Freedom From Religion Foundation Raises Unprecedented Challenges to Church and Clergy Tax Laws

Dan Busby | President, ECFA | Friday, September 27, 2013

Freedom From Religion Foundation Raises Unprecedented Challenges to Church and Clergy Tax Laws

Church leaders, take note. The Freedom From Religion Foundation (FFRF) is aggressively engaged in two federal court challenges to declare longstanding church and clergy tax code provisions unconstitutional.

As if that weren’t enough, a third lawsuit by the same group — which describes itself as the nation’s largest association of atheists, agnostics, and skeptics — is also calling into question the Internal Revenue Service’s enforcement of the law in certain respects for churches and other religious organizations.

Depending on their outcomes, these cases could have drastic legal, tax, and finance implications for every congregation throughout the United States. 

Case #1: Clergy Housing Exclusion

This latest series of cases filed in Wisconsin federal district court began just over two years ago with FFRF targeting the clergy housing exclusion. This provision in Section 107 of the U.S. tax code allows qualifying religious leaders to exclude from income tax the rental value of church-provided housing or a comparable allowance designated from a religious leader’s salary used to provide housing, subject to certain limitations.

FFRF alleges that the clergy housing exclusion of Section 107 and the manner in which the law is administered by the federal government violate the First Amendment’s Establishment Clause and the Constitution’s Due Process Clause. The U.S. Department of Justice has rejected FFRF’s claims that the law and its administration are unconstitutional and has advanced intriguing arguments to suggest that FFRF lacked the necessary legal standing at the outset to bring its case.

According to the government, FFRF cannot show that Section 107 and its administration unfairly discriminate in favor of religious groups because FFRF’s own leaders never tried to claim their designated housing allowances with the IRS. FFRF assumed that since its leaders did not self-identify as “ministers” in the traditional sense they would not be entitled to exclude their designated housing allowances for income tax purposes. The government, however, suggested that for purposes of administering the tax law an atheist leader could conceivably be treated by the IRS like a traditional religious minister and be entitled to receive a tax-free housing allowance.

The district court has not yet ruled on these arguments by the government to defend the clergy housing exclusion in its motion for summary judgment.

Case #2: Church Exemptions to IRS Application and Reporting Requirements

A second lawsuit in the trio of FFRF cases was aimed at ending church exemptions to the initial application (Form 1023) and annual reporting (Form 990) requirements that public charities generally must file with the IRS. If FFRF had its way, churches would be required to pay a fee and register with the federal government in order to officially operate as churches and would be subject to detailed annual reporting and monitoring by the IRS.

While FFRF claims these exemptions for churches are unconstitutionally discriminatory in favor of religion, the reality is that these exemptions — included in federal law since filing and reporting requirements were first instituted for tax-exempt organizations — promote the important public policy of avoiding excessive entanglement between churches and the government required by the First Amendment.

The court recently dismissed on procedural grounds FFRF’s claim regarding the Form 1023 exemption for churches, but litigation surrounding the Form 990 exemption will continue for now.

Case #3: IRS Enforcement of Political Campaign Prohibition

The third FFRF case is different in nature because, rather than challenging a particular tax law provision applicable to churches and clergy, the foundation is arguing that the way in which the IRS administers the law results in an unfair benefit to religious organizations. In particular, FFRF suggests that the IRS has a policy and practice of not enforcing the controversial political campaign prohibition of Section 501(c)(3) against churches and other religious organizations.

As with the two other cases, the government is rejecting FFRF’s allegations and denies that the IRS has any such policy or practice of non-enforcement.

Those interested in the campaign prohibition issue will want to keep a close eye on this case, especially for any facts that might be uncovered in discovery regarding the IRS’s record of enforcement in this difficult area of the law.

National Commission Provides Input on Church and Clergy Tax Issues

At the request of Senator Charles Grassley in 2011, ECFA formed the Commission on Accountability and Policy for Religious Organizations ( to provide input on major tax policy issues affecting religious organizations, including the clergy housing allowance, church accountability and donor engagement, and the political campaign prohibition.

The Commission’s first report released in December 2012 provides well-reasoned analysis from leaders across the religious and broader nonprofit sector supporting the existing provisions of Section 107 concerning the clergy housing exclusion. The Commission also recommended that, while churches should be appropriately accountable to their members, congregants, and financial supporters, churches should not be required to file Form 990 or any similar information return or form with the federal government. Doing so would not only place a substantial and unnecessary burden on churches and the government but would also raise significant constitutional concerns.

A final report released by the Commission in August 2013 was dedicated exclusively to the question of government regulation of political speech by religious and other 501(c)(3) organizations. With an extraordinarily high degree of agreement from those participating, the Commission proposed new solutions to Congress and the Treasury Department that would eliminate much of the existing controversy over the campaign prohibition including the issues recently litigated by FFRF surrounding non-enforcement.


What are the implications of these court challenges for churches and clergy? It’s too early to tell.

For one thing, litigation of this nature can drag on for years. Additionally, legal observers have expressed serious doubts as to FFRF’s chances of prevailing in federal court on these issues. Even if FFRF is successful in obtaining a favorable district court decision in one or more of these cases, a government appeal to a higher court would be almost inevitable given the unprecedented nature of these challenges.

In my observation, the most salient point for church leaders to understand from these suits is that we are now witnessing the fruits of living in an increasingly irreligious society. Any provisions in the law that touch on religion, such as the clergy housing exclusion or church reporting exemptions, are more likely to be challenged as the perceived value of religious belief and conduct in our nation continues to decline.

But let us not be discouraged (Galatians 6:9). While it is important to be aware of our surroundings, we must move ahead knowing the final outcome promised to us in Scripture. We cannot allow these or other challenges to detract us from living in integrity before God and our fellow man as we faithfully fulfill our calling to the Great Commission.

Dan Busby is president of ECFA (Evangelical Council for Financial Accountability), an accreditation organization that sets standards for governance, financial management, and fundraising/stewardship for churches and other nonprofits across the country.

Publication date: September 27, 2013

Freedom From Religion Foundation Raises Unprecedented Challenges to Church and Clergy Tax Laws