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According to Professor Zelinsky, the Warren court's inquiry highlights the tensions and uncertainties of the First Amendment doctrine governing tax exemptions for religious persons and entities. Texas Monthly indicates that exclusions such as section 107 are appropriately viewed as tax subsidies and that when restricted to religious institutions and actors, these subsidizing exclusions run afoul of the Establishment Clause. On the other hand, an earlier case, Walz v. Commissioner, focuses more on Free Exercise concerns and suggests that for First Amendment purposes, tax provisions like section 107 properly accommodate the autonomy of sectarian entities and persons.

A trial or appellate judge seeking to follow the Supreme Court's most recently expressed sentiments will, per Texas Monthly, strike section 107 on Establishment Clause grounds, according to Professor Zelinsky.

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Dr. Warren, The Parsonage Exclusion, and the First Amendment
By Edward A. Zelinsky

Table of Contents

Statutory Background
The Warren Case
Texas Monthly and Walz
Texas Monthly, Walz, and Dr. Warren
Choosing Between Texas Monthly and Walz
Conclusion 

[1] In Warren v. Commissioner, ¹ a three-judge panel of the Court of Appeals for the Ninth Circuit has sua sponte questioned the constitutionality of Internal Revenue Code section 107(2), which excludes from gross income the cash rental allowance provided to "a minister of the gospel." ² The Commissioner and the taxpayers in Warren had treated the case as a statutory controversy and had disclaimed any intent to raise constitutional considerations. The Ninth Circuit, even as it raised the issue of section 107(2)'s constitutionality, also expressed reservations about the propriety of a court considering an issue advanced by neither litigant and indicated that in the final analysis, it may decline to resolve the constitutional controversy the court has itself engendered.

[4] I write to explore the substantive issue ⁴ raised by the Warren panel, that is, whether section 107 ⁵ offends the First Amendment. My conclusions will not comfort those searching for certainty. Indeed, the Warren court's inquiry highlights the tensions and uncertainties of the First Amendment doctrine governing tax exemptions for religious persons and entities.

Texas Monthly indicates that exclusions such as section 107 are appropriately viewed as tax subsidies and that when restricted to religious institutions and actors, these subsidizing exclusions run afoul of the Establishment Clause. On the other hand, an earlier case, Walz v. Tax Commission, ⁶ focuses more on Free Exercise concerns and suggests that for First Amendment purposes, tax provisions like section 107 properly accommodate the autonomy of sectarian entities and persons. From this vantage, section 107, rather than subsidizing, serves as the proverbial wall between church and state, disentangling the secular from the sectarian.

[5] A trial or appellate judge seeking to follow the Supreme Court's most recently expressed sentiments will, per Texas Monthly, strike section 107 on Establishment Clause grounds. If on the other hand, the accommodationist jurisprudence of Walz controls, section 107 (like the property tax exemption challenged in Walz) survives First Amendment scrutiny. Since, as a normative matter, there are sound reasons for preferring the Walz framework to Texas Monthly, the Ninth Circuit (or whoever confronts the issue) should resolve the tension between Texas Monthly and Walz by holding section 107 constitutional.

Statutory Background

[6] Section 107 is best approached through another provision of the code, section 119. Section 119 excludes from an employee's income employer-provided lodging but only if the lodging is on the employer's premises, is provided for the employer's "convenience," is required as a condition of employment, and is furnished in-kind rather than through a cash allowance. ⁷

[7] Section 119 applies whether the employer is a secular organization or a sectarian entity. Much housing provided by religious institutions is covered by section 119 and thus excludable from the recipient's gross income under that provision. For example, a dorm suite provided by a religiously affiliated college to a live- in student counselor falls within section 119 and is excluded from the counselor's gross income under that section. Given the breadth of the employers covered by the section 119 exclusion, that provision raises no apparent constitutional concerns as section 119 applies to housing furnished by religious employers the same criteria applicable to secular organizations. ⁸

[8] Section 107, in contrast, is limited to certain employees of religious institutions, in particular, to "minister(s) of the gospel," a term the courts have held to include clergy who do not fall within the literal phraseology of the statute. 9 Moreover, section 107 (unlike section 119) contains no convenience- of-the-employer test, does not require that the excluded housing be located on the employer's premise or be a condition of employment, and extends tax-free treatment to cash allowances. Thus, to take a common example, a rabbi living in a home owned by his congregation can exclude the rental value of that home even though the home is not part of the synagogue and is given to the rabbi for his benefit, rather than for the congregation's convenience. Or, if the congregation gives the rabbi a cash housing allowance that he uses to rent a home, that allowance too is excluded from the rabbi's gross income.

