May 30, 2002 | Read Time: 2 minutes
A new statute limits the income-tax deduction that ministers, priests, rabbis, and other religious leaders can claim for the housing allowances they receive from their parishes.
The law, which takes effect this month, allows religious leaders who receive a housing allowance to write off the sum on their income-tax forms, but they cannot claim more than the rental value of their home.
The value of housing that a church provides for its leader has been exempted from taxation since 1921 under the so-called parsonage exemption. The exemption was broadened in 1954 to include cash that ministers receive from their churches to pay for their own housing.
Congress wrote the new law in response to a case pending before the Ninth Circuit Court of Appeals, in San Francisco. At issue is whether the Rev. Richard D. Warren, who receives his entire annual stipend, which averaged $88,000 from 1993 to 1995, as a housing allowance, is required to abide by an Internal Revenue Service interpretation of the parsonage-exemption law. Mr. Warren, who works at the Saddleback Valley Community Church in Lake Forest, Calif., receives income to live on from sources other than his employer.
The IRS has argued that the amount Mr. Warren should be allowed to write off must be limited to the “fair rental value” of the home, including utilities, furniture, and other items that might be included with a parsonage. The rental value of Mr. Warren’s house was about $59,000 a year, the IRS has said. Mr. Warren has sought to write off expenses of some $79,000 a year.
The U.S. Tax Court two years ago upheld Mr. Warren’s position, and the IRS appealed the decision (Richard D. Warren and Elizabeth K. Warren v. Commissioner of Internal Revenue, 114 T.C. 23).
The new federal law affirms the IRS’s interpretation of the parsonage exemption for tax years beginning in 2002. But it also clarifies that housing allowances given before the law takes effect are not subject to the limitation, a move tax experts say should help Mr. Warren’s case.
