wfn.org | Episcopalians: Court case could eliminate housing allowance for clergy

[dmack@episcopalchurch.org]

April 4, 2002

2002-086

Episcopalians: Court case could eliminate housing allowance 
for clergy

by David Skidmore

(ENS) A case unfolding in the Ninth U.S. Circuit Court of 
Appeals could result in the elimination of the clergy housing 
allowance tax exemption. According to observers, the court is 
considering striking the housing allowance on the grounds it is 
unconstitutional, imposing an estimated $500 million annual tax 
increase for clergy.

In a 2-1 decision March 5, a three-judge panel of the court 
requested briefs from a court- appointed law professor and 
parties to the original tax case on whether the housing 
allowance exclusion in the tax code is constitutional and 
whether the court has the authority to rule on this question. 
The parties have until mid-April to file briefs and until early 
May to file reply briefs. If the court rules in favor of the 
IRS, then the matter could find its way to the U.S. Supreme 
Court. 

The courts involvement stems from a United States Tax Court 
ruling in May 2000 in favor of the Rev. Rick Warren, the 
Southern Baptist founder and pastor of Saddleback Valley 
Community Church and the author of The Purpose-Driven 
Church, who was contesting an Internal Revenue Service 
assessment. The IRS had assessed a deficiency in Warren's tax 
payments, claiming the tax code limited the housing allowance 
exclusion only to his homes fair market rental value. Warren 
had claimed the tax code (Section 107 (2)) exempted all costs 
pertaining to clergy housing, not just the fair market rental 
value, from taxation. Following the Tax Courts decision the IRS 
appealed the ruling to the Ninth Circuit Court. 

The matter has prompted protests from pension boards of most 
major denominations, including the Church Pension Fund (CPF) of 
the Episcopal Church.

In a letter to Episcopal clergy April 3, CPF President Alan 
Blanchard warned that unless Congress steps in, the court may 
declare the housing allowance exemption unconstitutional and the 
result, he said, would cause an unprecedented tax increase and 
burden for clergy. Blanchard urged clergy to contact their 
senators and representatives, and ask them to support a bill 
sponsored by Congressman Jim Ramstad (R-Minn.) that clarifies 
the IRS statute limiting a housing allowance exemption to the 
fair market rental value. 

Though his bill supports the more restrictive understanding 
of Section 107limiting the deduction to fair market valueit 
does preserve the exemption, said Ramstad in a March 28 press 
release. By codifying the original IRS revenue ruling, my 
legislation is designed to resolve the pending court case 
without risking a disastrous tax increase on Americas 
ministers, he said.

Ramstad noted that since 1921 clergy have been able to exempt 
a portion of their housing expenses from taxation, a benefit 
available to all faiths. Now because of the IRS appeal, the 
Circuit Court has hijacked the case and turned it into a 
challenge of the very constitutionality of the allowance, he 
said.

According to Blanchard, the CPF is working with 32 other 
pension boards of Protestant, Catholic and Jewish faith groups 
to preserve the housing allowance exclusion and promote 
legislation that strengthens church and synagogue employee 
benefits. The Ramstad bill is an example of the actions being 
supported by the Church Alliance, said Blanchard. Securing this 
original IRS interpretation would settle the pending court case 
without adverse tax consequences on clergy, he said.

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--David Skidmore is director of communications for the Diocese 
of Chicago.