Five Takeaways from the November 2013 Housing Allowance Ruling
Richard Hammar offers key points regarding Wisconsin judge's ruling.

UPDATE (12/2/13): Below are five immediate takeaways from Richard Hammar on the November 22, 2013, ruling on clergy housing allowances by a federal judge in Wisconsin. Rich goes deeper on these five, plus five more, in the January/February issue of Church Law & Tax Report.


On November 22, 2013, federal judge Barbara Crabb from the Western District Court of Wisconsin (a President Carter appointee) struck down the ministerial housing allowance as an unconstitutional preference for religion. The ruling was in response to a lawsuit brought by the Freedom From Religion Foundation (FFRF) challenging the constitutionality of the housing allowance and the parsonage exclusion.

Here are five things to note about this ruling:

  • First, the ministerial housing allowance is set forth in section 107(2) of the federal tax code. This section exempts from federal income taxation that portion of a minister's compensation that is designated in advance by an employing church as a housing allowance to the extent that it is used for housing expenses and does not exceed the home's fair rental value. Section 107(1) exempts from income taxation the rental value of a parsonage provided by a church to a minister as compensation for ministerial services. While FFRF challenged the constitutionality of both sections, it ultimately narrowed its challenge to section 107(2), meaning that the parsonage exclusion remains intact, at least for now.

  • Second, the court enjoined the IRS and Department of the Treasury from enforcing section 107(2). But it added that its ruling "shall take effect at the conclusion of any appeals . . . or the expiration of the deadline for filing an appeal, whichever is later." An appeal by the IRS and Department of the Treasury would be to the Seventh Circuit Court of Appeals in Chicago, and could take up to a year to resolve.

  • Third, a ruling by a federal district court judge in Wisconsin is not binding on other courts, and does not apply to minsters in other states. If the ruling is appealed and affirmed by the Seventh Circuit Court of Appeals, it will apply to ministers in that circuit (Illinois, Indiana, and Wisconsin). It would become a national precedent binding on ministers in all states only if affirmed by the United States Supreme Court (an unlikely outcome). As a result, churches should continue to designate housing allowances for ministerial employees for 2014, and church pension plans should continue to designate housing allowances for retired ministers. Such allowances will continue to be valid in all states outside of the Seventh Circuit (Illinois, Indiana, and Wisconsin), and to ministers in the Seventh Circuit so long as the district court's ruling is reversed on appeal, or the appeals court does not render an opinion in 2014. However, if the appeals court affirms the district court's decision in 2014, or if no appeal is pursued, then a housing allowance for ministers in Illinois, Indiana, and Wisconsin may be partially or wholly lost. Ministers in these states should address the continuing availability of the housing allowance with a tax professional.

  • Fourth, the court concluded that the housing allowance under section 107(2) is an unconstitutional preference for religion since the same benefit is not provided to other taxpayers. The court relied on a 1989 decision by the United States Supreme Court in which the Court ruled that a Texas statute exempting from the state sales tax periodicals and books "published or distributed by a religious faith" was an unconstitutional preference for religion. The Supreme Court concluded that tax exemptions that include religious organizations "must have an overarching secular purpose that equally benefits similarly situated nonreligious organizations." To illustrate, the exemption of church property from taxation is constitutionally permissible because state laws exempt a wide range of non-religious properties from taxation. In contrast, the housing allowance applies only to ministers.

    The Wisconsin court conceded that there are other provisions in the tax code that recognize housing allowances, and it referred specifically to state department employees and the military. But, "it is not enough to point to a small number of secular groups that could receive a similar exemption for a different reason."

  • Fifth, the financial impact of this ruling will be significant, especially for ministers who purchased homes in reliance on the continuing availability of the housing allowance. This impact would be mitigated if Congress eliminates the treatment of ministers as self-employed for Social Security. Most ministers are employees for income tax reporting, but the tax code treats all of them as self-employed for Social Security. This is sometimes referred to as the "dual tax status" of ministers. The financial impact can be significant, since self-employed persons pay the "self-employment tax" which is 15.3 percent of net earnings, while employees and employers split the Social Security and Medicare (FICA) tax rate of 15.3 percent, with each paying 7.65 percent. There is little Congress can do to overturn a federal district court's interpretation of the Constitution, but it can materially reduce the financial impact of the district court's ruling on ministers, which in many cases will be substantial, by revoking their mandatory self-employed status for Social Security.

