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Gaylor v. Mnuchin - 919 F.3d 420 (7th Cir. 2019)


The primary effect of 26 U.S.C.S. § 107(2) is not to advance religion on behalf of the government, but to allow churches to advance religion, which is their very purpose.


A rule in the Internal Revenue Code defining "taxable" income is the "convenience-of-the-employer" doctrine. Under that doctrine, housing provided to employees for the convenience of their employer is exempt from taxable income. Under 26 U.S.C.S. § 107, in the case of a minister of the gospel, gross income does not include: (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home. Section 107(1) reauthorized the long-standing "in-kind parsonage" exemption and authorized the IRS to also exempt cash allowances from ministers' taxable income. Plaintiff Freedom From Religion Foundation ("FFRF") paid its co-presidents, plaintiffs Annie Gaylor and Dan Barker, a portion of their salaries in the form of a housing allowance. FFRF also paid this housing allowance to a former president of the organization, Anne Nicol Gaylor (N. Gaylor). Neither Gaylor, Barker nor N. Gaylor were "ministers" within the meaning of the tax code, and they were denied refunds on taxes paid on their housing allowances. Ultimately, plaintiffs filed a lawsuit in federal district court against defendant Steven T. Mnuchin, Secretary of the United States Department of Treasury, claiming that § 107(2), the tax code exemption for religious housing, violated the Establishment Clause of the federal Constitution. The district court agreed. Mnuchin several intervening religious organizations appealed.


Was excluding housing allowances from ministers' taxable income a law "respecting an establishment of religion" in violation of the Establishment Clause of the federal Constitution?




The court of appeals reversed the district court's judgment. The court held, inter alia, that under the Lemon test, the government articulated three secular purposes for the tax exemption: (1) to eliminate discrimination against ministers; (2) to eliminate discrimination between ministers, and; (3) to avoid excessive entanglement with religion. Moreover, the court ruled, the primary effect of § 107(2) was not to advance religion but to allow churches to advance religion, as was their purpose. Historically, the court observed, religious groups had been allowed tax breaks.

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