Seventh Circuit Rules Minister's Housing Allowance is Constitutional, Overturning District Court Ruling

The Seventh Circuit Court of Appeals overturned a District Court ruling that the exclusion from income of a minister’s housing allowance under IRC §107(2) violated the Establishment Clause of the First Amendment to the United States Constitution (Gaylord v. Mnuchin, et al, Case No. 18-1277 & 18-1280).

IRC §107 provides:

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.

The challenge was to the second part of §107, where a minister is paid an excludable housing allowance.  That allowance is excludable from income unless it is used for a home, as provided by Reg. §1.107-1(c):

(c) A rental allowance must be included in the minister's gross income in the taxable year in which it is received, to the extent that such allowance is not used by him during such taxable year to rent or otherwise provide a home. Circumstances under which a rental allowance will be deemed to have been used to rent or provide a home will include cases in which the allowance is expended (1) for rent of a home, (2) for purchase of a home, and (3) for expenses directly related to providing a home. Expenses for food and servants are not considered for this purpose to be directly related to providing a home. Where the minister rents, purchases, or owns a farm or other business property in addition to a home, the portion of the rental allowance expended in connection with the farm or business property shall not be excluded from his gross income.

The question that was raised was whether granting this benefit that is limited to “ministers of the gospel” violated the First Amendment’s initial clause which reads:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;

While the District Court that heard this matter ruled it did violate that standard, the Seventh Circuit panel unanimously overturned that decision.

The panel noted that there are multiple provisions in the IRC that grant certain classes of employees an exclusion from income for payments related to housing or the provision of housing by the employer, so that this is not a special benefit.  While the standard rule for employer provided housing found at IRC §119 imposed conditions that aren’t part of the §107(2) rule, the other provisions show that it is not unusual for Congress to carve out more generous exceptions for specific situations.

The opinion notes:

Myriad provisions in Title 26 employ this categorical approach and exempt any form of housing benefits, whether in cash or in kind: § 132 and § 162 exclude housing provided to an employee away on business for less than a year; § 134 excludes housing provided to current or former members of the military; § 911 excludes housing above a certain level provided to citizens or residents living abroad; § 912 excludes housing provided to government employees living abroad; and, of course, § 107 excludes housing provided to ministers. These categorical exemptions allow hundreds of thousands of employees (including ministers) to receive tax-exempt housing every year without needing to satisfy the proof requirements of § 119(a)(2).

These parallel provisions show an overarching arrangement in the tax code to exempt employer-provided housing for employees with certain job-related housing requirements. Congress has exempted certain categories of employees from complying with the specific requirements of § 119(a)(2) to simplify the application of the convenience-of-the-employer doctrine to those occupations. Section 107, including subsection (2), recognizes ministers often use their homes as part of their ministry. This provision thus eases the administration of the convenience-of-the-employer doctrine by providing a bright-line rule, instead of requiring that ministers and the IRS repeatedly engage with a fact-intensive standard.