COURT CONSIDERS CONSTITUTIONALITY OF HOUSING ALLOWANCE

On December 3, 2001, the Ninth Circuit Court of Appeals heard oral arguments in Warren v. Commissioner, a minister housing allowance case. Rev. Rick Warren won his Tax Court case in 2000 and the Internal Revenue Service appealed. The issue was whether Rev. Warren’s housing allowance exclusion from income tax extended beyond the fair rental value of his home.

Rev. Warren, pastor of Saddleback Community Church, received 100% of his compensation from the church as housing allowance. He then spent all that compensation on qualified housing expenses. Rev. Warren and the IRS agreed that the amount designated and the amount spent exceeded the fair rental value of the house and its furnishings. They asked the Tax Court to decide whether the amount of the housing allowance excluded from income tax was limited to the fair rental value amount. 

The IRS had issued Revenue Ruling 71-280 that held that a minister’s housing allowance was limited to the fair rental value of the minister’s home. Revenue rulings, while not having the effect of law, notify the public of the IRS’s opinion when presented with facts similar to those contained in the revenue ruling. The IRS believed that this revenue ruling represented a reasonable interpretation of housing allowance exclusion.

The Tax Court, in a 14-3 decision, ruled that housing allowance exclusion was not limited to the fair rental value of the minister’s home, effectively voiding the revenue ruling. The IRS appealed the decision to the Ninth Circuit Court of Appeals.

Recent developments could alter the Tax Court’s decision. First, the United States Supreme Court issued a decision in United States v. Mead that held that government agency rulings are entitled to deference by trial courts. Stated another way, the courts must prefer the agency’s interpretation unless the challenger presents strong arguments for the court to overrule it. 

After the Mead decision was released, the IRS asked the court to consider reversing the Tax Court in Warren because it did not give deference to Revenue Ruling 71-280. Rev. Warren and NACBA opposed the IRS request because the revenue ruling did not qualify for judicial deference. 

Second, shortly before the oral arguments, the Ninth Circuit Court of Appeals asked the parties to argue whether housing allowance exclusion was unconstitutional under Bullock v. Texas Monthly, Inc., a 1989 Supreme Court decision. The Bullock decision held a sales tax exemption that only applied to religious organizations was unconstitutional. The Ninth Circuit Court was questioning whether housing allowance exclusion was similarly unconstitutional because it only applied to religious professionals.

The Bullock decision was relevant because three Supreme Court justices held that any tax exemption must include nonreligious groups for it to be constitutional. Three more justices wrote that they based their decision on the basis that the statute granted an exemption solely for religious teachings. Since the exemption was based solely on religious content, it was unconstitutional. The last three justices dissented from the opinion and would have held the sales tax exemption was constitutional.

This is the same Supreme Court that two years earlier unanimously held that the exclusive exemption for religious organizations contained in the employment discrimination statute was constitutional. The opinion stated that the exemption was appropriate because it did not imply sponsorship of religion and the exemption reduced the entanglement between religion and the government.

In oral arguments, Judge Reinhardt questioned whether the court could review the constitutionality of housing allowance exclusion. He observed that ministers would not question the constitutionality because they benefited from the statute. He also observed that the IRS is bound by law to support the constitutionality of statutes passed by Congress. In theory, Congress could pass unconstitutional statutes because no one interested in the constitutionality of the statute would have standing to question its constitutionality.

The Ninth Circuit Court stated that it would notify the parties if it was going to make its decision based on the constitutionality of housing allowance exclusion. In the notice, the court would give the parties an opportunity to brief and argue fully the issue.

A decision from the Ninth Circuit Court is expected in 2002.

NOTE: Frank Sommerville of Hammar & Sommerville participated in the oral arguments in the Ninth Circuit Court of Appeals on behalf of the members of NACBA. He can be reached at  for more information. NACBA has the oral arguments available on our Web site

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Last modified: 06/04/07

©2001 National Association of Church Business Administration®