By: A.J. Cook


It looked heaven-sent.

The church trustees gave pastor Rev. Richard D. Warren a generous tax deductible housing allowance but a paltry taxable salary. The allowance, over three years averaged $88,333; the salary averaged $6,667.

The law says the housing allowance paid to a minister of the gospel as part of his compensation is not taxable to the extent used to rent or provide a home. But can the allowance be all or practically all of the compensation?

Warren, an ordained Baptist minister, not only lead the Saddleback Valley Community Church, but was also blessed with several successful books: "The Purpose Driven Church," "The Power to Change Your Life" and "Answers to Life's Difficult Questions." From these books and some tapes he made over three years he received an annual average profit of $207,602.

Rev. Warren used his housing allowance to pay his utilities, furnishings, repairs, property taxes, homeowner's insurance. He also used it for mortgage payments on his new $360,000 home in Tracuco Canyon, Calif. He spent practically all the allowance and excluded what he spent from taxable income.

The Internal Revenue Service delivered a sermon on the mountain of housing expenses. It said Rev. Warren's income exclusion must be limited to the home's rental value, about $58,000 a year.

Rev. Warren appealed to a higher authority – the Tax Court. Because this court considered the case extremely important, 17 Tax Court judges heard the case. Fourteen of them blessed the preacher. They said the law allows a housing stipend to be used for the rent or purchase of a minister's home as well as for expenses related to the home upkeep. And the law doesn't cap the amount.

Three judges, however, issued a strong dissent complaining about the "majority's open-handed generosity..." They said this case is a good "example of the potential for abuse." The allowance should be only a part of compensation -- not all except a "pittance".

The IRS probably will ask an appellate court to reverse this decision. But for now, pastors and rabbis can pray that other courts will allow them large non-taxable housing allowances.

The Moral:  Those who dwell in the house owned by the Lord can use their income for something else.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
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Released 10-16-00