After months of consideration, the Ninth Circuit Court of Appeals entered an order on August 26, 2002 to dismiss the efforts to have the ministerial housing allowance declared unconstitutional. Although legislation had been enacted in early summer to re-state congressional support of the housing allowance, legal maneuverings continued as certain groups sought to have the Ninth Circuit rule on the constitutionality of allowing ministers a "tax break" not commonly available to other taxpayers. The court's most recent order dismisses those efforts and the lawsuit, bringing this chapter of the fight to a close.
However, the court clearly pointed out that their dismissal was "without prejudice," meaning that law school professor who had sought to intervene in the case and have the housing allowance declared unconstitutional could file a separate lawsuit and raise those same issues. While we have won a substantial victory for now, we may be back fighting this battle again in the near future.
With
the dismissal of this case (Warren v. Commissioner) and under the newly enacted
law, the ministerial housing allowance exclusion cannot exceed
· the fair rental value of the furnished house, plus the cost of utilities,
· the actual expenses of operation of the home, or
· the amount designated by the church as a housing allowance;
whichever is less.
This statutory interpretation is the same that existed prior to the Warren
case - the housing allowance can not exceed the least of the three provisions
stated above. It should be noted that just because the church designates a
certain amount does not automatically make it excludable from the minister's
income.
The Benefits Board will continue to monitor issues that impact all benefits available to ministers and church-related employees.
As we have previously reported, a motion was filed in late May to prevent the dismissal of the court case which was questioning the constitutionality of the ministerial housing allowance exclusion. While I will not seek to cover all the details of what has transpired in this case, I will simply note that the parties to the case (Reverend Rick Warren and the IRS) agreed to dismiss the case following the passage of specific legislation that addressed the issue. However, now a law school professor who has written a friend of the court brief is asking to be made a party to the case so that he can continue the challenge.
As of this writing, the Ninth Circuit Court of Appeals has given no indication on when or how they will rule on the professor’s motion. Based upon this court’s recent decision in the “Pledge of Allegiance” case, it seems highly likely that they will not allow the case to be dismissed – and will seek to render a decision on the constitutionality of the housing allowance. We will certainly keep you informed of any new developments and will continue to fight to assure that the housing allowance exclusion remains intact.
Pledge of Allegiance and the Ministerial Housing Allowance
On Wednesday, June 26, a federal appeals court drew outrage from across the political spectrum by ruling that it is unconstitutional for classrooms to recite the Pledge of Allegiance. While I am appalled at the audacity of the court in making this asinine decision concerning the Pledge, I am most concerned about what this decision may signify for the pending decision on the ministerial housing allowance. As you may know, the same court (the 9th Circuit Court of Appeals) that issued the Pledge decision is currently considering the ministerial housing allowance case. In fact, Judge Stephen Reinhardt who concurred in the Pledge decision is the presiding judge in the three-judge panel currently considering Professor Chemerinsky’s request to be made a part of the Warren housing case so that he can contest the constitutionality of the tax exclusion for the ministerial housing allowance.
It almost seems a precursor that if the court has found the Pledge to be unconstitutional because it has one Nation “under God” included in the recitation that they would find the ministerial housing allowance unconstitutional. While I certainly do not want to be a predictor of bad news, it seems as though we may be in for a long fight – both on the Pledge of Allegiance and the ministerial housing allowance exclusion.
As we have continued to report, the passage of legislation to clarify the ministerial housing allowance tax exclusion has not resolved the issue as we had hoped. The “Warren” case remains active as of today. Last week, the law professor that had been asked to write a brief as a “friend of the court” officially sought to be made a party to the litigation so that he could (1) prevent the court from dismissing the case and (2) contest the constitutionality of the ministerial housing allowance exclusion. The 9th Circuit Court of Appeals has not yet ruled on his motion.
The Wall Street Journal, on Friday, May 31, featured a detailed article on the clergy housing allowance on page B1. You may read the article at the following link: http://www.nacba.net/Warren/WSJ%20on%20Warren.PDF
As previously noted, we had hoped that the signing into law of the Clergy Housing Allowance Clarification Act of 2002 would eliminate the pending “Warren” case and bring closure to the constitutional challenge of the ministerial housing allowance exclusion. However, our hopes may be dashed.
As agreed, immediately after President Bush signed the new legislation, the Department of Justice, acting on behalf of the Internal Revenue Service, and Pastor Rick Warren filed a request to dismiss the lawsuit pending in the Ninth Circuit Court of Appeals.
However, the Benefits Board has learned that on Wednesday, May 22, University of Southern California Law Professor Erwin Chemerinsky filed a motion to intervene in the case and he has asked the court to ignore the request for dismissal. If you will recall, Professor Chemerinsky is the “friend of the court” who filed a brief on behalf of the court stating the reasons the court should find that the housing allowance is unconstitutional. He is now asking to be made a party to the case so the case will stay alive and the court will be able to rule on the constitutionality of the housing allowance.
