Friday, August 31, 2012

Housing Allowance: Rick Warren giveth, will Ed Young taketh away?

My last post on the Minister's Housing Allowance, our Sacred Tax Loophole, was probably unwelcome with some of our Southern Baptist colleagues (Nope. You cannot use your housing allowance for a second home) because it shared the bad news that the more affluent clergy among us cannot expect Joe Sixpack to subsidize their second home at the beach or in the mountains.

Let's not get too upset about it because that first home that does qualify can be the Biltmore House and a high-income clergy person can pour as many hundreds of thousands of dollars into that as he can in order to maximize his or her tax break.

Makes sense in the same way that a lot of federal tax policy makes sense.

And, no, Rick Warren didn't originate the housing allowance but he was the catalyst for the federal law passed a decade ago that made it a bit smoother for us.

Ed Young? He has a pretty spiffy house in Houston that is or was on the market for over $2 million and Tom Rich of SBC Jax Watchdog puts a hefty figure on what his housing allowance comes to, a quarter million dollars or so. 

Rick Warren giveth...so how does Ed Young cause it to be taketh away?

Does anyone misunderstand that when clergy claim such exemptions to income by right and tax law that sooner or later folks will pay attention and say that something just isn't right here? Why should the government subsidize a mansion for clergy and not some hourly worker's hovel?

Why indeed?

There is some news here, rumblings on the horizon, because of a new legal challenge to the minister's housing allowance: Challenge to clergy tax break gets green light... My friend and CPA Peter J. Reilly has an interest in such things. The link is to his blog on Forbes. Read and learn.

The suit is being brought by the Freedom From Religion Foundation and Peter Reilly explains it much better than I could.

The FFRF certainly has some material to work with, what with clergy  mansions like the one above, not to mention the clergy who are "qualified" for the housing allowance as ministers of loose basketballs, ministers of maintenance, ministers of fun overseas mission trips and other odd church staff positions.

I'm guessing that the FFRF lawyers know how to hit softballs out of the park.

The average SBC minister in my state has a compensation package (generally salary plus housing allowance, or rental value of a pastorium) of around $71,000 and the housing allowance probably translates into a savings of a thousand dollars annually or so. A thousand dollars is real money to most SBC clergy.

If asked, and I have been asked about this, I cannot say that we clergy deserve this tax break any more or less than any other group with some pull in D.C.

Is it unconstitutional? Guess we may see.

 








18 comments:

Anonymous said...

Originally the allowance was based on a real need, but now it’s simply an entitlement that is not need-based, which reference to $71K underscores, thus not justifiable. Pastors apparently are no less selfish than anyone else, but given this, they might be more so.

Jack Carver said...

One of the most challenging obstacles for a pastor applying for a mortgage is explaining to the agent the nature of an ordained minister's tax situation. How you can be considered an employee on one side of the ledger and self-employed on the other is always a difficult reality to explain.

Anonymous said...

Glad to see you picked up on the announcement regarding these historic developments in case against IRC 107.

We discussed this earlier.

Remember?

The mainstream, however, appears to still be neglecting the matter.

Sincerely,
Robert Baty

William Thornton said...

I remember you, Robert, and while Peter R. generally alerts me to these things, I would appreciate your keeping me informed as well.

We will see where this goes.

Anonymous said...

I'll try to have you on my list of persons to contact regarding any developments I may get wind of.

I think the Government, FFRF, and the Court are to have a telephone conference on or about September 20 in order to set the future schedule as to how the case is to proceed.

Sincerely,
Robert Baty

William Thornton said...

Bob Allen and Associated Baptist Press has an article on the latest development. Perhaps he keeps his ear to scintillating, informed, and witty blogs like mine.

Regardless, this is another reason why SBCers need to get ABP's daily feed. Baptist Press just doesn't do as well in some areas.

Anonymous said...

I got a notice about the Baptist Press article and posted a comment over there.

