Warren v. Commissioner, 114 T.C. 23 (2000)
Background. In one of the most significant clergy tax cases in recent years, the United States Tax Court ruled that a housing allowance is nontaxable for income tax reporting purposes so long as it is used to pay for housing-related expenses. The court threw out the annual "rental value" test that the IRS adopted in 1971, which limited nontaxable housing allowances for ministers who own their homes to the "annual rental value" of their home. The court's decision will have a direct and immediate impact on many ministers. Church treasurers should be familiar with the application of this ruling to their pastor or pastors. This article will tell you what you need to know.
The housing allowance. Section 107 of the Internal Revenue Code provides that "in the case of a minister of the gospel, gross income does not include … the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home." This language requires very little explanation. The portion of a minister's church-designated housing allowance that is used to pay for housing-related expenses is nontaxable for federal income tax reporting purposes. Stated differently, ministers may exclude from taxable income the lesser of (1) the church-designated housing allowance, or (2) the actual amount of housing-related expenses paid during the year.