Church & Clergy Tax Guide

Introduction

A number of provisions in the tax code apply specifically to ministers. However, the following four provisions are unique in that they use the same language in defining which persons are eligible for the special treatment:

This example illustrates the significance of this subject:

EXAMPLE A church has an ordained senior minister, a licensed associate minister, a nonordained youth minister, a nonordained music minister, a business administrator, four office secretaries, and two custodians. How many of these persons are eligible for a housing allowance? How many should be treated as self-employed for Social Security (and pay the self-employment tax rather than FICA taxes)? How many are eligible for exemption from Social Security coverage (assuming they meet all of the conditions)? How many are exempt from income tax withholding? These questions are confusing to many church leaders. This chapter is designed to provide guidance in resolving the same or similar issues in your church or organization on the basis of the most recent legal precedent.

The four special rules mentioned above are available only to ordained, commissioned, or licensed ministers of a church with respect to service performed in the exercise of ministry. The term service performed in the exercise of ministry is defined in the income tax regulations as follows:

[S]ervice performed by a minister in the exercise of his ministry includes the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious organizations . . . ​under the authority of a religious body constituting a church or church denomination. The following rules are applicable in determining whether services performed by a minister are performed in the exercise of ministry:

(i) Whether service performed by a minister constitutes the conduct or religious worship or the ministration of sacerdotal functions depends on the tenets and practices of the religious body constituting his church or church denomination.

(ii) Services performed by a minister in the control, conduct, and maintenance of a religious organization relates to directing, managing, or promoting the activities of such organization. Any religious organization is deemed to be under the authority of a religious body constituting a church or church denomination if it is organized and dedicated to carrying out the tenets and principles of a faith in accordance with either the requirements or sanctions governing the creation of institutions of the faith. . . .

(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.

(iv) If a minister is performing service for an organization which is operated as an integral agency of a religious organization under the authority of a religious body constituting a church or church denomination, all service performed by the minister in the conduct of religious worship, in the ministration of sacerdotal functions, or in the control, conduct, and maintenance of such organization is in the exercise of his ministry.

(v) If a minister, pursuant to an assignment or designation by a religious body constituting his church, performs service 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 ministration of sacerdotal functions, is in the exercise of his ministry.

If a minister is performing service for an organization which is neither a religious organization nor operated as an integral agency of a religious organization and the service is not performed pursuant to an assignment or designation by his ecclesiastical superiors, then only the service performed by him in the conduct of religious worship or the ministration of sacerdotal functions is in the exercise of his ministry. Treas. Reg. 1.1402(c)-5.

The tax regulations quoted above make the four special tax rules discussed in this chapter available to

Each of these requirements is explained below on the basis of the most recent legal precedent.

Tax Court decisions

Unfortunately, Tax Court decisions have not always been helpful in deciding if a person is a minister for federal tax reporting purposes. Consider the following cases:

Salkov v. Commissioner, 46 T.C. 190 (1966)

The court ruled that a Jewish cantor was eligible for a housing allowance since he was the equivalent of a commissioned minister and was recognized as a religious leader by his congregation. The court observed that the cantor satisfied all three types of religious services described in the regulations (ministration of sacerdotal functions; conduct of religious worship; and the control, conduct, and maintenance of a religious organization), and accordingly, he had to be regarded as a minister. The court reasoned that neither the Code nor the regulations “attempt to say what a minister is, but only what a minister does.” The court left unclear the question of whether a minister must satisfy all three kinds of religious activities mentioned in the regulations to qualify as a minister for tax purposes. A similar result was reached by the court a few years later in the case of Silverman v. Commissioner, 57 T.C. 727 (1972).

Lawrence v. Commissioner, 50 T.C. 494 (1968)

The Tax Court ruled that a nonordained but commissioned minister of education in a Southern Baptist church was not eligible for a housing allowance, since he was not a “minister of the gospel.” The court emphasized that the minutes of the meeting at which the minister had been commissioned indicated that he had been commissioned a “minister of the gospel in religious education so that he may receive benefits of laws relative to the Social Security Act and Internal Revenue Service.”

The court called such a commissioning “nothing more than a paperwork procedure designed to help him get a tax benefit . . . ​without giving him any new status.” It noted that his duties were in no way changed by the commissioning. Such evidence convinced the court that the individual was not “recognized by his church as a minister of the gospel” and therefore could not be considered a minister for tax purposes.

The court rejected the individual’s argument that he qualified as a minister because he “performed the duties of a minister of the gospel.” The court observed that “even if it be thought that the status of a minister of the gospel in the Baptist religion could be established by proof of services performed, the evidence falls far short of showing the prescribed duties of a minister of education are equivalent to the services performed by a Baptist minister.”

In particular, the court noted that “it is more important to note the religious rites and ceremonies which [the taxpayer] did not perform,” including the only two ordinances of the Baptist faith—baptism and the Lord’s Supper. The taxpayer admitted that he never administered either ordinance or assisted the regular pastor in their administration.

This decision seemed to require that a minister perform all three kinds of religious services described in the regulations, despite the fact that the regulations state that “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” (emphasis added).

Kirk v. Commissioner, 51 T.C. 66 (1968)

A denomination maintained an office of Social Concerns that had 11 professional employees, nine of whom were ordained ministers. The remaining two employees were not ordained, commissioned, or licensed ministers. All 11 employees performed essentially the same duties, which included the administration of programs with respect to a broad range of social issues and problems, including race relations, civil liberties, church and state relations, foreign policy, disarmament and nuclear weapons control, mental health, and problems associated with aging and overpopulation. All 11 employees were paid a housing allowance. One of the two nonminister employees was audited by the IRS, and his housing allowance exclusion was disallowed on the ground that he was not a minister. On appeal, the Tax Court agreed. It conceded that the employee performed the duties of a minister but concluded that he was not entitled to a housing allowance because he was not a minister. It observed:

Granting that petitioner performed services that are ordinarily the duties of a minister of the gospel, another requirement of the regulations is that petitioner be a minister of the gospel. Specifically the regulations require him to be “a duly ordained, commissioned, or licensed minister of a church or a member of a religious order.” We have recognized that the purpose of this reference in the regulations is to exclude self-appointed ministers. . . . ​The regulation does not say only “ordained.” It also says “commissioned or licensed.” Commission means the act of committing to the charge of another or an entrusting; and license means an official document giving permission to engage in a specified activity. Petitioner is a member of a church which provides for the ordination of ministers. He does not claim to be ordained. Nor is he “licensed” in the sense that he has any official document or other indicia of permission, formally conferred upon him, to perform sacerdotal functions. We do not think he is “commissioned.” No congregation or other body of believers was committed to his charge. The duty of spreading of the gospel, either by sermon or teaching, was not formally entrusted to his care. Petitioner here is merely a non-ordained church employee.

Wingo v. Commissioner, 89 T.C. 922 (1987)

The Tax Court defined the term minister as follows: “In determining whether [one] is a minister, we must look at whether he performed the duties and functions of a minister within the three types of services set out in the regulations. In making that determination, we will also consider the additional factors as to whether he was ordained, or commissioned, or licensed, and whether [his church] considered him to be a religious leader.” This language, along with other statements in the court’s opinion, clearly indicates that to be a minister for tax purposes, one must satisfy all three types of religious services mentioned in the regulations. To illustrate, the court noted that “the regulations . . . ​describe three types of services that a minister in the exercise of his ministry performs,” and that “when a person performs all three types of services set forth in the regulations, and is recognized as a minister or religious leader by his denomination, that person is a minister” (emphasis added).

The Wingo case was disturbing for two reasons. First, it was contrary to the specific wording of the regulations, which provide that “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” (emphasis added). This language certainly recognizes that not all three types of services are essential. The IRS itself recognized this in a 1978 ruling in which it stated that licensed or commissioned clergy need not perform all the religious functions of ordained clergy in order to qualify for a housing allowance (or any of the other special tax provisions) but rather need only perform “substantially all” of such functions. The IRS also recognized that “when the individual’s regular, full-time duties to the congregation are spiritual or religious in nature, such as leading the worship service, those duties are in the exercise of ministry.” Revenue Ruling 78-301.

The Wingo case was also disturbing because it implied that only those clergy who work for churches or church-controlled organizations were eligible for the housing allowance and other special tax provisions since only such clergy satisfied the third type of service mentioned in the regulations (the control, conduct, and maintenance of a religious organization “under the authority of a religious body constituting a church or church denomination”). This was clearly contrary to the regulations quoted above, which specifically recognize that “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” (emphasis added).

Knight v. Commissioner, 92 T.C. 199 (1989)

The Tax Court’s decisions, and in particular its 1987 decision in the Wingo case, demanded correction and clarification. The needed response occurred a few years later in the Knight decision. The Knight case presented the question of whether a “licentiate” minister in the Cumberland Presbyterian Church (CPC) was a minister for tax purposes.

Here are the facts: The taxpayer was presented as a candidate for ministry in the CPC in 1980 and became a licentiate in 1981. Becoming a licentiate in the CPC is a solemn occasion and a necessary step toward ordination. A licentiate (or licensed minister) is authorized to preach and perform certain other functions of the ministry. In 1984 the taxpayer was called by a local CPC church to serve as its minister, and he remained at the church during 1984 and 1985, during which time he preached, conducted worship services, visited the sick, performed funerals, and ministered to the needy. Because he was not ordained, he was not able to vote in the “session” (the local church’s governing body), administer the sacraments (the Lord’s Supper and baptism), or solemnize marriages. The taxpayer reported his income as a self-employed minister in 1984 and 1985 (using Schedule C) and never filed an application for exemption from Social Security taxes (Form 4361). The local church issued the taxpayer a Form 1099-MISC (rather than a W-2) and did not withhold taxes from his wages. The taxpayer was audited, and the IRS asserted that he owed self-employment taxes (i.e., Social Security taxes for self-employed persons) for 1984 and 1985. The taxpayer argued, somewhat inconsistently, that while he reported his income taxes as a self-employed person, he was an employee for Social Security and accordingly was not subject to the self-employment tax for 1984 or 1985.

The Tax Court noted that section 1402 of the tax code specifies that a “duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry” is always self-employed for Social Security (unless a timely exemption application is filed that is subsequently approved by the IRS) and accordingly is subject to the self-employment tax. The question in this case, therefore, was whether the taxpayer was a “duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry.”

