Churches Fight Atheist Lawsuit that Could Result in $1B in Taxes on Church Leaders

For nearly six decades, religious leaders have enjoyed a housing tax exemption from the IRS.

But one atheist organization says no more. The Freedom From Religion Foundation is fighting to strip that tax break in a move that would mean churches across the country would be socked with almost $1 billion in new taxes.

Supporters say the provision, known as the "parsonage exemption," allows pastors, rabbis, and others to live in the communities they serve.

In Gaylor v. Mnuchin, FFRF is suing the IRS and charging the provision actually violates the Establishment Clause of the First Amendment.

The case kicked off this past week in the Seventh Circuit Court of Appeals.

Pastors like Chicago's Chris Butler told the federal appeals court Thursday that taking away the tax break would be a big blow to both the leaders and the community.

"For the majority of churches, the pastors are like me and experience at some level the same problems that we're trying to face in the community," said Butler.

"If you take away even a little bit, it can become a lot of trouble quickly," he continued.

Butler is a pastor at Embassy Church on the south side of Chicago, an inner-city congregation serving at-risk teens and the city's homeless. 

The Becket Fund for Religious Liberty, which intervened in the case in on behalf of Embassy Church and several others, says the plaintiff's claim doesn't add up. That's because many secular businesses and organizations receive similar tax treatment.

"Treating ministers like other professionals isn't an establishment of religion; it's fair tax treatment," said Luke Goodrich, deputy general counsel at Becket.

"The same group of atheists claimed it was unconstitutional to put Mother Teresa on a postage stamp, so it's no surprise they're trying to sic the IRS on churches," Goodrich said.

According to the IRS, the parsonage exemption is when "a minister's housing allowance (sometimes called a parsonage allowance or a rental allowance) is excludable from gross income for income tax purposes but not for self-employment tax purposes." 

The issue at hand stems from the notion that the home is an extension of the ministry and thus a convenience to the employer.

Home is where pastors prepare sermons, meet with congregants and host Bible studies for the community.

The string of legal bouts began in 2011 with FFRF Co-Presidents Annie Laurie Gaylor and Dan Barker, and Ian Gaylor representing the estate of Anne Nicol Gaylor.

The co-presidents argued that "as leaders of a freethought organization they are similarly situated to clergy" and able to take advantage of the same allowance.

The FFRF sued when the IRS denied their request, thus kicking off years of legal challenges.

The Seventh Circuit Court is expected to hear oral arguments later this year.