Maybe we are starting to see a little smoke and we can get the fire lit.

Regardless of where one stands on the issue, it needs to start getting some serious national media and public attention.

Folks should be looking to Obama and Romney to give their position on the future of IRC 107; after all, haven't they spent a lot of time talkin' up taxes and what is and isn't constitutional...in other contexts.

Sincerely,
Robert Baty

Anonymous said...

Peter has now published a guest column regarding the prospects that the issue will become one for the presidential candidates to address:

Here's the link:

http://www.forbes.com/sites/peterjreilly/2012/09/01/where-do-romney-and-obama-stand-on-special-tax-status-for-ministers/

Sincerely,
Robert Baty

Anonymous said...

While there is a federal tax break for a minister using a housing allowance, one needs to remember that this break helps to balance the self employment tax paid by most clergy. Ordained clergy are considered "self-employed" therefore paying the full "FICA." W-2 employees only pay 1/2 of the 15.3%. The housing allowance "balances" the overall tax liability for clergy. If they repeal the housing allowance, then the IRS needs to be consistent and remove the "self-employment" label. Most churches do not offset the self-employment tax for their pastor. If the housing allowance is lost, then a pastor should be considered an "employee" of the church. Before you criticize the "break" clergy gets with the housing allowance, be sure to look at the entire tax liability a pastor faces. It's not as simple as it appears.

Deal with the abusers, but don't throw everyone under the bus.

William Thornton said...

I have noted elsewhere that most of my colleagues and me likely pay far more in FICA than in income tax but I do not recall ever seeing the argument advanced for the HA that it is intended to "balance" FICA taxes. Your argument is basically the same as that given by our convention attorney, an economic one.

If the HA is ruled unconstitutional would ministers want to be considered "employees" of the church? The whole point of the dual status of ministers is that they did not want to be considered as such.

My fear is that the extreme cases of highly paid ministers will cause us all to be thrown under the bus.



Anonymous said...

Your articles are much needed on this subject due to the dearth of discussion on this matter. However, I would like to differ with you on the Joe sixpack subsidizing clergy lake houses. I have two houses, one in a former city where I served and one in the current one. I have never had two houses before and neither one is anywhere near the beach or mountains.The housing bust has made houses that are not foreclosures extremely hard to sell and getting called to a new place of service now often involves an unsold house plus a new residence. Not all two house situations are luxury homes, and I have seen many Baptist ministers get battered recently when trying to sell houses that are now worth less than they owe. These poor guys now cast longing glances at our Methodist friends where housing is provided in the place you serve. I predict the comeback of the parsonage if the market does not improve! Also, multi site churches might leave a pastor needing a residence in two different cities.
You estimate the savings of a thousand dollars due to the HA exemption and I think you are about right. That's not small change for most ministers, but many of the guys I went to seminary with also opted out of Social Security for religious reasons (though I have yet to see the theological argument for Southern Baptists taking this stance). When you have a signed IRS form 4361 you are exempt from self employment on your HA, a savings of thousands of dollars. Now this does get hard to explain to people in your church which may be why you rarely hear this brought up in SBC circles. Russell Moore addressed this rare topic a few years ago:
http://www.russellmoore.com/2010/02/15/is-it-okay-for-me-to-opt-out-of-social-security-my-response/
Just my two cents and thanks for keeping the information coming on new housing allowance issues.

William Thornton said...

I have addressed the SS exemption in the past and have never yet met a SBCer who had a religious objection to receiving government benefits. Those who exempted themselves made only economic arguments.

As I understand it, ministers are no longer allowed to take the HA on more than one house.

Anonymous said...

Having made the previous comments regarding the housing allowance and the Self Employment tax issues, let me state clearly, I did not opt out of Social Security taxes. While I do not judge or condemn those who did, it was not an economic decision for me. After reading the documentation, it was clear to me that my only basis for opting out would be economic. The federal government has made it clear that one cannot opt out for financial reasons. For me personally, it was an integrity issue.