The taxpayer, relying on the Lawrence case (discussed above), argued that he was not a minister for tax purposes, since he had not been formally ordained by the CPC, and could not participate in church government or administer the sacraments. The IRS maintained that he was a minister for tax purposes and that he should have paid self-employment taxes for 1984 and 1985.

The court reviewed its earlier decisions and interpreted them to mean that “the phrase ‘ordained, commissioned, or licensed’ is applicable to various classes of ministry within a particular religious body.” The court acknowledged that the taxpayer could not administer the sacraments and that this same fact had led it to conclude in the Lawrence case that the taxpayer was not a minister for tax purposes. The court repudiated Lawrence to the extent that it precludes ministerial status to those clergy who are not authorized to administer sacraments. The court announced a new test for determining whether an individual is a minister: “Five factors [must be] analyzed. Those factors are whether the individual (1) administers sacraments, (2) conducts worship services, (3) performs services in the ‘control, conduct, or maintenance of a religious organization,’ (4) is ‘ordained, commissioned, or licensed,’ and (5) is considered to be a spiritual leader by his religious body.”

The Tax Court claimed to base its new test on the Wingo case as well as on the regulations quoted above. Surprisingly, the court claimed that the Wingo case never implied that “all of the ecclesiastical functions mentioned [in the regulations] must be performed” in order for one to be a minister for tax purposes. Such a statement is not supported by a careful reading of Wingo (as noted above).

The court concluded that the taxpayer (1) did not administer the CPC sacraments; (2) did conduct religious worship; (3) did not participate in the conduct, control, or maintenance of his church or denomination; (4) was duly licensed (though not ordained); and (5) was considered to be a religious leader by the CPC. Thus, three of the five factors were present, and accordingly, the taxpayer satisfied the definition of a minister for tax purposes and was subject to the self-employment tax.

The court emphasized that its new test for ministerial status “is not an arithmetical test but a balancing test. Failure to meet one or more of these factors must be weighed by the court in each case.” It did acknowledge that one of the five factors must be present in every case—the requirement that the individual be an ordained, commissioned, or licensed minister.

The court further observed that in weighing the significance of the limitations upon the taxpayer’s ministry, “it appears that [his] incapacity to perform the Lord’s Supper, baptism, marriage or to moderate the church session or otherwise participate in church government did not diminish the ministry that [the taxpayer] did perform. [He] preached, conducted worship, visited the sick, performed funerals, and ministered to the needy in the exercise of his ministry. [He] did perform one of the three significant ecclesiastical functions described [in the regulations]—the conduct of religious worship.” Therefore, the taxpayer satisfied the definition of the term minister, “notwithstanding that the CPC constitution provides for the ordination of a minister with higher authority and greater ministry.”

Reeder v. Commissioner, T.C. Memo. 1993-287

A minister became a licensed Assemblies of God minister in 1971. During 1973 and 1974, he served as senior pastor of a local church. He left the church to pursue further seminary training, and he was ordained in 1980. On December 23, 1980, the minister filed an application for exemption from self-employment taxes (IRS Form 4361). The minister represented on the application for exemption that he was licensed in 1971 and ordained in 1980 and that 1973 and 1974 were the first years he had received ministerial earnings subject to Social Security tax. The minister’s application for exemption was denied in 1981. The IRS noted that under federal law, an application for exemption must be filed no later than the due date of the federal tax return (Form 1040) for the second year in which a minister earns $400 or more in self-employment earnings, any portion of which comes from ministerial services. The IRS reasoned that the taxpayer became a minister when he was licensed in 1971, and accordingly, the exemption application was due no later than April 15, 1973.

In 1983 the minister submitted a second Form 4361, but this time he stated that he was ordained in 1980 and did not refer to the date he was licensed. This second application was also denied. The IRS again reasoned that the taxpayer became a minister in 1971 when he was licensed and that the exemption application, accordingly, was due no later than April 15, 1973. The minister appealed this denial to the Tax Court. He argued that he was not an official minister until he was ordained in 1980, and therefore his application was filed on time. He acknowledged that he had been licensed in 1971 and had served as a pastor of a local church in 1973 and 1974. However, he insisted that his church was a dependent assembly under the direct supervision of his district and that only upon ordination was he able to participate in the governance of his church organization at a higher level than the local church.

The Tax Court agreed with the IRS that the taxpayer had become a minister for federal tax purposes when he was licensed in 1971, and accordingly, both of his applications for exemption were filed too late. It noted that one of the requirements for exemption from self-employment taxes is that the applicant must be an “ordained, commissioned, or licensed minister.” While this term is not defined in the tax code or regulations, the court did note that it had ruled in a previous case that whether an individual is an “ordained, commissioned, or licensed minister” depends on whether he or she performs the duties and functions of a minister.

The court referred to its previous 1987 ruling in Wingo v. Commissioner, 89 T.C. 922, 930 (1987), in which it addressed the question of whether a licensed local pastor of a church was a minister for federal tax purposes. In the Wingo case, the court pointed out that the income tax regulations describe three types of services a minister in the exercise of his ministry performs: “(1) the ministration of sacerdotal functions; (2) the conduct of religious worship; and (3) service in the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination.” The court concluded in this case that the Assemblies of God minister became an “ordained, commissioned, or licensed minister” when he was licensed in 1971 since he satisfied all three of these conditions.

First, with respect to the ministration of sacerdotal functions, the court observed:

As to the sacerdotal functions, [the minister’s] own testimony is that while he was the pastor of the [local church] during 1973 and 1974, he could have performed a marriage or performed funeral services with permission or performed services with respect to the dedication of infants, and he did in fact perform the ministry functions of preaching and teaching, baptism, and communion. There is no requirement that to qualify as a “duly ordained, commissioned, or licensed minister” . . . ​an individual must be qualified to perform and actually perform every sacrament or rite of the religion.

Second, as to the conduct of religious worship, the court noted that “there is no dispute here that [the taxpayer] conducted the religious services of the church . . . ​during 1973 and 1974.”

Third, as to the question of service in the control, conduct, and maintenance of the religious organization, the court observed:

[The taxpayer] points out that during 1973 and 1974 he was the pastor of a local church which was a dependent church and subject to supervision under the constitution and bylaws of the [District]. [The taxpayer] argues that only upon ordination was he able to participate in the governance of his church organization at a higher level than the local church. In response to a similar argument, in Wingo v. Commissioner, we stated: “To perform services in the control, conduct, and maintenance of the church or organizations within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or the denomination.”

The Reeder case is unfortunate since the Tax Court applied the rigid Wingo case it repudiated in the Knight ruling. A few aspects of this decision are positive: First, the court clarified that “there is no requirement that to qualify as ‘a duly ordained, commissioned, or licensed minister’ . . . ​an individual must be qualified to perform and actually perform every sacrament or rite of the religion.” Second, the court clarified that “[t]o perform services in the control, conduct, and maintenance of the church or organizations within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or the denomination.” And finally, the court did not reverse or overrule the Knight decision. On the contrary, it did not even mention it. As a result, the Knight case can still be relied upon as a precedent.

Other legal precedents

Following are some additional legal precedents addressing the definition of minister for tax purposes.

IRS Technical Advice Memorandum 8915001

In a 1989 Technical Advice Memorandum (released prior to the Knight decision), the IRS national office addressed the question of who is a minister for tax purposes. Specifically, the IRS was addressing the question of whether a minister had filed a timely application for exemption from Social Security taxes (Form 4361). The individual had been licensed in 1971 and ordained in 1980 and had submitted an application for exemption from Social Security taxes (Form 4361) in 1980. The parties conceded that if the individual became a minister for tax purposes at the time he was licensed, the exemption application was properly rejected since it was too late; but if he became a minister for tax purposes upon his ordination in 1980, then the application was timely.

The IRS, applying the Wingo test, concluded that the individual became a minister for tax purposes in 1971 (when he was licensed) since at that time he performed all three kinds of ministerial services described in the regulations and mandated by the Wingo decision. The IRS observed that in determining whether an individual is a minister for tax purposes, “the courts have consistently examined whether the individual has performed the three types of ministerial services set forth in . . . ​the regulations” (emphasis added). In summary, the IRS reached the right result for the wrong reasons. There is no doubt that the individual satisfied the five-part test of ministerial status announced a few weeks later in the Knight decision. It is unfortunate that the IRS reached its conclusion by relying on the more restrictive test announced in the Wingo decision—a test repudiated in the Knight decision. The reliance by the IRS on the Wingo case in this ruling can be explained by the fact that it was released prior to the Tax Court’s decision in the Knight case.

IRS Letter Ruling 9221025

The IRS addressed the question of whether commissioned ministers in a denomination that both commissions and ordains ministers are eligible for a housing allowance. A Protestant denomination (the “Church”) with more than 5,900 congregations located throughout the United States recognizes two levels of ministry—commissioned and ordained. Generally, a candidate for commissioned minister completes four years of study at a college, operated by the Church, where the curriculum centers around courses in religion. Upon completion of the required education, the college faculty, on behalf of the Church, certifies that the candidate is fit for the position of commissioned minister. The certificate of fitness assures that the candidate is academically, theologically, and morally fit to have the status and authority of a commissioned minister. The certified candidate is then “called” by a congregation, and after accepting the call, the candidate is installed as a commissioned minister in a formal ceremony. Occasionally an individual may become a commissioned minister through a “colloquy,” which requires the candidate to have achieved equivalent academic, religious, educational, and personal life qualifications. In addition, a colloquy candidate must pass oral and written examinations.

Commissioned ministers serve God and the Church by performing full-time public ministry functions, including classroom teaching, evangelism, counseling individuals, leading Bible study groups, leading devotions, conducting worship services for youths, music ministry, giving the children’s sermon at the regular Sunday worship service, addressing the congregation in a worship service on a subject in which the commissioned minister has expertise, coordinating lay church workers, administering or guiding a congregation’s youth ministry, coordinating family ministry events, participating in ministries to those with special needs, and caring spiritually for the sick and imprisoned and their families. The Church regards teaching of the faith to the children and youths of the flock as a major duty of the pastoral office. Upon acceptance of a call and installation into a ministry position, a commissioned minister becomes a “member” of the Church.

The majority of commissioned ministers are called directly by local churches to serve in church-controlled parochial schools. The schools, for the most part, are not separate organizations from the churches. However, some of the schools are incorporated separately from a member congregation, but each such school is an integral agency of a member congregation. A commissioned minister also may be called by a congregation to be a deaconess or director of Christian education. In contrast, ordained ministers of the Church officiate in the public administration of the sacraments and lead in public worship. In certain situations a commissioned minister may lead in prayer, read the Scriptures in a church service, or perform a baptism. Under the doctrine of the Church, baptism is a sacrament.

