confidence.  This way when you feel the urge to write or draw or doodle, you can get started without needless delay and frustration.

There is another piece of advice, one  that I generally don't follow.  Although he is referring to sports on TV, I think it has broader implications.  That advice is :

                                           Don't be a passive spectator

When you're watching two teams, always pick one to pull for.  Cheer and boo.  Laugh and cry.  Eat and drink.  And experience not just the game, but the competition.

In my blog, I have adopted an attitude of - It is what it is.  Before long it will be something different.  Deal with it.  Other tax bloggers seem to enjoy advocating for one side or the other.  The Tax Court's decision in Phillip A. Driscoll has motivated me to finally do some serious booing.  The issue is the parsonage exclusion.  I have previously written about an effort to have the exclusion declared unconstitutional.  I think my post on the constitutionality of the parsonage exclusion took a pretty balanced view.

The case of Phillip Driscoll is another matter.  Reverend Driscoll heads Mighty Horn Ministries.  The ministry is not apparently classified as a church since it files Form 990.  If you look at the website, it strikes one more as being a record label, albeit one that specializes in religious music.  Since 2007, perhaps coincidental with the Reverend's visit to a federal facility because of a misunderstanding about taxes, the organization has been officially known as Phil Driscoll Ministries. Their 990 is available on guidestar.org (registration is free). In 2009, it had gross receipts in excess of $3,000,000.  Officers salaries were fairly modest $77,440 to President Phillip Driscoll, $5,700 to Jamie Driscoll the VP and $31,700 to Lynn Driscoll.  The Reverend Phil, however, had expense accounts and "other allowances" totalling $283,032.  This nicely ties with the item in other expenses labelled parsonage.  If you know anything about airplanes, take a look at the depreciation schedule on page 21 of the adobe file and you can let me know if I should get cranked up about that.  The mission of Phil Driscoll Ministries (a/k/a) Mighty Horn is:

Spreading the gospel of Jesus Christ to approximately 500,000 people annually through concerts and other ministry opportunities.

As occasionally happens to me further research has shown that a case I have found of interest is actually a late act in old news.  Reverend Driscoll did time in 2007 for tax evasion.  At least one commentator believes the real villain in that case was the IRS.  In his post Welcome Home Phil, James Paris speculated that Phil was being persecuted for his Christianity.  You can find similar comments in the Christian music realm of the blogosphere.  Apparently Reverend Driscoll is quite a celebrity with even Bill Clinton trying to help him avoid prison time.  It will be interesting to see if this tax court decision is seen as something of a vindication of him.

At issue were parsonage exclusions covering the years 1996 to 1999 totalling just over $400,000.  The largest being $195,778.72 in 1999.  This was not Reverend Driscoll's entire parsonage allowance.  This was the portion attributable to his second home (for parts of 1998  it was "second homes").  Just a little bit of tax history here.  The parsonage exclusion goes back to the Revenue Act of 1921.  It excludes from income the rental value of a residence provided to a "minister of the gospel".  This exclusion might have been rendered redundant by the subsequent creation of an exclusion from income for lodging provided to employees for the convenience of the employer.  In the classic "parsonage" or, if you are Catholic, "rectory", situation, presumably the convenience of the employer standard would be met.  It's convenient for the congregation to have the minister living next to the church in a house maintained by the church.  Maybe not so convenient for the minister's spouse or the minister's kids.

Here is where we get into the tension between the establishment clause and the free exercise clause.  Some denominations and congregations might think, perhaps with some encouragement from the clergy, that it is not such a good idea to have the minister live in a house owned by the church.  Since you wouldn't want to treat them differently than other denominations or congregations the parsonage exclusion was expanded to include "rental allowances".  There is no dollar limitation on such rental allowances and no limit on the relationship that they can bear to taxable compensation.  The money just has to be spent on providing housing.  If the housing allowance is used to pay deductible expenses they are still deductible.

The question the tax court had to decide in this case was whether a parsonage allowance should be allowed with respect to a second home.  In 2002, the Code was amended to limit the exclusion to the fair rental value of a home.  Prior to that it would presumably have been legitimate to have a $500,000 parsonage exclusion that was used to be buy a house.  Since the parson would have basis in the house it could be subsequently sold for $500,000 with no taxable income.  The case which prompted the Code change was not nearly that extreme.

Interestingly the question of whether the parsonage allowance can apply to a second home has never been addressed before.  The court was left to try to figure out what Congress was up to when it first enacted this thing in 1921.  They didn't get very far:

One commentator has suggested that the in-kind exclusion grew out of “the general respect held by Congress and the public for churches,”

What they came down to was statutory construction.  The language in Section 107 says "provide a home", but when you go to the definition section of the Code you find :

In determining the meaning of any Act of Congress, unless the context indicates otherwise— words importing the singular include and apply to several persons, parties, or things;

So providing a home includes providing two or, in this case for part of the time, three places to live.  And of course Reverend Driscoll in 2007 had free housing provided by the federal government, although that was just for himself.

I really don't think this type of thing does the cause of religion much good.  I doubt that it is good for the clergy to have their own special tax gimmick that while appearing modest can be gamed to exclude from income tax as much as 100% of above average incomes in some cases.  If 107 were simply repealed it would not cause the taxation of clergy who are provided a place to live by their congregations.  They would be covered by the convenience of the employer exception even if the residence had a theoretically high rental value (conceivably a bishop's residence or the like).

There is another option, which as far as I know is original with me, although whenever I think that it turns out that I am wrong.  Code Section 134 excludes from income a number of military benefits including a housing allowance. A rationale similar to that for the parsonage exclusion can be made here.  Members of the military are frequently and perhaps more so traditionally provided with housing at a place convenient to the employer, think Fort Apache. It is reasonable that a cash allowance in lieu of that benefit would be exempt.  From a policy viewpoint the military housing exclusion is less troubling, since there is nothing disturbing about the federal government deciding who is entitled to it (Unless you are a far out militia type).  Perhaps more significantly, since it is paid by the federal government, it is limited.  The allowance varies by whether the service member has dependents, by region and as you might expect rank.  If you look at the table, though, you will see that the variation by region is the most dramatic with junior enlisted ranks in Alaska having housing allowances greater than a general in Alabama.  My recommendation is that the parsonage allowance be limited to no more than the highest military allowance anywhere.  You could come up with something more complicated than that.  The important thing is that there be some dollar limit.

Dropping back to my normal persona as amoral tax advisor congregations and ministers might consider whether there is an opportunity here to further pump up housing allowances.  I don't know how many clergy members own multiple homes, but I will predict that as word of this decision gets out, the number will increase.  A cautionary note.  The Tax Court was divided on this opinion.