Litigation

Case: Gaylor (Freedom From Religion Foundation) v. Mnuchin

October 11, 2017—Wisconsin Federal District Court Rules Clergy Housing Allowance Unconstitutional

On Friday, October 6, a federal district court judge ruled that the exclusion from taxation of a minister’s cash housing allowance is unconstitutional. The exclusion allows a minister to exclude from taxable income a cash housing allowance designated and paid by his or her church. The Church Alliance will continue to monitor the case.

A summary of the case is available here.

 


 

Case: Bacon v. Portico

February 19, 2016—Church Alliance Files Amicus Curiae Brief

On February 19, 2016, the Church Alliance filed an amicus curiae (friend of the court) brief with the Minnesota Court of Appeals in the case of Bacon et al v. Portico Benefits Services. That case involves a class of plaintiffs alleging that the Board of Pensions of the ELCA (“Portico”) breached its fiduciary duties in selecting plan investments with fees that plaintiffs claim are excessive.

Background on Bacon v. Portico
In March of 2015, the plaintiffs, a class of retirement plan participants, filed suit in Minnesota district court against Portico. The plaintiffs allege that Portico breached fiduciary duties owed to the retirement plan participants by selecting and retaining ELCA funds as retirement plan investments, and that such funds charged unreasonable fees and had a history of poor performance relative to other available investments. This type of “excessive fee” litigation has been brought by plaintiffs in numerous cases against large for-profit companies that sponsor 401(k) retirement plans. Many of these corporate plan class actions have resulted in multi-million dollar settlements. The suit filed against Portico is the retirement plan fee case brought against a church pension board.

Portico filed a motion to dismiss the case, arguing that the plaintiffs’ claims were barred by the Establishment and Free Exercise Clauses of the First Amendment of the U.S. Constitution. Portico argued that a secular court’s review of the plan investments and pension board operating costs would require unconstitutional government entanglement with religion. Portico’s motion to dismiss also argued that plaintiffs’ claims were barred by the Freedom of Conscience Clause of the Minnesota Constitution. The Minnesota district court agreed with Portico’s arguments, and granted Portico’s motion to dismiss the case. The plaintiffs appealed to the Minnesota Court of Appeals.

Amicus Curiae Brief
The Church Alliance filed an amicus curiae brief to support Portico’s position. The brief provides the court not only with legal arguments supporting Portico’s position, but illustrative examples of how church polities, doctrines and practices, which vary greatly among denominations, impact church retirement plan investments, administration and operations and therefore affect related fees. As a result, a court’s review of the reasonableness of a particular denomination’s retirement plan investments and related fees cannot be completed without the court’s review of that denomination’s structure and beliefs – and such a review would entangle the court in religious questions in violation of the First Amendment.

You can read the amicus curiae brief here.

 


 

Case: Rollins v. Dignity Health

July 13, 2015—Church Alliance Files Amicus Curiae Brief

Background on Church Plan Litigation
A number of class-action lawsuits have been filed throughout the country in recent years, challenging the application of the church plan exemption from ERISA to certain plans established and maintained by church-affiliated organizations. Plaintiffs in these lawsuits allege that only churches (or conventions or associations of churches) are permitted to establish church plans. They argue that plans established by church affiliates, which are being treated as church plans, are in fact subject to, and in violation of, provisions of ERISA (including vesting, funding, reporting, and PBGC insurance premium requirements). These class action lawsuits have resulted in a split of decisions among federal district courts. Some courts have held for the plaintiffs, breaking from the long-standing interpretation that church plans include not only those that are established by churches, but also those that are sponsored by organizations that are affiliated with churches. Other courts have held that organizations affiliated with churches can establish and maintain a church plan. At least three of these cases have been appealed to the U.S. Courts of Appeals. The Third Circuit Court of Appeals recently held in favor of the plaintiffs in Kaplan v. St. Peter’s Healthcare System.

Rollins v. Dignity Health
The case Rollins v. Dignity Health is being appealed to the Ninth Circuit Court of Appeals. The issue in Rollins is the same as in the other church plan definition cases: whether employee benefit plans of a church-affiliated employer qualifies for church plan status, even if the plan is established by a church-affiliated employer and not by a church. At the district court level, the Northern District of California became the first court in this recent wave of church plan litigation to hold that only churches may establish church plans. The district court in Rollins addressed the pension plans sponsored by Dignity Health—a health care organization associated with the Roman Catholic Church. Dignity Health treated its pension plans as exempt from ERISA under the church plan exemption. The plaintiffs alleged that the pension plans were not eligible for the church plan exemption because Dignity Health was not a church. Dignity Health moved to dismiss the suit, arguing that its pension plans were entitled to church plan status due to Dignity Health’s church affiliation.