The IRS national office concluded that commissioned ministers are eligible for a housing allowance. The IRS based its decision on a 1978 revenue ruling in which it stated that “if a church or denomination ordains some ministers of the gospel and licenses or commissions other ministers, the licensed or commissioned minister must perform substantially all the religious functions within the scope of the tenets and practices of his religious denomination to be treated as a minister of the gospel.” Revenue Ruling 78-301. However, the IRS also relied squarely on the Wingo case. The IRS, applying the Wingo five-part test, concluded that the commissioned ministers were ministers for federal tax purposes since they satisfied all five of the conditions set forth in that decision.

IRS Letter Ruling 199910055

The IRS ruled that three ordained deacons in a Methodist church who served as the ministers of education, music, and stewardship were ministers for federal tax purposes. After 20 years of study, the Methodist Church (the “Church”) voted to establish the status of ordained deacon. Prior to this decision, elders were the only ordained members of the clergy. To qualify for ordination as either a deacon or an elder, an individual must meet the requirements set by the Church that are specified in its governing document. In addition, to be ordained, the individual must be recommended by the regional Conference and receive the affirmative vote of the ministerial members of the Conference. Through ordination the ordained individual is given the approval of the Church to serve as an ordained minister and the authority to carry out those acts reserved to members of the clergy. As a result, following ordination, an ordained elder or deacon has the authority to exercise the responsibilities and duties of an ordained minister.

According to the Church’s governing document, an ordained deacon is permitted to give leadership in teaching and proclaiming the gospel, forming and nurturing disciples, performing marriages and funerals, and assisting the ordained elder in administering the sacraments. An ordained deacon has full right of voice and vote in the regional Conference where membership is held; may serve or hold office as a member of the clergy on the boards, commissions, or committees of the Conference; may be elected as a clergy delegate to the national Conference; must attend all sessions of the regional Conference; and, with the elder, is responsible for all matters of ordination, character, and Conference relations with members of the clergy. An ordained deacon is accountable to his or her regional Conference and bishop for the fulfillment of his or her call. An ordained elder is appointed to a position by a bishop. However, unlike an elder, an ordained deacon does not itinerate; nor does the Church guarantee an ordained deacon a position, salary, or place of employment. Ordained deacons are permitted to participate in the Church retirement plan for members of the clergy.

A Methodist church employed more than 50 persons, including three ordained deacons. The church asked the IRS whether these ordained deacons were ministers of the gospel performing services in the exercise of their ministry for purposes of eligibility for a housing allowance, self-employed status for Social Security, and exemption from income tax withholding. The ordained deacons served as a minister of education, a minister of music, and a minister of stewardship. As integral members of the church’s pastoral team, the ordained deacons met with the church’s elder to plan the worship services, assisted with the sacraments, and officiated at weddings and funerals. Each was required to preach at Sunday worship service. They participated with the elder in the weekly worship service. They also performed various other duties at the church, including confirmation preparation and membership reception.

The IRS ruled that the three ordained deacons were ministers of the gospel performing services in the exercise of their ministries. It observed:

As ordained members of the clergy in the Church [they] conduct worship and assist with the sacraments. In addition, as ordained members of the clergy in full connection they perform services in the control, conduct and maintenance of the Church. Further, [the local church and national church] consider [them] to be religious leaders who can perform substantially all of the religious functions within the scope of the Church’s tenets and practices. . . . ​Accordingly [they] are performing services as “ministers of the gospel.” . . . ​Thus, [they] are eligible to have a portion of their salary designated as a parsonage allowance. Any parsonage allowance will be excluded from gross income, provided the allowance is designated and paid in accordance with [the tax code]. We further conclude that the services [they] perform are in the exercise of their ministry within the meaning of section 3121(b)(8) of the Code [which treats ministers as self-employed for Social Security].

The IRS cautioned, “nor does this ruling suggest that the Service has departed from its position in Revenue Ruling 59-270.” In Revenue Ruling 59-270 (1959), the IRS ruled that a church’s minister of music and minister of education, who performed some of the duties of a minister of the gospel, could not be treated as ministers for federal tax purposes, since neither was ordained, commissioned, or licensed as a minister of the gospel. In other words, ministers of music and education who hold no ministerial credentials should not assume, based on the IRS ruling, that they now qualify for a housing allowance.

Eade v. United States, (unpublished opinion, W.D. Va. 1991)

A federal court in Virginia ignored the Knight test and applied the Wingo ruling. The court ruled that a minister was entitled to exemption from self-employment taxes. In reaching its decision, the court concluded that the individual satisfied the definition of minister since he met all five of the factors required by the Wingo decision. It observed:

The minister testified that he performed ministerial functions for the [church] beginning in March of 1985, that he conducted religious worship, and that the church was an independent Baptist church under the authority of a religious body comprised of deacons drawn from members of the church congregation. As to his qualifications for the ministry, the minister testified, without contradiction, that he received a B.A. in Bible Studies from a Tennessee Bible college, an M.A. in sacred literature from Liberty Baptist University, had earned credits toward a Ph.D. in church administration, and had been ordained a minister in the Baptist faith on January 26, 1985 after nomination by the ordination committee of the [church]. At that time the minister received a certificate of ordination. Thereafter, [the church], comprised of some 300–350 active members, issued a call for him to become their pastor, which call he accepted, assuming his pastoral duties in April of 1985. Applying the Wingo factors and the income tax regulations criteria, I find that the minister meets [all five requirements]. I find that he performs in accordance with his denomination’s requirements for sacerdotal function, that he conducts religious worship and provides service that is under the control, conduct and maintenance of an organized and recognized religious body constituting an independent church belonging to that denomination widely known as Baptist. Further, I find that he is an ordained minister and that Colonial Baptist Church recognizes him as its religious leader by paying him a salary to minister to the needs of its congregants.

Ballinger v. Commissioner, 728 F.2d 1287 (10^th Cir. 1984)

A federal appeals court ruled that a person who functioned as a minister could file an application for exemption from self-employment taxes despite the fact that he had not been ordained. The court observed:

Not all churches or religions have a formally ordained ministry, whether because of the nature of their beliefs, the lack of a denominational structure or a variety of other reasons. Courts are not in a position to determine the merits of various churches nor an individual’s conversion from one church to another. Thus, we cannot hold that an individual who functions as a minister in a church which does not ordain, license or commission that individual in a traditional or legally formal manner is not entitled to the exemption. Nor can we hold that an individual who has a change of belief accompanied by a change to another faith is not entitled to the exemption. We interpret Congress’ language providing an exemption for any individual who is “a duly ordained, commissioned or licensed minister of a church” to mean that the triggering event is the assumption of the duties and functions of a minister.

This language suggests that the court was limiting its conclusion to churches that do not formally ordain, commission, or license clergy. However, the case before the court involved a church that eventually did ordain the minister. As a result, this case would support the treatment of a person as a minister for federal tax purposes who performs the functions of a minister even though the person has not been formally ordained, commissioned, or licensed—whether or not he or she is associated with a church that credentials ministers. No other court has reached this rather questionable conclusion, so it should not be relied upon without the advice of a tax attorney or CPA.

Haimowitz v. Commissioner, T.C. Memo. 1997-40 (1997)

The Tax Court ruled that an administrator of a Jewish synagogue was not eligible for a housing allowance, since he was not ordained, commissioned, or licensed, and there was no evidence that a housing allowance had been properly designated for him. In ruling that the administrator was not a minister and therefore was not eligible for a housing allowance, the court made a number of important observations:

The court concluded that even if the administrator were a minister for federal tax purposes, he would still be ineligible for a housing allowance since no evidence existed that a housing allowance had ever been properly designated for him.

IRS Tax Guide for Churches

The IRS issued a revised Tax Guide for Churches and Religious Organizations in 2015. This publication does not attempt to define the term minister for federal tax purposes. It simply states that “as used in this booklet, the term minister denotes members of clergy of all religions and denominations and includes priests, rabbis, imams, and similar members of the clergy.” It is unfortunate that the IRS chose not to provide any assistance in defining this critical term in a book that is designed to help churches “voluntarily comply with tax rules.” This is a major flaw in the IRS publication.

IRS audit guidelines for ministers

In 1995 the IRS released its first audit guidelines for ministers pursuant to its Market Segment Specialization Program (MSSP). The guidelines were intended to promote a higher degree of competence among agents who audit ministers. In 2009 the IRS released a newly revised version of the guidelines (the Minister Audit Technique Guide). The guidelines instruct IRS agents in the examination of ministers’ tax returns.

The guidelines provide IRS agents with clarification on the meaning of the term minister:

Legal rulings

The guidelines refer to the following legal rulings:

The Tax Court considered whether a licentiate of the Cumberland Presbyterian Church (a status that was less than full ordination), who had not filed a timely exemption from self-employment tax, was a duly ordained, commissioned, or licensed minister in the exercise of required duties who was thus liable for self-employment tax. The petitioner argued that he was not formally ordained as a minister and could not administer church sacraments or participate in church government. Thus, he could not be a minister subject to IRC § 1402(c). The court rejected this view, and looked at all the facts. In concluding that he was a licensed minister, it cited the facts that he was licensed by the church, he conducted worship services, and he was considered by the church to be a spiritual leader. The court also noted the petitioner preached, performed funerals, visited the sick, and ministered to the needy within the context of his duties for the church.

a “minister of education” in a Baptist church was not a “duly ordained, commissioned, or licensed” minister for purposes of IRC § 107. The petitioner held a Master’s Degree in Religious Education from a Baptist Theological Seminary, but was not ordained. Although his church “commissioned” him after he assumed the position, the court interpreted the commissioning to be for tax purposes, as it did not result in any change in duties. Most significant, however, was the court’s analysis of petitioner’s duties or rather, the duties he did not perform. He did not officiate at Baptisms or the Lord’s Supper, two Ordinances that closely resembled sacraments, nor did he preside over or preach at worship services. The court concluded that the evidence did not establish that the prescribed duties of a minister of education were equivalent to the duties of a Baptist minister.

Conclusions

What conclusions can be drawn from these rulings? Consider the following:

(a) The Knight case (1989). The definition announced by the Tax Court in the Knight case is now the preferred definition since it has been endorsed by the IRS in its audit guidelines for ministers. It is likely that this is the only test IRS agents will apply when auditing persons who claim to be ministers.

