SACRAMENTO, Calif. A federal judge rejected an attempt to dismiss a lawsuit challenging housing tax breaks for clergy.
The lawsuit was filed by the Freedom from Religion Foundation in October 2009 challenging Section 107 of the Internal Revenue Code.
Section 107 states that "In the case of a minister of the gospel," gross taxable income does not include the rental value of a home furnished as part of compensation or, notably, the housing allowance paid as part of compensation.
Clergy have been allowed to deduct their housing allowance since the 1950s. For most churches, a housing allowance has taken the place of providing a home or parsonage to augment clergy's often-meager salaries.
The May 21 ruling denied the U.S. Department of the Treasury's motion to dismiss the case. U.S. District Judge William Shubb ruled that "plaintiffs have alleged sufficient facts" to proceed with the lawsuit.
Shubb also wrote that if the alleged facts are true, that "leave[s] open the possibility" that "Section 107 goes too far in aiding and subsidizing religion by providing ministers and churches with tangible financial benefits not allowed secular employers and employees."
Alan Blanchard, president of Church Pension Fund for the Episcopal Church, warned in a letter, that unless Congress steps in, the court may declare the housing allowance exemption unconstitutional. A decision like that he wrote, "would cause an unprecedented tax increase and burden for clergy."
In 1996 the IRS challenged the amount of housing allowance declared by Rick Warren, pastor of Saddleback Church in California and bestselling author of "The Purpose Driven Life."
Warren then sued the IRS, which had limited the amount that he could deduct. In May 2000, the U.S. Tax Court ruled in favor of Warren. But the IRS appealed to the 9th U.S. Circuit Court of Appeals in San Francisco, questioning the constitutionality of the clergy housing deduction.
Congress took action and in May 2002 passed the Clergy Housing Clarification Act, approved unanimously by both the House and Senate and signed by George W. Bush.
This lawsuit will challenge the constitutionality of the long-standing federal and state tax exemptions for housing allowances provided by churches and religious institutions to members of the clergy.