______________________________, a sister site of, provides additional coverage from Friday's ruling. covered the FFRF's previous challenge to the clergy housing allowance in 2011.

For more help with understanding clergy housing allowances, pre-order the 2014 Church & Clergy Tax Guide.

Also watch for further developments and analysis in upcoming issues of Church Law & Tax Report and Church Finance Today.

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."


Displaying 1–7 of 7 comments

Gary Waddell

December 13, 2013  9:51am

How does this affect parsonage provided to clergy? Is the fair market rental value deductible from their salary?

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December 12, 2013  1:45pm

Rich Bolton, lawyer for the FFRF that won the case, indicated that the application of the ruling beyond the limitations suggested above may be up to the IRS, Congress and the President if the Supreme Court does not ultimately decide the case. That is, the IRS may choose to apply it nationally. If "ministers" didn't like that, they could continue claiming the housing benefit, the IRS could disallow it, and the "ministers" could return to court to litigate the issue. In such a scenario, the IRS could suggest that Congress and the President repeal IRC 107(2), and maybe even 107(1), in order to affirm their agreement with the IRS to apply the ruling nationally. For those that think Judge Crabb's ruling has limited geographic prospects, mutliple efforts to litigate the same issue in other districts could begin to start cropping up. The 9th Circuit, in the Rick Warren case, already indicated it would like to rule IRC 107 UNconstitutional. There are a lot of self-employed people paying the self-employment rate of Social Security tax and they don't get to exclude their housing expenses from income. Ministers are treated as self-employed as an accommodation to allow them to participate in the Social Security system without burdening the churches or entangling the churches with the matter; that may seem anachronistic these days with so many churches otherwise handling payroll taxes for their employees. The self-employment tax, except for political purposes and public relations rhetoric, is quite independent from the housing exclusion matter. I am still waiting to see members of Congress and President Obama publicly speak to their vision as to the future of IRC 107.

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Julie Ruchotzke, CPA

December 02, 2013  4:31pm

I'm echoing Simon's thoughts regarding the Fifth point. A change from self-employed status to that of employee would increase the church's payroll tax to the same extent it decreased the pastor's SE tax. Hence, if the church is budgeting a package deal to the pastor, they would have to subtract from his salary the 7.65% for the church to have the same total dollar outlay for his services. The government would then win by taxing housing allowances. It will be interesting to see if anyone has a different take on this at CPE next week.

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December 02, 2013  11:13am

Mark–The Wisconsin lawsuit by FFRF was narrowed to only address housing allowances. Parsonage exclusions are not affected by the ruling at this time, however, parsonage allowances would be affected if the decision is upheld. Simon–Rich goes into greater detail about potential Congressional options in the article he is writing for the January/February Church Law & Tax Report. I will forward your thoughts to him as well. Jon–Such a change would lessen the tax burden on the minister, which would presumably help offset the additional tax burden a minister would face if a housing allowance was no longer available. You are correct, though–such a change would increase the church's tax burden (from 0% to 7.65%) for the minister's payroll taxes.

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Jon Twitchell

November 27, 2013  11:53am

I wonder if you could expand on your fifth point. I don't particularly understand how the effect of this would be mitigated by changing the status of clergy to employed (for the purposes of SS/Medicare). Wouldn't the churches simply have to contribute a payroll tax of 7.65% and withhold an equal amount from clergy paychecks, in order to still make a 15.3% contribution? Since churches have a limited amount of money, I don't see how it would change the bottom line (either for the government, the church, or the minister). But perhaps I'm missing something.

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Simon Trautmann

November 26, 2013  2:10pm

This is a great summary. Thank you. How likely is it that this issue might be resolved legislatively? My initial thought is that Congress could simply amend Section 107 to include clergy more broadly and expand the exemption to accommodate atheistic groups. That would moot the law suit and take the IRS out of the business of defining the theologically fraught term "minister of the gospel."

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Mark Adams

November 26, 2013  11:08am

If this court decision is upheld, how would it effect pastors who live in church provided housing (parsonages, rectories, manses, etc.)?

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