Newsletter from
Steve Richardson & Company, Certified Public Accountants

July 3, 2018

Legal challenges to the Housing Allowance

To Our Clients and Friends:

A Hot Topic

We get questions about Ministerial Housing Allowance multiple times every day.  The Ministerial or Clergy Housing Allowance is authorized by §107 of the Internal Revenue Code (Code).  This allowance has been a part of the Code from the beginning of Income Tax Law in 1913.  The first Rules and Regulations related to the Housing Allowance date to 1916! This is old law.

Important law

It’s important law because it has an impact on a large number of people subject to US Taxation; these people can be working inside the USA or anywhere in the world.  It has an impact on more than the people actually in receipt of a Housing Allowance; employers, church members, board members and contributors to churches and other §501(c)(3) organizations.

Interesting!

Here is one interesting bit of tax law.  A minister who is employed as a minister by a non-church §501(c)(3) not-for-profit organization can have a housing allowance.  Here is another even more interesting bit of tax law: a minister (who is employed as a minister) by a for-profit corporation can also have a housing allowance! Surprised? Most people are surprised to learn that Ford Motor Company actually employs chaplains on its staff and compensate them as ministers. Other company that employ ministers on their staff include General Motors, Coca-Cola, Tyson Foods and literally hundreds of other commercial enterprises of all sizes.

Who can employ a minister?

To recount: churches, non-church §501(c)(3) organization and even commercial companies can employ members of the clergy on their staff and allow them to receive a ministerial housing allowance.  Interesting indeed!

The Ministerial Housing Allowance is under constant legal challenge

One of the more recent challenges to the ministerial housing allowance was on November 22, 2013.

The Legal Challenge

Federal district court judge Barbara Crabb of the District Court for the Western District of Wisconsin struck down the ministerial housing allowance as an unconstitutional preference for religion. [Freedom from Religion Foundation, Inc., v. Lew, 983F. Supp.2d 1051 (W.D.Wis.2013)]. The ruling was in response to a lawsuit brought by the Freedom from Religion Foundation (FFRF) and two of its officers challenging the constitutionality of the housing allowance and the parsonage exclusion.

A Narrow Defense Strategy

The federal government, which defended the housing allowance because it is a federal statute, asked the court to dismiss the lawsuit on the ground that the plaintiffs lacked standing to pursue their claim in federal court.

Judge Crabb ruled in favor of the FFRF saying that the plaintiff (FFRF) did have standing because ‘they would have been denied a housing allowance exclusion had they claimed one on their tax return’.  The government appealed to the US Court of Appeals for the Seventh Circuit in Chicago.

A Narrow Appeal

On November 13, 2014, the appeals court issued its ruling reversing the Wisconsin court’s decision. It concluded that a ‘hypothetical’ situation did not establish any reasonable standing to pursue their challenge to the housing allowance.

The FFRF Response

The FFRF responded to the appeals court’s ruling by designating a housing allowance for two of its officers. The officers reported their allowances as taxable income on their tax returns and thereafter filed amended tax returns seeking a refund of the income taxes paid on the amounts of their designated housing allowances. The FFRF claims that in 2015, the IRS denied the refunds sought by its officers.

Having endeavored to correct the standing problem, the FFRF renewed its legal challenge to the housing allowance in the federal district court in Wisconsin. Agreeing that the FFRF had standing, Judge Crabb struck down the ministerial housing allowance again as an unconstitutional preference for religion. The federal court’s decision regarding the housing allowance is currently being appealed to the Seventh Circuit, which is expected to deliver a decision sometime this year.

How Will the Seventh Circuit Rule?

That is entirely up to the Judges of the Seventh Circuit; we will need to wait and see.

This case is not going away

If the Seventh Circuit again overturns Judge Crabb, which I expect to happen, the FFRF and other groups opposed to the ministerial housing allowance will find time and venue to launch a renewed attack.

If the Seventh Circuit agrees with Judge Crabb’s and determines that the ministerial housing allowance is unconstitutional, legal responses and challenges could put this issue into the hands of the US Supreme Court.  [Note: the US Supreme Court accepts less than 1% of all cases appealed to that level.]

Which way it goes, no one knows.

My only complaint is that The Department of Justice has, again, chosen another narrow basis on which to appeal.  To me, it looks like legal nit-picking.  I would prefer a much more robust appeal where we put the real issues before the court and let them rule; is the ministerial housing allowance constitutional or not.

Be Aware

The ministerial housing allowance is under attack; this will not change or end soon.  The tax implications of losing the housing allowance are significant.

Tax Planning!

Win, lose or draw, there are always tax planning options.  One thing we are considering is a Home Equity Allowance.  Not a perfect solution but a good thought.