[9] Thus, from a constitutional perspective, the potentially controversial situations are those arrangements by which religious employers provide housing assistance to clergy failing the section 119 tests for excludability but satisfying the more lenient standard of section 107.

The Warren Case

[11] For the years in question, Dr. Warren's congregation, the Saddleback Valley Community Church, paid him most of his compensation from the church in the form of a cash housing allowance designed to be excluded from gross income under code section 170(2). The amount of that allowance was roughly $80,000 annually. In each year, Dr. Warren spent that year's allowance on housing expenses pertaining to the home he and Mrs. Warren had bought in 1992. ¹²

[12] Per the stipulation of the parties, the rental value of the Warrens' home for each  year in question was substantially less than the amount of the cash housing allowance which Dr. Warren received from the church and excluded from gross income. For example, in 1994, the church paid Dr. Warren $86,175. Of that sum, the Warrens spent $76,309 on housing-related outlays and excluded that amount per section 107(2). During that same year, the IRS and the Warrens stipulated, the rental value of the Warrens' house was $58,004. According to the IRS, the Warrens' section 107 exclusion was limited to this latter figure. 

[14] On appeal, ¹⁵ the Ninth Circuit sua sponte asked the parties whether either wanted to frame the issue in constitutional terms. While both the IRS and the Warrens answered in the negative, ¹⁶ the three-judge panel hearing the case, over strong dissent, ordered the parties to brief both the constitutionality of section 107(2) and the propriety of the court reaching that issue on its own initiative. The panel specifically (and only) mentioned Texas Monthly as relevant to the First Amendment status of section 107(2). ¹⁷ As part of its order, the panel appointed Professor Erwin Chemerinsky of the University of Southern California Law School as amicus to brief the issues. Briefs from the parties and the court-appointed amicus are due on April 19, 2002.

Texas Monthly and Walz

[16] In contrast, the Texas Monthly dissenters ²² would have upheld the Texas sales tax exemption as a permissible accommodation of the autonomy of religious institutions. The dissenters, speaking through Justice Antonin Scalia, criticized the Texas Monthly majority for implicitly invalidating on First Amendment grounds tax benefits that "permeate the state and federal (tax) codes," including, most prominently, section 107. ²³

[17] While it is often problematic to infer the implications of a decision from the dissent, Justice Scalia's observations are persuasive. Under the subsidy-based analysis embraced by the Texas Monthly plurality, there is no discernible difference between the Texas sales tax exemption for religious publications and section 107's exclusion from gross income of the value of housing provided to clergy. Both, from Justice Brennan's perspective, are narrow subsidizations of religion that because of their narrowness, violate the Establishment Clause.

[18] However, there is as the Texas Monthly dissenters pointed out, an alternative doctrinal vantage epitomized by Justice Warren E. Burger's majority opinion in Walz. From this perspective, which places greater weight on Free Exercise considerations, tax exemptions and exclusions for religious entities do not subsidize but rather, recognize "the autonomy and freedom of religious bodies." ²⁴ From this vantage, it is not the exemption of religious organizations and actors which entangles, but the taxation of the sectarian which enmeshes state and church.

Texas Monthly, Walz, and Dr. Warren

[20] Warren presents a paradigmatic case of employer- provided housing assistance that flunks the tests for excludability under section 119, but that qualifies for exclusion under section 107:

The church's housing assistance to Dr. Warren was in cash, not in-kind. The Warrens own their home, which is (apparently) off the church's premises. There is no claim that the housing allowance paid to Dr. Warren serves the church's convenience or is required as a condition of Dr. Warren's employment by the church. 26 Under section 119, any one of these factors precludes exclusion from the employee's gross income of the church's housing assistance.

[21] Under section 107, in contrast, the only statutory issue is the amount excluded from Dr. Warren's gross income, the full amount of the cash allowance used for housing (as claimed by the Warrens and permitted by the Tax Court majority) or the housing allowance limited to the rental value of the Warrens' home (as asserted by the IRS and the Tax Court minority).

[24] And yet -- the Texas Monthly Court was badly splintered. The plurality opinion attracted the same number of adherents -- three -- as did the dissent. The three swing justices who rounded out the Texas Monthly majority issued two separate concurring opinions, neither of which went as far as Justice Brennan's statement for the plurality. ²⁷

Choosing Between Texas Monthly and Walz

[30] This analysis suggests that in assessing the constitutionality of section 107, the fundamental choice is between the Texas Monthly or the Walz framework. At one level, this choice reflects the common and much discussed tension between the Establishment and Free Exercise Clauses. But I think there is more to say than this. For three reasons, Walz is the more convincing approach to tax provisions like section 107.

