In 2011, the Freedom From Religion Foundation (“FFRF”) challenged the constitutionality of the parsonage tax exemption contained in Section 107 of the Internal Revenue Code. Section 107 allows clergy to exclude certain housing expenses from their gross income. FFRF’s case failed – and the parsonage exemption survived – when the United States Court of Appeals for the Seventh Circuit ruled in 2014 that FFRF did not have standing to bring the constitutional challenge, i.e. that the parsonage exemption had not caused FFRF to suffer any “injury in fact.” FFRF has since reorganized its efforts to eliminate the parsonage exemption, attempted to cure its standing issues, and filed a nearly identical constitutional challenge in the same court – the Western District of Wisconsin.
The tax code divides the parsonage exemption into two parts: Section 107(1) provides an exemption for ministers who live in a physical, church-provided parsonage, and Section 107(2) provides an exemption for ministers who receive a cash parsonage allowance. Yesterday, Judge Barbara Crabb narrowed the dispute by granting the Government’s motion to dismiss FFRF’s Section 107(1) claim on the grounds that it did not have standing. The Government, however, did not challenge FFRF’s standing with regard to the Section 107(2) claim. Thus, the constitutionality of clergy receiving an exemption for a cash parsonage allowance is still an open question before the Court (and Judge Crabb left the door cracked open to revisit the Section 107(1) challenge in the remedy stage of the case).
Judge Crabb’s decision is not surprising. She reached a similar decision in the FFRF’s 2011 parsonage challenge. In that case, Judge Crabb also determined that Section 107(2) was unconstitutional before the Seventh Circuit reversed on standing grounds. Stay tuned here for additional updates.