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Taxes, religion mix it up in heavyweight fight

Jim HamillALBUQUERQUE, N.M. — Not too long ago I wrote a column that said tax law is interesting, not just to those who practice it, but to people in general because it permeates all aspects of our lives.

Bob Woodward wrote a book in 1979 called The Brethren, which purported to be an inside look into the Supreme Court. Woodward noted that the Court hates to hear tax cases, which often lack a broad social or constitutional focus.

I suspect the 12 courts of appeals, one level below the Supreme Court, also dislike tax cases. But the Seventh Circuit got a good one with the minister’s housing allowance.

Section 107 of the Internal Revenue Code excludes from income a payment made to a Minister of the Gospel for a housing allowance. If the formalities are satisfied, some of the minister’s pay can be designated for things like property taxes, mortgage interest and principal, and utilities and repairs. This designated amount is not taxed.

The minister can also claim a deduction for mortgage interest and property taxes under the “normal” rules that apply to everyone else. So it may be possible to effectively deduct interest and taxes twice, and principal, utilities and repairs once.

The aptly named Freedom From Religion Foundation challenged this tax provision. FFRF is based in Madison, Wisconsin, so they brought a suit in a Wisconsin District Court. The Wisconsin Court said the minister’s housing provision was unconstitutional as it violated the Establishment Clause.

The case was appealed to the Seventh Circuit, which in 2014 dismissed it because the FFRF lacked standing to bring the suit. FFRF then entered into some creative machinations to create standing for some of its officers and, by the employment link, for FFRF itself.

Returning to the Wisconsin District Court, FFRF again was able to get a holding that the Section 107 housing allowance was unconstitutional. So the Treasury Department went back to the Seventh Circuit for appeal no. 2.

If you like the tax law, this was beginning to look like the great Ali-Frazier sequence of fights. Unfortunately, I can think of no way to rhyme with Chicago, the setting of the Seventh Circuit Court of Appeals, like Ali did with the Thrilla’ in Manila.

Both combatants trained hard for the rematch. They each had hangers-on in their respective camps who filed friend-of-the-court briefs. The decision was carried on Pay-for-View in many local bars (OK, sorry, that part is a lie).

The Seventh Circuit applied the 1971 Lemon test, which is not based on some religious significance of a fruit, but instead on an unfortunately named person. It also examined the more recent 2014 historical significance test. A third test was said to be wrapped up in the second prong of the three-pronged Lemon test.

If the Supreme Court has done anything, it has sure created some very confusing tests to evaluate the Establishment Clause. For this reason, Vegas odds makers could not create a good line on the FFRF fight.

After much discussion of the prongs of the Lemon test, and a bit of delving into the historical significance test, the Court announced that it had a decision. A microphone was lowered from the rafters and the winner, by unanimous decision, was Treasury Secretary Steve Mnuchin, a man who always forces me to google the proper spelling of his name.

Yes, the Section 107 housing allowance passes constitutional muster. Or so says the Seventh Circuit. So what, you say? Well it saves 200,000 to 300,000 ministers, found in 384,000 congregations, from amending tax returns and starting interesting discussions about their after-tax compensation packages with their church employers.

Yes, our tax laws say something about our values. For some, the Seventh Circuit decision would be representative of poor values – why do ministers get a status-based benefit that others do not?

The Seventh Circuit believed its decision represented good values. Without the housing allowance, a church organization would argue that the housing was for the convenience of the employer organization, a separate provision that also allows a tax exclusion.

This would force the government into the church’s governance and operations to see if the exclusion applied. The court’s decision avoided this government involvement in religion.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at