[31] First, Texas Monthly deploys the "subsidy" label in a conclusory and ultimately unconvincing manner. Without a sound method for identifying tax subsidies, the Texas Monthly approach, which proscribes these subsidies when targeted to religious persons and entities, rests on an insecure premise, that is, that the challenged tax provision constitutes a subsidy.

[32] Much ink has been spilled on the difficulties, in constitutional and tax policy discourse, of identifying which tax provisions subsidize and which do not. 30 For present purposes, the relevant point is that no persuasive test has yet been devised for determining which sections of the Internal Revenue Code measure ability to pay and which subvent desired activity. Without such a test, in contexts like Texas Monthly and similar constitutional controversies, the application of the "subsidy" label states a conclusion, but does not provide a reason. 

[33] It is, for example, tempting in Warren to designate section 119 as the normative tax baseline and to treat section 107 as a subsidization from this baseline. Whether or not the majority of the Warren panel would articulate its concerns in this way, likely something similar underpins that majority's thinking. But why should section 119 be accepted as a normative tax provision and section 107 be deemed the subvention? If section 107 is a constitutionally permissible recognition of sectarian autonomy, then it too is part of a normative tax base, rather than a subsidy. Thus, labeling section 107 as a "subsidy" assumes away the very issue to be determined, that is, whether section 107 is constitutional.

[35] Second, equally unconvincing is the assertion in Texas Monthly that a narrow tax exemption, affecting only religious persons and entities, entails more entanglement between church and state than does taxing these persons and entities. Consider, again, the sales tax exemption at issue in Texas Monthly, an exemption restricted to religious periodicals. The Texas Monthly plurality correctly noted that this exemption necessarily engenders borderline disputes as periodicals attempt to qualify as religious (and therefore exempt) and as the tax collector resists some of these attempts.

[36] But the taxation of religious periodicals entangles as well. The tax collector must lien and levy against recalcitrant taxpayers. He must audit all taxpayers to ensure their compliance. No course eliminates all contact (and all potential tax-related conflict) between the modern state and the contemporary church.

[37] Given that reality, Walz is a more realistic approach ³³ than is Texas Monthly: The state can (but is not required to) exempt to recognize sectarian autonomy on the theory that exemption (even with the need to determine the boundaries of exemption) will, on balance, engender less entanglement than will taxation. From this perspective, section 107 is not constitutionally required but is constitutionally permitted and embodies a congressional judgment that the more lenient exclusion of section 107 entangles less than does section 119 with its on-premise and employer-convenience tests and the litigation which results from them. 

[38] Finally, Walz is more consistent with the intentions of the founding generation than is Texas Monthly. There is, of course, much controversy as to whether the Founders' intent can be discerned and, if it can, whether it should be relevant today. We should, I think, be careful to avoid projecting our norms and categories onto an earlier world. Nevertheless, in this area -- the constitutionality of tax exemptions for religious persons and property -- the Founders' intent, I suggest, can be located and is revealing: At the same time the founding generation was disestablishing churches, that generation continued to exempt churches from taxation. It is hard to reconcile such behavior with the notion that exemption is subsidization. What would have been the point of disestablishing churches in one form merely to reestablish them in another? ³⁴

[39] A more convincing explanation of the simultaneous program of disestablishment and exemption is that the Founders saw exemption as a form of separation, a means (in our vocabulary) of disentangling church and state. Thus, exemption was consistent with disestablishment since both separated state from church and vice versa. 

Conclusion

[41] Having identified the constitutionality of section 107 as an important issue, the Warren panel has highlighted the tensions and uncertainties of the First Amendment doctrine governing tax exemptions for religious persons and entities. Under the Texas Monthly framework, section 107 violates the Establishment Clause. If, in contrast, the jurisprudence of Walz controls, section 107 survives First Amendment challenge as an expression of Free Exercise values.

Thus, a trial or appellate judge seeking to follow the Supreme Court's most recently expressed sentiments will, per Texas Monthly, strike section 107 on First Amendment grounds. Since, however, there are sound reasons for preferring the Walz approach to Texas Monthly, the Ninth Circuit (or whoever confronts the issue) should hold section 107 constitutional.

FOOTNOTES

2 See Warren v. Commissioner, Doc 2002-5526 (10 original pages), 2002 TNT 44-12 (Mar. 5, 2002).

3 489 U.S. 1 (1989). See Edward A. Zelinsky, "Are Tax 'Benefits' for Religious Institutions Constitutionally Dependent on Benefits for Secular Entities?" 42 Boston College L. Rev. 805 (2001) at 823-830.

4 In discussing the merits, I do not intend to slight the procedural issue, i.e., whether the Ninth Circuit should sua sponte address a constitutional question raised by neither party. I doubt that it should. Nevertheless, as I indicate in the text, in light of the publicity generated by Warren, it is likely that this question will arise again -- if not in this litigation, in another proceeding.

