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The Clergy Housing Allowance Clarification Act of 2002

Signed into law by the President on May 20, 2002

Article summary. A new law amends the tax code to limit the nontaxable amount of a housing allowance for ministers who own their home to the annual "fair rental value" of the home. This legislation was designed to bring an end to the "Warren case," in which the Tax Court had ruled two years ago that a 1971 IRS ruling imposing the "fair rental value" limit to ministers' housing allowances was an unwarranted interpretation of the tax code. The IRS appealed this ruling to a federal appeals court. In a preliminary order, the court indicated that it was going to rule that the housing allowance violates the first amendment's nonestablishment of religion clause. In response, Congress enacted the Clergy Housing Allowance Clarification Act to resolve the appeal of the Warren case. This article reviews the background of this legislation, and explains its application to ministers.

In 1971 the IRS issued a revenue ruling limiting the nontaxable portion of a church-designated housing allowance for ministers who own their homes to the annual "fair rental value" of the home (furnished, including utilities). However, in a 2000 case (Warren v. Commissioner) the Tax Court struck down the fair rental value test as an unwarranted interpretation of the tax law by the IRS.

The IRS appealed the Tax Court's decision to the ninth circuit federal court of appeals in California, and the appeals court issued a preliminary ruling on March 5, 2002 ordering the parties (and a law professor) to submit briefs addressing the question of whether the housing allowance is an unconstitutional "establishment" of religion. The court's order left little doubt that it considered the housing allowance to be unconstitutional. The court's action was extraordinary, since neither party had ever raised the constitutionality of the housing allowance as an issue in the case.

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