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Gaylor v. Mnuchin

United States Court of Appeals, Seventh Circuit

March 15, 2019

Annie Laurie Gaylor, et al., Plaintiffs-Appellees,
v.
Steven T. Mnuchin, et al., Defendants-Appellants, and Edward Peecher, et al., Intervening Defendants-Appellants.

          Argued October 24, 2018

          Appeals from the United States District Court for the Western District of Wisconsin. No. 16-cv-215 - Barbara B. Crabb, Judge.

          Before Bauer, Manion, and Brennan, Circuit Judges.

          BRENNAN, CIRCUIT JUDGE.

         Since the Founders crafted the Religion Clauses of the First Amendment, courts have grappled with the "play in the joints" between them. Walz v. Tax Comm. of City of N.Y., 397 U.S. 664, 669 (1970). This case calls us to do so once more. Freedom From Religion Foundation ("FFRF") claims that a longstanding tax code exemption for religious housing, 26 U.S.C. § 107(2) of the Internal Revenue Code, violates the Establishment Clause. The district court agreed. The U.S. Treasury Department and several intervening religious organizations ask us to reinstate the exemption, asserting that the survival of many congregations hangs in the balance. We must decide whether excluding housing allowances from ministers' taxable income is a law "respecting an establishment of religion" in violation of the First Amendment.

         I.

         A. History of §107(2)

         The facts before us are not in dispute. The Sixteenth Amendment was ratified in 1913, authorizing Congress to levy an income tax. Congress imposed a federal income tax that same year and has levied one in various forms since. As a result, Congress and the Treasury Department needed to define taxable "income." A rule defining income that survives today in the Internal Revenue Code 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. Early examples of exclusions under the doctrine include housing provided to sailors living aboard ships, workers living in camps, and hospital employees. But the convenience-of-the-employer doctrine was not made available to ministers.[1] In 1921, the Treasury Department announced ministers would be taxed on the fair rental value of parsonages provided as living quarters. O.D. 862, 4 C.B. 85 (1921).

         Congress reacted quickly and enacted a statute to exclude church-provided parsonages from the taxable income of ministers. The Treasury Department interpreted this statute to apply only to housing provided in-kind; cash housing allowances were included in income. I.T. 1694, C.B. II-l, at 79 (1923). This continued for decades until in the 1950s several ministers successfully challenged the limitation to in-kind housing.[2] Congress then enacted 26 U.S.C. § 107, which provides:

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 in-kind parsonage exemption in place since the 1920s. Section 107(2) authorized the IRS to also exempt cash allowances from ministers' taxable income.[3]

         B. District Court Proceedings

         FFRF describes itself as a "nonprophet nonprofit" organization that "[t]akes legal action challenging entanglement of religion and government, government endorsement or promotion of religion." What Does the Foundation Do?, Freedom From Religion Foundation, https://ffrf.org/faq/item/15001-what-does-the-foundation-do (last visited March 10, 2019). Seeking to challenge both § 107(1) and § 107(2), FFRF paid its co-presidents 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 ("Nicol Gaylor").[4] FFRF, Gaylor, Barker, and Nicol Gaylor, none of whom meet the IRS's definition of "minister," then sued the Treasury Department, claiming § 107 violates the First Amendment because it conditions a tax benefit on religious affiliation. We dismissed this challenge for lack of standing because FFRF and its employees never applied for § 107(1) or § 107(2) exemptions, so they were never denied them. Freedom From Religion Foundation, Inc. v. Lew, 773 F.3d 815, 825 (7th Cir. 2014) ("Lew").

         In response, Gaylor and Barker filed amended tax returns for 2012 and 2013 claiming refunds for their housing allowances under § 107(2); Nicol Gaylor did the same for 2013. The IRS erroneously issued refunds to Gaylor and Barker for 2013 but made no decisions on plaintiffs' other claims. After more than six months without IRS action on plaintiffs' claims, FFRF and its employees brought this suit. The IRS then denied the 2012 refund claims because none of the claimants were ministers.

         The Treasury Department moved to dismiss FFRF's § 107(1) challenge for lack of subject matter jurisdiction. The district court granted the motion for the same reasons we articulated in Lew: FFRF's employees never claimed a § 107(1) exemption. FFRF does not appeal that ruling. Later, the district court permitted several pastors who receive housing allowances and their associated religious organizations to intervene to defend § 107(2).[5]

         The Treasury Department and intervenors moved for summary judgment. The district court denied their motions and instead granted summary judgment to FFRF and its employees. The court held that FFRF and its employees had standing to challenge § 107(2), and that that statute violates the Establishment Clause of the First Amendment. Gaylor v. Mnuchin, 278 F.Supp.3d 1081, 1104 (W.D. Wis. 2017). The court held that § 107(2) violated the secular purpose prong of the test set forth in Lemon v. Kurizman, 403 U.S. 602 (1971), and ruled that the statute's true purpose was to "provide aid to a group of religious persons." Gaylor, 278 F.Supp.3d at 1099. The court rejected the argument that § 107(2) avoids excessive government entanglement with religion, because in the court's view "concerns about entanglement [do not] justify preferential treatment for religious persons." Id. The Treasury Department and the intervenors appeal.