If a minister is to be considered self employed by the IRS, then stop issuing a W-2 and allow him to operate as a self-employed businessman would operate. The dual treatment has led to much of this conversation.

While I understand the concern with fairness in the tax codes, let me reiterate, this is not as simple as "ministers get an unfair tax advantage."

Anonymous said...

You are correct in stating that the HA is only allowed on one home. My earlier comment was in response to the suggestion that Joe Sixpack should not be asked to subsidize clergy beach houses. I wanted to point out that there are two home situations that are consequences of the mobility of ministry, not luxury. Thanks for helping all of us keep current on this and other issues.

Brian Prucey said...

Every once in a while the subject of the clergy housing allowance rears its head. Some consider it an unconstitutional endorsement or support of religion. I disagree.

The courts have routinely held that Congress has the power to determine what is considered “income” for income tax purposes. Congress has determined that certain payments do not constitute taxable income: military housing allowances, interest from municipal bonds, and certain foreign-earned income are just a few examples.

Congress provides certain additional tax breaks to those who are blind. Does this unfairly disadvantage sighted people? Congress provides additional tax breaks for those over 65. Does this unfairly disadvantage younger tax payers? Congress provides additional tax benefits for those with children under age 17 (Child Tax Credit), certain low income workers (Earned Income Tax Credit), those seeking higher education (American Opportunity Credit), and those who contribute to retirement plans, etc. Do these tax breaks unfairly disadvantage those who do not meet the criteria for those breaks? No.

The recently decided Supreme Court decision on the Affordable Care Act (aka Obamacare) further supports the right of Congress to use the tax code to either reward to punish certain types of commerce or the failure to engage in certain types of commerce.

Fully taxing the clergy housing allowance would certainly provide a hardship for those pastors serving smaller churches and designate nearly all of their salary as housing allowance. It will also horribly burden those who serve smaller church and live in church-owned parsonages.

It is burdensome enough to have to pay 15.3% self employment tax on the fair rental value (FRV) of the parsonage out of the meager salary smaller churches provide, but adding the FRV as taxable ordinary income would financially crush small church pastors and their families.

If there is a problem with higher income clergy abusing the housing allowance benefit, then let’s deal with the alleged abuse. Congress revised the clergy housing allowance rules back in 2002 and Congress can revise the rules again to cap the benefit at a certain dollar amount and specifically limit the benefit to the clergy’s primary residence.

In the interest of full disclosure, I am retired USAF (22 years), actively serving pastor (25 years) and a practicing tax accountant.

William Thornton said...

Thanks for the comment, Brian. While fairness will probably come into play, the core issue in the current legal challenge is whether or not the HA constitutes an establishment of religion. We will see.

As mentioned several times my myself and others, ministers who live in pastoriums qualify their housing allowance in a non-religious manner thereby removing the risk of it being deep-sixed by the courts in a first amendment challenge.

You are the first pastor, besides myself, who recommends a cap on the HA. I don't see why this would be an issue for us.

Brian Prucey said...

William, I've tried to coalesce my arguments support the housing allowance as not violating the Establishment Clause into the following points. Since I don't blog, please forgive me if I've co-opted yours.

I think the establishment of religion challenge to the clergy housing allowance will fail for several reasons:

1. All religions are treated equally with respect to the clergy housing allowance without one being favored over another. The original intent of the Establishment Clause was to forbid the federal government from establishing a national church. While the clergy housing allowance may benefit clergy as employees, it does not create a benefit for the church that would violate the Establishment Clause.

2. Religious institutions are economic entities. With nearly 400,000 houses of worship of all faiths, as well as their governing institutions, religion is big business. The courts have already determined that churches are involved in interstate commerce and thus Congress can relate to churches on economic terms, especially as employers. As economic entities, Congress can establish rules specific to them and their employees that neither burdens nor benefits other economic entities. Section 107 is a provision that allows the church as an employer to designate a housing allowance as an employee benefit. Pastors may request a portion of their salary be designated as a housing allowance, but the church is not mandated to do so. A church may even designate an amount less than what the minister requested.

