A Federal District Court judge in Wisconsin recently ruled that a 1945 law providing an income tax exemption for a minister’s housing allowance violates the establishment clause of the First Amendment to the United States Constitution, which states that “Congress shall make no law respecting an establishment of religion.” The suit, brought by the Madison-based Freedom From Religion Foundation (“Plaintiffs”), argued that the law discriminates against secular employees.

Previously, the same federal district court struck down the law in 2013, but the United States Circuit Court of Appeals for the Seventh Circuit reversed the ruling based on a lack of standing by the Plaintiffs. To have standing, a plaintiff must have suffered an actual injury.

In 2015, the Plaintiffs, in order to overcome the issue of standing, applied for the tax benefit but were rejected by the Internal Revenue Service, leading them to file the new lawsuit. As before, the district court ruled the law unconstitutional.

The Court did not grant the relief sought by the Plaintiffs, which could include an injunction to block the tax benefit. Instead, the Court set a hearing for October 30 in which both sides will present arguments regarding the appropriate remedies.

As in the previous case, the matter will be decided on appeal to the Seventh Circuit Court of Appeals. If the appeals court upholds the lower court’s ruling, only ministers in Indiana, Illinois, and Wisconsin will be effected initially. However, if the Supreme Court rules that the law is unconstitutional, the ruling will apply nationwide; however, the Supreme Court only hears approximately 1% of cases appealed from circuit courts. So, it is unlikely that the Supreme Court will hear the matter. However, the IRS could create rules that apply a ruling of the Seventh Circuit across the country to make the tax code uniform.

Of course, the Seventh Circuit could overrule the district court ruling, as well.

What Should Churches Do?

Until the legal dust settles, churches should continue to designate housing allowances for 2018 and beyond. And, churches and ministers should pay close attention to the matter as it winds its way through the judicial system. It should be noted that the ruling does not apply to the use of a parsonage by ministers, as the Plaintiffs did not have the standing to challenge the parsonage exclusion.

When and if the housing allowance benefit is revoked, ministers should be prepared to increase their quarterly income tax payments as the minister will incur a tax hike. Churches may also want to consider giving ministers salary increases over a period of time to offset any tax liability increase.