Congress Unanimously Enacts Legislation to Resolve Ministers’ Housing Allowance Dispute

An update on the Warren case.

On April 16th the House of Representatives passed the “Clergy Housing Allowance Clarification Act” (H.R. 4156) by a vote of 408 to 0. On May 2, the Senate unanimously passed the same legislation. President Bush has indicated that he will sign the bill into law. This legislation reinstates the “fair rental value” limit on a minister’s housing allowance exclusion. In other words, the nontaxable portion of a church-designated housing allowance for ministers who own their homes cannot exceed the annual rental value of the minister’s home (furnished, including utilities). This has been the IRS view since 1971. However, in a 2000 case (Warren v. Commissioner) the Tax Court struck down the annual rental value test as an unwarranted interpretation of the tax law by the IRS. The IRS appealed this ruling to the ninth circuit federal appeals court in California, and the court issued a preliminary order 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 order was extraordinary, since neither party had ever raised the constitutionality of the housing allowance as an issue in the case.

The Clergy Housing Allowance Clarification Act will result in a dismissal of the Warren case and deprive the federal appeals court of the opportunity to address the constitutionality of the housing allowance on its own initiative. For the record, no other court has ever even suggested that the housing allowance is unconstitutional since its enactment in 1954, perhaps because there are compelling arguments that can be made to defend its constitutionality.

This article first appeared in Church Treasurer Alert, June 2002.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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