IRC 107, 70-549, Cherminsky & Warren!
- 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
The Constitutionality of the
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
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 valueincluding utilitiesof 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 paidat least in partwith
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
Both said the Ninth Circuit lacked jurisdiction to question section
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
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