By Edward Zelinsky

February 3, 2014 OUPBlog - Confronting an important constitutional question about religion and taxation, the US District Court for the Western District of Wisconsin, in Freedom from Religion Foundation, Inc. v. Lew, held that Section 107(2) of the Internal Revenue Code violates the First Amendment. Code Section 107(2) excludes from gross income cash housing allowances furnished to “minister[s] of the gospel.” Such housing allowances are today designated as “parsonage allowances.”

For three, interrelated reasons, the District Court’s opinion in FFRF is unpersuasive and should be reversed by the Court of Appeals. First, contrary to the District Court’s conclusion, Section 107 has secular purpose and secular effect. Section 107 manages the entanglement which is inevitable when the modern government decides whether or not to tax the modern church. Moreover, Section 107 accommodates the autonomy of religious institutions and actors by declining to tax both clerical housing provided in kind and parsonage allowances paid to clergy in cash. Section 107 should be understood, not as subsidizing the church, but as separating the church from the state. The economic benefit of tax exemption is a by-product of that separation.

Second, the District Court’s FFRF opinion places too much weight on the US Supreme Court’s plurality opinion in Texas Monthly, Inc. v. Bullock while giving short shrift to the Supreme Court’s earlier opinion in Walz v. Tax Commission. In Texas Monthly, the Supreme Court struck on First Amendment grounds a Texas sales tax exemption for religious periodicals. In Walz, the Supreme Court upheld against First Amendment challenge New York’s property tax exemption for churches.

A careful reading of Texas Monthly and Walz indicates that, consistent with the First Amendment, Congress can exempt from taxation churches and religious actors to avoid church-state entanglement and to accommodate the autonomy of religious institutions and actors. That is what Code Section 107 does. Third, the District Court in FFRF accepts the premise of the Texas Monthly plurality that tax exemptions are always subsidies. Often tax exemptions are subsidies, comparable to direct expenditures. However, in many instances, they are not. In constitutional terms, Section 107 is more convincingly perceived, not as a subsidy, but, per Walz, as managing the inevitable entanglement caused by taxation and as accommodating the autonomy of religious institutions and actors. In a world of imperfect choices, Section 107 separates rather than subsidizes. The economic benefit of Section 107 is a side-effect of that separation.

As a matter of tax policy, there is a strong argument for taxing all cash income including parsonage allowances now excluded from gross income by Code Section 107(2). However, as a constitutional matter, Section 107 reflects a constitutionally permitted, though not a constitutionally compelled, choice to accept one form of entanglement over others and to accommodate the autonomy of churches and religious personnel by excluding their housing and housing allowances from clerical gross incomes. For First Amendment purposes, this is a plausible choice with secular purpose and secular effect in an area where there are no disentangling alternatives.

On 24 January 2014, the US Justice Department filed notice that it will appeal FFRF to the US Court of Appeals for the Seventh Circuit. The appeals court should reverse the District Court’s opinion and thereby sustain Code Section 107(2) as a constitutionally permitted, though not constitutionally compelled, accommodation of religious autonomy under Walz.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.