Originally published on Forbes.com.
John Oliver’s send-up of televangelists highlighted the IRS, because the televangelists can organize as churches, making them exempt from taxation without being subject to the transparency – annual filing of Form 990 and application for exempt status – required of other not for profits. Oddly he only really discussed one tax issue beginning around 9:50 when he gets into Kenneth and Gloria Copeland’s $6.3 million lakeside parsonage.
The abusive practices that he focused the most attention on were soliciting donations based on faith healing and the prosperity gospel. If we assume, for the sake of argument, that the televangelists are insincere, then these are noxious practices. The only problem is they are not really matters within the competence of the IRS. People lying about the health benefits of a practice would seem to fall under the scrutiny of the FDA and people make bogus financial claims would seem to fall under the SEC. Sadly, given the First Amendment’s free exercise clause, it is likely that the government can’t scrutinize those claims.
Parsonage
Parsonage is a tax issue, although it is not something made up by the IRS. Like the rest of the tax law it was passed by Congress, specifically Code Section 107. The parsonage exclusion has two aspects. If a church provides a house for a “minister of the gospel” to live in the fair market value of the in-kind housing is exempt. The second part is where the abuse comes in. Cash housing allowances paid in lieu of in-kind housing are also exempt from income tax. There is no dollar limit. Tax-free housing allowances to televangelists and mega-church pastors can and do run into the hundreds of thousands. Reverend William Thornton, who himself has modestly benefited from the housing allowance, writes in the SBC Plodder.
One wonders, why is the government giving this tax break? Shouldn’t there be some cap on this? Is it serving any legitimate purpose to subsidize million dollar beach homes for the few ministers who have enough income to live in them? Is there any way to justify this tax policy at such stratospheric income and housing levels?
Congress Protects The Clergy Housing Tax Break
Congress has been quick to patch any threat to the parsonage allowance. In the eighties the IRS had taken (or maybe threatened to take) the position that home mortgage interest and real estate taxes paid with an exempt housing allowance were not deductible. Congress amended the Code to allow the double dipping to continue. When Rick Warren got into a dispute with the IRS on some of the fine points of the housing allowance, the Ninth Circuit took notice and questioned whether a special income tax exemption for “ministers of the gospel” might raise issues under the establishment clause. Congress responded with alacrity to keep the Ninth Circuit from considering the issue.
The House acted on the bill only six days after it was introduced by Rep. Jim Ramstad, R.-Minn. The speed with which representatives moved came in reaction to a threat by a federal appeals court to strike down the allowance as unconstitutional. A panel of the Ninth Circuit Court of Appeals announced in March it is reviewing the constitutionality of the allowance, even though neither side in the related case challenged the exemption.
While Ramstad’s bill would not settle the issue of constitutionality, he and other supporters hope that by clarifying the “fair rental value” language formerly used by the Internal Revenue Service, it will set the stage for settlement in a pending case, thereby ending the Ninth Circuit’s threat to the allowance.
Dubious Constitutionality
Congressmen recognized the dubious constitutionality of the provision. They could do nothing about that, but they moved quickly to prevent an appeals court from considering it.
The Freedom From Religion Foundation directly attacked the constitutionality of the cash housing allowance and won. In November of 2013, Judge Barabar Crabb of the United States District Court for the Western District of Wisconsin ruled
With respect to the merits, I conclude that § 107(2) violates the establishment clause under the holding in Texas Monthly, Inc. v. Bullock, 489 U.S. 1(1989), because the exemption provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.
A year later the Seventh Circuit overturned Judge Crabb’s decision. Not because they think the provsion is constitutional. The never got to that. It was because Freedom From Religion Foundation did not have standing to bring the case in the first plance. Standing is a very a lawerly concept, but one of the things it does is protect tax benefits of dubious constitutionality, since the court more or less says to anybody objects – “Hey, it’s no skin off your nose. Write your congressman.”
There’s More
At any rate, unseemly as it may be to pat myself on the back, I think that if John Oliver’s piece has piqued your interest in the tax free housing allowances of televangelists, you will find that I have covered the issue more thoroughly than any other tax blogger. One of the joys of the topic for me is the way in which the tax law intersects with history in this area as I noted in – Work, Fight or Pray – Vestige of the Medieval in Our Tax Code. Or you could just put parsonage into the forbes.com search box.
How About A Limit?
Something that would be a small blow against the greediest of the televangelist that would not be harmful to more modest clergy would be a dollar limit on the cash housing allowance under Section 107(2) . FFRF’s attack on the housing allowance had a marvelous effect on the ecumenical movement. One of the amicus briefs defending the housing allowance had Southern Baptists joining with the Russian Orthodox, the Krishna Consciousness people and the Islamic Center of Boca Raton. I’m hoping that a proposal for a dollar cap might not be as disturbing to denominations that don’t have so many mega pastors.