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The National Republican Senatorial Committee blasts on its website ICYMI // How Raphael Warnock Dodges Income Taxes. It’s strong criticism of a practice Republican lawmakers defended as recently as 2018.
When the 7th Circuit was considering the constitutionality of the income tax exclusion for cash housing allowances for clergy, 17 members of Congress — all Republicans — signed an amicus brief from the First Liberty Institute, defending the tax benefit. Thus it seems odd that the NRSC would characterize the “parsonage exclusion” as a “tax dodge” when it benefits a senator who is also the senior pastor of one of the most historically significant churches in the nation.
The NRSC references a story by Alana Goodman in The Washington Free Beacon – How Raphael Warnock Dodges Income Tax – Warnock doesn’t pay income taxes on $90K ‘parsonage allowance’ from Atlanta Church. Goodman quoted me in the story to the effect that Senator Warnock’s parsonage allowance struck me as on the high side, but not crazy.
When she interviewed me, she told me that she was new to the parsonage exclusion. I realize I might have made a mistake in saying that the exclusion runs into the millions for televangelists and some of the megapastors of megachurches. I probably should have said hundreds of thousands.
Code Section 107 – Rental value of parsonages – is short enough to reproduce in full:
26 U.S. Code § 107 – Rental value of parsonages
In the case of a minister of the gospel, gross income does not include—
(1)the rental value of a home furnished to him as part of his compensation; or
(2)the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
Note the noninclusive language (he, him) and the Christian reference (minister of the gospel). That tells you it has been around a long time. The first part goes back to the 1920s. In the case of a building next to the church where the minister is required to live, it would seem that it duplicates – Section 119 – Meals or lodging furnished for the convenience of the employer, but there were religious liberty concerns about the level of scrutiny that would be required to apply the latter to parsonages. The exclusion for cash rental allowances came into the tax law in the 195os and was tweaked in the 1990s.
Many people, including tax experts and including me, think that the cash exclusion is poor tax policy that leads to a lot of abuse. And there was serious concern about the constitutionality of the provision. Judge Barbara Crabb of the U.S. District Court for the Western District of Wisconsin ruled that 107(2) was unconstitutional twice. The Seventh Circuit overruled her the first time based on standing. Then on March 15, 2019 in a suit brought by the Freedom From Religion Foundation the appellate court ruled:
FFRF claims § 107(2) renders unto God that which is Caesar’s. But this tax provision falls into the play between the joints of the Free Exercise Clause and the Establishment Clause: neither commanded by the former, nor proscribed by the latter. We conclude § 107(2) is constitutional. The judgment of the district court is REVERSED. (emphasis added)
About The Ebenezer Baptist Church
Senator Warnock is the pastor of Ebenezer Baptist in Atlanta, Georgia. Now you and I both know what a big deal that is, but you have to consider some young readers who might not. In my mind, Ebenezer Baptist is the most historically significant church in the United States in the 20th century. I would be willing to debate that with you, but you have to show up with a church that had a co-pastor who has a federal holiday in his honor. Next year, Martin Luther King Jr. Day will be on January 16.
Just to make sure, I checked in with my friendJerilyn James Lee, who runs a fantastic site on the contribution of Black troops to Union victory in the Late Unpleasantness. I asked her if Ebenezer is of special significance. She wrote me:
Absolutely. It’s historical significance reaches much further than Atlanta. Ebenezer is “hallowed ground” throughout all black communities, regardless of denomination. To be named Pastor of Ebenezer is more than an honor; he is the Gatekeeper of one of the most significant spaces in US and Civil Rights history.
So Senator Warnock occupies a very prestigious pulpit.
What’s The Problem?
I spoke with Fran Brown, Managing Partner of CapinCrouse, a national CPA firm that specializes in faith based organizations. Fran and I were partners together in CCR LLP, a regional firm that was acquired by a not quite Big Four national firm. I can see from this video that CapinCrouse is more his type of firm. You can catch Fran at around 0:30 saying, “What it is about is the Kingdom of God.”
At any rate, Fran did not think that a $90,000 housing allowance for the pastor of a large prestigious congregation was at all remarkable. He also confirmed that there is no limit on the percentage of compensation that can be designated as housing allowance. As noted in 107(2) the exclusion of the allowance is limited to the rental value of the house.
Republicans Lead With ‘Tax Dodge’
What raised this issue was concerns about Senator Warnock’s compliance with rules around outside earnings. Nonetheless, the NRSC and Goodman’s article both refer to the exclusion as a “tax dodge”. And that is just wrong.
Reilly’s First Law of Tax Planning – It is what it is. Deal with it. I happen to think that the parsonage exclusion is terrible tax policy and probably on net actually bad for religion. Nonetheless I remember reviewing the return of a minister, and calling him up and suggesting that he ask his congregation to designate more of his compensation as housing allowance. The anthem of my generation of tax planners is a quote from Learned Hand:
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
Do all tax advisors think that way? Well, according to my unscientific survey, 98% do.
Professor Adam Chodorow of the Sandra Day O’Connor College of Law at Arizona State University wrote an amicus brief in support of the Freedom From Religion Foundation in the Seventh Circuit case. Clearly he is not a fan of the parsonage exclusion. Nonetheless, he views the criticism of Senator Warnock as absurd, saying in an email:
This is not a case of someone stretching the law or finding a questionable loophole. Chastising Warnock for receiving a tax-free parsonage allowance would be equivalent to criticizing him for buying tax-exempt bonds or paying capital gains rates on his capital gains. It is not hypocrisy to advocate for higher taxes while taking full advantage of the existing provisions in the code.
Natalie Allison and Burgess Everett have Republicans try a pocketbook play to vilify Warnock on Politico.
Paul Streckfus picked up the Politico story on EO Tax Journal. He comments:
As has been noted in these pages, the section 107 parsonage allowance is a tremendous benefit for qualifying ministers, especially those with high incomes and high housing costs, but very unfair to the rest of us, especially where everyone connected with a church is treated as a minister. In the case of Warnock, section 107 limits the housing allowance exclusion to the lesser of actual housing expense or fair rental value. Any benefit in excess of that is not covered by section 107.
For deep background check out my Church State Tax Roundup With Emphasis On Parsonage Issue.