This Freeman Law Insights blog dives into what is a minister of the gospel for housing allowance and federal income tax purposes.
Housing Allowances, Generally.
Compensation for services rendered is generally included in gross income that is taxable to the individual worker. The Internal Revenue Code (the “Code”) excepts from gross income a housing allowance (known as or sometimes generally called a “parsonage allowance”) under certain circumstances. Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Specifically, the Code states that
in the case of a minister of the gospel, gross income does not include—
(1) the rental value of a home furnished to him as part of his compensation; or
(2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed that fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
I.R.C. § 107(1) and (2); see Treas. Reg. § 1.107-1(a).
Minister of the Gospel Requirement.
To qualify as a “minister of the gospel” for the rental allowance exclusion under section 107 of the Code, the home or rental allowance must be provided as remuneration for services which are ordinally the duties of a minister of the gospel. However, neither the Code nor applicable Treasury Regulations define the term “minister of the gospel,” and the United States Tax Court has repeatedly stressed the fact that the phrase “minister of the gospel” is not statutorily defined:
There is no legislative definition in the statute of the phrase ‘minister of the gospel’ and the legislative history of the statute contains no clear statement as to the meaning ascribed to the term ‘minister of the gospel.’ The Commissioner’s regulations under section 107 do not attempt to define the term ‘minister of the gospel’.
See Lawrence v. Comm’r, 50 T.C. 494, 497 (1968).
The phrase “minister of the gospel,” as used in the Code and Treasury Regulations, customarily requires interpretation in cases presented on the issue of housing allowances and other matters addressed by section 107 of the Code, and the Tax Court generally applies the regulations set forth in Treasury Regulation § 1.1402(c)-5 and § 1.107-1 to make a determination in this context.
The Treasury Regulations prescribe example of activities that are considered “duties of a minister.” Examples include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries.
Under section 1.107-1 of the Treasury Regulations, an individual is a minister for federal income tax purposes if, acting pursuant to his or her authority as a minister, he or she performs sacerdotal functions, conducts religious worship, participates in the maintenance of “religious organizations and their integral agencies,” and performs “teaching and administrative duties at theological seminars.” See Treas. Reg. § 1.107-1(a).
Treasury Regulation § 1.107-1 also states that “the rules provided in § 1.1402(c)-5 will be applicable to [determining whether services are considered the duties of a minister of the gospel].” Section 1.1402 of the Treasury Regulations sets forth a set of rules in this regard:
(i) Whether service performed by a minister constitutes the conduct of religious worship or the ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting his church or church denomination.
(ii) Whether services performed by a minister in the control, conduct, and maintenance of a religious organization relate to directing, managing, or promoting the activities of such organization.
(iii) If a minister is performing service in the conduct of religious worship or the ministration of sacerdotal functions, such service is in the exercise of his ministry whether or not it is performed for a religious organization.
Treas. Reg. § 1.1402(c)-5(b)(ii)(1)(i)–(iii). The Tax Court effectively summarized sections 1.107-1 and 1.402(c)-5 into a set of five factors, known colloquially as the “Wingo factors”:
- Ministration of sacerdotal functions;
- Conduct of religious worship;
- Performing services in the control, conduct and maintenance of organizations within the congregation;
- Whether the person is duly ordained, commissioned, or licensed; and
- Whether the congregation itself considers the person to be a religious leader or minister (i.e., whether the person is regarded as a spiritual official and leader in the faith).
See Wingo v. Comm’r, 89 T.C. 64 (1987); accord Knight v. Comm’r, 92 T.C. 199, 204 (1989). The Tax Court in Knight noted that the ordination, commission, or license factor must be met, while the other factors are weighed against the facts and circumstances of each taxpayer to make a determination of “minister” status.
Whether a worker for an organization that is not a “church” (or similar religious organization, such as a temple, synagogue, mosque, etc.) can be classified as a “minister” for federal income tax purposes is a more delicate and scrutinized analysis. As the Tax Court has noted, “[i]t is seldom the case that a minister who is working for a non-church organization is provided with a parsonage or residence.” Boyer v. Comm’r, 69 T.C. 521, 524 (1977). The Boyer court further noted, “if a minister, pursuant to an assignment by his church, performs services for an organization which is neither a religious organization nor operated as an integral agency of a religious organization, all service performed by him, even though such service may not involve the conduct of religious worship or the administration of sacerdotal functions, is in the exercise of his ministry.” Id. at 531.
The “assignment” to perform religious services must be significant. In the eyes of at least one Tax Court, “[m]ore is required than mere ordained status and the perfunctory ratification by religious authority of secular employment obtained by the minister for non-church-related reasons.” See id. at 532.
If ever challenged by the IRS, or if the matter is presented to the Tax Court, a taxpayer seeking “minister of the gospel” status must be able to introduce credible evidence to show that the taxpayer is licensed, ordained, or commissioned (a required showing); performs sacerdotal functions; participates in the conduct or control of religious boards, societies, or other agencies related to the religious affiliation; or performs teachings or administrative duties at religiously affiliated institutions. The religious assignment generally must be directly related to accomplishing the purposes of the assigning religious organization.
Treasury Regulation section 1.1402(c)-5 provides the following examples that help identify those outside traditional minister roles who may qualify as ministers for federal income tax purposes. In these examples, either the specific duties of the minister or the assignment of duties by the religious organization generally determine whether the person qualifies as a minister for these purposes:
- Example 1: “M, a duly ordained minister, is engaged to perform service as chaplain at N University. M devotes his entire time to performing his duties as chaplain which include the conduct of religious worship, offering spiritual counsel to the university students, and teaching a class in religion. M is performing service in the exercise of his ministry.”
- Example 2: “M, a duly ordained minister, is engaged by the N Religious Board to serve as director of one of its departments. He performs no other service. The N Religious Board is an integral agency of O, a religious organization operating under the authority of a religious body constituting a church denomination. M is performing service in the exercise of his ministry.”
- Example 3: “M, a duly ordained minister, is assigned by X, the religious body constituting his church, to perform advisory service to Y Company in connection with the publication of a book dealing with the history of M’s church denomination. Y is neither a religious organization nor operated as an integral agency of a religious organization. M performs no other service for X or Y. M is performing service in the exercise of his ministry.”
- Example 4: “M, a duly ordained minister, is engaged by N University to teach history and mathematics. He performs no other service for N although from time to time he performs marriages and conducts funerals for relatives and friends. N University is neither a religious organization nor operated as an integral agency of a religious organization. M is not performing the service for N pursuant to an assignment or designation by his ecclesiastical superiors. The service performed by M for N University is not in the exercise of his ministry. However, service performed by M in performing marriages and conducting funerals is in the exercise of his ministry.”
Designation Requirement, Briefly.
In addition to satisfying the “minister of the gospel” requirements, the employing organization must officially designate the payment as a housing allowance. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.
Insights.
“Ministers of the gospel” are afforded material federal income tax benefits under the Code and related Treasury Regulations, and failing to properly qualify the worker and/or failing to properly designate the housing allowance (and its amount) can result in tremendous adverse income tax consequences. Due care should be taken in assigning otherwise taxable income as housing allowance, and the first analysis in the process should be to ensure that the person receiving the compensation designated as housing allowance is, under law, a “minister of the gospel.”
Recognition.
Freeman Law attorney and former clerk for the United States Tax Court, Devin Hludzik, contributed greatly to this informational piece, and for her support day-in and day-out of the Firm’s representation of religious organizations and otherwise, I am grateful.
