| ||A Plea for the Repeal of Section 107: No More Tax-free Mansions for Dubious "Ministers of the Gospel" |
*B.A., University of Utah; J.D., Tulane University Law School; LL.M. in Taxation, Georgetown University Law School. Author recently clerked for the Honorable Judge Swift at the U.S. Tax Court and wishes to thank Judge Swift for his tutelage. Author also wishes to thank Giovanna Mosca for her always helpful comments and to remind his son Alexander to strive for excellence in all things.
"It is easier to admire the motives for [a religious tax] exemption than to justify it by any sound argument."
As a general rule, under section 61 of the Code, compensation for services should be included in gross income. Section 107 (hereinafter sometimes referred to as the parsonage allowance exclusion), however, provides that gross income does not include either (1) the rental value of a home furnished to a "minister of the gospel" as part of his or her compensation for services or (2) a rental allowance furnished as part of a minister of the gospel's compensation to the extent such allowance is used to rent or provide a home and, as recently amended by Congress, to the extent such allowance does not exceed the home's fair rental value. In other words, under section 107, qualified ministers of the gospel may exclude from gross income either the rental value of a furnished home or a rental allowance used to provide a home (provided such allowance is less than or equal to the home's fair rental value).
An explanation of section 107 must necessarily begin with a brief discussion of the regulations that attempt to define the terms and delineate the scope of section 107. To qualify for the parsonage allowance exclusion, the regulations under section 107 require that ministers of the gospel receive the home or rental allowance as remuneration for services that are ordinarily the duties of ministers of the gospel. Duties of ministers of the gospel, for purposes of section 107, 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 obligations at theological seminaries.
Individuals may qualify as ministers of the gospel under section 107 if officially commissioned as ministers of the gospel by a qualified church or church denomination. A religious institution qualifies as a church or church denomination if the institution has, among other criteria, a distinct legal existence, a formal code of doctrine, a distinct religious history, regular services at established worship places, and any other facts that may support the institution's claim of church status. Ministers of the gospel need not be formally ordained ministers, but they must perform substantially all of the religious functions of the church within the scope of the practices and tenets of their religion.
Under the regulations, amounts paid by an employing religious institution or other qualified organization to a minister of the gospel to rent or otherwise provide a home may qualify as "rental allowance" under section 107(2). In order to qualify, such amounts must be properly designated in advance by that religious institution or other qualified organization as a rental allowance. Ministers of the gospel may prove the designation of a rental allowance by simply evidencing that designation in any appropriate instrument indicating the designation (e.g., employment contracts with the employing religious institution, the institution's minutes or resolutions, or the institution's budget documents).
Properly designated amounts are deemed to be used to rent or provide a home if the amounts are expended for the rental of a home, for the purchase of a home, and for any expenses "directly related" to providing a home. The term "home" is defined under the regulations as a dwelling place, including furnishings and appurtenances (such as a garage). Although expenses for food and servants are not directly related to providing a home and are particularly excepted from the scope of the parsonage allowance exclusion, regulations under section 107 specifically permit that utilities paid in connection with the home or rental allowance are to be excluded from the gross income of qualified ministers of the gospel. The Service and the courts have permitted the following expenditures, among others, to qualify as expenses used to provide a home under section 107: mortgages, utilities, landscaping, repairs, maintenance, antique furniture, patio additions, real property taxes, and homeowner's insurance premiums.
Section 107 and the regulations do not specifically provide a dollar limit-either for rental allowances or for expenses directly related to providing a home-for amounts that may be excluded from gross income under section 107.
Because the parsonage allowance exclusion has had very little impact on tax revenues as compared to other tax benefits issues, the exclusion has historically created little controversy. However, there exists with respect to section 107 important constitutional questions and the potential for significant, abusive tax avoidance. In light of these important concerns, Parts II and III of this article examine the history of the parsonage allowance exclusion (and religious exceptions to tax generally) and analyze, through case law and various positions taken by the Service, the reach of section 107. Part IV explores some of the more blatant abuses that have occurred in connection with section 107. Finally, due in large part to the potential for abuse, coupled with constitutional concerns, Parts IV and V conclude that, as the parsonage allowance exclusion is not required for genuine clergy to exclude legitimate rental values of furnished parsonages as part of their compensation under section 119, Congress should scrap the exclusion entirely.