The income tax exclusion of the housing allowance for ministers of the gospel per I.R.C. section 107: First Amendment establishment of religion or free exercise thereof - where should the Warren court have gone?

• Author: Dorocak, John R.

1. INTRODUCTION--CONSTITUTIONAL QUESTIONS AND THE ROLE OF THE TAX PRACTITIONER/PROFESSOR II. THE LEADING CASE--WARREN V. COMMISSIONER A. FACTS B. ORIGINS OF SECTION 107 III. THE INTERVENTION ATTEMPT A. THE TAX COURT DECISION B. THE NINTH CIRCUIT COURT ORDERS IV. UNANIMOUS CONGRESSIONAL RESPONSE--ANOTHER ATTEMPT TO STIPULATE AWAY THE CONSTITUTIONAL QUESTION? V. A PROCEDURAL SUGGESTION--REMAND ON A JUDICIAL SUA SPONTE CONSTITUTIONAL QUESTION A. NINTH CIRCUIT'S REASONING B. DISSENTERS: JUDGE TALLMAN AND JUSTICE FRANKFURTER C. MARBURY V. MADISONAND THE REQUIREMENT OF CONTROVERSY D. ANOTHER MATTER: SUIT FOR INJUNCTION OR DECLARATORY RELIEF VI. FIRST AMENDMENT RELIGION CLAUSES TAX CASES: TEXAS MONTHLY, INC. AND WALZ--EVOLUTION AND DEVOLUTION IN CONSTITUTIONAL LAW DEVELOPMENT VII. THE ARGUMENTS: PROFESSORS RAKOWSKI AND ZELINSKY--SHOULD THE COURT OF ORIGINAL JURISDICTION IN TAX CASES SEEK NORMATIVE SOLUTIONS OR RATIONALIZE PRECEDENTS? WHAT IS THE ROLE OF THE FRAMERS' INTENT? A. PROFESSOR ZELINSKY B. PROFESSOR RAKOWSKI C. PROFESSOR ZELINSKY'S NORMATIVE APPROACH AND PROFESSOR RAKOWSKI'S RESORT TO PRECEDENT VIII. REINTERPRETING CON LAW FOR THE TAX PROFESSOR AND THE TAX PRACTITIONER IX. OTHER FIRST AMENDMENT/TAX CASES OF INTEREST X. THE FUTURE: THE ROLE OF (TAX) COURTS AND OTHERS I. INTRODUCTION--CONSTITUTIONAL QUESTIONS AND THE ROLE OF THE TAX PRACTITIONER/PROFESSOR

The exclusion of the housing allowance paid to "ministers of the gospel" from federal income tax under the Internal Revenue Code (I.R.C) Section 107 both presents a unique tax issue and raises constitutional issues under the Establishment and Free Exercise Religion Clauses of the First Amendment. (1) Neither taxpayers nor the Internal Revenue Service (I.R.S.) seem to want to raise these issues. (2) In Warren v. Commissioner, (3) the Ninth Circuit Court of Appeals raised the constitutional questions, appointed an amicus to brief those questions, but then prevented that amicus from intervening in the same case when the parties, the taxpayers and I.R.S., filed a joint stipulation to dismiss the appeal. Now, some five years since Warren, no one has attempted to litigate whether allowing ministers of the gospel to exclude housing allowances under I.R.C. section 107 is an unconstitutional establishment of religion under the First Amendment, or rather a permissible accommodation of religion, or even a necessary exemption to allow free exercise under that same amendment. (4)

This somewhat unusual posture, of supposedly adverse parties stipulating to end litigation, has led to an academic debate as to the lower courts' role in subsequent litigation when faced with United States Supreme Court constitutional precedents and varying interpretations thereof. (5) To put this controversy in terms that likely pragmatic (tax) practitioners and academicians might more easily understand, the g6uestion becomes whether practitioners could, under revised I.R.C. section 6694, (6) continue to advise on and sign tax returns and avoid a preparer penalty if claiming a parsonage exclusion on the tax return? I.R.C. section 6694, as revised by the Emergency Economic Stabilization Act of 2008, requires that a practitioner have "substantial authority" in order to avoid a practitioner penalty where there is not disclosure of a filing position on the tax return. (7) Presumably, a tax preparer signing a return prepared for a "minister of the gospel" would need to perform the substantial authority calculation, taking into account whether the exclusion violates provisions of the First Amendment. (8) Or, to place the issue in another compliance setting, additional questions arise: first, whether an industrious tax informant under I.R.C. section 7623(a), as revised, could seek to collect a discretionary reward of up to 15% of amounts collected from various informed-upon ministers, (9) and second, must the I.R.S. explore the unconstitutionality of the exclusion given Congress's penchant to close the now-fashionably dubbed "tax gap?" (10)

This article will first review the leading case of Warren v. Commissioner, including the Tax Court decision in favor of the taxpayer, the two Ninth Circuit orders, the attempt of the court-appointed amicus Professor Erwin Chemerinsky to intervene, and the unanimous congressional response. Also, the article will suggest an alternative procedure that the Warren court might have employed, review the arguments made by, among others, Professors Eric Rakowski and Edward A. Zelinsky on Section 107's constitutionality, and examine the leading United States Supreme Court First Amendment religion and tax cases, Texas Monthly, Inc. and Walz. (11) Finally, the article will consider other cases of interest and the future role of the Tax Court or another court that might take up this matter.

