Case Threatens Pastor Housing Allowances
How a California court may alter a long-standing ministry benefit.

Earlier this month, we covered eight federal issues that local churches should watch closely during the remainder of 2010 and into 2011, according to recent remarks from Dan Busby, president of the Evangelical Council for Financial Accountability. Busby, one of our editorial advisors, is based near Washington, D.C. His role at the ECFA includes advocating on behalf of ministry interests on Capitol Hill, so he's uniquely positioned to see national tax and finance developments unfold that can influence church leaders.

We took notice when we heard the first item on Busby's list: a California lawsuit, filed by the Freedom from Religion Foundation Inc., challenging the constitutionality of tax benefits associated with the housing allowances that churches provide to pastors.

The significance of housing allowances isn't lost on church leaders. For decades, churches have used them to recruit and retain pastors. It's an especially handy tool that churches with limited means, especially small congregations, can use to lure a gifted person. And at a time when the country slogs out of a multiyear recession, it's perhaps as useful of a benefit as ever. The down economy has challenged weekly giving and strained budgets for many congregations, making pay raises remain small, even nonexistent in some places.

As Richard Hammar notes in his 2010 Church & Clergy Tax Guide:

"The three most common housing arrangements for ministers are (1) living in a church-provided parsonage; (2) renting a home or apartment; or (3) owning a home. The tax code provides a significant benefit to each housing arrangement … The rules … represent the most significant tax benefits enjoyed by ministers."

Given the importance of housing allowances, we asked Hammar to give us a deeper sense for where the California case will land.

At the moment, the signs aren't favorable. Church leaders should begin thinking now about a future in which housing allowances for pastors do not receive federal tax exemptions.

In May, the government requested the case be dismissed on the grounds the plantiffs' primary arguments lacked legal standing. The federal district court denied the request. That means the case now moves forward to trial, keeping alive the possibility of a ruling against housing allowances.

"Given the obvious hostility of the federal district court judge to the housing allowance, it is probable that the court will rule that the housing allowance is unconstitutional," Hammar says.

If that happens, the case would be appealed to the Ninth Circuit Court of Appeals. Many, including Hammar, believe the Ninth Circuit will affirm a decision against housing allowances for pastors. As far back as March 2002, for instance, the Ninth Circuit announced it would review "the constitutionality of the allowance" in a different case, "even though neither side in the related case challenged the exemption," according to an article in the Baptist Press. In other words, the Ninth Circuit has looked for opportunities to scrutinize the allowance before.

Should an appeal fail, any other intervention to attempt to reverse it is highly unlikely, Hammar says.

"An appeal from the Ninth Circuit to the U.S. Supreme Court is a long shot. The U.S. Supreme Court hears appeals in only a small percentage of cases, probably one percent or so, so one cannot assume that the Supreme Court will "fix" the problem," he says. "A decision by the courts that the housing allowance violates the nonestablishment of religion clause would be difficult, if not impossible, to "fix" via congressional legislation … Congress cannot directly overturn a federal court's interpretation of the Constitution, but it can deprive the federal courts of jurisdiction to hear a particular question, such as the constitutionality of the housing allowance. This power has rarely if ever been used, so it, too, is unlikely."

That leaves the outcome of the upcoming trial as the best hope for preserving housing allowances.

"This case is of immense significance to the hundreds of thousands of ministers who acquired homes in reliance on this benefit," Hammar says.

Despite the uncertainty of the case's outcome, and the tendency for legal cases to continue for months, or even years, Busby suggested in his remarks that church leaders identify the consequences of losing the pastor's housing allowance benefit and develop a contingency plan now.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

Comments

Displaying 1–10 of 21 comments

Tim

July 01, 2013  8:03pm

The reason ministers receive housing allowance, theologically speaking, is that they are official servants of King Jesus, whose Kingdom is sovereign over the kingdoms of men. Caesar should not tax the Church's official servants.

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Tom

March 29, 2011  9:09am

If the housing allowance is removed, this will have a devastating affect on small Churches in the United States. Most of which depend on the housing allowance in order to be able to afford to hire a minister. What I fear will happen in most cases is that the small church will cease to exist at least in the capacity that it does now.

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Rebecca

March 28, 2011  8:18pm

Is this issue just in California, or national? My husband and I are both ordained. I am taking time off now so we are down to one income. Without this benefit, I don't know if we could afford to be in ministry. Isn't the rationale basically that the church is regarding the housing provision for pastors as like a gift, not income? Who is the government to determine that a gift is suddenly taxable? Kinda scary...

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roger

January 18, 2011  4:08am

It's really glad to read about the following topic which has enhanced my knowledge regarding topic and plus has given alot of ideas which I can think on.So I would say thank you to the blog owner for providing this amazing information.

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Matt

December 13, 2010  10:25am

Brent–I shared your comment with Rich Hammar. Here's his response: "This comment is incorrect. Whether or not the housing allowance is nontaxable is most definitely not a "moot" point. It will cost many ministers thousands of additional dollars in income taxes if the exclusion is deemed to be unconstitutional. Yes, the housing allowance is taxable in computing self-employment taxes, but so what? The issue here is the impact on income taxes, and that impact will be significant." I hope that helps. Best, Matt

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Brent Charles

December 09, 2010  9:07am

This case really means nothing in the long-run. Whether or not the housing is "Taxable" is a moot point because we, as ministers, already "Pay" tax on that home expense. It is called "Self-employment Tax" and we cannot deduct anything from it. As a young Pastor I belive this would have helped my situation, to NOT have a housing allowance. With 4 children at home, a $30,000 a year salary means a Pastor is already @ the poverty level. But many people do not know that though a minister does not pay "Income Tax" he does pay "Self-employment Tax" if he is not waived vie., form 4361. If I am wrong about this please enlighten me.

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Used laptops

December 04, 2010  6:29am

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Matt

November 12, 2010  10:56am

Malcolm–Thanks for posing your question. I sent it directly to Richard Hammar. Here is his response: "This is a very common mistake that ministers make. He is not alone! To correct this, he will need to file an amended tax return for 2009 (Form 1040X) and pay the self-employment taxes with interest. The instructions to this form are available on the IRS website, and they provide all the information required to complete this form." I hope this helps.

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Malcolm

November 08, 2010  10:41am

I have been receiving a salary from my church since 2009 which 100% is designated as my HA.I just realized I have to pay self-employment tax. How can I correct this error?

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matt

October 07, 2010  3:22pm

To respond to an earlier comment, the likelihood that this case will strike down the housing allowance is not based on the fact that it is being litigated in California, but that the federal judge (Shubb) has already stated that he thinks the atheists' arguemtns are persuasive. The Pacific Justice Institute (www.pji.org) sought to intervene in this lawsuit on behalf of ministers so that it would not be soleley up to the IRS and state tax authorities to defend and appeal it. Judge Shubb denied intervention, and that issue is currently pending at the Ninth Circuit.

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