At this time, the Court has not stated when it might rule on these motions. This office will keep you up-to-date on any additional developments.
As I noted to you in a special issue of In the Know on Thursday of last week, President Bush signed the Clergy Housing Allowance Clarification Act of 2002 on Friday of last week. We are still awaiting the IRS’s reaction, but based upon their previous remarks, we anticipate that the Service will take steps to drop the case against Pastor Rick Warren which is now pending before the U.S. Court of Appeals for the 9th Circuit. I have had questions about what would happen if the Service or Pastor Warren refused to drop the court case, and to be perfectly honest, I am not sure what the outcome of such a scenario might be. We will hope, and pray, that we do not have to deal with such a morass.
Based upon the legislation signed into law last week, the ministerial housing allowance exclusion cannot exceed
· the fair rental value of the furnished house, plus the cost of utilities,
· the actual expenses of operation of the home, or
· the amount designated by the church as a housing allowance;
whichever is less.
This
statutory interpretation is the same that existed prior to the Warren case.
Simply put, in looking at the three qualifiers above, you must use the least
of the three. For example, let say the minister receives a housing allowance
of $12,000 a year from his church. In the year in question, he had to put
a roof on his house in addition to his payments and he paid out $16,000 towards
his housing costs. Further, the house he lives in, fully furnished with all
utilities paid, would rent for $2,000 a month ($24,000 a year). In this example,
the most the minister could exclude from his income would be $12,000 – the
amount designated by the church as housing allowance since it is the least
of the three. Assuming the same example, but with the fact that the minister
paid out only $8,000 for actual housing costs in the year, the housing exclusion
would be limited to $8,000, again the lesser of the three qualifiers. Just
because the church designates a certain amount does not automatically make
it excludable from the minister’s income.
While these limitations may seem unfair, you must remember that when Pastor Warren questioned such it led us to the brink of having the entire housing allowance exclusion declared unconstitutional. So far now, we will accept the limitations and move on.
Of course, you can expect the Benefits Board to keep you updated on any changes to the housing allowance as they occur.
The White House has informed me this morning that President Bush will sign the Clergy Housing Allowance Clarification Act of 2002 tomorrow (Friday, May 17) in a private ceremony in the Oval Office.
While this legislation re-instates legislative support for the ministerial housing allowance, there has been no indication from the U.S. Court of Appeals for the 9th Circuit that the “Warren” case (which has questioned the constitutionality of the housing allowance) will be dropped. However, the attorneys from the U.S. Attorney General’s office representing the IRS has publicly stated that they will seek to have the Warren case dismissed immediately upon the legislation being signed by the President.
While we anticipate that there will be further challenges to the constitutionality of the ministerial housing allowance, as well as to the new legislation, it seems as though we have won a substantial battle in this war to protect minister’s unique tax status.
As you know, the Benefits Board has been working with officials from other denominations to assure the continuation of the ministers’ housing allowance provision. The constitutionality of the housing allowance has been raised and debated in a recent case (Warren case) before the U.S. Court of Appeals for the 9th Circuit. The first set of briefs was filed in that case last Friday.
However, late Thursday night the Senate passed the Clergy Housing Allowance Clarification Act of 2002. The House had cleared a similar proposal on April 16 and the President is expected to sign the legislation. All of this is expected to lead to the dismissal of the Warren case before a decision is rendered on the merits of the case.
While most constitutional scholars do not believe that the new legislation will forever hold off groups like the ACLU from challenging the ministerial housing allowance on constitutional grounds, it comes as a major victory at this time in the battle. Unless something unusual happens (and that is always possible in matters like this), the ministerial housing allowance should be safe for the short-term. We will certainly keep you apprised of any changes if they should occur.
The ministerial housing allowance exclusion continues to be the topic of court action, as well as legislative action. Briefs in the Warren case, now pending in the 9th Circuit Court of Appeals, are due within days and a decision is expected as early as the end of May. Since that decision is expected to go against ministers, i.e. ruling that the housing allowance is unconstitutional, a parallel track has been adopted to seek legislative changes to hopefully maintain the housing allowance. In early April, legislation (H.R. 4156) was introduced in the U.S. House of Representatives to re-instate congressional approval of the ministerial housing allowance. After being placed on a fast-track legislative calendar, H.R. 4156 passed the House on April 16 by a vote of 408 to 0. The bill has now been forwarded to the U.S. Senate were if faces a more uncertain future. Political bickering in the Senate may keep the legislation from ever seeing the light of day. We, along with countless other religious organizations, are working to overcome that division in the Senate and get quick action on this bill.
