Constitutionality became a much discussed issue when the Ninth Circuit Court of Appeals decided reciting the Pledge of Allegiance in a public school was unconstitutional. In a less publicized opinion, the Ninth Circuit also questioned the constitutionality of the parsonage allowance, which provides a tax break to ministers. In Richard D. Warren, 282 F3d 1119, the appeals court reviewed a Tax Court decision allowing Warren, a minister, and his wife to exclude up to $80,000 of parsonage allowance.

The appeals court requested a brief from law professor Erwin Chemerinsky on the constitutionality question. Later, after Congress amended IRC section 107 to limit the allowance to the fair rental value of the parsonage, the Warrens and the IRS agreed to dismiss the case. However, Professor Chemerinsky then filed a motion to intervene, challenging the constitutionality of section 107 as amended. On August 26, 2002, the Ninth Circuit issued its opinion in the Warren case. Since the parties already had agreed to dismiss the suit, the only issue was Chemerinsky’s motion. The court denied it.

The parsonage allowance
Section 107 allows a “minister of the gospel” to exclude from income the rental value—including utilities—of a home the church furnishes as part of his or her compensation or the rental allowance it pays under the same circumstances to the extent the minister uses the allowance to rent or provide a home. Under Treasury regulations section 1.107-1(a), the home or rental allowance the religious organization provides must be as payment for services that ordinarily are the duties of a minister of the gospel. Treasury regulations section 1.1402(c)-5(b)(2) defines the services ministers perform as “sacerdotal functions,” the conducting of religious worship and the control, conduct and maintenance of religious organizations (including religious boards, societies and other integral agencies of such organizations), under the authority of a religious body.

The Warren case
Richard Warren, a Baptist minister in California, founded the Saddleback Valley Community Church in 1980. It was successful and grew to 18,000 members by 1992. Warren also derived substantial income as an author and from a tape and book ministry. He and his wife owned a residence that cost $360,000 in 1992. In the three years in question, the home’s fair rental value was $58,061, $58,004 and $59,479. The church trustees allocated $42,496, $85,000 and $80,000, respectively, as the Warrens’ housing allowance. The allocated amounts were 80% to 100% of the compensation the church paid Warren. The Warrens spent $77,663, $76,309 and $84,278 to provide a home for themselves by paying for mortgage, utilities, furnishings, landscaping, repairs, maintenance, real property taxes and homeowner’s insurance. The Warrens excluded those amounts from income to the extent the church allocated and paid them.

The dispute between the Warrens and the IRS centered on the difference between how much the couple spent on housing and the home’s fair rental value. The IRS disallowed the housing allowance exclusion for amounts they spent in excess of the fair rental value. However, the Tax Court held that the Warrens could exclude the full amount. The court carefully evaluated the wording and history of section 107, concluding that it did not limit the exclusion. The IRS appealed to the Ninth Circuit.

The Ninth Circuit did not immediately reach a conclusion. It appointed an amicus curiae (Latin for “friend of the court”) and asked for supplemental briefs. Rather than decide on the Tax Court’s interpretation of section 107, Judge Browning and Judge Reinhardt chose to question the provision’s constitutionality. Judge Tallman wrote a strong dissent. Browning and Reinhardt questioned whether the government should provide a subsidy to religious organizations that the free exercise clause of the U.S. Constitution does not require. Quoting the U.S. Supreme Court decision in Texas Monthly, 109 US 890 (1989), the judges considered the possibility such a subsidy would provide unjustifiable assistance to religious organizations at the expense of nonreligious ones.

The amicus curiae brief
The Ninth Circuit appointed Professor Chemerinsky, of the University of Southern California Law School, to serve as amicus curiae. In his brief (Ninth Circuit document 2002-11315), he argued strongly that, under controlling Supreme Court precedents, the parsonage allowance clearly violated the Constitution’s establishment clause (see box) and was unconstitutional. In reaching this conclusion Chemerinsky relied primarily on Lemon v. Kurtzman, 403 US 602 (1971).

Chemerinsky argued that the purpose of the exemption was to advance religion. Because the provision applied only to “ministers of the gospel,” it didn’t appear to have a secular legislative purpose because only clergy had the advantage of being paid—at least in part—with tax-free dollars.

The professor also argued the parsonage allowance fostered excessive government entanglement with religion as government representatives must set standards and eventually decide who is a minister of the gospel, requiring the representatives to look closely into a religious entity’s organization and activities.

Church and Justice Department briefs
Representatives of a group of church-related organizations (Ninth Circuit document 2002-10836) and the Department of Justice (Ninth Circuit document 2002-11969) also submitted briefs. Their arguments were quite similar.

Both said the Ninth Circuit lacked jurisdiction to question section 107’s constitutionality. But if the court did, in fact, have such jurisdiction, both parties argued section 107 was constitutional. They said Chemerinsky’s arguments were not valid because he took a very narrow view. The parsonage allowance is one of many provisions that allow employees to enjoy employer-provided housing tax-free. If all were analyzed together, it would be clear that no particular group gets preferential treatment and thus there is no constitutionality question.

The Clergy Housing Allowance Clarification Act
In response to the Ninth Circuit’s actions, Congress passed the Clergy Housing Allowance Clarification Act of 2002. President Bush signed it into law on May 20. One of the purported purposes of the new law was to support the constitutionality of the parsonage allowance.

The parsonage allowance now is limited to the fair rental value of a minister’s home. This provision is effective for tax years beginning after 2001. Under new section 107(b)(2), if the taxpayer filed a return before April 17, 2002, and limited the exclusion to the fair rental value of the home, or filed the return after April 16, 2002, the new limitation applied.

New section 107(b)(3) says: “Except as provided in paragraph (2), notwithstanding any prior regulation, revenue ruling or other guidance issued by the Internal Revenue Service, no person shall be subject to the limitations added to section 107…for any taxable year beginning before January 1, 2002.” This provision would likely have dictated the Ninth Circuit’s conclusion as to how much Warren could exclude for his parsonage allowance. Since the years in question were before 2001, Warren would not have been limited to the fair rental value of his home for those years.

The status of the parsonage allowance
With this case closed, there is no immediate challenge to the constitutionality of the parsonage allowance. If he wishes, Professor Chemerinsky can file a motion in his district court to challenge this presumption and proceed through the court system. Taxpayers claiming the parsonage allowance now must be ready to document the fair rental value of their homes. Any costs related to preparing this documentation would be a miscellaneous itemized deduction under IRC section 212 as an expense related to determining income tax.

—Ronald R. Hiner, CPA, EdD, professor of accounting, and Darlene Pulliam Smith, CPA, PhD, professor of accounting, both at T. Boone Pickens College of Business, West Texas A&M University, Canyon.