The U.S. Treasury Department is appealing the decision to the 7th U.S. Circuit Court of Appeals in Chicago. Judge Crabb stayed the decision pending the outcome of the appeal. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana. An unfavorable action by the 7th Circuit would most likely be appealed in the Supreme Court.
MMBB is working with the other organizations that represent faith based institutions to develop a response to this challenge to the housing allowance. We will continue to keep you informed about developments in this case.
10 Key Points from the Housing Allowance Ruling
Summary of a supplement to the 2014 Clergy Tax Preparation Guide for 2013 Returns prepared by Richard R. Hammar, J.D., LL.M., CPA:
- Executive officers of the Freedom From Religion Foundation (FFRF), the plaintiffs in this case, applied for the housing allowance. The IRS denied their request. As residents of Wisconsin, the executive officers filed suit in federal district court for western Wisconsin. They claimed that they were unable to receive the benefit of the housing allowance solely on the grounds that they were not ministers and that this violated the establishment clause of the Constitution. The federal district court in western Wisconsin ruled that FFRF staff were directly injured and, therefore, had standing to bring the suit.
- Federal District Court Judge Crabb ruled that the housing allowance is an unconstitutional preference for religion. The Supreme Court has ruled that the tax exemptions that include religious organizations “must have an overarching purpose that equally benefits similarly situated nonreligious organizations.” Judge Crabb ruled that the housing allowance does not meet this criterion.
- The ruling does not apply to pastors living in a church-owned parsonage. According to the Church Law & Tax Report, only about 11% of full-time senior pastors live in a church-provided home.
- The Department of the Treasury has appealed Judge Crabb’s decision. A timetable for hearing the appeal is unknown. It will probably play out through most of 2014. MMBB will keep you informed of developments in the appeal.
- The ruling is not yet in effect. If the 7th Circuit Court of Appeals upholds the ruling, it will apply to ministers in Illinois, Indiana and Wisconsin. It becomes a national precedent if the Supreme Court upholds the ruling or the IRS chooses to apply the decision nationwide to promote consistency in tax law.
- While the appeal is pending, churches should continue to designate housing allowances for ministerial employee. MMBB will continue to designate housing allowances for retired, eligible ministers. If the decision is upheld in 2014, churches in Illinois, Indiana and Wisconsin may lose the housing allowance deduction. This may be the case for pastors nationwide if the IRS adopts the decision.
- According to Hammar, there is little Congress can do to overturn the decision because it is based on an interpretation of the Constitution. It may not be a perfect solution, but Hammar suggests that ministers push to eliminate their self-employed status for Social Security. This would require churches to pay half of the Social Security and Medicare tax, 7.65% of salary.
- There are three other special tax rules that apply specifically to ministers. These benefits include: possible exemption from self-employment taxes; treatment of non-exempt ministers as self-employed for Social Security with respect to ministerial services; and exemption of minsters’ wages from income tax withholding.
- If the housing allowance is deemed to be unconstitutional, then no reduction in business expense deductions is necessary in computing income taxes.
- If a church does not withhold income taxes from wages paid to its minister, the end of the housing allowance will result in an increase in income taxes. People paying their own taxes will need to increase their quarterly estimated tax payment.