4 Points in Favor of the Ministerial Housing Allowance

I will blog a lot more about the decision in Freedom From Religion Foundation, Inc. v. Lew, (W.D. WI Nov. 22, 2013), which declared Section 107(2) of the Internal Revenue Code an unconstitutional establishment of religion. But here are four points lost in much of the coverage I am reading:

Housing Allowance isn’t limited to ministers.

Section 107(2) is a specific application of a broader, secular rule. If any employer provides or pays an employee to obtain a required housing arrangement, there is a long history of excluding it from income. The “convenience of the employer” doctrine developed inside the IRS around 1919, and evolved through many court decisions, statutes, and regulations.

Importantly, Congress first acted so that ministers would be treated like everyone else. Under an early IRS ruling, ministers are “self-employed” for tax purposes, and must pay higher taxes; Congress spoke in 1921 to make sure that ministers were treated as employees of their churches under housing rules, just like the employees of secular businesses. When Congress adopted Section 107(2) in 1954, it was to make sure that Ministers were treated largely like secular employees.

Today, Section 119 lays out a general rule about employer-paid or provided housing. Sections 107(1), 107(2), 134 and 911 lay out specific rules for parsonages, ministerial Housing Allowance, military housing, and foreign housing, respectively. The entire area is more restricted than it was in 1954. But the concept of Housing Allowance has a secular origin; it isn’t a unique break for religious people.

A good overview of this history is in a note by Martha Legg, Excluding Parsonages from Taxation: Declaring a Victor in the Duel Between Caesar and the First Amendment, 10 Georgetown J.Law & Pub. Policy 269 (2012).

Housing Allowance isn’t a deduction or give away.

Housing Allowance excludes from gross income; it is not a ‘deduction’ or a ‘handout.’ What’s the difference? Congress uses deductions to favor particular expenses from an individual’s income, like the home mortgage interest deduction.

But the “convenience of the employer” rules do not “deduct” from income; they confirm that the employee never had any real income to spend, apart from the employer’s requirements. The “Allowance” is an expense of the church, made for the church’s business reasons. There’s no reason to tax that expense like an increase in a minister’s personal wealth.

And, for good measure, it’s the opposite of a giveaway; without Sec. 107(2), churches would have an incentive to purchase parsonages outright — taking the property off many local tax rolls.

Fraud protection is built into the Housing Allowance.

Many seem to think the Allowance is easily abused. However, the IRS built-in some anti-fraud protections. A minister can’t set the Allowance by himself; his employer must designate an amount. Then, the minister is limited to documented actual expenses. Are there abuses? Perhaps. But significant Housing Allowance fraud requires a group of people to act badly. If the minister and the church leaders are corrupt (or asleep), extra Allowance is probably a minor part of more general fraud.

Ministers use their houses in ways that most employees do not.

Some people argue that a minister’s house is just like anyone else’s house. But most employers don’t expect an employee to use their personal house for the employer’s benefit. Employers that have those requirements might get a similar break.

And most of the ministers I know do use their houses for work. There are home offices and studies, meetings with members, pie and coffee discussions with prospects, and dinners with deacons and elders. They see lots of impromptu visits and requests for handouts. They keep extra food around for unexpected guests, and store diapers for the crisis pregnancy center in the garage. They keep the A/C and heater a bit closer to 72 degrees for guests. They house visiting missionaries, evangelists, speakers, guests, youth groups, and more. They try to have a public area of the house that is presentable on short notice, with decent furniture, separate from the kids. If Ministers made a daily log of the hours, expenses, and areas used for church activities, it would be a significant sum in many cases.

Ministers don’t just pick their favorite house within commuting distance of a job. He (or she) is likely to buy a bigger house than he otherwise would. He will spend money on different features, devote some of the space primarily to church and career, and spend money differently to keep it stocked and maintained as his church expects. He’s likely to be in a more expensive house than others earning a similar income. And given the statistics on pastor employment, he’s not likely to stay in this job for very long — taking the risk that housing prices will go down in that time.