Minister’s Housing Allowance Loses a Court Battle

Written by John Stancil | Posted in TaxConnections

In a 2013 count case in Wisconsin the Freedom From Religion Foundation (FFRF) challenged the Minister’s housing allowance, claiming it provided an unconstitutional subsidy of religion. They won that case, but it was overturned on appeal. The reason for overturning it was that the appeals court indicated that the FFRF did not have standing (or reason to sue) as they had not been damaged by the housing allowance law. The FFRF took it to heart and certain leaders in FFRF paid themselves a housing allowance and excluded it from tax on their individual 1040’s. The IRS disallowed some of them. This led to a new suit, heard by the same Wisconsin judge who made the 2013 ruling. Once again, she ruled the housing allowance unconstitutional.

The case is certain to be appealed. However, since the FFRF basically did what the appeals court suggested, the likelihood of their success is better. Currently the ruling does not apply outside the 7^th District Court of Appeals – Wisconsin, Illinois, and Indiana. It is unlikely that anything would be finalized before 2020.

I am by no means an expert on courts and procedures. I also lack a reliable crystal ball. However, there are several possible scenarios that I envision. I see any of the following as an end result:

FFRF wins all the way to the Supreme Court and the housing allowance disappears. I should note here that the provision of a parsonage was not a part of the suit, so churches would be free to provide a parsonage rather than a housing allowance. Not saying that is a desirable alternative, but it is a possibility.
The IRS backs off and allows the housing allowance to individuals who are part of an organization such as FFRF. This is a possibility, in my opinion. It would not be a huge step to further broaden the definition of a minister to be more inclusive.
The IRS wins the case and the housing allowance is preserved. I don’t really see this as a significant possibility, as there is somewhat of a hostile attitude by many toward religious organizations. Many of these would revoke the tax-exempt status of churches and religious organizations.

At issue here is approximately $800 million annually in income. From a government revenue standpoint, that is a huge influx of taxable income. However, the people paying and receiving the housing allowance are religious people from all stripes of religion and not just Christian. It would be immensely unpopular in religious circles to ban the housing allowance. And these religious people do vote. But, as mentioned, we do live in an increasingly hostile environment toward religion. Broadening the definition of a minister may gain the housing allowance some support and some strange bedfellows (as in politics makes strange bedfellows).

Stay tuned. Updates will be made as more information becomes available.

Have a question? Contact John Stancil

John Stancil

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.