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Pastoral privilege?

Religion | A tax break for clergy housing faces a legal challenge

Issue: "Will Kurds stand alone?," June 1, 2002

Many clergy receive a special tax break unavailable to journalists, engineers, doctors, and other professionals. It's called the "parsonage [or manse] allowance." That tax break is likely to face a new court challenge, even though Congress and the president moved speedily in April and May to give it federal protection.

The issue is rooted in tax-code provisions adopted in 1921 and expanded in 1954. Under the code, the Internal Revenue Service allows clergy to exempt from reportable income the portion of their salary used to rent or provide a home.

To prevent abuse, IRS regulators capped the allowance at the "fair rental value" of a home and its furnishings, plus the cost of utilities. But they failed to define standards to determine fair rental value.

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Enter Rick Warren, 48, pastor of the 10,000-member Saddleback Valley Community Church (Southern Baptist) in Orange County, Calif. In 1995, he claimed $79,999 as a housing allowance-80 percent of his church compensation. (He also earned more than $200,000 in 1995 in book and audiotape sales, according to court records.) He and his wife had purchased their four-bedroom home for $360,000 a few years earlier.

IRS auditors said the minister's claimed exemption exceeded fair market rental value by $20,000; they sent him a bill for underpayments and penalties covering three years.

Rev. Warren chose to fight. He said the IRS arbitrarily assessed his home's value at less than its true worth, thereby lowering the rental value. He objected to the "vagueness" of the "fair market rental value" regulation and lack of "a fair and objective standard" that all IRS agents should use in determining such value. He appealed to the U.S. Tax Court. In May 2000, it ruled in his favor 14 to 3. Curiously, the court said the IRS code's exemption applies "to the amount used to provide a home, not the fair market rental value of the home."

Alarmed that the court's definition could lead to widespread abuse, the IRS appealed to the liberal-tilted San Francisco-based 9th U.S. Circuit Court of Appeals. Two of the justices on a three-judge panel shocked both sides when they decided first to review whether the parsonage allowance is constitutional in the first place.

Justice Stephen Reinhardt said it may violate the Establishment Clause and result in "an unconstitutional windfall at the public's expense." (Many of the nation's estimated 850,000 ministers, priests, rabbis, and other clergy qualify for the housing tax break.)

The 9th Circuit appointed University of Southern California law professor Erwin Chemerinsky to study the issue and write a brief. Mr. Chemerinsky's conclusion, announced in March: Since the housing allowance is available only to clergy, it is an indirect subsidy of religion and therefore unconstitutional.

Mr. Warren's attorney, John Eastman, countered that the allowance is not a subsidy but an "accommodation of religion"-like the tax-free status of church property. "It's the difference between a direct payment by the government and the government not taking money away from a church."

Some denominational leaders warned that for many small churches with meager budgets, the allowance spells the difference between having or not having a minister. Without the allowance, some clergy would have to leave the ministry and find other employment, they said.

To Mr. Chemerinsky, this is proof that "the government is subsidizing them."

Seeking to head off a judicial showdown, Rep. Jim Ramstad (R-Minn.) on April 10 introduced the Clergy Housing Allowance Clarification Act. It simply restated the allowance provision in the tax code and said it must not exceed the fair rental value of a house. It also elevated the allowance status to law of the land.

The House approved the measure 408-0 six days later. The Senate in early May approved it without opposition. And President Bush signed it into law on May 20.

It gave both sides a basis for settling their dispute outside the 9th Circuit. A spokesman for Rev. Warren said he endorsed the measure but still wants the IRS to settle on standards for assessing property values fairly. Legal experts meanwhile say it is only a matter of time before the constitutional question is back in court.

Edward E. Plowman
Edward E. Plowman

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