MORTGAGE PAYMENT DIRECTLY TO MORTGAGE COMPANY

Diane - Pub 17 says, "Expenses paid by another. If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income.
I'm an IRS-trained and certified tax preparer; the mortgage payment is taxable as income.

Where is the ruling that a mortgage payment that is paid directly by the church has to be reported as income instead of housing allowance? I'm not questioning your knowlege, but I need to know where this is written in IRS policy or laws. Thank you.

Yes a church can, but then it should be included on his W-2 as income.

A designated housing allowance (properly set up)and paid directly to the Pastor would be more tax beneficial for him.