Clergy housing allowances: IRS loses battle, wins war.

• Author: Bader, Mary

Congress adopted the longstanding IRS position on housing allowances for clergy when it passed the Clergy Housing Allowance Clarification Act of 2002 (CHACA). Tax practitioners with clergy as clients must clearly understand how to calculate a minister's housing allowance exclusion, deductible expenses and net self-employment (SE) earnings. Unfortunately, these amounts may not be properly calculated by tax preparation software packages.

CHACA

Two years before the CHACA, the Tax Court in Warren, 114 TC 343 (2000), rejected the IRS's position and held that the housing allowance exclusion is not limited to the fair rental value (FRV) of a minister's home. The court excluded the actual amounts the taxpayer paid to provide a home, even though they clearly exceeded his home's FRV. After Warren, the Service appealed to the Ninth Circuit. Before a decision was rendered, however, Congress passed the CHACA, which effectively prevented the Ninth Circuit from ruling on Warren. As a result, the court dismissed the Warren appeal, based on stipulations filed by the taxpayer and the IRS; see Warren, 302 F3d 1012 (9th Cir. 2002).

The Congressional Record clearly indicates that Congress passed the CHACA because it Feared the Ninth Circuit was about to strike down the housing allowance exclusion for clergy on the grounds that it violated the doctrine of separation of church and state; see 148 Cong. Rec. H1299-1301 (statements of Rep. Jim Ramstad (R-MN) and Rep. Earl Pomeroy (D-ND)).

Although neither party to the appeal raised Constitutional issues, an amicus, appointed by the Ninth Circuit, was opposed to the exclusion. In fact, he opposed Warren's dismissal and filed a motion to intervene. The Ninth Circuit rejected the motion, because the amicus was not directly affected by the case's outcome, and dismissed the Warren appeal.

By enacting the CHACA, Congress prevented the Ninth Circuit from ruling and, at the same time, conceded to the IRS'S position in Warren. As a result, the Service won the war to limit the housing allowance exclusion to FRV The CHACA applies to tax years beginning after 2001.

Prior to the CHACA, Section 107 read as follows:

Section 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.

The...