Ministers are allowed to exclude the portion of their compensation designated as a housing allowance from their taxable income.  Quite a few people question the constitutionality of this provision and it looks like it may be finally put to the test.  A federal district court has ruled that the Freedom From Religion Foundation has standing to proceed with its suit against the exclusion (Code Section 107).  There are arguments that the provision is constitutional, though.  I have invited Frank Sommerville to make the case for Section 107′s constitutionality.  Mr. Sommerville is a lawyer and a CPA from Dallas Texas.

[Editor’s note: Since this article was written, a federal judge in Wisconsin has struck down a law that exempts clergy members from paying income taxes on housing allowance.]

HISTORICAL CONTEXT OF SECTION 107

Section 107 is best analyzed by reviewing the historical context surrounding the development of Section 107 of the Internal Revenue Code, the clergy housing allowance. Section 107 is only one part of the larger statutory framework of exclusions for employees who receive employer-assisted housing due the requirements of the job and for the convenience of their employers. See Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, (JCS-10-87) May 4, 1987, at {54} (in amending I.R.C. 265(a) “Congress concluded that it was appropriate to continue the long-standing tax treatment…claimed by ministers and military personnel who receive tax-free housing allowances”).

Current tax policy lightens the tax burden of the taxpayers who receive qualifying employer-assisted housing. See Sections 107 (clergy housing), 119 (general housing), 134 (military housing), and 911(a)(2) (foreign housing). Congress created these tax-free housing allowances within its discretion and to demonstrate a willingness to give tax breaks to classes of taxpayers who have little choice about their personal living space. Whether the employer provides a cash allowance or a home, each benefit serves the same purpose; that is, often the employer’s needs affect the living space needs of its employees. Many times, these classes of employees frequently relocate, thus preventing them from settling down and hindering long term close friendships. Further, the employers frequently require them to use their homes to conduct employer business. Additionally, the employee’s place of service may not be desirable. These employees must reside where their employer requires and must frequently use their residence for employer business. Some employees sacrifice amenities that most citizens take for granted, such as long term stability in one locale and privacy.

Tax favored employer-assisted housing existed in both the statutory and common law of taxation prior to the enactment of the Internal Revenue Code of 1954. In fact, all the Internal Revenue Code references to taxation of employee assisted housing began with “convenience of the employee” doctrine. As discussed below, the convenience of the employer doctrine was recognized by the Bureau of Internal Revenue in 1919, before it was ever codified. Section 107 traces its origin to the convenience of the employer doctrine beginning in 1921; Section 134 traces its origins to the convenience of the employer doctrine beginning in 1919; while Section 911 traces its origins to the convenience of the employer doctrine beginning in 1926. Together these code sections create a logical framework that Congress created for addressing the taxation of employer assisted housing. Due to their common origin, they have many elements in common and should be analyzed together.

The Bureau of Internal Revenue addressed employer-provided housing and meals very early. O.D. 265, 1 C.B. 71 (1919) (providing that the value of the meals and lodging furnished a seaman was not taxable compensation). Dubbed the “convenience of the employer” doctrine, the concept looks at employees who had very little say in the place of their residence or where they ate meals. The basic premise: taxable compensation does not include housing and meals provided for the convenience of the employer. Other governments have typically excluded this type of benefit from taxation for thousands of years. Seaman, ranchers, innkeepers, ministers, military officers and the President of the United States all have benefited from this doctrine since at least 1919.

Read More