I need to pass along two bits of news on the “housing allowance” ministers of the gospel are allowed to exclude from their federal taxable income.

Background

The Internal Revenue Code allows ministers of the gospel to exclude from their gross income the amount of their pay designated as a housing allowance, but only up to their actual cost of obtaining housing and only if the pay is earned as part of their ministry. This is, of course, a huge tax benefit and helps countless ministers and missionaries.

I go over this in more detail in these earlier posts:

Tax Guide for Church Leaders

More Missionaries and Taxes Regarding Housing

Church Finances and Business: Further on the Housing Allowance

PLR 201023008 (Feb. 26, 2010)

The IRS has released a recent private letter ruling finding that employees of a church-sponsored orphanage qualify for the housing allowance if they are ministers of the gospel.

It seems probable from the facts spelled out in the ruling that this is a Church of Christ-affiliated orphanage –

The Church consists of a confederation of churches under congregational government. For theological reasons, the Church does not have a central governing body and does not term itself a denomination. However, congregations of the Church form a closely-knit federation with common doctrines and goals, tied together by their conservative theology and traditions. Congregations cooperate with one another to establish and maintain “parachurch” institutions, including colleges, nursing homes, and charitable organizations, with which the Church has a symbiotic relationship.

The Church does not have a creed. Church rules and requirements are only those from the Bible. Numerous verses from the Bible speak of the requirement to provide for widows and orphans, and therefore it is a requirement of the Church, and all Church congregations provide support for orphans.

The question ruled on is whether the orphanage is is “an integral agency” of the Church, such that the ministers employed by the orphanage are employed by the “church” in some sense so that their ministry is for the church. The IRS found that it is, despite the utter absence of any central denominational government to oversee the orphanage because of its relationship to its supporting churches. As a result, “properly designated rental allowances paid to managers, executives, supervisors, or administrators who are ordained, licensed or commissioned ministers” will qualify for the housing allowance.

Now, this fails to answer the more difficult (to me) question of just who is an “ordained, licensed or commissioned” minister in a Churches of Christ. Nonetheless, the ruling will save taxes for some ministers — which seems good to me.

Freedom from Religion Foundation, Inc. v. Geitner

The Freedom from Religion Foundation, Inc. has filed suit against Treasury Secretary Tim Geitner asserting that the housing allowance in unconstitutional as impermissibly favoring religion. The government moved to dismiss the complaint on several grounds, and the District Judge has ruled that the question must go to trial.

It’s clear from a reading of his opinion that it’s likely he’ll find the statute unconstitutional.

Some efforts that have a legitimate secular purpose will, however, go too far and cross the line between accommodation and establishment. See Amos, 483 U.S. at 334-35. Such is what plaintiffs allege in this case. Regardless of Congress’s motive in passing § 107 and regardless of whether § 107 has an effect of reducing government entanglement with religion by keeping ministers out of the § 119 exemption, plaintiffs have alleged sufficient facts which, if accepted as true, “leave open the possibility” that an objective observer would determine that § 107 goes too far in aiding and subsidizing religion by providing ministers and churches with tangible financial benefits not allowed secular employers and employees. Winn, 562 F.3d at 1012.

In sum, the court believes that plaintiffs have sufficiently alleged that a reasonable and objective observer would perceive § 107 as endorsing religion and as having a predominantly non-secular effect. At this stage in the proceedings, it is not implausible on the face of plaintiffs’ Complaint that § 107 fails to satisfy the second prong of the Lemon test. Plaintiffs have therefore stated facts sufficient to withstand a motion to dismiss on their challenge to the enforcement of § 107.

I’ll spare you a detailed analysis, as these things can become quite technical, and this judge’s decision will not be the final word. Anything he decides will certainly be appealed to the Court of Appeals for the Ninth Circuit (famously liberal) and likely to the Supreme Court.

However, it’s important that ministers and church leaders be aware that the housing allowance is under challenge and may not be with us much longer.

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