Pastors’ Housing Revisited

The Chicago Temple First United Methodist Church may have the coolest parsonage anywhere.

The Chicago Temple First United Methodist Church may have the coolest parsonage anywhere.

Not quite three years ago, and again not quite two years ago, I wrote about a Freedom From Religion Foundation lawsuit against the IRS. In the suit, the FFRF argued that section 107 of the Internal Revenue Code was unconstitutional.

Quick refresher: in general, when your employer gives you something, that thing you receive is income to you. And it doesn’t matter if what you receive is cash, is property, or even is services. To the extent your employer gives you something of value, that’s income to you.

Congress has carved out a handful of exceptions to the general rule, though. Maybe most importantly, employer-provided health insurance is not treated as income. So those of us lucky enough to have health insurance provided by our employers don’t have to pay taxes on its value. Similarly, all kinds of fringe benefits are excluded. 

And in 1921, Congress amended the tax law to add the predecessor to section 107. Under the 1921 law, “ministers of the gospel”[fn1] didn’t have to include the value of housing provided by their church employer in gross income. In 1954, for an array of reasons, Congress added to the exclusions and, since then, ministers of the gospel also don’t have to include in income cash they receive that the church designates as a housing allowance even if they own their own home.[fn2]

Several years ago, FFRF challenged the constitutionality of this parsonage allowance, and the district found it unconstitutional. The Court of Appeals, though, found that FFRF didn’t have standing to challenge the provisions, because its executives had never tried to claim it. (For a more details on the whole standing thing, you can look at my two prior posts on the subject, or, for a lot of depth, you can always look at a real academic article I wrote that dealt with the subject.)

Recently, the FFRF refiled, following the map the Court of Appeals suggested would give them standing. Two executives filed amended returns, claiming the parsonage allowance on their taxes and requesting a refund. The IRS denied the refund.

Last week, Forbes blogger Peter J. Reilly gave me a head’s-up that FFRF has passed one significant hurdle: the government does not contest that FFRF and its executives have standing to sue over the cash housing allowance.[fn3] (The government doesn’t concede that FFRF has standing to challenge the constitutionality of ministers’ excluding in-kind housing and, I suspect, if FFRF pursues that part of the provision, that part of the suit will ultimately be dismissed for lack of standing.)

What does that mean? It means we’ll (eventually, at least) get a ruling on the constitutionality of the cash parsonage allowance.

And what will that ruling be? As I said to Reilly, at the district court level, I suspect it will be ruled unconstitutional. At the Court of Appeals level, I still think it’ll be found unconstitutional. At the Supreme Court? It’s anybody’s guess. Establishment Clause jurisprudence is a hot mess, and I’m not sure what cues we can take from the past. (From a tax policy perspective, though, I think this particular allowance is indefensible.)

And is there a Mormon connection? Probably. The church almost certainly either provides in-kind housing or designates a housing allowance for General Authorities who draw a salary from the church. Those General Authorities almost certainly qualify as “ministers of the gospel.” The parsonage allowance lowers the cost of employing them, and it would border on malpractice[fn4] if the church didn’t take advantage of the parsonage allowance.

[fn1] The IRS has read “minister of the gospel” broader than merely Christian minister; essentially, according to the IRS, MofG means any religious leader who exercises certain sacerdotal functions, including cantors and imams.

[fn2] There are limits to the cash allowance. Specifically, the minister in question can’t exclude more than the fair rental value of her house.

[fn3] It’s in footnote 2, page 2, of the government’s brief.

[fn4] (Slight hyperbole alert.)


  1. Standing issues always bother me. The implication that the diffuse public interest is not reason enough to challenge the legality or constitutionality of a law or practice–that specific harm must be demonstrated–has always rubbed me the wrong way. In large part this is because the legislative process is thoroughly unsuited to advancing the interests of unpopular minorities, and indeed often acts against them out of sheer animus. (Magic word, there.)

    Also, one could argue that a carve-out for one group raises tax rates for everyone else, which is real harm. In the context of rate making in the regulated utility space (my line of work), this is a very, very important principle indeed, and departures from it need strong justification.

