In a complaint filed last month at a federal court in Wisconsin, members of an atheist group renewed their fight against a tax law provision that unsurprisingly offers special perks to religious leaders and has been in practice since the Cold War. Section 107 of the Internal Revenue Code—also known as Rental Value of Parsonages—is a rare feature, all of 100 words; but its brevity is not at all insignificant as it bestows a yearly tax break on so-called Ministers of the Gospel in excess of $700 million.

Section 107 achieves this in two ways. First, Section 107(1) says if a church offers residence to a minister/pastor/priest free of charge, the rental value of that home will not be included as part of the minister’s taxable income. However, since most churches are not big enough to own or provide housing, Section 107(2) states that the church in question can pay the minister a certain ‘rental allowance’ for housing purposes and the value of that amount will not be included as part of the minister’s taxable income.

Section 107 is not a new provision as it has been implemented as part of the Code for the better half of the last century. A variation of the law was passed as Section 213(b)(11) in 1921 but that eventually transformed into Section 107(1) with the following Section 107(2) being added in 1954.

Freedom From Religion Foundation (FFRF)—which engages in educational activities advocating nontheistic practices and promoting the separation of church and state—has its co-presidents lead in such matters, acting in several ways as a Minister of the Gospel by delivering their absolute atheistic message. Both presidents are paid a salary by the foundation and a portion of their income has also been designated as their rental allowance.

However, since neither president is a member of the clergy, Section 107(2) does not qualify their rental allowance as being excluded from their total income. Knowing this fact, neither president bothered to claim that their rental allowance should also be exempt from their income. Instead, they decided to sue the Internal Revenue System, alleging that Section 107(2) is unconstitutional as it discriminates in favor of certain taxpayers on grounds of their religious practices.

And not to mention, the First Amendment of the American Constitution states, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.”

Both presidents summarized their stance at the time, saying, “If I’m doing the same thing day in and day out as a minister in a church, why should my rental allowance represent taxable income when theirs does not?”

In 2013, the district court in Western District of Wisconsin set out to respond to that question by first deciding whether FFRF had any legal standing to challenge the constitutionality of Section 107(2). After much debate, the court concluded that it did have sufficient standing despite the taxpayers not having been harmed by Section 107(2) as they never really bothered to claim an exemption on their tax returns.

In reaching its decision, the court said, “….plantiffs’ alleged injury is clear from the fact of the statute and that there is no plausible argument that the individual plaintiffs could qualify for an exemption as ‘ministers of the gospel,’ so it would serve no legitimate purpose to require plaintiffs to claim the exemption and wait for the inevitable denial of the claim.”

The court then moved on to addressing the IRS’ argument that the taxpayers had no legal standing to challenge the constitutionality of Section 107(2) as it was possible for them to have qualified for the exemption.

The court reached a quick decision in this regard, concluding, “while the IRS has liberally interpreted Section 107 to include members of non-Christian faiths, there is a difference between non-theistic faiths such as Buddhism and having no faith at all.”

Furthermore, the court added since atheists do not typically have a need for a Minister of the Gospel as mandated by Section 107, neither president would match that qualification as pertaining to Section 107.

With the standing settled, the court eventually progressed to addressing the issue at hand—whether or not Section 107(2) was unconstitutional. To decide if the 1954 enactment of Section 107(2) had in fact violated the First Amendment, the court first established the purpose and desired effect of the provision.

The IRS said at the time that the purpose of the provision was to draw parity between religious and nonreligious employees as well as large-sized and small-sized churches.

According to Section 119, nonreligious employees can exclude the value of accommodation provided by an employer if it is offered for the convenience of the employer. However, until the enactment of Section 107(1), no such benefit was available for religious employees, which is why the IRS stressed Section 107(2) was eventually added.

“Section 107(1) was unfair to those ministers who are not furnished a parsonage, but who receive larger salaries (which are taxable) to compensate them for expenses they incur in supplying their own home,” the IRS had said.

Quoting Representative Peter Mack—who had sponsored the enactment of Section 107(2) in 1954—FFRF countered, saying, “Certainly, in these times when we are being threatened by a godless and anti-religious world movement we should correct this discrimination against certain ministers of the gospel who are carrying on such a courageous fight against this. Certainly this is not too much to do for these people who are caring for our spiritual welfare.”

According to FFRF, this very language exemplified the discriminatory nature of the provision.

Finally, the district court agreed with FFRF, ruling Section 107(2) is in fact discriminatory and therefore unconstitutional for many reasons.

“Defendants do not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses,” ruled the court against Section 107(2), which had been in place for almost six decades.

That is how hundreds of thousands of ministers lost their tax benefit of exempt rental allowance,but not for long. Less than a year after the district court ripped Section 107(2) from the pages of the Code the Seventh Circuit assembled to hear the IRS’ appeal and in fewer pages than it was required for the lower court to reach its decision, the higher court overturned the previous ruling concluding how FFRF had no legal standing to challenge the constitutionality of Section 107(2).

“The plaintiffs here argue that they have standing because they were denied a benefit (a tax exemption for their employer-provided housing allowance) that is conditioned on religious affiliation. This argument fails, however, for a simple reason, the plaintiffs were never denied the parsonage exemption because they never asked for it. And absent any denial of a benefit, the plaintiffs claim amounts to nothing more than a generalized grievance about Section 107(2)’s unconstitutionality, which does not support standing,” said the Seventh Circuit.

Having learned their lesson from the Seventh Circuit’s ruling and mostly undeterred, three leading members of FFRF—namely Dan Barker, Anne Laurie Gaylor and Anne Nicol Gaylor— decided to file amended tax returns for 2012 and 2013 claiming an exemption for the rental allowance received and seeking a refund for previously paid taxes. When the IRS promptly denied their claim, it did not realize that it had once again given the three an opportunity to challenge the legality of Section 107(2). In fact, this time, FFRF had the added security of having gone through the recommended channels for requesting a tax exemption only to have it denied by the IRS. Now legal standing should no longer be a hindrance in discovering whether or not Section 107, or at least Section 107(2) belongs in the tax law.

In their complaint filed last week, FFRF restated its position, saying, “Section 107 of the Internal Revenue Code violates the Establishment Clause because it provides preferential and discriminatory tax benefits exclusively to ministers of the gospel; church ministers can and do pay virtually all of their housing costs with tax-free dollars under §107, and implementing regulations; but other taxpayers (like the plaintiffs) are denied this benefit, as §107 is administered and enforced by the Internal Revenue Service. Section 107, as administered and applied by the IRS and Treasury Department, directly benefits ministers and churches most significantly by lowering a minister’s tax burden while discriminating against the individual plaintiffs, who as the leaders of a nonreligious organization opposed to governmental endorsements of religion are denied the same benefit.”

It must be mentioned that there is a $700 million yearly benefit at stake here; and as this case begins its journey through a long and tedious legal system in the Western District of Wisconsin once again, both worlds of revenue and religion would be watching closely.

Photo Credits: The Homewood Star