Under this test the following five factors must be considered in deciding whether a person is a minister for federal tax reporting: (1) Does the individual administer the “sacraments”? (2) Does the individual conduct worship services? (3) Does the individual perform services in the “control, conduct, or maintenance of a religious organization” under the authority of a church or religious denomination? (4) Is the individual “ordained, commissioned, or licensed”? (5) Is the individual considered to be a spiritual leader by his or her religious body? Only the fourth factor is required in all cases (the individual must be ordained, commissioned, or licensed). The remaining four factors need not all be present for a person to be considered a minister for tax reporting.

The Tax Court in the Knight case did not say how many of the remaining four factors must be met. It merely observed that “failure to meet one or more of these factors must be weighed . . . ​in each case.” The court concluded that the taxpayer in question was a minister despite the fact that he only satisfied three of the five factors.

One may reasonably assume, however, that persons who claim to be ministers solely on the basis of the final three factors mentioned in the Knight case will not be deemed ministers by the IRS or the courts unless they can demonstrate that they are entitled to ministerial status on the basis of other considerations. After all, if a church is willing to ordain its bookkeeper and secretary, these persons could argue that they satisfy the final three factors in the Knight case (management responsibilities, ordination, and a “religious leader”). No doubt, the IRS and the courts will not accept such a conclusion. Considerations that suggest ministerial status, even if the first two Knight factors are not satisfied, would include (1) ordination to pastoral ministry and actual pastoral experience, and (2) formal theological training.

(b) The Wingo case (1987). The more restrictive definition announced by the Tax Court in the Wingo case has been applied by the IRS in two rulings and by two federal courts in addition to two Tax Court rulings. However, all of these rulings occurred prior to the issuance of the original IRS audit guidelines for ministers in 1995. The audit guidelines not only fail to mention the Wingo definition, but they specifically endorse the Knight definition discussed above.

To be a minister under the Wingo test, one must satisfy all five of the factors mentioned in the Knight decision. The Wingo definition is overly restrictive and would result in the denial of ministerial status to many persons who clearly are ministers. Examples include ministers of music, ministers of education, ministers to youths, and other associate ministers who often will not satisfy all five factors announced by the Tax Court in the Wingo decision. Even ordained ministers teaching at church-operated seminaries would be adversely affected by a literal application of the Wingo decision, to the extent that they do not satisfy all five of the factors for ministerial status.

The following examples illustrate the application of these two definitions.

EXAMPLE Pastor J is an ordained minister who serves as a minister of education at his church. He does not preach or conduct worship services, and he never administers the sacraments. He does have management responsibility in his local church and at regional and national meetings of his denomination. His duties include overseeing the educational program of his church, occasional counseling, and hospital visitation. Under the Wingo test, Pastor J would not be a minister for federal tax reporting, since he does not meet all five factors. Specifically, he does not conduct religious worship or administer sacerdotal functions. Under the IRS tax guide test, it is possible that Pastor J would be a minister for federal tax reporting so long as he has the ecclesiastical authority to conduct worship, administer sacraments, and perform sacerdotal functions—even though he does not perform any of these tasks. Under the IRS audit guidelines for ministers, it is likely that Pastor J would be a minister for federal tax reporting so long as he is a minister under the Knight definition. Under the Tax Court’s decision in the Knight case, it is probable that Pastor J would be a minister for federal tax reporting. Pastor J must now decide whether to follow the Knight decision or the Wingo test. For the reasons stated above, the Knight definition of the term minister is now the preferred definition.

EXAMPLE Pastor B is a minister of music at his church. He is not ordained, commissioned, or licensed. Pastor B is not a minister for federal tax purposes under either the Wingo or Knight cases, since he is not ordained, commissioned, or licensed.

EXAMPLE Pastor C is a minister of music at her church. She is licensed, and her duties include leading religious worship and administering all the music programs and activities of the church. However, Pastor C does not administer sacraments or engage in sacerdotal functions. Pastor C would not be a minister for federal tax purposes under the Wingo test, but she may be under the Knight test and the IRS audit guidelines. Further, if Pastor C’s status as a licensed minister invests her with the ecclesiastical authority to conduct worship, administer sacraments, and perform sacerdotal functions, she may satisfy the IRS tax guide’s test even though she does not actually perform some or all of these tasks.

EXAMPLE Same facts as the previous example, except that Pastor C occasionally assists the senior pastor in administering communion. This limited performance of a sacerdotal function increases the likelihood that Pastor C will be considered a minister for federal tax purposes. The Tax Court noted in the Reeder case that “there is no requirement that to qualify as ‘a duly ordained, commissioned, or licensed minister’ . . . ​an individual must be qualified to perform and actually perform every sacrament or rite of the religion.” However, the performance of only one sacerdotal function on an occasional basis will not necessarily make Pastor C a minister for federal tax purposes and probably would be of limited relevance. On the other hand, the Tax Court ruled in the Haimowitz case (discussed above) that the performance of some religious functions of an administrative nature will not make one a minister for tax purposes.

EXAMPLE Pastor G, an ordained minister with 25 years of pastoral experience, is now employed as a full-time seminary professor. Pastor G does not preach or administer sacraments and accordingly would not be considered a minister under the Wingo case. This is an unreasonable result. Such a person clearly is a minister even though not presently serving in a traditional pastoral ministry. It is possible that Pastor G would be a minister under the Knight test and the IRS audit guidelines. Further, if Pastor G’s status as an ordained minister invests him with the ecclesiastical authority to conduct worship, administer sacraments, and perform sacerdotal functions, he may satisfy the IRS tax guide’s test even though he does not actually perform some or all of these tasks.

EXAMPLE M is a teacher at a private religious school operated by a church. She is not a minister, and accordingly, she is not eligible for a housing allowance exclusion. Assume further that M asks the church to commission her in order to render her eligible for a housing allowance. Even if the church complies with such a request, it is doubtful, based on the Lawrence decision, that she will become eligible for the housing allowance exclusion. Recall that the Tax Court in the Lawrence decision called Pastor Lawrence’s commissioning “nothing more than a paperwork procedure designed to help him get a tax benefit . . . ​without giving him any new status.” It emphasized that his duties were in no way changed by the commissioning. Such evidence convinced the court that the individual was not “recognized by his church as a minister of the gospel” and therefore could not be considered a minister for tax purposes. The following factors would further support this conclusion: (1) the local church’s charter does not specifically authorize it to commission ministers; (2) the church has never before commissioned a minister; (3) the church is affiliated with a denomination that will not recognize the ministerial status of M.

EXAMPLE The IRS ruled that full-time male and female teachers employed by parochial schools of a particular church denomination qualified as “duly ordained, commissioned, or licensed ministers of a church” for purposes of federal tax law. The teachers were graduates of a theological college conducted under the auspices of a church denomination for the express purpose of training full-time church workers. Upon graduation teachers are recommended as candidates for the teaching ministry in the congregations of the church and in its parochial schools. Although not ordained as pastors, the male teachers’ duties as full-time teachers in the parochial schools include the teaching and preaching of the religious principles of the church to the children and youths of the various congregations and the conducting of the musical portion of their religious services. They also may be called upon to function in the place of a pastor during his absence or together with him as the needs for the ministrations of the pastor increase. The female teachers’ duties include all of the above-prescribed functions except that they are never called upon to preach or to take the place of or assist a pastor in the conduct of religious services. Both the male and female teachers are called to their respective offices for life. Teachers may be removed from office only for the same reasons that apply to pastors. 

Under these facts, the IRS concluded that

the male teachers, although not duly ordained as pastors, are, in performing full-time services for the church by teaching, preaching, and, when needed, acting for or assisting an ordained pastor in the conduct of religious services, “duly ordained, commissioned, or licensed ministers of a church” for purposes of [federal tax law], and that their services are performed in the exercise of their ministry. . . . ​The female teachers whose services appear to be restricted to the teaching of the religious principles of the church and to the direction of the musical portion of the church services do not qualify as “duly ordained, commissioned, or licensed ministers of a church.” Revenue Ruling 57-107. See also IRS Letter Ruling 7939023. But compare IRS Letter Ruling 8614010.

EXAMPLE The IRS ruled that a “minister of administration” who was licensed by a denomination that also ordained ministers was not a minister for federal tax purposes, since he did not “perform substantially all the religious functions within the scope of the tenets and practices of his religious denomination.” The IRS noted that the minister acknowledged that he had never conducted worship services, preached a sermon, conducted a funeral, performed a baptism, or administered communion and had no intention of performing any of these activities. The IRS concluded that because the minister had “not performed substantially all the religious functions within the scope of the tenets and practices of [his] religious denomination,” he was not a minister of the gospel for federal tax purposes. IRS Letter Ruling 8442130.

Of course, many persons seek ministerial credentials not only for the housing allowance but also so they can exempt themselves from Social Security. As noted under “Exemption of Ministers from Social Security Coverage” on page , few ministers qualify for this special exemption. Further, even for those who do, the financial hardships often associated with such a decision make the avoidance of Social Security taxes a dubious benefit.

An individual who satisfies the definition of a minister as described above is eligible for the four special tax provisions discussed in this chapter. However, it must be stressed that the special tax treatment will only apply with respect to services performed in the exercise of ministry.

In other words, ministers are not automatically eligible for a housing allowance exclusion or any of the other four special rules that apply to ministers. Each rule is available only with respect to compensation received by a minister for the performance of services in the exercise of ministry. To illustrate, if a minister has a part-time secular job, the housing allowance exclusion will not apply to such work, since it is not service performed in the exercise of ministry. Similarly, ministers who have exempted themselves from self-employment (Social Security) taxes are not exempt from paying FICA taxes on wages they earn from a secular job, since such a job is not the exercise of ministry.

Income tax regulations

As noted above, the income tax regulations define service performed in the exercise of ministry as follows:

Service performed by a minister in the exercise of his ministry includes the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious organizations . . . ​under the authority of a religious body constituting a church or church denomination. Treas. Reg. 1.1402(c)-5(b)(2).

If a minister is performing service for an organization which is operated as an integral agency of a religious organization under the authority of a religious body constituting a church or church denomination, all service performed by the minister in the conduct of religious worship, in the ministration of sacerdotal functions, or in the control, conduct, and maintenance of such organization is in the exercise of his ministry. Treas. Reg. 1.1402(c)-5(b)(2)(iv).

