By Sam Brunson
I’ve blogged several times about the Freedom From Religion Foundation’s suit over the parsonage allowance.[fn1] Quick refresher: Section 107(1) allows “ministers of the gospel” to exclude church-provided housing from their gross income, while section 107(2) allows them to exclude housing stipends. The Freedom From Religion Foundation sued and won in the district court. The Seventh Circuit found that FFRF didn’t have standing, so two of its executives claimed a refund for the portion of their salary that had been designated a housing allowance and sued again. Again, the district court held that section 107(2) was unconstitutional.[fn2]
Now we’re in the briefing stage. And a week and a half ago, the government and intervenors filed their most recent briefs in Gaylor v. Mnuchin.
I’m not going to analyze the full briefs, but I do want to respond to a central point that the government mentions, and that the intervenors find critical in their opening brief: the idea that the parsonage allowance is part of a series of provisions that relax the default exclusion rule.
And maybe some brief history: in 1919, the Treasury decided that seamen didn’t have to include employer-provided housing in their gross income, as long as the housing was provided for the convenience of the employer, and not as compensation. It expanded this exclusionary rule to other professions but it expressly said that clergy didn’t qualify. Congress disagreed and, in1921, enacted the predecessor to today’s section 107(1), expressly allowing clergy to exclude church-provided housing from gross income. Then, in 1954, Congress codified Treasury’s convenience-of-the-employer rule into today’s section 119(a)(2). To qualify under section 119(a)(2), the housing must not only be provided for the convenience of the employer, but it must be on the employer’s business premises, and the employee must accept the housing as a condition of employment.
The intervenors (accurately, imho) characterize this inquiry as a fact-intensive one; they go on to point out that, in addition to the default rule in section 119(a)(2), Congress has enacted about a half-dozen other exemptions from the general rule that employees must include employer-provided housing into income. They explain that, in enacting these provisions, “Congress has also relaxed this default rule where the type of work, the burdens on the employee’s housing, or the non-commercial working relationship make it likely that the lodging or housing allowance was intended to benefit the employer.” The brief goes on to list the other exemptions from the general rule, then concludes that “[i]n all these cases, Congress determined that a bright-line rule was preferable to § 119’s fact-intensive test.”
This is a fairly compelling argument: section 107(2) isn’t impermissible because it’s part of a web of exemptions from the strict rules of section 119 intended to simplify the question of employer convenience.
Unfortunately, that explanation doesn’t fit with the legislative history of the various provisions, which suggest that, in most cases, Congress wasn’t trying to expand section 119 to a profession that didn’t quite fit within its contours. Rather, each is for a unique and generally unrelated purpose.
Employees of Educational Institutions
Section 119(d) provides a limited exception to the strict rule for employees of educational institutions. And this one is probably most on point with the parsonage allowance. According to the 1896 Act Bluebook,[fn3] several courts found that on-campus housing didn’t qualify under section 119. So Congress expanded the reach of 119.[fn4]
It’s worth noting, though, that section 119(d) has significant limitations absent from section 107(2). The housing has to be provided in-kind, not in cash. It has to be on or in proximity to the campus. And there’s a ceiling to how much an employee can exclude. To the extent that she pays less than the lesser of 5% of the appraised value of the housing or the average amount non-employees pay for similar housing, she has to include that excess in her gross income. Still, section 119(d) was meant to expand the convenience-of-the-employer test.
Section 119(c) says that certain foreign camps will be considered the business premises of the employer. Which is to say, it’s entirely inapposite to the intervenors’ arguments. Section 119(c) doesn’t simplify—or eliminate—the fact-intensive inquiry as to whether an employee lives in employer-provided housing for the convenience of the employer; rather, it expands areas that will be considered the employer’s business premises.
Citizens Living Abroad
Section 911(a)(2) allows U.S. taxpayers living abroad to exclude housing costs from their gross income. This one, then, allows an exclusion of cash, not just of in-kind housing.
But this exemption has nothing to do with section 119; it developed independently, circuitously, and for entirely different reasons.
Section 213(b)(14) of the Revenue Act of 1926 allowed bona fide nonresidents of the United States to exclude their foreign-source income from gross income. And why? According to the legislative history, basically to avoid double taxation. Congress wanted to allow U.S. individuals working in foreign countries to compete on a level playing field with their local competitors.[fn5]
The details and limitations of this exemption for expatriates of foreign-source income changed frequently throughout the twentieth century. In 1978, it shifted from an exclusion to a series of deductions (including for some housing costs). Then, in 1981, Congress enacted what is basically the current section 911, including the exclusion for housing. And why did it do that? Three main reasons jumped out at me:
- Congress was worried that double taxation would reduce U.S. business’s competitiveness overseas, as well as increasing the costs to U.S. individuals of working overseas.
- Because businesses often reimbursed their employees for increased costs, the costs of double taxation would be passed on to consumers.
