Historically, tax law has been written to allow certain employees to exclude employer provided housing from gross income. The exclusion is allowed if the employer provided housing is for the benefit of the employer such as housing provided to the super of an apartment complex who needed to be available at all times.
A second exclusion for housing is available under IRC Section 107, which allowed religious leaders of faith to exclude from income “the rental allowance paid to him/her as part of his compensation” as long as the allowance was used for housing. This allowance is commonly referred to as parsonage. This exclusion for parsonage was available regardless of whether the allowance was given for the convenience of the employer.
The exclusion allowed under IRC Section 107 was recently challenged in District Court (Wisconsin) claiming it to be a violation of the First Amendment, stating the belief that this exclusion endorses religious believers only. The District Court agreed and ruled that the exclusion allowed for housing allowances paid to religious leaders did violate the First Amendment leaving impacted taxpayers with additional taxable compensation.
At this time, this ruling is only binding to taxpayers living in an area covered by this district court (Wisconsin). Religious leaders relying on this housing exclusion should monitor this situation as the exclusion could be challenged in other district courts or the IRS could adopt the ruling going forward. Religious leaders can still utilize the exclusion for housing provided for convenience of the employer, if applicable, where the Section 107 exclusion is not allowed.