If a minister, pursuant to an assignment or designation by a religious body constituting his church, performs service 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 ministration of sacerdotal functions, is in the exercise of his ministry. Treas. Reg. 1.1402(c)-5(b)(2)(v).

The regulations provide the following examples:

Examples of specific services the performance of which will be considered duties of a minister . . . ​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. Also, the service performed by a qualified minister as an employee of the United States (other than as a chaplain in the Armed Forces, whose service is considered to be that of a commissioned officer in his capacity as such, and not as a minister in the exercise of his ministry), or a State, Territory, or possession of the United States, or a political subdivision of any of the foregoing, or the District of Columbia, is in the exercise of his ministry provided the service performed includes such services as are ordinarily the duties of a minister. Treas. Reg. § 1.107-1(a).

The above-quoted regulations identify eight examples of services performed by ministers in the exercise of their ministry:

The first four of these examples of services performed by ministers in the exercise of their ministry are illustrated below. The fifth and sixth examples are illustrated in the examples that appear later in this chapter. The final two examples are addressed separately under “Ministers Employed by Integral Agencies or on Assignment” on page .

Sacerdotal functions

The term sacerdotal functions generally includes baptisms, communion, marriages, funerals, and prayer for the sick. The Tax Court, in the Reeder decision (discussed above), made the following comment regarding the performance of sacerdotal functions:

As to the sacerdotal functions, [the minister’s] own testimony is that while he was the pastor of the [local church] during 1973 and 1974, he could have performed a marriage or performed funeral services with permission or performed services with respect to the dedication of infants, and he did in fact perform the ministry functions of preaching and teaching, baptism, and communion. There is no requirement that to qualify as a “duly ordained, commissioned, or licensed minister” . . . ​an individual must be qualified to perform and actually perform every sacrament or rite of the religion.

The income tax regulations (quoted above) clarify that “whether service performed by a minister constitutes the . . . ​ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting his church or church denomination.” The regulations also specify that “if a minister is performing service in . . . ​the ministration of sacerdotal functions, such service is in the exercise of his ministry whether or not it is performed for a religious organization.”

The IRS has recognized that sacerdotal functions include, but are not limited to, baptism, holy communion, and the performance of marriage and funeral ceremonies. IRS Letter Ruling 8915001.

Religious worship

The income tax regulations (quoted above) clarify that “whether service performed by a minister constitutes the conduct of religious worship . . . ​depends on the tenets and practices of the particular religious body constituting his church or church denomination.” The regulations also specify that “if a minister is performing service in the conduct of religious worship . . . ​such service is in the exercise of his ministry whether or not it is performed for a religious organization.”

How much religious worship is necessary to satisfy this test? This is an interesting question. The IRS has ruled on a few occasions that the religious worship must be part of a minister’s regular duties. In one case the IRS ruled that an ordained minister who served as administrator of a religious school was not engaged in services performed in the exercise of ministry despite the fact that his duties included conducting worship services three times each week for the students. The IRS noted that while the administrator performed religious services and sacerdotal functions on occasion, his “regular, full-time duties were administrative duties.” IRS Letter Ruling 8646018.

Similarly, in 1968 the IRS ruled that an ordained minister employed by a charitable organization as its Director of Special Services was not engaged in the performance of services in the exercise of ministry despite the fact that he occasionally performed certain sacerdotal duties, including conducting worship services. The IRS acknowledged that while the minister occasionally performed worship and some sacerdotal duties, his overall duties were not basically the conduct of religious worship or the ministration of sacerdotal functions as contemplated by the regulations. Revenue Ruling 68-68.

On the other hand, the Tax Court has ruled that a minister employed by a parachurch ministry was engaged in services performed in the exercise of ministry because he conducted staff devotions, despite the fact that his “regular, full-time duties were administrative duties.” Mosley v. Commissioner, T.C. Memo. 1994-457 (1994). The court observed:

Daily worship services are conducted at [the parachurch ministry]. Apparently, they were conducted during the years in question. [The minister] conducts those services. They are conducted for employees engaged in [the organization’s] marketing efforts. On occasion, the Lord’s Supper is administered at those services. . . . ​[I]t seems clear that his activity in conducting worship services was known to, and approved by, the board of directors of the corporation. We think that his conduct of those services constitutes the conduct of religious services within the meaning of [the regulations]. . . . ​Clearly, [his] preaching and conduct of religious services constituted only a portion of [his] duties on behalf of [the organization].

The control, conduct, and maintenance of religious organizations

The regulations include “the control, conduct, and maintenance of religious organizations . . . ​under the authority of a religious body constituting a church or church denomination” in the definition of service performed by a minister in the exercise of ministry. The regulation quoted above defines this as “directing, managing, or promoting the activities of such organization.” This terminology is admittedly confusing.

The Tax Court, in the Wingo decision, in interpreting this language, noted that “the fact that [a minister] was not permitted to do all that [an ordained minister] could do does not mean that he performed no services in the control, conduct, and maintenance of his church or denomination. To perform services in the control, conduct, and maintenance of the church or organization within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or denomination.”

The Wingo court also noted that a minister can be engaged in the control, conduct, or maintenance of either a local church or a denomination. To illustrate, the fact that a minister has the right to vote at national conventions of his or her denomination will constitute sufficient control, even if the minister possesses little, if any, control over a local church. This is often true of ordained youth pastors—they have the right to vote at national conventions (and thereby they are engaged in the control, conduct, and maintenance of their denomination) even though they possess little, if any, authority in their own congregation.

The Tax Court, in the Reeder decision (discussed above), made the following comment regarding the question of service in the control, conduct, and maintenance of the religious organization:

[The taxpayer] points out that during 1973 and 1974 he was the pastor of a local church which was a dependent church and subject to supervision under the constitution and bylaws of the [District]. [The taxpayer] argues that only upon ordination was he able to participate in the governance of his church organization at a higher level than the local church. In response to a similar argument, in Wingo v. Commissioner, we stated: “To perform services in the control, conduct, and maintenance of the church or organizations within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or the denomination.”

The income tax regulations (quoted above) further clarify that

services performed by a minister in the control, conduct, and maintenance of a religious organization relates to directing, managing, or promoting the activities of such organization. Any religious organization is deemed to be under the authority of a religious body constituting a church or church denomination if it is organized and dedicated to carrying out the tenets and principles of a faith in accordance with either the requirements or sanctions governing the creation of institutions of the faith.

The IRS has recognized that services in the control, conduct, and maintenance of a religious organization can occur at either the local congregational level or in the context of a regional or national denomination. To illustrate, in one ruling the IRS noted that a minister satisfied this test because “[h]e was directly responsible for the local church as its administrative head or overseer, and he was chairman of the official board of the church. Thus, he was in charge of all the organizational concerns of his own congregation.”

The IRS also noted that the minister was a member of a regional body of his denomination and in that role was part of the voting constituency of that body. As a voting member, “he had the opportunity to influence the conduct, control, and maintenance of the governing body of his church in [his denomination]. Also, [his] denomination recognized the taxpayer as a minister or religious leader, by licensing him as a minister.” IRS Letter Ruling 8915001.

Administration and maintenance of religious organizations and their integral agencies

The phrase administration and maintenance of religious organizations and their integral agencies is not defined in the tax code or regulations. The best indication of its meaning was provided by the IRS in a 1958 ruling:

This phrase was included in the regulations in view of the practice of some church denominations to select and approve ordained ministers as the governing body, the administrators or overall managers, of a religious organization, or an integral agency of the church denomination, which they support or sponsor in order that the purposes and aims of such church denomination are carried into effect. Hence, ordained ministers appointed by a religious denomination to administer or manage a religious organization are engaged in carrying out the tenets and practices of their denominations and to an extent engaged in ecclesiastic duties. Ordained ministers employed by a religious organization in a capacity subordinate to the administrator or manager of such organization, are considered to be primarily engaged in secular duties, if the duties for which they are being remunerated are not ordinarily the duties of a minister of the gospel. Letter Ruling 5807234520A.

In another 1958 ruling the IRS observed: “The term ‘maintenance’ as used in the preceding sentences means the overall management and supervision necessary for effectuating the purposes and aims of an organization.” Revenue Ruling 5807024980A.

In a 1960 ruling the IRS clarified that “the term ‘maintenance’ . . . ​does not relate to the upkeep of property, machinery, or equipment, but rather to the overall management and supervision necessary for effectuating the purposes and aims of an organization.” Letter Ruling 6008269790A.

The IRS audit guidelines for ministers use the phrase “administration and maintenance of religious organizations” interchangeably with the phrase “control, conduct, and maintenance of religious organizations.” As a result, “administration and maintenance” probably should be viewed as synonymous with “control, conduct, and maintenance.”

IRS audit guidelines for ministers

The IRS audit guidelines for ministers instruct agents that the income tax regulations define the term service performed by a minister in the exercise of the ministry to include

The guidelines note that the income tax regulations specify that whether service performed by a minister constitutes conduct of religious worship or ministration of sacerdotal functions depends on the tenets and practices of the particular religious body constituting the church or denomination.

The guidelines note that the income tax regulations associated with section 107 of the tax code (pertaining to the housing allowance) provide the following examples of services considered duties of a minister:

The guidelines add that “the duties performed by the individual are also important to the initial determination whether he or she is a duly ordained, commissioned, or licensed minister. Because religious disciplines vary in their formal procedures for these designations, whether an individual is duly ordained, commissioned, or licensed depends on these facts and circumstances.”

IRS Publication 517

IRS Publication 517, which addresses tax reporting for ministers, refers to “service performed in the exercise of ministry” as “ministerial services” and describes this term as follows:

Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include:

You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization’s activities.

A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.

Services for nonreligious organizations. Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship.

Services that are not part of your ministry. Income from services you perform as an employee that are not ministerial services is subject to Social Security and Medicare tax withholding (not SECA) under the rules that apply to employees in general. The following are not ministerial services.

Books or articles. Writing religious books or articles is considered to be in the exercise of your ministry and is considered ministerial services.

The Hosanna-Tabor case

In a ringing endorsement of religious liberty, the United States Supreme Court, in a 2012 ruling, unanimously affirmed the so-called “ministerial exception” barring civil court review of employment disputes between churches and ministers. Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012).

The case involved a claim by a “called” teacher at a church-related school in Michigan that the school committed unlawful disability discrimination in terminating her employment. The Court’s ruling has potential significance in defining the term minister for tax purposes. Consider the following two points:

The Court noted that the plaintiff’s status as a commissioned minister in the Lutheran church did not, by itself, “automatically ensure coverage” under the ministerial exception. But it concluded that “the fact that an employee has been ordained or commissioned as a minister is surely relevant, as is the fact that significant religious training and a recognized religious mission underlie the description of the employee’s position.”