5 The Warren panel has carefully stated that it is concerned about the constitutionality of section 107(2). As I discuss infra, section 107 is either constitutional or unconstitutional in its entirety.

6 397 U.S. 664 (1970). See Zelinsky, supra note 3, at 816-823.

7 Commissioner v. Kowalski, 434 U.S. 77 (1977) at 83 ("Section 119 does not cover cash payments of any kind").

8 Indeed, if section 119 excluded the rental value of housing provided by all employers other than sectarian institutions, serious First Amendment issues would arise from apparent discrimination against religious employers.

9 See, e.g., David Silverman v. Commissioner, 1973 U.S. App. Lexis 8851 (8th Cir. 1973). ("Cantor Silverman provides ministerial services functionally equivalent to those performed inChristian ministry.")

10 This description of the facts in Warren is based on the Tax Court's opinion114 T.C. 343 (2000).

11 Warren, 114 T.C. at 344.

12 Dr. Warren's writings and his tape and book ministry apparently provided the income for the Warren family's nonhousing expenses.

13 Warren, 114 T.C. at 343.

14 Id. at 351.

15 Warren, 2002 TNT 44-12 .

16 Id. at paragraph 10 (dissenting opinion of Judge Tallman).

17 Id. at paragraph 1 (order of the court).

18 Texas Monthly engendered four opinions, none of which garnered the adherence of more than three justices.

19 Texas Monthly, 489 U.S. at 20 (exemption "produce(s) greater state entanglement with religion than the denial of an exemption.").

20 Justices Thurgood Marshall and John Paul Stevens joined the plurality opinion in Texas Monthly.

21 See, e.g., Texas Monthly, 489 U.S. at 15 ("It is difficult to view Texas's narrow exemption as anything but state sponsorship of religious belief").

22 Chief Justice William H. Rehnquist and Justices Scalia and Anthony M. Kennedy.

23 Texas Monthly, 489 U.S. at 31-33. The Texas Monthly plurality characterized Walz as affirming a property tax exemption for religious real estate only in the context of the simultaneous exemption of secular eleemosynary property. See Texas Monthly, 489 U.S. at 12. The Texas Monthly dissenters rejected this reading of Walz and, in my judgment, were correct to do so. See Texas Monthly, 489 U.S. at 33-38. See also Zelinsky, supra note 3, at 823- 824, 829.

24 Walz, 397 U.S. at 672.

25 Id. at 676.

26 Dr. and Mrs. Warren had no need to make either claim since they grounded their exclusion on section 107, not section 119, and, under section 107, it is irrelevant whether the housing allowance is for the employer's convenience or is required as a condition of employment.

27 Indeed, one of those justices, Justice White, declined altogether to view Texas Monthly as an Establishment Clause case and instead viewed Texas Monthly as a Press Clause controversy. His vote and opinion consequently have no bearing on the constitutionality of section 107 under the Establishment Clause. See Texas Monthly, 489 U.S. at 25 (separate opinion of Justice White) and at 26 (separate opinion of Justice Blackmun, joined by Justice O'Connor).

28 This history is discussed in Warren, 114 T.C. at 349 and 353. See also Ronald L. Reed v. Commissioner, 82 T.C. 208 (1984) at 213.

29 Walz, 397 U.S. at 676.

30 The classic exploration of the tax subsidy concept in constitutional settings remains Professor Bittker's seminal piece on the Walz controversy. See Boris I. Bittker, "Churches, Taxes and the Constitution," 78 Yale L. J. 1285 (1969). For a more recent discussion, see Edward A. Zelinsky, "Are Tax 'Benefits' Constitutionally Equivalent to Direct Expenditures?" 112  Harvard L. Rev. 379 (1998) at 393-395, 428. The tax policy literature on the tax subsidy concept is today voluminous. See, e.g., Edward A. Zelinsky, "The Deductibility of State and Local Taxes: Income Measurement, Tax Expenditures and Partial, Functional Deductibility," 6 American J. of Tax Policy 9 (1987).

31 Texas Monthly, 489 U.S. at 14.

32 See Edward A. Zelinsky, "Text, Purpose, Capacity and Albertson's: A Reply to Professor Geier," 2 Fla. Tax Rev. 717 (1996) at 718-720; Edward A. Zelinsky, "Qualified Plans and Tax Expenditures: A Rejoinder to Professor Stein," 9 American J. of Tax Policy 257 (1991) at 259-271.

33 Walz, 397 U.S. at 676 ("Separation in this context cannot mean absence of all contact; the complexities of modern life inevitably produce some contact. . . . ")

34 Zelinsky, supra note 3, at 839-840.

END OF FOOTNOTES