  2. APM, fair points; still, standing is a constitutional issue, and it is honestly doubly important in the tax context. If being a taxpayer were sufficient to challenge tax laws, the IRS would be in a state of constant—and expensive—litigation. Courts have recognized that collecting revenue is an essential governmental project, and have put in protections to keep it from being disrupted too much.

    That said, it looks like FFRF got past the standing hurdle for (part of, anyway) this suit. It’ll be interesting to see how the courts approach the parsonage allowance on the merits. (Other than the district court, of course, which already dealt with the case on the merits and, I suspect, will address it in a similar manner).

  3. D Christian Harrison says:

    There’re also allowances for mission presidents, fwiw.

  4. Last Lemming says:

    The IRS has read “minister of the gospel” broader than merely Christian minister; essentially, according to the IRS, MofG means any religious leader who exercises certain sacerdotal functions, including cantors and imams.

    Nevertheless, one should not try to sneak the phrase past a Jewish boss, even when trying to be faithful (pun not originally intended, but now that I see it, why not?) to IRS instructions (in my case, with regard to self-employment taxes).

  5. Sam: the way that public utilities commissions resolve this is by having a permanent, independently funded Ratepayer Advocate who is a party in all proceedings but also does not answer to the elected or politically appointed members of the commission. I’m actually surprised that federal agencies–and especially the IRS–don’t have something like this.

  6. I wonder if US missionaries living in church paid-for apartments also fall under this. The monthly ‘donation’ the parents make to the church is considered a general donation to the fund, isn’t it (and tax deductible)? And not tied directly to their missionary. It sure appears on paper that missionaries are receiving a housing benefit for their service.

  7. One reason why my ward has, probably, more general authorities per square foot than any other ward in the church is because the church owns a number of apartments in a building within the ward where Seventies live whose assignments bring them to Salt Lake for only a year or two; the generally accepted public explanation for that is so that these men aren’t constantly having to buy and sell homes. Of course I am not privy in the slightest to arrangements between the church and these officers — but it would be understandable for the church to take advantage of applicable tax breaks, and also to wonder how a suit like this might ultimately affect those arrangements.

  8. Thanks, Sam. For the update and pointer to your article. How did I not know about it before? (I’m more interested in the subject of the article than parsonage allowances, and may take up a comment or two with you, off-line.)
    You say “this particular allowance is indefensible.” It’s not clear whether you are making the large policy argument that would apply to many allowances, including employer provided health insurance (or at least the inconsistencies inherent in the “employer provided” requirement). Or the lesser policy argument that would distinguish cash from in-kind, where there is often an additional layer of justification for an allowance or exception for in-kind benefits? My view is that “allowance for cash is indefensible” is a correct statement, and relatively easy apart from church-state politics. A broader policy argument is more interesting and would warrant more than a one-liner.

  9. Thanks Sam. I love these posts. Competition between churches for members is only one place where religious competition occurs; the courts is one of the most important other arenas–at least that’s what I tell my students when I teach economics of religion.

    One friend of mine who was on his congregation’s governing council told me that his pastor’s salary and living allotment were by far the majority of their budget, and they struggled to stay in the black. He wished his congregation would adopt the Mormon model of unpaid local clergy as it would save thousands. I think that switch is unlikely for many churches, so I suppose clergy income (broadly defined) would decline in real terms as taxes would have to be paid, or there would have to be some shifting of benefits from housing to some other non-taxable category that is less valuable to the clergy (or more expensive to the congregation) than the housing allotment. I’m curious to know your own thoughts about the kinds of budgetary maneuvering that churches may end up having to make.

  10. Last Lemming says:

    the way that public utilities commissions resolve this is by having a permanent, independently funded Ratepayer Advocate who is a party in all proceedings but also does not answer to the elected or politically appointed members of the commission. I’m actually surprised that federal agencies–and especially the IRS–don’t have something like this.

    The IRS does have a taxpayer advocate who is independent of the political appointees. However, her budget and staff are not such that she can be party to all proceedings (or even most) and given the reflex to punish the IRS by cutting its budget, such funding is a pipe dream.

  11. Kevin Barney says:

    I’m interested in whether (and in what ways) this would affect mission presidents (and, I guess, missionaries).