While one’s status as an ordained, commissioned, or licensed minister is not determinative or even essential, it is relevant in deciding whether a person is a minister for purposes of the ministerial exception.

This aspect of the Court’s opinion could serve as justification for liberalizing the current definition of minister in the context of federal tax law. By defining the term minister to apply only to ordained, commissioned, or licensed ministers, the tax code, regulations, Tax Court, and IRS adopted a definition more restrictive than the analysis applied by the Supreme Court in the Hosanna-Tabor case. This may serve as a basis for liberalizing the Tax Court definition to include persons who perform ministerial functions but who are not formally recognized as ordained, commissioned, or licensed ministers.

Another important aspect of the Court’s ruling in the Hosanna-Tabor case was its conclusion that a finding of ministerial status cannot be based solely on the amount of time a person spends on religious functions. In rejecting the appeals court’s conclusion that the ministerial exception did not apply because of the limited time the teacher devoted to religious tasks, the Court observed: “The issue before us, however, is not one that can be resolved by a stopwatch. The amount of time an employee spends on particular activities is relevant in assessing that employee’s status, but that factor cannot be considered in isolation, without regard to the nature of the religious functions performed.”

The Court acknowledged that the teacher’s religious duties “consumed only 45 minutes of each workday, and that the rest of her day was devoted to teaching secular subjects.” However, the Court noted that it was unsure whether any church employees devoted all their time to religious tasks: “The heads of congregations themselves often have a mix of duties, including secular ones such as helping to manage the congregation’s finances, supervising purely secular personnel, and overseeing the upkeep of facilities.”

This aspect of the Court’s rulings will be helpful in several contexts, including the determination of ministerial status for tax purposes. The IRS and the Tax Court in some cases have contended that a person is not a minister for tax purposes because of the limited time the person devotes to religious functions. The Supreme Court concluded in the Hosanna-Tabor case that the plaintiff was a minister despite the fact that her religious duties occupied less than 45 minutes per day. The Court noted that ministerial status cannot be resolved by a stopwatch.

The Court also noted that many ministers devote less than all their time to religious tasks: “The heads of congregations themselves often have a mix of duties, including secular ones such as helping to manage the congregation’s finances, supervising purely secular personnel, and overseeing the upkeep of facilities.”

This will be a helpful precedent to persons whose ministerial status is challenged by the IRS on the basis of the limited time spent on religious duties.

Conclusions

The courts and the IRS have had little difficulty in deciding that a minister engaged in pastoral ministry in a local congregation is performing services in the exercise of ministry. As the IRS noted in Revenue Ruling 78-301, “when the individual’s regular, full-time duties to the congregation are spiritual or religious in nature, such as leading the worship service, those duties are in the exercise of ministry.” Further, the income tax regulations (quoted above) clarify that “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.”

Consider the following examples:

EXAMPLE Pastor R is an ordained youth minister. He regularly performs sacerdotal duties and conducts religious worship. He would be a minister under the Knight definition. As a minister, he is eligible for the four special tax provisions discussed in this chapter (if he otherwise qualifies) with respect to his services on behalf of the church.

EXAMPLE R is the minister of music. She has not been ordained, commissioned, or licensed by her church or denomination, and she does not perform any sacerdotal duties. Her duties include directing the church choir, overseeing the music program at the church, and playing the organ during church services. She will not qualify for any of the four special provisions discussed above, since she is not ordained, commissioned, or licensed. (According to the Knight definition, one must be ordained, commissioned, or licensed in order to be a minister for federal tax purposes.) This means she is not eligible for a housing allowance exclusion or exemption from either Social Security taxes or income tax withholding. Revenue Ruling 59-270.

EXAMPLE M retired from a secular job and began working as a church’s “minister of visitation.” His responsibilities include hospital visitation and visiting new and prospective members. He is not ordained, commissioned, or licensed, and he performs no sacerdotal functions or religious worship. He does not qualify for the four special tax provisions discussed in this chapter, since he is not an ordained, commissioned, or licensed minister, and he performs neither sacerdotal duties nor religious worship.

EXAMPLE Pastor P is the senior minister of a church. The church is not affiliated with any sect or denomination. Pastor P has never been ordained or licensed. He is not eligible for any of the special tax provisions discussed in this chapter (including a housing allowance). Of course, his church is free to ordain or commission Pastor P, and this may entitle him to be treated as a minister for federal taxes. However, note that the Tax Court in the Lawrence decision warned that an individual would not qualify for minister status for tax purposes if he or she was ordained, commissioned, or licensed solely to reduce taxes. Further, the court noted in the Salkov case that an individual cannot become eligible for the special tax provisions by “ordaining” himself or herself.

EXAMPLE B serves as business administrator of a church. The church “licenses” her as a “minister of administration” in order to make her eligible for a housing allowance. B performs no sacerdotal functions and does not conduct religious worship. She has no formal theological training, and her duties were not affected by her “license.” The act of licensing B probably will not make her eligible for a housing allowance, according to the legal precedent cited above, since it is doubtful that she will satisfy a majority of the five criteria mentioned in the Knight case. Again, persons seeking special tax benefits through licensing or commissioning should pay special heed to the Tax Court’s decision in Lawrence (discussed above).

EXAMPLE The IRS ruled that a “licensed minister” in a denomination that both ordains and licenses its ministers was a minister for federal tax purposes since he performed substantially all the functions of an ordained minister. The minister was licensed in 1971, and as a licensed minister he pastored a church, administered the ordinances of baptism and holy communion, preached sermons, and performed the services of marriage, burial, and membership reception. He also was responsible for ministering to the needs of the people of the church, which included instructing candidates for membership and receiving them into the church and counseling troubled or bereaved families. The minister was ordained in 1980 and filed an application for exemption from self-employment tax (Form 4361) in 1980. The IRS ruled that the minister qualified as a minister for tax purposes when he was licensed in 1971, and accordingly, the Form 4361 was filed too late.

The IRS noted that the minister performed all three of the kinds of ministerial services described in the income tax regulations (sacerdotal functions, conduct of worship, and the “control, conduct, and maintenance” of a religious organization):

The taxpayer was heavily involved in all three of the types of services in his capacity as a licensed minister and pastor of a local church. . . . ​With respect to the first type of ministerial services, he was authorized to and in fact did administer sacerdotal functions. He administered the ordinances of baptism and holy communion and presided at marriage and funeral ceremonies. Secondly, he conducted religious worship on a regular basis in his capacity as pastor of a local church. Thirdly, in his role as pastor of a local church he was involved in the control, conduct, and maintenance of religious organizations under the authority of a religious body. He was directly responsible for the local church as its administrative head or overseer, and he was chairman of the official board of the church. Thus, he oversaw all the organizational concerns of his own congregation. . . . ​He was also a member of the District Council and in that role was part of the voting constituency of the District Council. As a voting member of the District Council, he had the opportunity to influence the conduct, control, and maintenance of the governing body of his church in [his] District. Also, [his] denomination recognized the taxpayer as a minister or religious leader, by licensing him as a minister. IRS Letter Ruling 8915001.

EXAMPLE The Tax Court ruled that a minister was not exempt from Social Security, because his exemption application was filed too late. While enrolled in college, a student (John) was licensed as a “student local pastor” for the United Methodist Church (“the Church”) and served in a local church in 1983 and 1984. His earnings exceeded $400 each year. John thereafter attended seminary, and during this time he was licensed and served as the local pastor of a church from 1985 to 1987. In 1987 he was ordained a deacon in the Church. In 1990 he was ordained an elder. The ordained ministry of the Church consists of deacons and elders.

In 1989 John filed an application for exemption from Social Security (self-employment) taxes by filing a Form 4361 with the IRS. He noted on the form that he had been ordained in 1987, when he was ordained a deacon. Therefore, the form was filed prior to the deadline. The Tax Court ruled that John’s application for exemption had been filed too late since the duties he performed as a licensed pastor in 1983 and 1984 were the performance of services as a minister. The court noted that as a licensed local pastor in 1983 and 1984, John was authorized to preside over the ministration of sacerdotal functions, such as baptism, communion, and marriage, and he conducted religious worship. Therefore, he “for those years acted in a manner consistent with the performance of service by a duly ordained, commissioned, or licensed minister within the meaning of [the tax code].”

The court conceded that as a licensed pastor John had no “voice or vote” on official matters of his denomination. But it noted that “to perform services in the control, conduct, and maintenance of the church or organizations within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or denomination.” It concluded that during 1983 and 1984, as a licensed local pastor, John served “in the control, conduct, and maintenance” of his local church even though as a licensed local pastor he might not have done so with respect to his national denomination. Since John had net earnings of at least $400 derived from the performance of services as a minister in 1983 and 1984, his application for exemption from self-employment tax should have been filed prior to the due date of his 1984 federal income tax return (April 15, 1985). Because it was not, it was filed too late and was not effective. Brannon v. Commissioner, T.C. Memo. 1999-370 (1999).

It is often difficult to determine if a minister is engaged in service performed in the exercise of ministry with respect to services performed outside the context of a local church. The following examples, based on actual cases, will be instructive. They are arranged by job classification, as follows: (1) authors, (2) chaplains, (3) church administrators, (4) counselors, (5) employees of parachurch ministries, and (6) teachers and administrators.

EXAMPLE An ordained minister performed services for a religious organization under the authority of a religious body constituting a church. His services included the writing of religious books and articles (that is, books or articles that were religious in nature and were designed for the dissemination of religious ideas), through the sale of which he received royalty payments. The IRS ruled that “the writing of bona fide religious books or articles by the minister is considered to be service performed in the exercise of his ministry.” Revenue Ruling 59-50.

EXAMPLE IRS Publication 517 states: “Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. This rule also applies to members of religious orders and to Christian Science practitioners and readers.”

EXAMPLE The IRS ruled that

service performed by a minister at either a church-related hospital or health and welfare institution, or a private nonprofit hospital is considered to be “in the exercise of his ministry,” for Federal employment tax purposes, and remuneration paid by such hospitals and institutions to their chaplains is not subject to either income tax withholding or [FICA] taxes. However . . . ​a minister performing service “in the exercise of his ministry” is required to take remuneration received for such service into consideration in computing “net earnings from self-employment” under the Self-Employment Contributions Act . . . ​unless the minister qualifies for, and has obtained, an exemption.

