Taxpayers Do Not Have Standing to Challenge Parsonage Exemption

By James A. Beavers, J.D., LL.M., CPA, CGMA


The Seventh Circuit held that an ­atheist group and two of its members did not have standing to challenge the Sec. 107(2) parsonage exemption because the members had never actually tried to claim the exemption and had therefore suffered no injury.


The parsonage exemption in Sec. 107 allows a minister to receive tax-free housing from his or her church, whether the church provides it directly (by giving the minister access to a church-owned residence) or indirectly (by giving the minister a rental allowance to obtain housing). Nonclergy must generally pay income tax on the value of their employer-provided housing unless they meet certain requirements, including that such housing be provided "for the convenience of the employer" per Sec. 119(a).

Freedom From Religion Foundation (FFRF) is a Wisconsin-based organization of atheists and agnostics. Annie Laurie Gaylor and Dan Barker, also plaintiffs in the case, are the co-­presidents of FFRF; they receive a portion of their salaries from FFRF in the form of a housing allowance. Because Gaylor and Barker are not ministers, they paid income tax on this portion of their salaries. They did not seek to exclude this income on their federal income tax returns, and neither filed a claim for a refund after payment. The foundation, Gaylor, and Barker (the taxpayers) brought suit in district court, claiming that Sec. 107 violates the First Amendment because it conditions a tax benefit on religious affiliation.

In the district court, the IRS contended that the court was without jurisdiction to decide the case because the taxpayers lacked standing. The taxpayers conceded that they did not have standing to challenge Sec. 107(1)—the exemption for housing provided in-kind by a church—because Gaylor and Barker do not receive in-kind housing from FFRF. The court dismissed that part of their challenge, and the taxpayers have not appealed that determination. As to Sec. 107(2)—the rental allowance exemption—however, the taxpayers argued that they did have standing. The district court agreed and ultimately held on the merits that Sec. 107(2) is unconstitutional under the three-part test established in Lemon v. Kurtzman, 403 U.S. 602 (1971). The IRS appealed both of these holdings.


The jurisdiction of federal courts is limited by Article III of the U.S. Constitution to cases and controversies. No case or controversy exists if the plaintiff in an action lacks standing to challenge the defendant's alleged misconduct. At a minimum, to establish standing, a plaintiff must show that he or she has suffered (or is imminently threatened with) (1) a concrete and particularized "injury in fact" (2) that is fairly traceable to the challenged action of the defendant and (3) that is likely to be redressed by a favorable judicial decision. "Concrete and particularized" means that the plaintiff's injury must be personal and individual. A "generally available grievance about government—claiming only harm to . . . every citizen's interest in proper application of the Constitution and laws" is not considered an "injury" for standing purposes (Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992)). In addition, the injury complained of cannot be merely psychic in nature, as opposed to an injury of a physical or pecuniary nature. Therefore, a plaintiff's claim of being offended by the government's behavior does not establish standing.

In cases involving the Constitution's Establishment Clause, plaintiffs can establish standing by demonstrating that "they have incurred a cost or been denied a benefit on account of their religion. Those costs and benefits can result from alleged discrimination in the tax code, such as when the availability of a tax exemption is conditioned on religious affiliation" (Arizona Christian School Tuition Org. v. Winn, 131 S. Ct. 1436, 1440 (2011)). Where a plaintiff can show this has occurred, the plaintiff's standing is based on an allegation that the government's unconstitutional action caused the plaintiff a concrete monetary injury, not merely a psychic harm.

The Seventh Circuit's Decision

The Seventh Circuit held that the taxpayers did not have standing. The taxpayers argued that they had standing because they were denied a benefit that is conditioned on religious affiliation. The court rejected this argument for what it called a simple reason: The taxpayers had never been denied the parsonage exemption because they never asked for it. According to the court, without a request, there can be no denial of a request, and absent any personal denial of a benefit, the tax­payers' claim amounted to nothing more than a generalized grievance about Sec. 107(2)'s unconstitutionality that did not support standing.

The Seventh Circuit found that although the Supreme Court had not squarely addressed this issue, its precedent favored this conclusion. In support, the Seventh Circuit cited Allen v. Wright, 468 U.S. 737 (1984), in which the Supreme Court held that a member of a group that is allegedly being illegally discriminated against, in the absence of being personally denied equal treatment, does not have standing to bring suit. The Seventh Circuit observed that:

Allowing members of discriminated-against groups who have not suffered a particularized injury to bring suit would not only be unconstitutional, it would also create practical difficulties by opening the door to constitutional challenges to any tax exemption that a given individual suspects he may not be entitled to—without first giving the IRS and the Tax Court the opportunity to determine the proper construction and application of the law.