The district court denied the motion to dismiss, holding that only churches may establish church plans. The court stated that its ruling was based on a plain-meaning interpretation of the statute. In reaching its holding, the court contradicted decades of precedent, including the IRS’s long-standing interpretation of the statute.

Amicus Curiae Brief
Dignity Health is appealing this decision to the Ninth Circuit Court of Appeals. Because the plaintiffs in Rollins are also challenging the constitutionality of the church plan exemption, the Church Alliance joined an amicus curiae (friend of the court) brief, filed by GuideStone Financial Resources of the Southern Baptist Convention and The Pension Boards-United Church of Christ, Inc. (both of which are members of the Church Alliance). The joint brief argues, among other things, that the legislative history of the 1980 amendment to ERISA’s definition of church plan demonstrates that Congress intended to permit employee benefit plans of church-affiliated employers to have church plan status, even if the plans were established by a church-affiliated employer and not by a church. The brief also argues that the long-standing, broader interpretation of the definition of church plan, held by the IRS for decades, does not violate the establishment clause of the First Amendment of the US constitution.

You can read the amicus curiae brief here.

 


 

Case: Freedom From Religion Foundation v. Lew

November 13, 2014—Federal Court Rules on Housing Allowance

On November 13, 2014, the U.S. Court of Appeals for the Seventh Circuit reached a decision in the case Freedom from Religion Foundation (FFRF) v. Lew, which involved a challenge by an atheist group to the constitutionality of the clergy housing allowance exclusion under Section 107(2) of the Internal Revenue Code of 1986 (Code). The case was on appeal from the U.S. District Court for the Western District of Wisconsin, which held that Code §107(2) is unconstitutional. The Court of Appeals reversed the decision of the District Court, holding that the plaintiffs did not have standing to sue because they had not asked the Internal Revenue Service (IRS) to exclude the housing allowance that its directors received from taxation. Accordingly, the Court of Appeals remanded the case to the District Court with instructions to dismiss. Because the case was dismissed due to lack of standing, the Court of Appeals noted: “We therefore do not reach the issue of the constitutionality of the parsonage exemption.” A copy of the opinion can be found here.

The Church Alliance played a supporting role in defending the clergy housing allowance, having filed an amicus curiae brief with the Court of Appeals. A copy of the Church Alliance brief is linked below.

Background on Clergy Housing Exclusion and FFRF v. Lew
Code §107(2), commonly called “clergy housing exclusion” or “clergy housing allowance,” excludes from income taxation cash compensation provided to “ministers of the gospel” (clergy) toward the cost of their housing. This section of the Code essentially excludes the value of clergy-owned (or rented) housing from income taxation. It is related to Code §107(1) which excludes from a minister’s taxable income the value of church-provided housing (commonly called a parsonage, vicarage or manse).

The FFRF brought suit in the Western District of Wisconsin alleging that the clergy housing allowance under Code §107(2) is unconstitutional. The District Court ruled in FFRF’s favor, holding that §107(2) is unconstitutional because it violates the Establishment Clause of the First Amendment to the U.S. Constitution. Under the Establishment Clause, “Congress shall make no law respecting an establishment of religion…”. The government appealed the decision to the U.S. Court of Appeals for the Seventh Circuit.

The Church Alliance filed an amicus curiae brief, which added a perspective not duplicated in the government’s brief, focusing on the jurisprudential history of permitted legislative accommodations of religion. The brief argued that Code §107(2) is a constitutionally permitted accommodation of religion when viewed in the context of Code §107(1), the parsonage exclusion, and Code §119, which excludes employer-provided housing from employees’ incomes in numerous secular circumstances. The Church Alliance has a substantial interest in the validity of Code §107(2) because of the immediate impact on compensation and housing of active clergy in the benefit plans of its member denominations, and also because of the indirect impact on retirement benefits.

Additional Amici
Numerous other churches, associations or conventions of churches, and other religious organizations with religious leaders eligible for the clergy housing exclusion under Code §107(2) were additional signers of the brief, supporting the filing of the Church Alliance’s brief and the positions advocated in it. They included the United States Conference of Catholic Bishops, Central Conference of American Rabbis, General Council on Finance and Administration of The United Methodist Church, Moravian Church, Rabbinical Assembly, Salvation Army, Union for Reform Judaism, United Synagogue of Conservative Judaism, and Wisconsin Council of Churches, among others. The full list of additional signers can be found on pages 1-3 of the Church Alliance Brief.

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