- Including the amounts in income—even where the law permitted deductions—was complicated, made it hard to predict tax liability in advance, and increased the cost of tax preparation. A simple exclusion avoided these problems.[fn6]
Essentially, then, the exclusion of housing (and some income) for expatriates was meant to make the U.S. more competitive abroad, and encourage U.S. workers to take overseas jobs.
Government Employees Living Abroad
On this one, the intervenors are straight-up wrong. There’s no special exclusion of housing expenses for government employees living abroad. Rather, section 912 says that these government employees do not include cost-of-living allowances in their gross income. The predecessor to section 912(2) was enacted during World War II, when “rapidly increasing income tax rates and increased living costs were consuming large portions of the allowances provided for Federal civilian employees stationed outside the United States.”[fn7] Instead of increasing the living allowances, Congress just eliminated the increased tax rates.
It’s worth noting that the regulations explicitly lay out the relationship between housing allowances and the COLA exemption: under the regs, the only portion of a “living and quarters allowance” that is exempt from taxation is the COLA portion.[fn8].
Finally, the comparison that the intervenors find most apt: section 134‘s exclusion of housing and housing allowances for members of the military.
This one’s weird, because section 134 doesn’t explicitly mention housing allowances. Rather, it refers to “qualified military benefits” that were excludable from gross income on September 9, 1986. In the 1986 Bluebook, p. 829, the Joint Committee on Taxation provides what it says is an exhaustive list of these excludable military benefits. They include “housing allowances authorized under
37 U.S.C. sees. 403, 403a, or 405.”
The history here is a little hard to peg down, but it appears that the exclusion of military housing benefits came first from the courts. In 1925, the Court of Claims decided Jones v. United States, 60 Ct. Cl. 552 (1925). In Jones, it determined that there was a long history of the government both providing housing to the military and determining where they would live. Moreover, the court said, members of the military had to be available for duty 24-7, and that the provision of housing wasn’t provided as pay to them; rather, they were paid to live in the housing.
The intervenors emphasize the 24-7 nature of being a minister, as well as the fact that an overarching authority tells them where to go. While I have no doubt that is true in many cases, that can’t be enough to justify the exclusion. Plenty of professions, ranging from attorneys to investment bankers to doctors to dentists, have to be on call at any time. Moreover, plenty of professions send employees to particular places.
And honestly, there are two big red flags for saying that ministers are sufficiently like members of the military to justify the tax equality. First, Jones was decided when the government was still figuring out whether they could tax federal employees. At this point, it had determined that the president and Congress and some judges could be taxed on their income, but it was still a relatively new idea. And the court gets at that question, saying,
They must not only have a place in which to live but adequate facilities for doing what they are called upon to do. Is the maintenance of this overhead expense to be first charged to the Government and then in part recouped from the officer’s salary by way of taxation?[fn9]
(Note that in today’s world, this justification is relatively absurd—certainly you recoup part of federal employees’ salaries through taxation.)
Second, while it accepted the court’s ruling, the IRS considered it a narrow decision. In a 1956 private letter ruling, the IRS explained that not only was the court’s holding limited to the military, but that it didn’t even apply to civilian employees of the military.[fn10] In the IRS’s view, the reasoning appears to have been more tightly connected to the long history of providing military housing and something unique about potentially being a combatant.
Finally, it’s also worth noting that the exclusions from income for members of the military really appear to be sui generis because we want to gives special benefits to the military. The exclusion for housing is buried amidst exclusions for all kinds of things, including COLAs, death gratuities, moving expenses, dependent education, and dozens of other things. In context, the section 134 exclusions are a way to provide more compensation for members of the military without actually paying them more. Essentially, they’re a subsidy.
But I’m not sure section 107(2) can be defended on the grounds that it’s a subsidy; that strikes me as cutting against the argument that there’s no establishment clause issue.
For purposes of this post, I’m not interested in the constitutional question. But as a tax matter, the various exclusions from gross income aren’t part of an interconnected web of housing exclusions meant to simplify the “convenience of the employer” test. Rather, they’re largely disparate and unrelated provisions, meant to react to specific pressures or provide specific subsidies.
[fn2] Section 107(1) isn’t at issue, because the FRFF plaintiffs didn’t have standing to challenge it.
[fn3] Most of the Bluebooks I’ll reference are available here.
[fn4] 1986 Bluebook at 823-24.
[fn5] It’s more work than a blog post is worth to find the legislative history, but it’s quoted in White v. Hofferbert, 88 F. Supp. 457, 462 (D. Md. 1950).
[fn6] 1981 Bluebook at 43.
[fn7] Gary E. Sjoroos, 81 TC 971, 973–974 (1983).
[fn8] Treas. Reg. § 1.912-1(a).
[fn9] Jones at 576.
[fn10] PLR 5612265140A.