Thursday, January 30, 2014

Court Strikes Down Clergy Housing Exemption

It is a section of the tax Code that goes back to 1954, yet a judge in Wisconsin has determined that the section is unconstitutional.

Makes one wonder how we survived all these years, doesn’t it?

It is the Freedom from Religion Foundation Inc v Lew decision by District Judge Barbara Crabb in November 2013. It deals with parsonages.

Parsonages are related to a church or religious organization. The Code section addressing parsonages is Section 107, and it goes back almost to the passing of the income tax itself. The provision started life in a humble way, allowing ministers of the gospel to exclude in-kind housing (i.e., the “parsonage”) from taxable income. Fast forward a few decades, and the section expanded in 1954 to include cash allowances, wherein one is provided tax-free cash to apply to housing one selects (rather than a house owned by the church).

You have to admit, it is a sweet tax break. I would not mind if such a break existed for practicing tax CPAs.

Would my tax wish be discriminatory? Well, yes. One would have to be a CPA specializing in tax and in practice in order to get the exclusion. What if you were a CPA but did not work in tax? Too bad. You would not qualify under my tax exclusion. 

In tax talk, the Foundation went after section 107 on the Constitution’s “establishment” clause. Judge Crabb found that: 

[Section] 107(2) violates the establishment clause under the holding in Texas Monthly, Inc v Bullock 489 U.S. 1 (1989), because the exemption provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”
Let’s backtrack a bit. Here is Code section 107:

In the case of a minister of the gospel, gross income does not include—

107(1)   the rental value of a home furnished to him as part of his compensation; or
107(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.

The judge is looking at Section 107(2), which is the cash allowance parsonage. What about the in-kind parsonage of 107(1)?
Initially the Foundation went after both 107(1) and 107(2), but the government motioned for summary judgment. The Foundation backed off, pressing only on Section 107(2).


It has to do with having “standing” to challenge a law. In brief, one is required to show injury, or the possibility of injury, traceable to the defendant and subject to remedy by the court.  As the Foundation did not have a parsonage of its own, it could not claim standing under Section 107(1). It did however change its compensation policy to pay a cash allowance to its “ministers of the gospel” (I admit, I do not understand that combination of words in reference to this Foundation), thereby bringing it into the orbit of Section 107(2). Since Foundation employees could not benefit from Section 107(2), the Foundation obtained standing.

I am not certain this lawsuit is really about taxation as opposed to hate politics, but it does have dramatic tax repercussions.

The clergy housing exemption benefits approximately 44,000 priests, ministers, rabbis and imams. It is estimated to “cost” $700 Treasury million per year. For many, it is not an insignificant piece of their compensation.  It may mean the difference between continuing in religious leadership or curtailing or abandoning their work because of financial strain.

Then there are others, such as the pastor of Elevation Church in North Carolina, who have to push the matter. The pastor is building a 16,000 square foot house, which, when completed, will be one of the largest homes in Charlotte.

My thoughts?

The tax code has long recognized that some employees are not in control of where they live, and the code has provided breaks accordingly. For example, innkeepers are usually not taxed on their accommodations, nor persons working in remote areas, nor – for that matter – the President of the United States for residency in the White House. This is the “convenience of the employer” doctrine, and it has been around as long as Section 107 itself.

Does a parsonage meet the “convenience of the employer” standard?

We don’t know, as Judge Crabb did not go there. Her decision is based on the establishment clause.

To her credit, Judge Crabb has said her ruling would not take effect until all appeals are concluded.

We can expect the politicians to step in before this story is done.

I do like the idea of a President paying taxes for living in the White House, though.

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