         II.

         Neither the Treasury Department nor the intervenors dispute the district court's ruling that FFRF has standing to challenge § 107(2). Nevertheless, even if the issue has not been raised, if there is no Article III standing our court must dismiss the suit. Diedrich v. Ocwen Loan Servicing, LLC, 839 F.3d 583, 588 (7th Cir. 2016). We evaluate standing to determine whether FFRF resolved the deficiencies we noted in Lew.

         To establish Article III standing, plaintiffs must show they have suffered "(1) a concrete and particularized 'injury in fact' (2) that is fairly traceable to the challenged action of the defendant, and that is (3) likely to be redressed by a favorable judicial decision." Lew, 773 F.3d at 819 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). To challenge the constitutionality of a tax provision, a plaintiff must have "personally claimed and been denied the exemption." Lew, 773 F.3d at 821.

         An essential element of "injury in fact" is that the injury be "actual and imminent, not conjectural or hypothetical." Lujan, 504 U.S. at 561 (internal quotations and citations omitted). When FFRF filed this action, Gaylor and Barker had yet to be denied a refund from their 2012 tax returns, and Nicol Gaylor had still, by the time of the district court's decision, received no answer to her 2013 refund request. Yet this does not necessarily mean FFRF lacked standing. Under 26 U.S.C. § 6532(a)(1), an income tax refund suit may be filed no earlier than six months after the refund claim was submitted. A statute cannot "'lower the threshold for standing below the minimum requirements imposed by the Constitution,' but Congress does have the power to 'enact statutes creating legal rights, the invasion of which creates standing, even though no injury would exist without the statute.'" Sterk v. Redbox Automated Retail LLC, 770 F.3d 618, 623 (7th Cir. 2014) (quoting Kyles v. J.K. Guardian Sec. Servs., Inc., 222 F.3d 289, 294 (7th Cir. 2000)).

         The district court concluded it was reasonable to interpret § 6532(a)(1) as rendering a claim "effectively denied if the IRS does not render a decision within six months." Gaylor, 278 F.Supp.3d at 1087. We agree. As the district court noted, preventing a claimant from filing a refund suit until the IRS responded to the claim "would allow the IRS to deprive a party of standing indefinitely by withholding a decision." Id. at 1088. Several courts of appeals have cited the six-month filing requirement approvingly. See, e.g., Fletcher v. United States, 452 Fed.Appx. 547, 552 (5th Cir. 2011) ("[B]efore a taxpayer can bring a refund suit, he or she must... wait until either the IRS denies the claim or six months have expired since filing the administrative claim."); Dumont v. United States, 345 Fed.Appx. 586, 590 (Fed. Cir. 2009) ("[A] suit... cannot be instituted until either the IRS denies the claim or six months pass without its taking action."); Sorenson v. Sec'y of Treasury of U.S., 752 F.2d 1433, 1438 (9th Cir. 1985), aff'd, 475 U.S. 851 (1986) ("The former section prohibits the courts from entertaining any refund suit filed before the expiration of six months from the date the claim for refund is filed ... ."); see also Lew, 773 F.3d at 821 n.3 ("The plaintiffs could have ... paid income tax on their housing allowance, claimed refunds from the IRS, and then sued if the IRS rejected or failed to act upon their claims.") (emphasis added).

         Gaylor, Barker, and Nicol Gaylor have properly alleged a "concrete, dollars-and-cents injury." Lew, 773 F.3d at 821. "[T]hey have incurred a cost or been denied a benefit on account of their religion [or lack thereof]," Arizona Christian Sch. Tuition Org. v. Winn, 536 U.S. 125, 130 (2011), which confers Article III standing. Because its members have standing and the contested issue is germane to its organizational purpose, FFRF has organizational standing to sue as well. See Sierra Club v. United States E.P.A., 774 F.3d 383, 388-89 (7th Cir. 2014) ("'An organization has standing to sue if (1) at least one of its members would otherwise have standing; (2) the interests at stake in the litigation are germane to the organization's purpose; and (3) neither the claim asserted nor the relief requested requires an individual member's participation in the lawsuit."') (quoting Sierra Club v. Franklin Cty. Power of III. LLC, 546 F.3d 918, 924 (7th Cir. 2008)).

         III.

         This case comes to us after a grant of summary judgment, so we assess the parties' claims de novo. Freedom from Religion Found., Inc. v. Concord Cmty. Sch., 885 ...


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