The August 2000 edition of this newsletter reviewed the Tax Court's recent decision in the Warren case. The 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 rejected 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. Ministers who rely on the Warren case in computing the nontaxable portion of their housing allowance should bear in mind three important consequences: (1) The IRS has appealed the Warren case, and if the case is reversed on appeal then ministers who have computed their taxes in reliance on this case are exposed to additional taxes and interest in the event of an audit. (2) If the Warren case is affirmed on appeal, this will reduce the annual retirement contributions of ministers who participate in a retirement plan that imposes contribution limits tied to a minister's taxable income (excluding the nontaxable portion of a housing allowance). (3) If the Warren case is affirmed on appeal, some ministers will consider filing amended tax returns for 1997 through 1999 to claim a larger housing allowance exclusion if the nontaxable portion of their housing allowance in any one or more of these years was limited to the annual rental value of their home. Before doing so, however, ministers should carefully consider the impact a larger housing allowance exclusion for these prior years would have on their retirement plan contributions. In some cases a minister's taxable income would be reduced enough to make his or her retirement contributions more than the applicable limits of the plan. In summary, ministers should review with a tax advisor the consequences of relying on the Warren decision.