by David Skidmore

(Episcopal News Service, New York, April 4, 2002)
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 court's 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 home's 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 Court's 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 107-limiting the deduction to fair market value-it 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 America's 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.

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