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IRC 107, 70-549, Cherminsky & Warren!

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  • rlbaty@webtv.net
    Cherminsky has indicated he still plans to file a suit to challenge the constitutionality of IRC 107. The following was written when it was front page news.
    Message 1 of 1 , Nov 30, 2005
      Cherminsky has indicated he still plans to file a suit to challenge the
      constitutionality of IRC 107. The following was written when it was
      front page news. However, I don't think I have seen it before and so am
      posting it for what it may be worth.



      Accountancy Online Issues
      November 2002

      Tax Matters

      The Constitutionality of the
      Parsonage Allowance

      Constitutionality became a much discussed issue when the Ninth Circuit
      Court of Appeals decided reciting the Pledge of Allegiance in a public
      school was unconstitutional.

      In a less publicized opinion, the Ninth Circuit also questioned the
      constitutionality of the parsonage allowance, which provides a tax break
      to ministers.

      In Richard D. Warren, 282 F3d 1119, the appeals court reviewed a Tax
      Court decision allowing Warren, a minister, and his wife to exclude up
      to $80,000 of parsonage allowance.

      The appeals court requested a brief from law professor Erwin Chemerinsky
      on the constitutionality question. Later, after Congress amended IRC
      section 107 to limit the allowance to the fair rental value of the
      parsonage, the Warrens and the IRS agreed to dismiss the case.

      However, Professor Chemerinsky then filed a motion to intervene,
      challenging the constitutionality of section 107 as amended.

      On August 26, 2002, the Ninth Circuit issued its opinion in the Warren

      Since the parties already had agreed to dismiss the suit, the only issue
      was Chemerinsky's motion. The court denied it.

      The parsonage allowance

      Section 107 allows a "minister of the gospel" to exclude from income the
      rental value—including utilities—of a home the church furnishes as
      part of his or her compensation or the rental allowance it pays under
      the same circumstances to the extent the minister uses the allowance to
      rent or provide a home.

      Under Treasury regulations section 1.107-1(a), the home or rental
      allowance the religious organization provides must be as payment for
      services that ordinarily are the duties of a minister of the gospel.

      Treasury regulations section 1.1402(c)-5(b)(2) defines the services
      ministers perform as "sacerdotal functions," the conducting of religious
      worship and the control, conduct and maintenance of religious
      organizations (including religious boards, societies and other integral
      agencies of such organizations), under the authority of a religious

      The Warren case

      Richard Warren, a Baptist minister in California, founded the Saddleback
      Valley Community Church in 1980. It was successful and grew to 18,000
      members by 1992. Warren also derived substantial income as an author and
      from a tape and book ministry. He and his wife owned a residence that
      cost $360,000 in 1992. In the three years in question, the home's fair
      rental value was $58,061, $58,004 and $59,479. The church trustees
      allocated $42,496, $85,000 and $80,000, respectively, as the Warrens'
      housing allowance. The allocated amounts were 80% to 100% of the
      compensation the church paid Warren. The Warrens spent $77,663, $76,309
      and $84,278 to provide a home for themselves by paying for mortgage,
      utilities, furnishings, landscaping, repairs, maintenance, real property
      taxes and homeowner's insurance.

      The Warrens excluded those amounts from income to the extent the church
      allocated and paid them.

      The dispute between the Warrens and the IRS centered on the difference
      between how much the couple spent on housing and the home's fair rental
      value. The IRS disallowed the housing allowance exclusion for amounts
      they spent in excess of the fair rental value.

      However, the Tax Court held that the Warrens could exclude the full
      amount. The court carefully evaluated the wording and history of section
      107, concluding that it did not limit the exclusion. The IRS appealed to
      the Ninth Circuit.

      The Ninth Circuit did not immediately reach a conclusion. It appointed
      an amicus curiae (Latin for "friend of the court") and asked for
      supplemental briefs. Rather than decide on the Tax Court's
      interpretation of section 107,

      Judge Browning and Judge Reinhardt chose to question the provision's

      Judge Tallman wrote a strong dissent.

