Wednesday, February 11, 2015

Minister Housing Allowance Challenge Thrown Out of Court

Ministers have the opportunity to receive employer provided housing benefits.  If the restrictions under IRC Section 107 are met, these benefits can be nontaxable for income tax purposes.  (They are subject to self-employment taxes.)  Nonclergy must generally pay income tax on the value of their employer-provided housing unless they meet certain requirements including that the housing be provided “for the convenience of the employer.”

The co-presidents of Freedom From Religion Foundation Inc. received part of their pay in the form of a housing allowance.  Because they were not ministers, they paid income tax on this portion of their salaries.  Neither of the co-presidents sought to exclude this income on their federal income tax returns.  Neither has filed a claim for refund.  Freedom From Religion Foundation Inc. and its two co-presidents filed suit stating Section 107 violated the First Amendment because it conditions a tax benefit on religious affiliation.

District Court held the plaintiffs had standing to challenge this and therefore heard the case.  The District Court then determined Section 107 was unconstitutional.  The case was appealed.

The 7th Circuit Court of Appeals heard the case and ruled the plaintiffs did not have standing to challenge Section 107 since the plaintiffs were not ministers. Part of the Appeals discussion included a statement that neither the organization nor the co-presidents suffered any personal injury.  The Court stated there may be direct harm such as mandatory prayer in a public school classroom, or by being exposed to religious symbols.  But in this case there is no harm to either the organization or the co-presidents.  The case was remanded to the District Court with instructions to dismiss the complaint.

Freedom From Religion Foundation Inc, 7th Circuit Court of Appeals, November 18, 2014.

This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111)

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