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Appeals court finally dismisses clergy housing exemption case

WASHINGTON (BP)–A federal appeals court has finally dismissed a case that prompted Congress to act swiftly to protect a longstanding housing tax exemption for ordained ministers and other clergy.

A three-judge panel of the U.S. Ninth Circuit Court of Appeals announced Aug. 26 its dismissal of Warren v. Commissioner of Internal Revenue.

Under the exemption, clergy have been able to deduct from federal taxes a portion of their income for housing since 1921. After the panel received the case on an appeal by the Internal Revenue Service, it stunned Congress and religious communities by announcing in March it would consider whether it should weigh the exemption’s constitutionality and, if so, whether the allowance would pass the test under the First Amendment’s ban on government establishment of religion. Neither party in the case had challenged the exemption’s constitutionality.

Congress reacted with unusual speed and unanimity. It passed a bill designed to protect the housing allowance less than six weeks after introduction. The legislation’s goal was to preserve the exemption by amending the Internal Revenue Code to make clear the allowance should not exceed the “fair rental value” of a house, including furnishings, accessories and utilities.

Both the House of Representatives and Senate approved the Clergy Housing Allowance Clarification Act without opposition. President Bush signed the bill into law May 20.

Two days after the president signed the measure, both parties in the case requested dismissal of the appeal. With the exemption preserved and the IRS’ interpretation of “fair rental value” verified, both sides were satisfied. The 9th Circuit panel, however, took three months to dismiss the case.

In its order, the panel said it had to weigh an attempt to intervene in the case by Erwin Chemerinsky, a professor at the University of Southern California Law School. The panel ruled Chemerinsky did not have grounds for intervention.

The judges had appointed Chemerinsky to write a brief for the court when they were pondering whether the exemption was constitutional. The law professor told The Los Angeles Times he believed it violated the First Amendment.

Judge Richard Tallman wrote a brief concurrence to the dismissal order, saying he agreed with the judgment only. The panel did not need to consider the motion to intervene since both parties requested a dismissal, he said.

The new law added the following language to the tax code: “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.” The amendment would not apply to taxable years before 2001. Amended tax returns could be filed without penalty or interest under the bill.

Rick Warren, pastor of Saddleback Valley Community Church, a large and influential Southern Baptist church in Lake Forest, Calif., sued the IRS after an agent assessed his home’s value at far less than its worth and thereby reduced the housing allowance, he said. The IRS penalized Warren for the years 1993-95 for the difference between the IRS valuation and the exemption from taxable income he claimed.

In May 2000, a U.S. Tax Court in California decided in Warren’s favor by a 14-3 vote. The court ruled the exemption in the code is limited “to the amount used to provide a home, not the fair market rental value of the home.” The IRS appealed the ruling to the Ninth Circuit.

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