However,

service performed by a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, a State, Territory, or possession of the United States, the District of Columbia, a foreign government, or a political subdivision of any of the foregoing, is not considered to be “in the exercise of his ministry,” even though such service may involve the ministration of sacerdotal functions or the conduct of religious worship. Such service is considered to be performed in his capacity as an employee of the government and not by a minister “in the exercise of his ministry.” Revenue Ruling 71-258.

EXAMPLE The IRS ruled that a chaplain employed by a church-affiliated retirement home was engaged in the exercise of ministry, and therefore his wages were exempt from income tax withholding and FICA taxes. The retirement home was open to persons 62 years and older in the form of independent living, home care, personal care, and nursing care. The chaplain was an ordained minister. He performed a variety of duties, including the conduct of religious worship and the performance of sacerdotal functions. The chaplain also spent significant time counseling and ministering to the sick and grieving. He officiated at funerals, taught religious studies, and led prayer meetings. During a typical week, he prepared for and conducted four worship services. He visited sick residents of the community either in the community or at a local hospital, and he counseled residents and staff. He conducted a communion service monthly and, when requested by a resident, performed baptisms, weddings, and funerals.

The IRS concluded that the chaplain was a minister and was performing services in the exercise of ministry, and therefore:

EXAMPLE Ordained ministers employed as chaplains by state prisons are not engaged in the exercise of ministry for Social Security purposes. As a result, they are subject to FICA taxes. If they exempted themselves from self-employment taxes, the exemption does not apply. This result is based on the income tax regulations, which specify that service performed by a duly ordained, commissioned, or licensed minister of a church “as an employee of the United States, a State, Territory, or possession of the United States, the District of Columbia, a foreign government, or a political subdivision of any of the foregoing” is not considered to be “in the exercise of his ministry” even though such service may involve the ministration of sacerdotal functions or the conduct of religious worship. The regulations specify that “service performed by an employee of a state as a chaplain in a state prison is considered to be performed by a civil servant of the state and not by a minister in the exercise of his ministry.” Treas. Reg. § 1.1402(c)-5. On the other hand, the regulations specify that, for purposes of determining the eligibility of a chaplain for a housing allowance, “service performed by a qualified minister as an employee of the United States . . . ​or a State, Territory, or possession of the United States, or a political subdivision of any of the foregoing, or the District of Columbia, is in the exercise of his ministry provided the service performed includes such services as are ordinarily the duties of a minister.” Treas. Reg. 1.107-1(a).

EXAMPLE Pastor C performs services as an employee of a nonprofit organization formed to provide a chaplaincy ministry of pastoral and theological care for and to hospitalized patients, including counseling and guidance of patients and their families, outpatients, staff, and medical personnel who may be connected with local hospitals and health organizations. The organization receives its operating funds from contributions by local churches. Pastor C is an ordained minister and was employed to perform services for the organization as the director of pastoral care at a public hospital. His daily duties include (1) spiritual and emotional counseling of patients and their families referred by the nursing staff and physicians (which occupies approximately 40 percent of his working hours); (2) performing religious rituals at the time of death for patients who pass away while in the hospital (15 percent of his working hours); (3) spiritual crisis counseling and notification of patients’ ministers in emergency situations (15 percent); (4) pastoral counseling of the hospital staff and student nurses in time of stress (5 percent); (5) performing funeral services, wedding services, and bedside communion services (5 percent); and (6) speaking in the hospital chapel at various community and church group gatherings on the hospital chaplaincy program and performing devotional programs (5 percent). The IRS ruled that Pastor C is a minister and that his work constitutes service performed in the exercise of ministry, and accordingly, he should be treated as a minister for federal tax purposes. It noted that “his services are principally spiritual counseling and the ministration of sacerdotal functions.” IRS Letter Ruling 8519004.

EXAMPLE Chaplain Boyd was an ordained minister employed full time by the City of Indianapolis (“City”) as a police chaplain. The police department’s chaplain program was established through its joint efforts with the Church Federation of Greater Indianapolis, Inc. (“Federation”). The Federation is an organization of Christian congregations and denominations in the Indianapolis metropolitan area. Chaplain Boyd claimed he was eligible for a housing allowance with respect to amounts so designated by the Federation. The IRS disagreed. It noted that the tax regulations require a housing allowance to be designated “pursuant to official action taken in advance of the payment of such amount by the employing church or other qualified organization.” Since the Federation was not the chaplain’s employing church (he was not a Federation employee and was not paid by it), the IRS asserted that he was eligible for a housing allowance only if the City was an “other qualified organization.” The IRS concluded that this test was not met, and the chaplain appealed.

The Tax Court ruled that the Federation was an “other qualified organization” that could designate a housing allowance. It concluded:

As a police chaplain, Boyd was under the direct supervision of the Chief of Police. However, the Federation retained supervision over Boyd’s ecclesiastical performance and maintained day-to-day contact with Boyd and other chaplains. Boyd’s salary was originally paid by the Federation, but in the years at issue, his salary was paid by the City. The Federation was also involved in the operation of the police chaplain program. If a problem arose concerning a police chaplain, a police department official would usually contact the Federation to resolve the problem. When a vacancy occurred for a chaplain, the Federation assumed primary responsibility for finding a qualified person to fill the vacancy. The Federation annually designated a specific amount of Boyd’s salary, in advance, as a housing allowance even though his salary was paid by the City. The City neither provided Boyd with a home nor designated any portion of his salary as a housing allowance.

The Tax Court concluded that the Federation was a qualified organization and that its designation of a portion of Boyd’s salary as a housing allowance was valid. The Tax Court based its decision on the “constant and detailed involvement of the Federation” in the City’s police chaplain program. The IRS later “acquiesced” in the court’s ruling on the ground that the Federation’s responsibilities toward the chaplain program were similar to those of an employer and that the Federation was closely involved with the police department in its employer–employee relationship with the ministers. Boyd v. Commissioner, T.C. Memo. 1981-528 (1981).

EXAMPLE The IRS ruled that an ordained minister employed by a state department of corrections as a prison chaplain was not entitled to a housing allowance. The chaplain was an employee of the state and was compensated by the state. His denomination submitted a letter to the department of corrections endorsing his call to the chaplaincy ministry and stating that 45 percent of his salary constituted a housing allowance. The IRS noted that the tax regulations require a housing allowance to be designated “pursuant to official action taken in advance of the payment of such amount by the employing church or other qualified organization.” Since the chaplain’s denomination was not an employing church, he was eligible for a housing allowance only if the state department of corrections was an “other qualified organization.” The IRS concluded that this test was not met:

In the present case, the [denomination] is not actively involved in the day-to-day conduct of the chaplain program of the state department of corrections. . . . ​The [denomination’s] involvement with the program was limited to sending a letter to the state endorsing [the chaplain] and receiving annual reports from him. We do not believe that this level of involvement is sufficient . . . ​to qualify the [denomination] as an “other qualified organization.” The [denomination] is not closely involved with the state in the conduct of its chaplain program and the responsibilities of the [denomination] are not similar to those of an employer. IRS Letter Ruling 9052001.

EXAMPLE An ordained minister was employed by the federal government as a full-time chaplain in a Veterans Administration hospital. The IRS ruled that the chaplain was not eligible for a housing allowance. It noted that a housing allowance is “an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization.” It referred to title 5, section 5301, of the United States Code, which specifies that it is the policy of Congress that federal pay fixing for employees under the General Schedule be based on the principles that “(1) there be equal pay for substantially equal work within each local pay area; (2) within each local pay area, pay distinctions be maintained in keeping with work and performance distinctions; (3) federal pay rates be comparable with non-federal pay rates for the same levels of work within the same local pay area; and (4) any existing pay disparities between federal and nonfederal employees should be completely eliminated.”

The IRS noted that the pay rates for General Schedule (GS) employees of the federal government are provided on the basis of the duties, responsibilities, and qualification requirements of the employees’ positions and that “no portion of a GS pay rate for a chaplain or for any other GS employee is provided as a rental allowance or as anything other than basic pay for the work the employee performs.” The federal pay comparability process

compares only basic pay and does not take into consideration extraneous benefits such as rental allowances for ministers, nor does it compare pay for individual occupations. It compares pay for levels of work. Thus, rather than comparing pay for federal chaplains with pay for non-federal clergymen, the comparability process compares pay for a GS grade with average basic pay for work of a similar level of difficulty and responsibility in several occupations in the private sector. The General Schedule pay rates do not expressly provide for any rental allowance exclusion for ministers. Furthermore, the IRS has been advised by the U.S. Civil Service Commissioner that there are presently no statutory provisions relating to General Schedule employees authorizing anyone in a government agency to designate part of a minister’s government compensation as a rental allowance as required by section 1.107-1(b) of the regulations. Accordingly, it is held that the taxpayer, a General Schedule employee, may not exclude any portion of his pay as a rental allowance under section 107 of the tax code. Revenue Ruling 72-462.

EXAMPLE A chain of nonprofit nursing homes (“Challenge Homes”) affiliated with the Assemblies of God Church (“Church”) employed several ordained ministers as chaplains. Challenge Homes designated a portion of each chaplain’s compensation as a housing allowance. The IRS later determined that none of the chaplains was eligible for a housing allowance, and the chaplains appealed to the Tax Court.

The court noted three ways the chaplains’ services could constitute the exercise of ministry, making them eligible for a housing allowance: (1) The performance of worship and sacerdotal functions constitutes the exercise of ministry, as defined by the Church. But the court concluded that this test was not met, since there was “no evidence regarding what, if any, sacerdotal functions or religious worship services the chaplains actually conducted pursuant to their employment with Challenge Homes. Nor, and more importantly for this test, is there any evidence that the duties which the chaplains did perform for Challenge Homes constituted the conduct of religious worship or ministration of sacerdotal functions within the stated tenets and practices of the Assemblies of God Church.” (2) The regulations specify that if a minister, pursuant to an assignment by his church, performs service for an organization that is not a religious organization, all service performed by him, even though such service may not involve the conduct of religious worship or the ministration of sacerdotal functions, is in the exercise of his ministry. This test was not met, since none of the chaplains had been assigned to a post by the Church. (3) The regulations specify that service performed by a minister in the exercise of ministry includes service “in the control, conduct, and maintenance of religious organizations under the authority of a religious body constituting a church or church denomination.” The court concluded that this test was not met, since there was not sufficient evidence that Challenge Homes was under the authority of the Church.

