There may not be any housing tax exemption for pastors. Such an exemption has existed since 1954. Most pastors lived at the “parsonage” owned and provided by the church. As churches became more affluent, the involuntary vow of poverty became less appealing. Pastors wanted to build up equity and own their own home. The parsonage began to slip into history. To aid pastors in acquiring a home churches turned to the “housing allowance.” The “housing allowance” began to form a significant part of the compensation of pastors. The allowance allowed the minister to buy a home near enough to the church to allow rapid access to the church but not owned by the church. The “housing allowance” was not included in taxable income. The “housing allowance” will remain a viable tax exemption for anyone, including pastors, that are required to live at a certain place by their employer just like any other secular employee. But, the “housing allowance” may not continue in the absence of the employer’s mandate if this decision stands.
In Gaylor v Mnuchin, Opinion and Order (WD Wis. 2017), 26 USC §107(2) has again by the same federal court been held to be in violation of the Establishment Clause. The Court held that the statute discriminates against secular employees because they cannot qualify for the exemption. The Court held the exemption does not have a secular purpose. The argument that the statute was enacted to implement the constitutional entanglements clause was rejected. The Court held the legislative history indicated the motive behind the statute was a preference for ministers over secular employees. The Court noted that taxes have been held to be neutral and not a burden on free exercise of religion, otherwise every tax would have to be inapplicable to employees of religious organizations. Housing allowances for pastors required to live on church grounds will not be effected because that is governed by a different section of the statute. The opinion of the Court runs to 47 pages.
Tax preparers that try to apply this decision should be cautioned that the Court expressly omitted from its ruling the other sections of the statute. Only 26 USC §107(2) is the subject of the decision. The practical loss of the housing allowance will only occur in those situations in which the housing allowance is used to shelter part of the income of the pastor. It will not be lost under this decision if the religious organization requires its pastor to live in a certain location or in a church owned parsonage. Any housing allowance that would be permitted to a secular employer’s employee will still be allowed for a religious organization employee.
No doubt this decision will be appealed as it has been in the past. Ultimately, the issue will be decided by a federal appellate court and possibly someday by the US Supreme Court. Several if not many tax years will come and go before then. Technically, the reach of this decision is not outside of the Western District of Wisconsin. But, the IRS could chose to insist it be followed nationally.