Update (Nov. 25): Richard Hammar, senior editor of CT sister publication Church Law & Tax Report, offers five takeaways from Friday's housing allowance ruling, including his thoughts on the ruling's limited yet significant impact and a possible workaround available to Congress.
His advice while the appeals process shakes out: "Churches should continue to designate housing allowances for ministerial employees for 2014, and church pension plans should continue to designate housing allowances for retired ministers."
Meanwhile, the Evangelical Council for Financial Accountability (ECFA) stated the decision is "sending shockwaves through the religious community, ... leaving many ministers wondering what the impact of this case will be." ECFA's take:
"This ruling [if not overturned] in effect would force clergy of nearly every religion across America to pay additional taxes, regardless of faith or creed. This will either force congregations to increase clergy compensation to offset these taxes or require pastors to dig deep to see if they are able to absorb these taxes."
ECFA also noted how the Commission on Accountability and Policy for Religious Organizations (CAPRO) advised last year that Congress "should not apply a dollar limit to the clergy housing exclusion ... because attempting to do so would create more challenges than it would solve."
One of the most important tax breaks available to American pastors is unconstitutional.
At least, according to a federal judge's assessment of an atheist group's complaint that the IRS's clergy housing allowance—which will save pastors $700 million this year in income taxes—violates the establishment clause of the First Amendment.
On Friday, U.S. District Judge Barbara Crabb of Wisconsin ruled that the second part of IRS Code Sec. 107, which exempts clergy from paying income taxes on compensation considered a housing allowance, "provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise."
"The significance of the benefit simply underscores the problem with the law, which is that it violates the well-established principle under the First Amendment that '[a]bsent the most unusual circumstances, one's religion ought not affect one's legal rights or duties or benefits,'" wrote Crabb in a ruling first reported by the Wisconsin State Journal.
The decision leaves alone the first part of Sec. 107, which excludes the rental value of actual parsonages from being taxed.
The ruling, while notable, will not have an immediate impact upon clergy compensation because Crabb has stayed its effect until any appeals are resolved. The case, Freedom From Religion Foundation, Inc. v. Lew, will almost certainly be appealed to the Seventh Circuit Court of Appeals in Chicago. (The Seventh Circuit previously reversed Crabb's ruling that the National Day of Prayer was also unconstitutional.)
The housing allowance is "the most important tax benefit available to ministers," according to GuideStone Financial Resources, the benefits arm of the Southern Baptist Convention (SBC). America's largest Protestant denomination opposes the ruling.
"The clergy housing allowance isn't a government establishment of religion, but just the reverse," said Russell D. Moore, president of the SBC's Ethics & Religious Liberty Commission. "The allowance is neutral to all religions. Without it, clergy in small congregations of all sorts would be penalized and harmed."
Religion News Service calculates that the loss of the housing allowance, if upheld, could reduce the take-home pay of some pastors by up to 10 percent.
The lawsuit by the Wisconsin-based Freedom From Religion Foundation (FFRF) addresses the practice of what it calls "double dipping," wherein a pastor can use tax-free income to buy a home, then deduct interest paid on the mortgage and property taxes.
CT previously noted how, after the FFRF's first challenge was dismissed due to lack of standing, the FFRF changed the way it compensated its co-presidents so that they received a housing allowance similar to many pastors. The federal government recently offered a novel defense: that atheist leaders could qualify as "ministers of the gospel." Crabb's ruling rejects this idea. Howard Friedman of Religion Clause explains more.
Such housing allowances last came under scrutiny in 2002 when the IRS challenged megachurch pastor Rick Warren on his housing allowance claim of more than $70,000, leading Congress to revise the law and limit allowances to "the fair rental value of the home." (CT offered its own take in an editorial.)
According to CT sister resource Managing Your Church, the average base salary of a full-time senior pastor in 2012-2013 ranges from $33,000 to $70,000. Eighty-four percent of senior pastors surveyed said they also receive a housing allowance, which accounts for $20,000 to $38,000 in added compensation. The Joint Committee on Taxation calculates the exemption amounted to $700 million in recent years, notes Peter Reilly of Forbes.
CT previously reported how the threat to pastor parsonages lost its legal legs but was revived again, and examined debate over whether or not Congress should change the rules on pastor housing allowances. CT also noted the quirky reasoning that recently allowed one prominent pastor to claim two parsonages.
Editor's note: This post has been updated.