The Clergy Housing Allowance is safe. . . for now.

In 2000 Rev. Richard Warren sued the IRS in Tax Court over its position that his housing allowance was limited by the fair rental value of his home. This limitation was not in the original housing allowance law (IRC Section 107(2)) and was adopted by the IRS as a private letter ruling in 1971. By a vote of 14-3, the Tax Court ruled that the IRS's limit was not supported by the Internal Revenue Code.

When the IRS appealed to the Ninth Circuit Court of Appeals, the case took a surprising turn for the worse. Two of the three judges hearing the appeal asked the two parties to brief the question of whether the housing allowance under IRC Sec. 107(2) is unconstitutional under the First Amendment's establishment clause. In addition the court appointed Professor Erwin Chemerinsky of the USC Law School to brief on the constitutionality question as amicus curiae. This was significant, because neither the IRS nor Rev. Warren had raised the constitutionality question, and was thus a clear indication that the Court was considering finding it unconstitutional.

Fearing that the housing allowance might be found unconstitutional, potentially costing ministers $500,000,000/year in increased taxes, large denominations and church pension boards pressed congress to pass a bill in hopes of forestalling the constitutionality question. Accordingly, H.R. 4156, The Clergy Housing Allowance Clarification Act of 2002 was signed into law by President Bush on May 20, 2002. This legislation codifies the fair rental value test.

For several months after this, we were still uncertain that the court would dismiss the case, thus ending the current constitutionality challenge. It finally did so on Aug 26, 2002.

What does this mean for you?

The housing allowance does now face a limitation under law that it did not face prior to May 2002. In some cases, such as years when a minister's housing expenses dramatically exceed the normal rental value, the minister will pay more tax than he would have under the old law. However, it is important to note that the law specifies that the fair rental value limit is the value of the home and its furnishings - a much higher value than that of an unfurnished home. As such, most ministers (provided they have competent tax advise) will not necessarily see any financial impact from the new law.

Unfortunately, the new law does nothing to prevent future constitutionality challenges. Likewise, the Court's dismissal of Chemerinsky's motion was without prejudice, which means he is not prevented from bringing another case challenging the housing allowance in the future. It is reasonable to expect such a case to begin in the next few years.