2. THE LEADING CASE--WARREN V. COMMISSIONER

   1. FACTS

      At the Tax Court level, in Warren v. Commissioner, the court held that the housing allowance exclusion for a minister of the gospel under I.R.C. section 107 could be more than the fair rental value of the minister's house and more than his other compensation. (12) The taxpayers had bought their residence in December 1992 for $360,000 and put more than $300,000 of improvements into the home during the period 1993 through 1996. The church trustees identified the cost of those improvements as all or part of the minister's salary for the years involved. The fair rental value for the house for each of the years was less than $60,000. (13)

      I.R.C. section 107 now provides as follows:

      107. Rental value of parsonages

      In the case of a minister of the gospel, gross income does not include--(1) the rental value of a home furnished to him as part of his compensation; or

      (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities. (14)

      Congress added the last phrase in section 107(2) after "provide a home" in response to the Warren litigation at the Appellate Court level. (15) Previously, the Service issued a revenue ruling seeking to limit the exclusion of a housing allowance (provided instead of in-kind housing) under section 107 to the fair rental value of the property. (16) In the Tax Court in Warren, the Service based its argument on the revenue ruling which stated a housing allowance was meant to be limited to the fair rental value because of the heading in section 107 "RENTAL VALUE OF PARSONAGES[,]" and that the allowance could not exceed compensation provided. The Service also argued that failing to limit the rental allowance meant that wealthy ministers, who did not need additional compensation and could afford lavish housing, would benefit unfairly. (17) Judge Nims, joined by Judges Cohan and Rowe, dissented and would have adopted the Service's rationales in holding for the I.R.S. (18)

      Taxpayer-employees may also exclude employer-provided housing under I.R.C. section 119 if such housing is on the premises of the employer, is for convenience of the employer, and is a condition of the employee's employment. (19) Employees of educational institutions have a potential exclusion if they include only the fair rental value of employer-provided campus housing, to the extent they pay less than five percent of the fair market value of the provided housing as rent. (20)

      The Warren case likely would have remained an unremarkable case if the Ninth Circuit Court of Appeals, in response to the IKS appeal, had not undertaken to appoint Professor Erwin Chemerinsky as an amicus on the issue of whether or not the exclusion was constitutional. (21)

   2. ORIGINS OF SECTION 107

      Professors Burgess Raby and William Raby explained the origins of section 107 as follows:

      The parsonage exclusion started in the 1920s, quite laudably, as a way of achieving tax justice for clergy who were required to live in a parsonage owned by the church, and usually adjacent to it. In addition, by avoiding the necessity of putting a value on this housing, Congress eliminated a potential source of friction 2 with churches and of government interference with their internal affairs. (22) As explained by the Warren Tax Court and the Rabys, the 1954 code addition of section 107(2) recognized that more clergy received housing allowances in cash rather than in kind. In fact, the Tax Court majority reasoned that, if it were to read a fair rental value limitation into section 107(2) as argued for by the respondent, ministers who had an allowance would have "potentially burdensome valuation obligations." (23) The dissent, responding to this same point, stated "I do not feel that requiring valuations or appraisal is unduly burdensome...." (24)

3. THE INTERVENTION ATTEMPT

   1. THE TAX COURT DECISION

      As previously indicated, the Tax Court decision in Warren would likely have been a relatively unremarkable decision in the taxpayers favor based on a statutory interpretation of section 107. (25) Despite the fact that at the Tax Court level the taxpayer and the I.R.S. litigants in Warren apparently showed little interest in the First Amendment constitutional questions involved with section 107, the Ninth Circuit Court of Appeals and its appointed amicus showed great interest.

   2. THE NINTH CIRCUIT COURT ORDERS

      Upon appeal by the I.R.S. from the Warren Tax Court decision, the Ninth Circuit appointed Professor Erwin Chemerinsky as amicus curiae and requested that he and the parties and other amici submit supplemental briefs on three issues as follows: "(1) Does the Court have authority to consider constitutionality of I.R.C. [section] 107(2)? (2) If so, should Court exercise that authority? (3) Is section 107(2) constitutional under the Establishment Clause?" (26)

      Apparently, the three judges (or at least two) agreed on the three issues listed on the Ninth Circuit's order...