Can tax benefits “establish” a religion? Perhaps, but as long as they show neutrality, meaning “no preference” for religion, they can pass muster.
The Internal Revenue Code establishes numerous income tax exemptions, one genre of which falls under the “convenience-of-the employer” doctrine. This doctrine is primarily codified in 26 U.S.C. §119(a)(2), which exempts employer-provided meals and lodging if they meet a five-part test. However, a variety of categorical exceptions apply to the five-part test: Housing provided to current or former members of the military (§134), housing provided to employees away on business for less than a year (§132, 162), housing provided to government employees living abroad (§912), and housing provided to ministers (26 U.S.C. §107).
Recently, in Gaylor v. Mnuchin, the Seventh Circuit held that the exemption for minister housing did not violate the Establishment Clause. In reaching its conclusion, the court considered a variety of competing Establishment Clause tests, demonstrating the need for a Supreme Court opinion establishing which test should control.
Since 2011, the Freedom from Religion Foundation has paid housing allowances to its co-presidents, Annie Gaylor and Dan Barker, as well as to a former co-president, who is now deceased. When these employees filed for income tax exemptions under 26 U.S.C. §107(2), an income tax exemption for housing allowances paid to ministers, the Internal Revenue Service (IRS) ultimately denied their refund claims because they were not “ministers.”
The plaintiffs brought their suit against the Internal Revenue Service in federal district court. The District Court granted summary judgment in favor of the plaintiffs. The court reasoned that the plain language of the statute, the legislative history, and its operation in practice all demonstrate a preference for ministers over secular employees.
The Seventh Circuit reversed. Writing for the panel, Judge Brennan analyzed the case under two tests crafted by the Supreme Court in their Establishment Clause jurisprudence: the Lemon v. Kutzman (1971) test and the more recent “historical significance” test.
The first prong of the Lemon test states that the statute at issue “must have a secular legislative purpose.” The defendants supplied three possible secular legislative purposes, all of which Judge Brennan found to be sincere (finding the “actual purpose [was not] to endorse or disapprove of religion”). First, the statute eliminates discrimination against ministers. In 1921, the Treasury Department included parsonages in taxable income. Congress responded by making a categorical exemption, placing religious employees on par with secular ones. The plaintiffs argued that the categorical exemption is a unique benefit. Judge Brennan cautioned against “[r]eading §107(2) in isolation from other convenience-of-the-employer provision[s]” because, in context, §107(2) “is simply one of many per se rules that provide tax exemption to employees with work-related housing requirements.”
The second legislative purpose was to eliminate discrimination between ministers. The standard housing exemption in §119 is limited to “in-kind” housing (as opposed to in cash). The in-kind requirement benefits ministers of richer denominations that can afford to buy property for minister housing. The plaintiffs argued that this reason was a sham by picking out particular statements made in committee hearings, such as: “we are being threatened by a godless and anti-religious world.” Judge Brennan called the evidence a “smattering of legislative history,” juxtaposing it with other statements in the same hearing about: “creat[ing] an equitable condition for ministers similarly situated, and . . . eliminat[ing] court action [by ministers suing for discrimination].” He pointed out that the legislative record does not establish a “singular motive” behind the statute and asserted that the conflicting statements “reveal the unreliability of this legislative history.”
The third legislative purpose was to avoid excessive entanglement with religion. By creating a categorical exception for ministers, the IRS could abstain from intrusive inquiries, often required by the status quo exemption of §119, into how religious organizations use their facilities.
Judge Brennan then addressed the second prong of the Lemon test which requires that the statute have a “principle or primary effect . . . that neither advances nor inhibits religion.” Under two undisturbed Supreme Court precedents (Walz v. Tax Commission of New York (1970) and Corporation of Presiding Bishop v. Amos (1987)), “[t]he grant of a tax exemption is not sponsorship since the government does not transfer part of its revenue to churches but simply abstains from demanding that the church support the state.”
The third prong of the Lemon test asks whether the state “fosters an excessive government entanglement with religion.” Again, Judge Brennan concluded that the statute actually reduces entanglement compared with the status quo of §119, which has an evidence-intensive five-part test.
Finally, Judge Brennan turned to the historical significance test that the Supreme Court developed in three recent cases. Interestingly, the plaintiffs “offered no arguments under the historical significance test, except to assert the test applies only to legislative prayer.” Judge Brennan rejected this conclusion, pointing out that Supreme Court cases have applied the test to a case about a monument, to a conflict between the federal government and a church over employment law, and to a case about legislative prayer.
The plaintiffs failed to offer evidence that the tax exemption at issue was “historically viewed as an establishment of religion.” On the contrary, Judge Brennan found that for over two hundred years, state and federal laws have enacted tax exemptions for religious groups and their property, which have typically been upheld.
The Seventh Circuit concluded that the tax provision “falls into the play between the joints of the Free Exercise Clause and the Establishment Clause: neither commanded by the former, nor proscribed by the latter.”
Gaylor v. Mnuchin is yet another case that highlights the Supreme Court’s indeterminate Establishment Clause jurisprudence, demonstrating the need for the Court to clarify which test should control. In this case, the Seventh Circuit took the same approach as other circuits: the court assumed that the Lemon test controls, but used the “historical significance” test to support its analysis. Judge Brennan addressed this indeterminate jurisprudence, noting that the Supreme Court has not used the Lemon test in a religious freedom case in “many years.” The Supreme Court has relied more recently on “historical significance,” and some Justices have promoted other tests such as the coercion and endorsement tests. Perhaps the Supreme Court will soon resolve some of this indeterminacy.
Despite the complicated jurisprudential landscape, the Seventh Circuit deftly navigated the competing tests and accurately characterized the tax exemption at issue here: one provided to employees of secular and religious institutions alike.