Work, Fight or Pray - Vestige of the Medieval in Our Tax Code

§ 119 Meals or lodging furnished for the convenience of the employer.
§ 134 Certain military benefits.
§ 107 Rental value of parsonages

One of the reasons I don't mind long drives is the Teaching Company.  They allow me to take courses I never got to in college, with no papers to do.  I'm a little torn about this, but I would say that Teofilio L. Ruiz is about the best that they have, which is saying a lot.  He lectures about Medieval Europe.  The thing that sticks in my mind from several of his lectures is the tripartite division of Medieval society.  Those who work, those who fight and those who pray.  The merchants and artisans in the cities were a fringe element irrelevant to the overwhelming majority who worked growing food, of which there was rarely enough.  The fighters and prayers owned just about everything and paid no taxes.

It's odd to see that division in our tax code, but the sections above lay it out pretty clearly.  When it comes to housing, it would seem that Section 119 is sufficient.  If your employer provides you with a place to live, so that you will be near at hand, the value of that place to live is excludible from your gross income.  If that place happens to be a room in a hotel for the manager, a rectory or fifteen square feet on a nuclear submarine, the principle is the same.  That's not the way it is, though.  The military and the clergy are special.  Since at least historically, housing tended to go with their jobs, monetary allowances paid in lieu of actual housing are exempt from tax.  Since the military is paid by the same entity that collects the taxes, ultimately it seems to me that it is a matter of six of one, half a dozen of the other.  Military housing allowances strike me as fairly modest.  Presumably they could be grossed up and made taxable with negligible net effect on either the deficit or military compensation.  Also there is nothing at all troubling about the federal government determining who is entitled to military housing allowances.

Parsonage is another matter entirely.  It involves the government in determining who is or is not "a minister of the gospel".  More significantly, and perhaps surprisingly to many, it is an area of abuse.  Generally speaking, ministry is not viewed as lucrative occupation.  In some cases it is, though.  There is no dollar limitation on the parsonage exclusion.  The last big flap over the parsonage exclusion was in 2002.  There were two clear requirements to the exclusion.  The first is that the entity making the payment designate the amount as a housing allowance.  The second is that the minister spend the money on housing.  The IRS inferred a third requirement namely that the exclusion be no greater than the fair rental value of the home provided.   The Warren case was supposed to be an argument about that requirement.  The Ninth Circuit, much to the chagrin of both parties, asked them to start briefing on the constitutionality of the exemption.  The Court appointed Erwin Chemerinsky as amicus or we might say, in this case, devil's advocate.

Since Reverend Warren and the IRS came to an accommodation, the Ninth Circuit decided to let the hornets nest they had stirred up calm down (WARREN v. COMM., Cite as 90 AFTR 2d 2002-6058) and freed Professor Chemerinsky to pursue other interests. ( I contacted Professor Chemerinsky and he indicated that although still interested in the issue he is no longer involved).  Congress amended 107 to include the fair rental limitation that the IRS thought was already there.

There was not a lot of activity in the parsonage area in 2010.  Just three things that I've been able to find.  The first is not of any great note, but I include it for the sake of completeness.  Rev. Proc 2010-03 was what I call the IRS "Don't even bother to ask" list.  It lists the specific items on which the IRS will not rule and includes:

(11) Section 107.—Rental Value of Parsonages.— Whether amounts distributed to a retired minister from a pension or annuity plan should be excludible from the minister's gross income as a parsonage allowance under § 107.


(12) Section 107.—Rental Value of Parsonages.—Whether an individual is a “minister of the gospel” for Federal tax purposes.

I don't think there is anything new about the IRS reticence in these areas.  Personally, I have significant resentment for item 12.  The IRS refusal to rule in this area substantially reduces the entertainment value of the corpus of private letter rulings.  Their ability to rule on whether an organization is exempt gives us a comic masterpiece like Free Fertility .  Rulings on who is and is not a "minister of the gospel"  would be immensely entertaining.

More significantly there were two court decisions on the parsonage exclusion. The first was courtesy of the Freedom From Religion Foundation.  They are challenging the constitutionality of the parsonage exclusion. I have to say that regardless of the merits of the argument, I find FRF a little disturbing.  Their distaste for religion borders on, well, the religious.  According to their website:


The history of Western civilization shows us that most social and moral progress has been brought about by persons free from religion. In modern times the first to speak out for prison reform, for humane treatment of the mentally ill, for abolition of capital punishment, for women's right to vote, for death with dignity for the terminally ill, and for the right to choose contraception, sterilization and abortion have been freethinkers, just as they were the first to call for an end to slavery.

I think they are pulling a little bit of a rhetorical fast one there in combining "free thinking" and being free from religion.  The abolition of slavery in the United States had a very strong religious impulse behind it, although many of the radical abolitionists became alienated from the denominations that they were born into.  We even have an American religion that is more or less based on free thinking in Unitarian Universalism.  I've met UU ministers who don't believe in God, but I've never known one to turn down a parsonage exclusion.

At any rate little as I am drawn to FRF, they do seem to have the stronger argument.  Personally, it doesn't bother me at all for the state to tilt the playing field a little in the favor of religion in general.  The FRF types seem to think that you have prayers at the inauguration and next thing you know it's the Spanish Inquisition.  I mean really nobody expects the Spanish Inquisition.  Apparently, though current First Amendment jurisprudence is not as easygoing as I am.  Here is part of the government's argument in its motion to dismiss:

Sections 107 and 265(a)(6)constitute constitutional accommodations of religious practice by eliminating discrimination between ministers and similarly situated taxpayers. Sections 107 and 265(a)(6) are part of a governmental policy of neutrality toward religion, and government neither advances nor inhibits religious practice through these provisions.

The government argument goes that lots of taxpayers get the convenience of the employer exclusion.  In order for clergy to get the exclusion, the IRS might have to go poking around in the rectory, which could be intrusive.  So to make all ministers equal Congress added the housing allowance.  I get the argument but I don't think it is really strong.

Then came the Driscoll case.  From everything I've read Phil Driscoll is a really nice guy.  As I write this I'm listening to him on pandora.  Nice sound.  But a parsonage exclusion of $195,000 for his second home! Ministers who are half of two income households can have 100% of, admittedly often low, compensation excluded.  Consider Terry and Robin, the couple of indeterminate gender and marital status I introduced several months ago. (Their role is to help me avoid awkward pronoun problems) In this example Terry is a UU minister and Robin is an attorney.  Terry makes $40,000 and Robin makes $200,000.  If they stretched on the house that they bought,  Terry would negotiate for the entire $40,000 to be excludible.  If I was on the congregation's ministerial compensation committee, it would be my idea. The portion of it that was interest and real estate taxes would still be deductible against Robin's income.  Thanks to Driscoll, now when Terry gets a better job they can exclude a $100,000 compensation package so they can buy a house on the Cape.  I really don't think that this type of tax gaming is good for the morale of the clergy. The tax free nature of housing allowances gives an extra twist to church financial debacles as in this story about the Crystal Cathedral.. People like me will encourage the tax gaming because that's our job.  We don't expect the tax system to be fair or make sense.  I think, though, that the cause of religion, in the broadest sense of the word, would be well served if members of the clergy would come out against their special tax status.  I'm not holding my breath.

The tax blogosphere still hasn't heated up on this issue.  I noted posts by two attorneys in a bonus post earlier this month. They focus on statutory construction, which is the key to the Driscoll case. The Driscoll case loses much of its drama if you leave out the numbers.  Robert Flach has taken note of the discussion in his What's the buzz post and has promised to weigh in on it.  That should generate some more interest.