If my employer provided me a house, I’d have to pay income tax on the value of the free rent. There’s an exception if living in the housing is required to do the job — such as being a house parent in an orphanage. And there’s an exception for parsonages provided by churches for ministers.
The parsonage exclusion has been expanded so that a minister doesn’t have to pay income tax on the portion of his salary designated a “housing allowance,” to the extent the housing allowance is actually spent on housing. This gives ministers who own their own homes the same tax advantage as ministers who are provided free housing — and allows ministers to build up equity in their homes.
There have been some recent cases significantly impacting this exclusion —
Driscoll v. Commissioner
Driscoll v. Commissioner allows a minister to claim a housing allowance on both his primary residence and a vacation home. (This is not Mark Driscoll of the Mars Hill Church in Seattle). There aren’t many ministers of any denomination who own two homes, but the case is understandably concerning to many, as the minister seems to have overreached. But the Tax Court allowed the exclusion.
Freedom from Religion Foundation v. Geithner
Freedom from Religion Foundation v. Geithner is a case pending in California challenging the constitutionality of the parsonage exemption. It’s produced two published decisions, one refusing to dismiss the case and another permitting a minister to intervene, that is, to join the suit so he could protect his interest in the housing allowance.
Arizona Christian School Tuition Organization v. Winn
In Arizona Christian School Tuition Organization v. Winn, the U. S. Supreme Court considered an Arizona tax credit designed to benefit private schools. The Supreme Court found that the parties challenging the credit did not have standing to challenge the credit. You see, to challenge the constitutionality of a law, the party suing must be somehow personally, significantly affected by the law. The court held,
When the government declines to impose a tax, by contrast, there is no such connection between dissenting taxpayer and alleged establishment. Any financial injury remains speculative.
In other words, a taxpayer has standing to challenge the expenditure public funds in violation of the First Amendment but does not have standing to challenge a credit — a refusal to tax.
The dissent (the opinion of the minority who disagreed) specifically cites Freedom from Religion Foundation v. Geithner as holding contrary to the majority opinion.
It seems that the challenge to the parsonage allowance may well be thrown out for lack of standing. It’s hard to read the Supreme Court’s decision any other way.
Senator Grassley’s memorandum
One more news item affecting the parsonage allowance: Senator Grassley has written a memo to the Senate Finance Committee summarizing the results of his investigation into tax abuses by certain churches. Among the abuses he found are —
* Improperly naming people as “ministers of the gospel” to allow them to claim the housing allowance.
* Allowing ministers to claim vacation homes as parsonages.
* Concern that the allowance may be defined too narrowly to be constitutional (presumably due to not covering the irreligious).
The bottom line
Continue to claim the parsonage allowance. It’s not been ruled unconstitutional yet.
The odds that it will be upheld look much, much better in light of Arizona Christian School Tuition Organization v. Winn.
Don’t claim exclusions you’re not entitled to. For now, you’re entitled to the exclusion on a second home, because the Tax Court says so. But don’t take unfair advantage of the IRS’s reluctance to challenge who is really a minister to take unfair advantage of the law. On the other hand, if you’re legitimately entitled to the exclusion, by all means, claim it.