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."

Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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