There’s a lot of talk these days as to what Congress can afford to cut out of the budget. Right now, they may have their eye on the tax allowance that enables clergy members to buy or live in multiple homes tax-free.
In March, the U.S. Tax Court ruled that Phil Discoll, an ordained minister and Grammy Award-winning trumpeter who went to prison for tax evasion, did not have to pay federal income taxes on property worth $408,638 that was provided to him by his ministry in order to buy a second home on a lake in Cleveland, Tenn.
A stipulation of the tax code passed in 1921 allows clergymen to live in a tax-free house or receive tax-free salaries to buy or rent a home. However, in a 7-6 ruling, the Tax Court said that Driscoll was correct in his interpretation of the passage: the word "home" is equivalent to "homes," just as "child" is interpreted to mean "children" elsewhere in the tax code. Therefore, clergymen may obtain multiple tax-free homes due to this interpretation.
“The housing allowance is an important aspect to religious freedom. Often it is one of the only ways we can compensate pastors because their salaries are so low,” Kevin Theriot , senior council Alliance Defense Fund (ADF) told The Christian Post.
"It’s not a subsidy, they are just not taxed.”
However, some argue that this interpretation could be a slippery slope to corruption.
Sen. Charles Grassley (R-Iowa), a member of the Senate Finance Committee, said he wants to ensure that the spirit of the provision isn't violated.
"It's fair to question why a clergy member needs a tax-free allowance for more than one home, and whether tax-exempt churches should subsidize millionaire ministers," said Grassley, according to The Wall Street Journal. He wants to ensure that the spirit of the provision isn’t violated.
The tax break was established to aid poorly paid clergy members who serve society. It is believed that most members use the exemption for one house, normally modestly valued. Ministers of every faith are included in this provision; they are also allowed to opt out of Social Security.
D. August Boto, general counsel of the executive committee of the Southern Baptist Convention, told The Wall Street Journal that for leaders of the organization's 46,000 churches, "the housing allowance is critically important for making ends meet-it is not a luxury."
However, it is noted that the same tax break is not available to employees at secular, non-profit organizations. Their pay and service to society are equated to that of ministers.
Pastor Rick Warren is widely known for championing the clergy members’ tax exemption cause. In 1971, the Internal Revenue Service limited the provision to the “fair market rental value” of the furnished home, utilities included.
In 1996, the IRS found that Warren’s housing deduction exceeded the rental value of the house.
Warren decided to sue.
On May 16, 2000, the United States Tax Court struck down the IRS’s restriction and ruled that clergy members could deduct “the amount used to provide a home,” however much that might be.
But the court decision was appealed to the United States Court of Appeals for the Ninth Circuit in San Francisco.
This sparked a national debate: is the tax exemption for clergy members constitutional?
Supporters said yes, citing that clergy members must be given a break for their social service and that many could not afford a proper house otherwise. Critics said this was an unnecessary entanglement of religion and government.
A few thousand dollars of court costs later, Congress passed the Clergy Housing Clarification Act of 2002, and President Bush signed it into law. This law approved the deductions that Warren had taken in the past, however, instated the IRS’ “fair market rental value” restriction on deductions in the future.
With the recent interpretation of the code, allowing ministers to own more than one tax-exempt house, the issue of constitutionality is being raised once again.