3. Congress is free to authorize tax-free housing allowances for any group of taxpayers. Congress has granted a tax-free housing allowance and basic allowance for sustenance (food allowance) for military members not enjoyed by the general public. Congress also exercises authority to not tax military income earned while serving in designated combat zones. The same benefit applies to many Department of Defense civilian employees as well. Congress allows other employers to provide tax-free lodging to certain employees as a condition of employment when such employer-provided lodging is deemed essential to the nature of the business.

4. Congress has the authority to treat certain classes of employees different from other classes of employees by the nature of their work. For example, qualifying U.S. citizens living overseas may claim a foreign-earned income exclusion. Certain DOT-governed transportation workers (e.g., truck drivers) may claim an increased meal expense deduction not allowed by other classes of employees. Clergy are simply a class of employees that Congress chooses to tax differently than others.

5. As I said in my earlier post, the recent Supreme Court decision on the Affordable Care Act reinforced Congress’s authority to tax economic activity either beneficially or punitively. In essence, SCOTUS has given Congress near-unlimited authority to determine who will and who will not be tax and how that tax should be determined.

The issue really comes down to one of fairness. Some feel that the clergy housing allowance or tax-free pastorium is unfair on its face. Perhaps it is; however, there are many inequities within the tax code. Some might argue that a progressive tax rate is unfair. Some might argue that tax credits that benefit some segments of society to the exclusion of others are unfair. Some claim that a tax-free housing allowance publicly subsidized clergy. However, that is no truer than the charge that the Earned Income Tax Credit results in a publicly subsidized underclass or that the Child Tax Credit results in publicly subsidized child support.

Robert Baty said...

Here's my rebuttal to Brian Prucey's points:

(1)

The 1st Amendment refers to "religion", not "religions". "All religions" equal "religion" and the 1st Amendment prohibits laws "respecting the establishment of religion". It's not that IRC 107 benefits "clergy", but that it benefits ONLY "clergy" and that results in a law "respecting" the establishment of religion in contravention of the 1st Amendment.

(2)

Churches were/are able to call a preachers pay anything they want without any consideration of IRC 107. IRC 107 does not "allow" churches to do so, but allows for a tax benefit ONLY to its "ministers" where they choose to make such designations. IRC 107 does not directly address churches but "ministers" as a class of persons who have "income" that otherwise is taxable without regard to its source or designation.

(3)

Congress is not free to authorize any benefits in contravention of the Constitution. Congress can allow all sorts of benefits to all sorts of people (please, please, quit trying to make the military allowance and other such tax-free benefits analogous to the ministerial allowance; they are not). However, when there is a "religious test" for the benefit, and ONLY those meeting the religious test qualify for the benefit, there may be reasonable questions raised as to whether such a benefit is in violation of the 1st Amendment. The Court has yet to accept their role in deciding that issue. . . . .until now.

(4)

See (3) above. When Congress singles out ONLY clergy for a benefit, 1st Amendment issues are most appropriately raised and, in the case of IRC 107, the Court should be able to resolve the issue.

(5)

SCOTUS has not given Congress the authority to pass laws "respecting the establishment of religion" as reflected in IRC 107 which allows a benefit ONLY to certain "clergy" and involves the Government intrusively in matters of religion.

The issue regarding IRC 107 is NOT REALLY one of fairness.

Laws don't have to be "fair", which is a rather subjective, political standard and many are not "fair" depending on who you ask.

It's NOT REALLY about "fairness". It is about the 1st Amendment and whether we should have a law that allows such a benefit, and involves the Government in matters religious as required by the administration and enforcement of the benefit provided by IRC 107.

I say IRC 107 loses if the Court is allowed to reach the merits of the case.

Sincerely,
Robert Baty