  12. It appears that the way they got past the “standing issue” as you call it is that the government just rolled over it the way the State officials in California and at the federal level to defend Prop. 8 and the DOM Act, both duly passed by appropriate legislative and constitutional means. Say what you want about the policies or laws themselves (either way), its the elected officials sworn obligation to defend the laws until they are properly (via legislative or judicial means) changed. To fail to defend them is to put the executive into the position of dictating the side since rarely is someone involved with the standing to challenge.

  13. peterreillycpa says:

    I get the impression from this article that the Church of Latter Day Saints (if that is the right name) is not really big on financial transparency.

  14. Thanks for the comments, everybody. A couple thoughts:

    Terry, the government didn’t “roll over.” Once the FFRF people asked for and were denied the benefit, they had standing. In fact, they did exactly what the Seventh Circuit said to do in its earlier denial of standing. The government vigorously (and correctly) contested its standing to challenge the in-kind provision of housing.

    Mike, it will certainly fall harder on poorer churches. The cost of compensation is going to be a huge part, and subsidizing housing takes a big chunk out of the cost. OTOH, we don’t subsidize other small entities.

  15. Why should housing provided to mission presidents be treated any differently from any other employee’s business travel expenses? Reimbursements for those expenses are not taxable income to the employee, and it seems that housing provided for mission presidents could be treated the same way.

    In fact, couldn’t parsonage expenses be viewed in the same way? The minister has moved to the church in response to a “call.” Though that call may end up being relatively permanent, I think in many instances it’s divided into considerably shorter time increments. Should the minister be required to pay for his “travel” expenses in a situation where a non-religious employee is not?

  16. Mark, because it’s not a business expense. Employer-provided housing can be excluded from income in very, very limited situations (basically, it’s on the employer’s premises and you’re required to live there for the convenience of the employer; there’s another exclusion for an employee’s housing when the employee lives out of the country). The parsonage allowance is an exception to this general rule.

    The reasoning behind it is that, even if you’ve been transferred somewhere else to live, housing is a personal expense that you have to incur anyway. Otherwise, housing is compensatory. That is, it doesn’t qualify as a “travel” expense, even if it is (three years) temporary, just like any other employee’s housing wouldn’t qualify as a travel expense.

    I’m actually not sure how mission presidents’ housing fits into the schema. My understanding is, the church doesn’t treat mission presidents as employees. And I’m not sure if the ministers of the gospel exception requires employer/employee status or not. (I could figure it out, but frankly, given that this is my kids’ back-to-school week, plus I have work, I wouldn’t be able to get to it in the near future). To the extent mission presidents are in foreign countries and are employees, they could exclude ~$100,000 of housing allowance or value under general tax principles (though, again, it’s not as a travel expense). In the US, though, that wouldn’t work. They could exclude it under the parsonage allowance unless the parsonage allowance only applies to employee-ministers, in which case, that wouldn’t be an option for them.

  17. Thanks for your response, Sam. A few more thoughts–and I don’t have an answer, or any axe to grind in this question: Isn’t the parsonage, at least historically, on the employer’s premises, and isn’t the parson required to live there for the employer’s convenience? (I realize this doesn’t apply for the off-premises housing and the paid housing allowance.)

  18. It is my understanding that as a non-profit, the church is not required to pay property taxes in most states. However, as the church has vast real estate holdings, I understand that they elect to pay them anyway, at least on their income producing properties. Whether this is done through good citizenship or image management, I don’t know.

    So it makes me wonder if a similar policy is in place for parsonage exemptions. I’m guessing that the incentive would be smaller, since it is likely that cities would try to obstruct purchases by entities who did not pay taxes — especially vast holdings. But the parsonage benefit to the church is much less visible.

  19. Income producing properties are subject to property tax, no matter who the owner is. The typical requirement is not just ownership by a tax exempt entity but also use of the property for a tax-exempt purpose.

  20. DeepThink, I believe the property tax exemption would not apply to a church’s income producing properties. Only to the properties where an actual chapel or temple resides. So the church is paying tax in accordance with law.

