Freedom from Religion v. Lew – US Federal District Court: Clergy Residence Allowance Provision Under IRC Invalid

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Freedom from Religion Foundation, Inc. et al. v. Lew et al. (U.S. Dist. Ct. – Western District of Wisconsin – November 22, 2013) held that the clergy residence allowance exemption[1] under the Internal Revenue Code violated the establishment clause under the First Amendment of the United States Constitution.  The decision will likely make its way to the Supreme Court of the United States.  It is difficult to predict whether this decision, if affirmed, would have any impact on the similar exemption contained in the Canadian Income Tax Act.[2]

[1] 26 U.S.C. §107(2).

(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

[2] R.S.C. 1985, c. 1, (5th Supp.), as amended, para. 8(1)(c).

Clergy residence

(c) where, in the year, the taxpayer

    (i) is a member of the clergy or of a religious order or a regular minister of a religious denomination, and

    (ii) is

        (A) in charge of a diocese, parish or congregation,

        (B) ministering to a diocese, parish or congregation, or

        (C) engaged exclusively in full-time administrative service by appointment of a religious order or religious denomination,

the amount, not exceeding the taxpayer’s remuneration for the year from the office or employment, equal to

    (iii) the total of all amounts including amounts in respect of utilities, included in computing the taxpayer’s income for the year under section 6 in respect of the residence or other living accommodation occupied by the taxpayer in the course of, or because of, the taxpayer’s office or employment as such a member or minister so in charge of or ministering to a diocese, parish or congregation, or so engaged in such administrative service, or

    (iv) rent and utilities paid by the taxpayer for the taxpayer’s principal place of residence (or other principal living accommodation), ordinarily occupied during the year by the taxpayer, or the fair rental value of such a residence (or other living accommodation), including utilities, owned by the taxpayer or the taxpayer’s spouse or common-law partner, not exceeding the lesser of

        (A) the greater of

            (I) $1,000 multiplied by the number of months (to a maximum of ten) in the year, during which the taxpayer is a person described in subparagraphs (i) and (ii), and

            (II) one-third of the taxpayer’s remuneration for the year from the office or employment, and

        (B) the amount, if any, by which

            (I) the rent paid or the fair rental value of the residence or living accommodation, including utilities


            (II) the total of all amounts each of which is an amount deducted, in connection with the same accommodation or residence, in computing an individual’s income for the year from an office or employment or from a business (other than an amount deducted under this paragraph by the taxpayer), to the extent that the amount can reasonably be considered to relate to the period, or a portion of the period, in respect of which an amount is claimed by the taxpayer under this paragraph;