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Pastoral Tax Break Faces Legal Test

In an Orange County case, an appeals court will decide the constitutionality of a housing allowance widely used by churches to help their clergy.


Ed Salas works in the house of God. But when the Santa Ana pastor goes home at night, the roof over his head is made possible, at least in part, because of a generous tax shelter courtesy of Uncle Sam.

About two-thirds of the $35,000 Salas draws from evangelical Tapestry Covenant Church comes as a housing allowance--a form of compensation that hasn't been subject to federal income tax since Congress approved it in 1954.

"I probably couldn't be a pastor here without it," said Salas, a father of three whose 120 congregants worship each Sunday in a rented middle school. He also works a second job as a salesman. "The church isn't large enough to give me a salary increase.... Right now, we scramble to make ends meet."

A little-noticed case now before the 9th Circuit U.S. Court of Appeals could make that scramble more difficult for ministers and churches nationwide. It challenges the way churches like Tapestry Covenant rely on an obscure provision in the federal tax code to stretch tight budgets.

At issue is whether the Internal Revenue Service's "parsonage allowance," which creates an estimated $400-million-a-year tax break for churches, is constitutional. Opponents contend that the provision violates the 1st Amendment's "establishment clause," which deals with the separation of church from state.

Legal experts and church officials said the case could redefine the often uneasy relationship between government and religion, as well as profoundly change the way churches do business. Briefs in the case are due to be filed later this month.

"There are 850,000 clergy in the United States--everything from rabbis to pastors to priests--who are qualified for this housing allowance," said Frank Sommerville, a Dallas accountant and tax lawyer who represents churches and was asked by the appeals court to file a brief in the case. "It's an issue about where religion and society" should intersect.

The case has its roots in a routine IRS audit of one of the nation's wealthier religious figures: the Rev. Richard Warren, senior pastor of Saddleback Church, a mega-church in the Orange County community of Lake Forest. In 1996, auditors said Warren's housing allowance for the previous three years exceeded the IRS-calculated rental value of the Trabuco Canyon home he and his wife bought for $360,000. In 1995, Warren claimed $79,999 as a housing allowance--80% of his compensation from Saddleback. Auditors said the exclusion was $20,000 more than he was entitled to.

Warren was in a position to spend that much on housing because his side business is so lucrative. In 1995, according to court records, Warren earned $221,401 from the sale of his religious audiotapes and books.

Warren appealed his case to a federal tax court and, by a vote of 14 to 3, the judges ruled that although IRS rules cap the amount a minister can claim as a housing allowance, the law doesn't.

The government appealed the case to the San Francisco-based 9th Circuit--and there Warren's case took on an entirely different cast.

In November, one of the appeals court judges, Stephen Reinhardt, stunned both parties in the case by asking that the constitutionality of the parsonage allowance be examined.

"It's morphed into a whole different critter," said Saddleback Pastor Forrest Reinhardt, a colleague of Warren's and no relation to the judge.

The 1st Amendment's establishment clause has been tested in a dizzying array of legal issues--from tax cases to the Americans With Disabilities Act to local zoning debates. The U.S. Supreme Court is now weighing how the establishment clause applies to a Cleveland program that uses public money to allow students to attend private religious schools.

To Erwin Chemerinsky, a USC law professor appointed by the 9th Circuit to write a brief on the Warren case, the issue is clear: Because the parsonage allowance is available only to ministers, it is an indirect subsidy of religion and therefore unconstitutional.

"Government can't subsidize religion," he said. "Religion is treated differently by the Constitution. If the government wants to subsidize journalists because it feels they aren't paid enough, I don't have any problem with that. But if they want to do the same thing with regards to religion, they can't."

John Eastman, Warren's attorney, said he will argue that the parsonage allowance is not a subsidy, but rather an "accommodation of religion" not unlike the tax-free status of church property,

"Exempting somebody from a tax simply allows them to keep more of their money," Eastman said. "It's the difference between a direct payment by the government and the government not taking money away from a church.

"That's what this fight is all about: How much of an accommodation of religion can we make before we violate the establishment clause?"

Warren declined to be interviewed. But in an e-mail, he said his legal fees so far are more than twice what the IRS offered to settle for. "We were fighting for a principle," Warren wrote.

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