Judge rules housing allowance unconstitutional. GCFA responds.

bigstock-Detail-closeup-of-current-tax--42654568A federal judge ruled last week that the Internal Revenue Service provisions that allow clergy to avoid taxes on housing allowances is unconstitutional.

U.S. District Court Judge Barbara Crabb ruled on November 22, 2013 that Section 107(2) of the tax code violates the Establishment Clause of the First Amendment of the U.S. Constitution (“Congress shall make no law respecting as establishment of religion…”), based in her belief  that the Section 107(2)  “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”

A complaint was also made in opposition to Section 107(1) of the tax code which allows clergy to live in church owned parsonages without paying taxes on that portion of their compensation. Judge Crabb dismissed that complaint as part of her order.

The suit was filed by the Freedom From Religion Foundation(FFRF), based in Wisconsin. In their complaint they asserted that the housing allowance violated the separation of church and state, and that the principle of equal protection should allow any non-profit to likewise receive the same exemption.

The provision for a tax benefit for clergy and others living in employer owned housing dates back to the 1920’s. That benefit was extended to cash allowances in with the enactment of the Internal Revenue Code of 1954. In 2002 Congress clarified the provisions by adding language limiting the amount of the allowance to the fair market rental value of the home.

The trend in recent years has been to move clergy from church-owned parsonages to housing allowances as a means of allowing clergy to purchase their own homes and build equity.

While the judge has ruled Section 107(2) unconstitutional, no actual changes are happening at this time as she has delayed the implementation of that decision until any appeals which may be filed by the government are concluded. The government has 60 days to appeal the decision, and while some observers wonder if there will be no appeal to prevent the ruling from having nationwide impact, most observers believe an appeal is likely.

“This is nothing to panic about,” said Jim Allen, treasurer of the Tennessee Annual Conference. “This is something to keep on the radar, but there’s still a long way to go.”

The General Council on Finance and Administration of The United Methodist Church (GCFA) agrees. “If an appeal is filed,” said GCFA in a statement released earlier today, “it is certainly conceivable that this case could take several more years to be finally decided.”

GCFA said that they will be monitoring the case as it develops, and will take actions to represent the interests of The United Methodist Church as needed. However, they believe that it is “…too early to fully understand the impact of this case, or to predict the chances for this decision to be reversed.”

According to Peter J. Reilly in an article at www.forbes.com, the cost of the allowance exclusion to the U.S. government is approximately $700,000,000 per year. Part of the argument made by FFRF in their complaint is that this allowance for religious clergy represents an increase in taxation for non-religious persons.

This ruling has no impact on the Social Security/self-employment status of United Methodist clergy.

Do you want to know more? The following sites have good information on this ruling and issue:
UMReporter Staff

This story was created by the staff of The United Methodist Reporter. For over 160 years The United Methodist Reporter has been helping the people called Methodist to tell their stories. If you have stories that you think need to be told, please let us know at editor@circuitwritermedia.com
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  1. Diane Hawk says:

    I plan to begin receiving my retirement benefits next year. My annual conference passes a resolution each year so that my pension is considered to be an housing allowance (if it is actually used for housing). If the judge's ruling stands and begins to apply nation-wide, I'm wondering if the housing allowance/pension will still be non-taxable income. I suppose no one knows the answer yet…

  2. Allie Edwards says:

    I've always paid tax on the fair market rental value of the parsonages I've lived in, but the article sounds like thats not true in all States? Also, I do think that my fellow Clergy who receive a housing allowance should pay tax on that income or on a percentage of it , just as us parsonage dwellers pay tax on our housing (in-kind compensation, I call it)…. isn't that right and just?

    • Allie, it's important to differentiate between what we pay on the parsonage in income tax, and what we pay in self-employment tax (social security). It was explained to me that we should not pay income tax on the parsonage rental value, but that we do pay self-employment on the rental value. the housing allowance likewise pay self employment tax on those moneys as well.

      the BIG issue for UM clergy is this split ruling which says that when it comes to income tax we are employees of the Annual Conference (since the bishop appoints) but when it comes to social security, we are considered self employed. Other clergy in other traditions don't have that status.

  3. My first question is how did the FFR folks prove they were "harmed" by this tax law? Don't you have to prove you have "standing" in any situation like this before a judge will even consider hearing the case? Where is their standing? Just wondering….

  4. Glen Bocox says:

    I'm glad and heartened that the GCFA will monitor this and hopefully, represent us in court if and when the time comes. Along the lines that Jay Voorhees mentioned above, I wish they would also have been just as diligent in helping resolve the employee/self-employed discrimination we have been subject to for many years by the IRS/Social Security distinction. I've often wondered why the denomination hasn't gone to bat for us in this arena. Would love to hear from our executives about this!

Your thoughts?

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