Aware of the precedent against them, the taxpayers argued that not all members of a group that is discriminated against by a tax exemption have standing to challenge the exemption; rather, only members of the discriminated-against group that are similarly situated to taxpayers who receive the exemption have standing. The taxpayers claimed that Gaylor and Barker were similarly situated to ministers receiving the Sec. 107(2) exemption because they receive a housing allowance. The only reason, they argued, that they could not take advantage of Sec. 107(2) is that they are not "ministers of the gospel."

The Seventh Circuit rejected this argument for a number of reasons. First, the court explained, it failed to address the heart of the standing inquiry, whether the taxpayers had suffered a constitutionally cognizable injury. According to the court, being part of a small group that suffers no injury is no different from being part of a large group that suffers no injury; the size of the group makes no difference. Second, the court noted that there was a crucial difference, other than religious belief, between Gaylor and Barker and the ministers who took advantage of the Sec. 107(2) exemption—the ministers have actually claimed the exemption.

Third, the court faulted the taxpayers because they offered no guidance on how to apply a vague "similarly situated" standard in the tax-exemption context. Finally, the court observed that it was quite possible that the IRS or the Tax Court would interpret an exemption to apply to a party that is "similarly situated" and, if it did so, the party would have no standing to challenge it. Thus, the court concluded it was important to allow the IRS and the Tax Court to interpret the boundaries of Sec. 107(2) before the court assessed its constitutionality.

The Seventh Circuit went on to explain why it did not agree with the reasons the district court gave for finding that the taxpayers had standing. The district court asserted that not granting the taxpayers standing might prevent Sec. 107(2) from being subject to judicial review. The Seventh Circuit found that under Supreme Court precedent this was not the case, and, even if it were, the Supreme Court had held that standing could not be based on the assumption that if the current party before the court did not have standing to bring suit, then no one would have standing.

The district court had also found that it would serve no legitimate purpose to require the taxpayers to claim the exemption and wait for the inevitable denial of the claim because the taxpayers' alleged injury was clear from the face of the statute and there was no plausible argument that Gaylor or Barker could qualify for an exemption. The district court cited the case Finlator v. Powers, 902 F.2d 1158 (4th Cir. 1990), in which the Fourth Circuit determined that the taxpayer had standing to challenge a tax when the taxpayer had not refused to pay a tax or paid it under protest and then sought a refund. The Fourth Circuit stated that it did not believe that requiring the taxpayer to start over and do either of these things to obtain standing would in any way contribute to its ability to decide the question and would be a waste of time and judicial resources.

The Seventh Circuit disagreed, concluding that even if requesting the exemption and being denied might be a futile gesture and that doing so would not improve the court's ability to resolve the taxpayers' constitutional challenge, this was beside the point. The court stated the Constitution does not allow federal courts to hear suits filed by plaintiffs who lack standing, and standing was absent because Gaylor and Barker had not personally been denied the parsonage exemption.

In addition, the district court claimed that the Supreme Court has frequently reached the merits in cases where a taxpayer challenged a tax exemption under the Establishment Clause, even when it was not clear that the taxpayer had been personally denied the exemption before filing suit, citing the case Walz v. Tax Commission of the City of New York, 397 U.S. 664 (1970). The Seventh Circuit, however, rejected this argument on the basis that the Supreme Court never discussed standing in its opinion in Walz, and that in Winn it had noted, "When a potential jurisdictional defect is neither noted nor discussed in a federal decision, the decision does not stand for the proposition that no defect existed" (Arizona Christian School Tuition Org. v. Winn, 131 S. Ct. at 1448).


Given that, based on a plain reading of the statute, in all likelihood the IRS would deny the taxpayers' claims for the parsonage exemption, it may be that in this case it is essentially pointless to make the taxpayers apply for and be denied the exemption before allowing them to challenge it in court. However, from a broader view, there is an important reason for strictly applying the rules of standing, as the Supreme Court expressed in Winn:

Few exercises of the judicial power are more likely to undermine public confidence in the neutrality and integrity of the Judiciary than one which casts the Court in the role of a Council of Revision, conferring on itself the power to invalidate laws at the behest of anyone who disagrees with them. In an era of frequent litigation, class actions, sweeping injunctions with prospective effect, and continuing ­jurisdiction to enforce judicial remedies, courts must be more careful to insist on the formal rules of standing, not less so. [Arizona Christian School Tuition Org. v. Winn, 131 S. Ct. at 1449]

Freedom From Religion Foundation, Inc., No. 14-1152 (7th Cir. 2014)

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