      Browning and Reinhardt questioned whether the government should provide
      a subsidy to religious organizations that the free exercise clause of
      the U.S. Constitution does not require. Quoting the U.S. Supreme Court
      decision in Texas Monthly, 109 US 890 (1989), the judges considered the
      possibility such a subsidy would provide unjustifiable assistance to
      religious organizations at the expense of nonreligious ones.

      The amicus curiae brief

      The Ninth Circuit appointed Professor Chemerinsky, of the University of
      Southern California Law School, to serve as amicus curiae. In his brief
      (Ninth Circuit document 2002-11315), he argued strongly that, under
      controlling Supreme Court precedents, the parsonage allowance clearly
      violated the Constitution's establishment clause (see box) and was
      unconstitutional. In reaching this conclusion Chemerinsky relied
      primarily on Lemon v. Kurtzman, 403 US 602 (1971).

      Chemerinsky argued that the purpose of the exemption was to advance
      religion. Because the provision applied only to "ministers of the
      gospel," it didn't appear to have a secular legislative purpose because
      only clergy had the advantage of being paid—at least in part—with
      tax-free dollars.

      The professor also argued the parsonage allowance fostered excessive
      government entanglement with religion as government representatives must
      set standards and eventually decide who is a minister of the gospel,
      requiring the representatives to look closely into a religious entity's
      organization and activities.

      Church and Justice Department briefs
      Representatives of a group of church-related organizations (Ninth
      Circuit document 2002-10836) and the Department of Justice (Ninth
      Circuit document 2002-11969) also submitted briefs. Their arguments were
      quite similar.

      Both said the Ninth Circuit lacked jurisdiction to question section
      107's constitutionality.

      But if the court did, in fact, have such jurisdiction, both parties
      argued section 107 was constitutional.

      They said Chemerinsky's arguments were not valid because he took a very
      narrow view. The parsonage allowance is one of many provisions that
      allow employees to enjoy employer-provided housing tax-free.

      If all were analyzed together, it would be clear that no particular
      group gets preferential treatment and thus there is no constitutionality

      The Clergy Housing Allowance Clarification Act
      In response to the Ninth Circuit's actions, Congress passed the Clergy
      Housing Allowance Clarification Act of 2002. President Bush signed it
      into law on May 20. One of the purported purposes of the new law was to
      support the constitutionality of the parsonage allowance.

      The parsonage allowance now is limited to the fair rental value of a
      minister's home. This provision is effective for tax years beginning
      after 2001. Under new section 107(b)(2), if the taxpayer filed a return
      before April 17, 2002, and limited the exclusion to the fair rental
      value of the home, or filed the return after April 16, 2002, the new
      limitation applied.

      New section 107(b)(3) says: "Except as provided in paragraph (2),
      notwithstanding any prior regulation, revenue ruling or other guidance
      issued by the Internal Revenue Service, no person shall be subject to
      the limitations added to section 107…for any taxable year beginning
      before January 1, 2002."

      This provision would likely have dictated the Ninth Circuit's conclusion
      as to how much Warren could exclude for his parsonage allowance. Since
      the years in question were before 2001, Warren would not have been
      limited to the fair rental value of his home for those years.

      The status of the parsonage allowance
      With this case closed, there is no immediate challenge to the
      constitutionality of the parsonage allowance.

      If he wishes, Professor Chemerinsky can file a motion in his district
      court to challenge this presumption and proceed through the court

      Taxpayers claiming the parsonage allowance now must be ready to document
      the fair rental value of their homes. Any costs related to preparing
      this documentation would be a miscellaneous itemized deduction under IRC
      section 212 as an expense related to determining income tax.

      —Ronald R. Hiner, CPA, EdD, professor of accounting, and Darlene
      Pulliam Smith, CPA, PhD, professor of accounting, both at T. Boone
      Pickens College of Business, West Texas A&M University, Canyon.

      The Establishment Clause

      The establishment clause is in the First Amendment to the U.S.
      Constitution. It reads in part: "Congress shall make no law respecting
      an establishment of religion, or prohibiting the free exercise
      2002 AICPA


      Robert Baty
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