    Regarding missionary housing, my understanding is that is a tricky area. I recall my tax professor at BYU saying that you could either deduct the $400 monthly missionary stipend as a charitable contribution or you could claim your missionary child as a dependent, but not both. The idea being that the $400 goes into a general missionary pool as a charitable contribution (not directly to your child) so you are not in fact supporting your child. Couple missionaries are a completely different situation

    With respect to mission presidents, I would doubt that the foreign employee housing exemption applies, but I could be wrong. In my mission, the housing for the mission president’s family (and temple president’s family) was in the temple (in Hong Kong). I wonder how they would determine the value of this housing since it’s a multipurpose building and any comparable market for such housing does not exist. I guess in that specific instance it could be argued that the housing is on site for the convenience of the employer, but again I don’t think MP are considered employees. I suppose, based on the above, the church can effectively gross up the payments to cover taxes in the future if necessary. This is common in all sorts of expense reimbursement situations.

  21. Mark, in 1921, that was roughly Congress’s idea. Treasury had issued some rulings that various professions (like seamen) qualified for the normal housing exemption, but ruled unequivocally that ministers did not. So Congress reversed Treasury, though in reversing Treasury it provided an expanded exemption.

    But in 1954, it expanded the exemption further, allowing ministers (as broadly defined) to receive a cash housing allowance tax-free. And that’s the provision FFRF has standing to challenge.

    I think there are circumstances that ministers could qualify for the normal housing exclusion, though it would be tough. Not only does the housing have to be on the employer’s premises and the employee has to live there, but the requirement that the employee live there must be for the employer’s convenience, not the employees. So examples of what qualify might include emergency room physicians at a hospital (because they could be needed at any time) and sailors or oil rig workers (because there’s no convenient way for them to live somewhere else). It’s harder to imagine when a minister might have to live on church property for the convenience of the church, but there are probably some situations that would meet that requirement.

    Chadwick, I think your BYU professor was wrong. I mean, that was one of the problems in the Davis case, but the church essentially mooted the Davis when it went to the current payment regime. You pay into a church fund, and that payment is deductible. The payment isn’t allocated to your particular child, so it’s not like you’re supporting her, so, if she otherwise qualifies as a dependent, I don’t see why you couldn’t take the charitable deduction and the dependent deduction.

    And valuing church-provided housing is clearly going to be hard in some circumstances. But I’m pretty sure that you could come up with a fair estimate.

  22. John Mansfield says:

    IRS Pub. 17 that Google turns up says of qualifying dependents: “The child must be (a) under age 19 at the end of the year and younger than you (or your spouse, if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse, if filing jointly), or (c) any age if permanently and totally disabled.”

    It doesn’t sound like missionaries 19 or older and non-disabled qualify as dependents.

  23. I don’t have a comment, but I do want to say thanks for writing posts like this. I’m with Mike. I love it when you do this kind of analysis.

  24. Last Lemming says:

    It doesn’t sound like missionaries 19 or older and non-disabled qualify as dependents.

    Somebody who is on a mission at the end of the tax year can still qualify as a dependent if he or she was in school for a long enough portion of the year. Conversely, newly-returned missionaries who only enroll in fall semester when they get back will not be in school long enough to qualify as dependents. One way or another (for male missionaries), there will be two tax years in which they will not qualify as dependents.

  25. Thanks, Sam, for doing the tax research that I don’t have time for. Convenience of the employer does seem to fit a Catholic model better than a Protestant one, roughly. If celebrating mass daily and hearing confessions etc., are all things that Catholic priests have to do, and they have to be done at the church, I can see at least an argument that having the priests live on the premises was for the benefit of the employer.

  26. I would love to hear from a former mp how this is all handled. Mp personal family expenses are shrouded in silence. The typical profile of a mp suggests that the mp has large personal family expenses. Lots of kids expensive homes etc.

  27. Aren’t US military housing allowances exempt from reporting as income for tax purposes? Of course, the government often exempts itself from requirements for other entities.

  28. Brian, there is a housing exemption for military that operates differently from the generally-available exemption and the parsonage allowance. I’ve never really looked into it, so I can’t comment on it intelligently; it doesn’t, however, raise the potential Establishment Clause issues that the parsonage allowance does.

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