H.R. 4156 would basically reinstate the housing allowance decisions prior to the Warren case. The law, assuming H.R. 4156 passes, would allow a minister to claim housing allowance based upon (1) the amount designated by his church, religious organization, or pension fund, (2) the amount actually spent by the minister on housing, or (3) the fair rental value of the house, whichever of the three is less.
The goal is to get the legislation passed within the next few days – and prior to the Warren case being decided. If the court acts first, more confusion will result as other courts seek to determine the law of the land. For your reading pleasure, I have attached information on the Warren case to this article. If we can answer other questions on this issue, please do not hesitate to contact us.
As I mentioned last week, the Warren case was argued before the Ninth Circuit Court of Appeals on Monday, December 3rd. The Court, as predicted, did concentrate on the constitutionality of the housing allowance, rather than the specific issues of Pastor Rick Warren’s case. Most interesting, the Court focused on the housing allowance provisions of Section 107 of the Internal Revenue Code, totally ignoring the “parsonage allowance” provision. In other words, the Court did not raise the constitutional issues about a church providing a parsonage for their pastor but rather raised all the constitutional issues about a church providing a “housing allowance” so that a pastor may pay towards the expenses of a home that he may own or rent. This distinction may have been made by the Court simply because Pastor Warren was claiming a “housing allowance” and not living in a parsonage.
Both the IRS and Pastor Warren are awaiting the Court’s request for written briefs on this issue. The parties expect that such briefs will be requested based upon the tone of the oral arguments. Of course, written briefs will only delay the Court’s decision even more. At the earliest, a decision by the 9th Circuit is not expected until early summer 2002.
Another interesting note on the Warren case was raised by the IRS in their arguments before the Court last week. The IRS contends that Congress must be allowed to address the constitutionality of the housing issue before the Court acts. The Justice Department attorney who argued the case for the Commissioner of Internal Revenue cited a statute that gives Congress the opportunity to file such a brief if a court questions the constitutionality of a statute Congress has passed. If Congress is asked to weigh in on this matter, it is highly likely that a decision by the 9th Circuit will not be forthcoming until the end of 2002 at the earliest. However, as our good friend Paul Harvey says, “Stay tuned for the rest of the story.”
In the fall of 2000, the U.S. Tax Court, in a case involving Pastor Rick Warren of the Saddleback Valley Community Church in California, held that the ministerial housing exclusion is limited only to the actual amount used to provide a home and the amount designated by the employer. The court held that a previous interpretation by the Internal Revenue Service, which also limited the nontaxable ministerial housing allowance to the “annual rental value” of the home, was invalid. The IRS appealed the Tax Court decision contending that the ministerial housing exclusion was limited by the lesser of the actual amount used to provide a home, the amount designated by the employer/church, or the fair rental value of the home. The appeal was taken to the U.S. Ninth Circuit Court of Appeals.
Since the IRS appealed the case in late September 2000, it has been assumed that this would be a simple matter of once and for all settling the issue of how to determine the ministerial housing allowance exclusion. Oral arguments at the 9th Circuit are scheduled for today (December 3, 2001).
However, the case took a major detour on Wednesday, November 21 (just a week and a half before oral arguments) when the court asked both the IRS and Pastor Warren to be prepared to argue the constitutionality of the housing allowance exclusion for ministers. Neither the IRS or Pastor Warren had previously argued this issue but the court, in its discretion, it seems has decided that the basic constitutional questions should be addressed in its’ decision.
For historical purposes, it should be noted that the “parsonage” exclusion was initially drafted in 1921, and has only been amended one time – in 1954. There has never been a court decision that has addressed the constitutionality of the exclusion, although that now seems likely. According to noted church financial scholar Dan Busby, there have been five law review articles written about the constitutionality of Section 107 of the Tax Code – the provision for exclusion of ministerial housing allowance. Of those five law review articles, four have reached the conclusion that the housing allowance is unconstitutional, primarily because it provides a tax benefit to ministers that is not available to any one else. Separation of church and state arguments abound in those law review articles. The 9th Circuit will certainly review those articles prior to making any decision.
Should the court hold the housing allowance exclusion unconstitutional, it would impact active ministers that are receiving a housing allowance, as well as retired ministers that are receiving a pension designated as housing allowance from church pension plans, such as the Benefits Board.
While oral arguments will occur today, a decision on this matter is not expected from the 9th Circuit Court of Appeals until late spring 2002 at the earliest. Of course, any decision, whether positive or adverse to ministers, will probably be appealed to the United States Supreme Court. A final determination may be years away. For additional information on the court’s deliberations, you may contact the Benefits Board.
The Board of
Trustees or the staff of the Benefits Board are not engaged in rendering
financial advice, legal advice, or other financial planning services. If such
advice is desired or required, the services of a competent professional should
be sought.