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Is Nothing Sacred?

Tax-free housing for clergy may be in jeopardy

By Robert V. Lally

Robert V. Lally

Robert V. Lally

Since its inception in 1913, tax law has been pushed and shoved by every economic force and special interest group in the country. Tax law looks like America: complex, diverse and ever changing. This past month tax law took a huge turn affecting one special group. The shift is a cautionary note for all taxpayers and extremely important to clergy. Little is sacred and everything is subject to change. First, a bit of historical background.

Since time immemorial, which in this case was the Revenue Act of 1921, clergy have been able to exclude from taxable income the value of free housing. This is the so-called “parsonage allowance.” Never mind that few members of the clergy actually live in a parsonage. A quaint idea more apocryphal than real in modern life. The concept is the same. The notion is that a church or synagogue could provide actual housing or even just the economic value of a housing allowance to its clergy and the value would be tax-free. Now, for non-clergy, the tax law does have a general notion of free housing as a fringe benefit. But tax-free housing exists generally in the tax law under a very limited test when it is for the “convenience of the employer.” The easiest example of this tax-free housing benefit is a firefighter who lives at the firehouse. When the bell rings and he jumps down the pole, his quick response is facilitated by his proximity. Or consider resident faculty in a prep school dormitory. Such housing is tax-free.

Clergy rarely fight fires (although, for some, brimstone and aspects of hell might be topics of interest) and there is no particular job-related reason for them to be close to the church or synagogue (although walking distance would be helpful), so a specific Internal Revenue Code section is needed to provide this benefit. Code Section 107 (written in 1921 and reflecting the limited sensibilities of the time) actually refers to “ministers of the gospel.” The regulations expand this notion of ministers of the gospel to include rabbis, priests and other members of the clergy (the key test being performing sacerdotal functions – a term usually only good for winning Scrabble: try to use sacerdotal in a sentence). One would immediately suspect that the authors of the original Code section did not have Judaism, Islam, Hinduism or other religions in mind. But times have changed since 1921 and presumably Congress would be more ecumenical if writing the statute now.

Last month, the District Court for Wisconsin rendered a dramatic decision on the constitutionality of Section 107 and the parsonage allowance. The suit was brought by the Freedom From Religion Foundation, a group that supports non-theistic views. In order to get the required legal “standing” to bring the suit, the Foundation cleverly asserted that its members could not get a similar exclusion. Since it is logical that atheists have no clergy and perform no sacerdotal functions, it was argued that one group of taxpayers received a benefit not available to others solely by virtue of religion. Since the First Amendment to the Constitution prohibits the government from doing anything to establish religion, the argument went that the parsonage allowance must fail, and the Court agreed (although it took 16 pages to get there).

The IRS found itself in the odd position of trying to assert that atheists could be ministers and that atheism was a religion of a sort. This left the Court to ponder if other non-theistic faiths such as Buddhism could count as well. In one particularly hilarious part of the decision, the Court considers whether an atheist performing a “de-baptism” was engaging in sacrament. Of course, now on a slippery slope the Court found when it could draw no thoughtful line, it threw everything out.

The parsonage allowance is a huge tax benefit to rabbis, ministers and other members of the clergy. Particularly in the case of retired clergy, where a large portion of their retirement pension may be designated as parsonage, the tax impact is significant. Nevertheless, one District Court, and not ours, has spoken and the tax law has a new area of controversy.

I suspect further developments. The IRS has not formally responded as to its position.

The Supreme Court may eventually get the final word. America is a complicated place.

Robert V. Lally, CPA, is a tax partner with Federman, Lally & Remis of Farmington.

 

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