The income tax regulations specify that the designation of the allowance may be contained 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 church’s designation should be in writing, although the Tax Court has ruled that an oral designation is sufficient, since “there is no requirement that the designation be in writing.” Libman v. Commissioner, 44 T.C.M. 370 (1982). The Tax Court has also noted that if a church board orally agrees to a specific allowance and neglects to make a written record of its action, it could draft an appropriate record of its action at a later time, dated as of the earlier meeting when the unrecorded action was taken. Kizer v. Commissioner, T.C. Memo. 1992- 584. The Court concluded:
It is clear that there was discussion about a parsonage allowance for [the minister], and that all of the members of the board of directors [of the church] who testified recollected that he was taking a cut in total compensation to come to their church. The recording secretary, the person whose obligation it was to keep the minutes of the various meetings, had a clear recollection of the discussion and thought that [the minister] was to receive the same amount as a parsonage allowance that he received at [his former church] …. There is no requirement that the parsonage allowance designation be in writing. Rather … the designation requirement is satisfied upon satisfactory proof of official action. (emphasis added)
However, it must be stressed that under no circumstances can a housing allowance be designated retroactively. If a church board never discussed its pastor’s housing allowance for a particular year, the minutes cannot be amended retroactively to insert a reference to an allowance that was never adopted by official action.
To illustrate, the IRS issued a private letter ruling in which it ruled that a pastor was not eligible for a housing allowance because there was no evidence that his employing church had designated an allowance for the year in question. The church had designated a $10,000 allowance for the previous year, and the pastor claimed an additional $10,000 allowance for the following year because it was his “understanding” that the previous year’s allowance was effective for future years until there was a salary change. The IRS disagreed, noting that the pastor had not furnished “any information or documents that show that the church designated a portion of your compensation as rental allowance for the [current] pursuant to official action taken in advance.” IRS Private Letter Ruling 8511075.
Obviously, the best practice is for a church board (or congregation) to designate housing allowances in advance of each calendar year, and to enter their actions in the minutes. Anything less than this, including retroactive recognition of oral designations that were never reflected in the minutes, will create problems of proof and may be challenged by the IRS in an audit.
