Lawsuit Challenges Income Tax Preferences for Clergy

Sections 107 and 265(a)(6)(B) of the Internal Revenue Code are unconstitutional because they are narrow income tax preferences for clergy that violate the First Amendment’s Establishment Clause. They are analogous to the Texas sales tax exemption for religious literature struck down in Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989). Federal taxpayers should be held to have standing to challenge these sections under Flast v. Cohen, 392 U.S. 83 (1968), and Winn v. Arizona Christian School Tuition Organization, 562 F.3d 1002 (9th Cir. 2009), cert. granted, May 24, 2010. Winn was correctly decided. Under section 107, clergy receive tax-exempt housing allowances from their churches and obtain the use of housing on a tax-exempt basis. These are exceptions to the taxation of compensation income. Under section 265(a)(6)(B), clergy are allowed to deduct mortgage interest and property taxes paid from, and allocable to, tax-exempt housing allowances. Clergy are thus granted tax privileges denied to taxpayers generally. Taxpayers other than clergy cannot ordinarily receive tax-exempt housing allowances and they cannot deduct expenses allocable to tax-exempt income. Only clergy and members of the military are allowed deductions for expenses allocable to tax-exempt income. In Freedom From Religion Foundation v. Geithner, a California district court correctly denied the federal government’s motion to dismiss the plaintiff taxpayers’ claims that section 107 is unconstitutional. The court correctly concluded that the plaintiffs have standing to sue as federal taxpayers and the complaint could not be dismissed for failure to state a claim. The court incorrectly granted the government’s motion to dismiss the plaintiff taxpayers’ claims that section 265(a)(6)(B) is unconstitutional; the court incorrectly held that the complaint failed to state a claim upon which relief can be granted.