Thousands of ministers and churches across America won a major victory 15 March when the U.S. Seventh Circuit Court of Appeals upheld the constitutionality of the longstanding clergy housing allowance under section 107(2) of the Internal Revenue Code. 

In a 3-0 decision, the Seventh Circuit Court determined that section 107(2) was constitutional under both the traditional three-factor test set forth in Lemon v. Kurtzman, 403 U.S. (1971), as well as the historical significance test of Town of Greece v. Galloway, 572 U.S. 565 (2014). 

In declaring the housing allowance constitutional, the court likened the clergy housing allowance to other similar benefits in the tax code for work-related housing, finding the provision permissible under the First Amendment and well-established legal precedent. 

The decision reversed the one made in 2017 by Wisconsin District Court Judge Barbara Crabb, who ruled in favor of the Freedom From Religion Foundation (FFRF). That action threatened the benefit for clergy in states covered by the Seventh Circuit (Illinois, Indiana, and Wisconsin) and, potentially, ministers across the USA. The result would have had a devastating financial impact on congregations and ministers who qualify for the benefit. 

According to Editor of Church Tax & Law Matthew Branaugh, this is the first time a federal court of this stature has evaluated the constitutional merits of the clergy housing allowance.

In announcing its verdict, Judge Michael Brennan, writing on behalf of the U.S. Court of Appeals for the Seventh Circuit, cited a number of court cases and actions by Congress in its 29-page decision, before simply ruling.

“We conclude Section 107(2) [IRS code that describes the housing allowance] is constitutional,” Brennan said. “The judgment of the district court is REVERSED.” 

The Church of the Nazarene had joined with hundreds of other religious groups across the United States in the appeal of Judge Crabb’s decision. 

“To say that we are pleased would be a vast understatement,” said Don Walter, director of Pensions and Benefits USA for the Church of the Nazarene. “The tax benefit afforded by the housing allowance affects both active and retired clergy, and its loss would have a monumental impact on them and our congregations.”

Walter went on to express Pensions and Benefits USA’s willingness to stand firm amid an uncertain future.

“While we don’t know if the FFRF will petition the U.S. Supreme Court to hear the case, we do know we will continue to join with brothers and sisters from other groups of faith to do everything we can to retain this significant benefit for our ministers,” Walter said.

The Supreme Court receives almost 8,000 petitions annually and hears about 80. Tax attorney Ted Batson Jr., of the firm of CapinCrouse, said whether the high court will review the case should be known within the next 90 days.

For more information about the case, you may check the following sources: Decision of the 7th Circuit, ECFA, and Church Tax & Law.

--Pensions & Benefits USA