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February 3, 2017

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Clergy housing allowance: Will it survive another court challenge?

As a pastor or a church council member, you know very well how important the tax break on clergy housing benefits is.

To be sure, many ministers would probably trade the break for a FICA payroll-tax match from their employers and not having to pay self-employment tax.

Not taxing a pastor’s housing allowance does help make ministry more financially feasible, however for smaller communities with limited resources for clergy compensation.

For several years, a non-profit group called the Freedom From Religion Foundation (FFRF) has been pursuing a constitutional attack on the exclusion of a clergy member’s housing allowance from taxable income.

The FFRF contends that giving clergy this tax break violates the constitution by favoring religion. A ruling in the FFRF’s current lawsuit against the IRS is expected this summer in federal district court.

This is not the first time around for this type of lawsuit. In 2013, a federal court ruled that the clergy housing allowance was constitutional. But the U.S. Court of Appeals for the Seventh Circuit overturned that ruling the following year.

Despite the Seventh Circuit’s ruling, it may well be that the housing allowance tax break will ultimately be rejected by the courts or rethought by Congress.

The reasons for this have as much with practical fairness as high constitutional principles. For example, there is no limit on the exemption, enabling highly paid mega-church ministers to benefit much more than more modestly paid counterparts.

Another problem is the way the exclusion is worded in Section 107 of the Internal Revenue Code. The wording puts the IRS in the difficult position of deciding who qualifies as a “minster of the gospel.” With society becoming more pluralistic, that is an increasingly difficult call to make.

Tax Controversy