Minister’s Housing Allowance Subject of Court Battles

The housing allowance is a significant tax benefit for a minister. It can result in thousands of dollars in tax savings annually. The law currently allows a minister to occupy a church-owned parsonage without paying income tax on the value of the accommodations. Alternatively, the church may designate an amount to be paid to the minister as housing allowance. This amount, when used for housing costs, is not subject to income tax. Both a parsonage and a housing allowance are subject to self-employment taxes.

Only One Home Subject to Housing Allowance

Several court cases have recently been brought, seeking to limit or abolish this tax benefit for ministers.

In 2010, the United States Tax Court ruled that a minister’s housing allowance could be applied to expenses related to owning two homes. However, the federal appeals court ruled in 2012 that the housing allowance could only be applied to the minister’s primary residence. The appeals court based its decision on two factors. First, the applicable law refers to a minister’s “home.” Despite the lower court interpretation that this could mean more than one home, the appeals court disagreed, stating that a home is “the house and grounds with their appurtenances habitually occupied by a family; one’s principal place of residence; domicile.” Thus “home” means one residence. The court also noted that in congressional committee reports, the context was consistently singular, concluding that Congress intended for the allowance to apply to one home only.

This ruling will not impact the majority of ministers. Some do own two homes, and this ruling has an adverse effect on those ministers who have taken a housing allowance on both. However, the public perception is that some ministers have taken advantage of this allowance by owning multiple homes, including large, expensive dwellings and should not be able to exclude large housing allowances applied to multiple homes.

Housing Allowance Ruled Unconstitutional

A more significant case seeks to eliminate the housing allowance. The Freedom from Religion Foundation (FFRF) brought suit in a Wisconsin district court, alleging that the clergy housing exclusion of Sec 107 and the manner in which it is administered by the government violates the First Amendment’s Establishment Clause and the Constitution’s Due Process Clause. This claim has been rejected by the Department of Justice. The case was heard in U. S. District Court for the Western Division of Wisconsin. On November 22, 2013, Judge Barbara Crabb declared the housing allowance to be unconstitutional. On January 24, 2014, the federal government filed notice that it is appealing the decision. The case deals specifically with the housing allowance and does not include the tax-free provision of a parsonage to a minister.

Since the ruling was heard in a Wisconsin federal court, the decision applies only to taxpayers residing in the state of Wisconsin. However, the decision is stayed until all appeals are exhausted. If the appeal is successful, the ruling will apply only to ministers residing in the 7th Judicial Circuit (Wisconsin, Indiana, and Illinois).

It would become national precedent binding on ministers in all states only if affirmed by the United States Supreme Court. According to Richard Hammar of Church Law and Tax, this is an unlikely outcome. However, the IRS has the discretion to follow the decision nationwide. While there is no compulsion for them to do so, it seems likely that the IRS would follow the ruling in order to make the rules uniform in all states should the District court decision be upheld on appeal.

The impact of this decision, should it stand, would be significant for ministers and churches. For the minister, it would create an additional tax burden, as the housing allowance would be subject to income tax in addition to self-employment taxes. Churches could increase the minister’s salary in order to compensate for the additional tax burden placed on the minister. This would, in turn, reduce funds available to the church for other purposes. The impact would also be felt by many ministers who live in a parsonage, as they frequently receive a “utility allowance” for housing-related expenses. Presumably, this allowance would fall under the housing allowance ban, if it is not reversed.

Alternatively, it could lead to churches getting back into the real estate business, as it would be more economically prudent to provide a parsonage for the minister, rather than a housing allowance. This has several undesirable effects. First, a parsonage is not “one size fits all.” Minister’s families come in all sizes and needs. Secondly, it does not allow the minister to build up equity in a home. Upon retirement, ministers would have no ownership and may not be able to purchase a home.

Kentucky Challenge to Church and Clergy Tax Provisions

A case was brought in Kentucky federal district court that challenged a number of church and clergy tax preferences. While the case did not specifically deal with the housing allowance, the outcome could signal how an appeal of the Wisconsin case would be decided. In this case, three groups filed suit claiming that the Internal Revenue Code contains provisions that preferentially benefit churches and religious organizations. The suit did not identify which statutes and regulations they were challenging but the court surmised that five provisions were probably the ones being challenged by the Atheist groups. One of these was the minister’s housing allowance. The courts dismissed the suit, stating that the groups “lacked standing” to sue in this case. The groups in question did not suffer direct injuries and any possibility of injuries was speculation, according to the court. The groups did not apply for 501(c)(3) status, claiming that to do so was a violation of their beliefs. Since they had not been denied the benefits, they have no standing to sue for damages.

This case may have an impact on the ultimate resolution of the Wisconsin case as the Kentucky court ruling referenced this case in its decision. The appeals court rule that the FFRF lacked standing as it had not suffered any damages from not receiving a housing allowance.


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.

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