The court acknowledged that many ties existed between the two entities but that these ties were not enough. It noted the following facts: (1) Challenge Homes advertised itself as a provider of nondenominational nursing home services whose primary source of revenue was from various agencies of government. (2) The charter of Challenge Homes states that no legal relationship exists between it and the Church. (3) The Church does not have the right of approval or the right to remove directors of Challenge Homes, does not support Challenge Homes financially, and cannot legally require Challenge Homes to report on its operations. The court concluded that the chaplains “have not shown any objective manifestation of control by the Church over Challenge Homes. The record is devoid of any evidence that the Church ever made a suggestion to Challenge Homes about the operation or management of the nursing homes it ran.” Toavs v. Commissioner, 67 T.C. 897 (1977). See also Revenue Ruling 72-606.

EXAMPLE The Tax Court ruled that an administrator of a Jewish synagogue was not eligible for a housing allowance, since he was not ordained, commissioned, or licensed. The court noted that in deciding whether an individual performs the functions of a minister, consideration must be given not only to the religious duties the individual performs but also to the religious duties that are not performed. The performance of some religious functions is not enough to make one a minister for federal tax purposes. The administrator in this case performed a number of religious functions, but these were largely administrative in nature. More importantly, he performed few of the duties of an ordained, commissioned, or licensed minister. The court also noted that the administrator had no seminary training. Haimowitz v. Commissioner, T.C. Memo. 1997-40 (1997).

EXAMPLE The IRS ruled that an ordained minister who was fully qualified to perform all of the sacerdotal functions of his church and who served as the “canon/administrator” of his local church was engaged in the exercise of ministry and accordingly was eligible for a housing allowance. His duties included supervising all aspects of the church’s finances, fund-raising program, plant and equipment, kitchen operations, and housekeeping. The IRS noted that “examples of specific services the performance of which will be considered duties of a minister for purposes of [the housing allowance] include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies.” The IRS concluded that “the regulations are specific concerning ministers who serve as administrators of religious organizations. Accordingly, we have concluded that you are performing services that are ordinarily the duties of a minister of the gospel and, as such, are eligible to receive a rental allowance exclusion.” IRS Letter Ruling 8142076.

EXAMPLE The IRS ruled that an ordained Presbyterian minister employed full time by a nonprofit pastoral counseling center was not eligible for a housing allowance. The minister spent 50 percent of his working hours providing “spiritual and pastoral counsel to individuals about a variety of issues, including marital difficulties, depression, anxiety, sexual problems, eating disorders, and gender identity.” His counseling approach was based on “applying Biblical principles of human nature and behavior” to the problems of patients. He spent 35 percent of his time preparing for and leading three small Bible study groups and two discussion groups of other ordained ministers; 10 percent of his time was spent preparing for and teaching Sunday-school classes in nearby congregations; and 5 percent of his time was spent on preaching, leading worship services, officiating at weddings, and administering the sacraments. Less than 5 percent of his time was taken up with administrative duties. The counseling center’s board of directors designated a portion of the minister’s compensation as a housing allowance. This practice was questioned by the IRS, and guidance was sought from the IRS national office.

The IRS national office concluded that the minister was not entitled to a housing allowance. It conceded that the taxpayer was a minister, but it concluded that he was not engaged in service performed in the exercise of his ministry and therefore was not eligible for a housing allowance with respect to his employment by the counseling center. It observed: 

In the present case, the facts indicate that only 5 percent of the taxpayer’s working hours are spent performing duties such as the conduct of religious worship or the performance of sacerdotal functions that are described in the income tax regulations as constituting service performed by a minister in the exercise of his ministry. Therefore, we conclude that the duties performed by the taxpayer for [the counseling center] are not service performed in the exercise of his ministry pursuant to . . . ​the income tax regulations.”

This ruling is unique in the sense that the IRS limited its analysis to the percentage of the minister’s time that was spent performing worship or sacerdotal functions. Such an approach is questionable since most pastoral ministers (like the pastoral counselor in this case) spend no more than 5 percent of their time conducting worship or administering the sacraments, and they spend a substantial amount of time engaged in counseling. Clearly, there is a need for the IRS to come up with a better justification for the result reached in this private letter ruling. IRS Letter Ruling 9124059.

EXAMPLE An ordained minister was a full-time counselor for an organization that promoted recovery from addictive disorders, such as alcoholism and drug addiction, through spiritual ministration and counseling. Many of the organization’s patients were referred by churches. The minister spent 75 percent of his time engaged in spiritual counseling; 20 percent in administration; and 5 percent in performing weddings and funerals, prayer services, and adult religious education classes. Under these circumstances the IRS concluded that the minister was not eligible for a housing allowance, since “the facts indicate that only 5 percent of the minister’s working hours are spent performing duties such as the conduct of religious worship or the performance of sacerdotal functions that are described in [the income tax regulations] as constituting service performed by a minister in the exercise of his ministry.” IRS Letter Ruling 9231053.

EXAMPLE Pastor B is an ordained minister employed as a counselor by a nonprofit religious organization not associated with any particular church. His employment includes the following services: teaching Bible classes, performing spiritual counseling, conducting seminars and workshops, speaking at churches, acting as a liaison with area churches, preaching, attending ministerial alliance meetings, and conducting staff devotions. Pastor B requested a ruling from the IRS that his services were in the exercise of his ministry and, accordingly, that he was eligible for a housing allowance exclusion (and the other special tax provisions available to ministers). The IRS concluded that Pastor B was engaged in the performance of services in the exercise of his ministry and was eligible for a housing allowance and the other special tax provisions. It relied on the regulation (quoted above), which specifies that “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.” The IRS concluded that the services performed by Pastor B were “clearly ministerial in nature” and, accordingly, that the services he performed on behalf of his employer were in the exercise of his ministry.

This case suggests that a minister serving in a parachurch ministry may be engaged in service performed in the exercise of ministry if his or her job description is amended to reflect the following responsibilities: (1) weekly worship service; (2) weekly religious education classes; (3) religious counseling with employees or supporters as desired; (4) administration of sacraments or sacerdotal functions to employees or supporters as desired; (5) serving as liaison with area churches; (6) staff devotions; and (7) representation of the ministry at ministerial alliance meetings. IRS Letter Ruling 8825025.

EXAMPLE The Tax Court ruled that an ordained minister who worked for an evangelical ministry was eligible for a housing allowance. The ministry conducted crusades, produced religious television broadcasts, and published religious literature. The ministry provided the minister with a housing allowance. The IRS claimed that the minister was not eligible for a housing allowance. The income tax regulations specify that a housing allowance must be provided as compensation for ministerial services, and they define ministerial services to include the performance of sacerdotal functions; the conduct of religious worship; and “the control, conduct, and maintenance of religious organizations, under the authority of a religious body constituting a church.” The IRS claimed that the minister was not eligible for a housing allowance, since his employer was not a church, and therefore he was not a minister performing services under the authority of a church.

The Tax Court disagreed. It defined a church as follows:

To classify a religious organization as a church under the Internal Revenue Code, we should look to its religious purposes and, particularly, the means by which its religious purposes are accomplished. . . . ​At a minimum, a church includes a body of believers or communicants that assembles regularly in order to worship. When bringing people together for worship is only an incidental part of the activities of a religious organization, those limited activities are insufficient to label the entire organization a church.

The court concluded that the evangelistic ministry in this case met this definition:

[It] has a far-ranging ministry that reaches its members through television and radio broadcasts, written publications, and crusades. It has loyal followers, some who attended worship services . . . ​and attended crusades held regularly in various cities. Many . . . ​were not associated with any other religious organization or denomination. In essence, [it] had the requisite body of believers, and, therefore, [the minister] performed services under the authority of a church. In addition, [he] was “authorized to administer the sacraments, preach, and conduct services of worship” and was an ordained minister of the gospel. Whittington v. Commissioner, T.C. Memo. 2000-296 (2000).

EXAMPLE An ordained Baptist minister established an exempt organization to produce videotapes to promote world missions. The minister was responsible for the “message” conveyed on the tapes. His other duties included preaching in local church missions conventions and marketing the tapes. He conducts daily worship services for employees of the organization to emphasize the importance of their work, and he performs sacerdotal duties (communion) on occasion. More than 30,000 churches have purchased or used the organization’s videos. The organization designated a portion of the minister’s compensation as a housing allowance. The IRS audited the minister and determined that he was not eligible for a housing allowance, since his services did not constitute the exercise of ministry. The minister appealed, and the Tax Court ruled that the minister’s duties were in the exercise of his ministry and that he qualified for a housing allowance. The court noted that the regulations specify that a minister employed by a separate organization can be engaged in ministerial services (and eligible for a housing allowance) under any of three circumstances: (1) the minister is assigned to the position by a church or denomination; (2) the minister is engaged in the “control, conduct, and maintenance” of a religious organization under the control of a church or denomination; or (3) the minister conducts religious worship or performs sacerdotal functions. The court concluded that the minister did not qualify under the first two tests but that he did under the third test. It emphasized that the minister conducted daily worship services for the employees of the organization and occasionally administered communion. In addition, he preached at local church missions conventions on behalf of the organization. The court acknowledged that these activities comprised only a portion of the minister’s duties, but it concluded that this did not matter since his duties as CEO of his parachurch ministry were his primary duties and constituted the performance of sacerdotal functions under the religious tenets of the Baptist faith.

The court relied in part on the testimony of a Baptist professor who testified that some ministers, such as the minister in this case, broaden their ministries beyond the local church to proclaim the gospel through other means (such as videotapes and other media). The professor testified that Baptist churches consider an ordained minister who “seeks to proclaim the Gospel in any fashion to any person or group of persons, or who provides church-related services to congregations,” to be functioning as a minister in accordance with the overall purpose of his ordination. The court concluded that the minister in this case was fulfilling his ministry through his organization by producing missions tapes for local congregations. Mosley v. Commissioner, T.C. Memo. 1994-457 (1994).

EXAMPLE An ordained minister was employed by a charitable organization as its Director of Special Services. The organization was neither a religious organization nor an integral agency of a religious organization. As Director of Special Services the minister’s basic functions were the directorship of the organization’s advisory council and the coordination of its cultural programs. In connection with his position, he occasionally performed certain sacerdotal duties, including the conduct of worship services. The IRS ruled that since the charitable organization was neither a religious organization nor an integral agency of one, the minister’s duties did not qualify as those in the administration or maintenance of a religious organization or an integral agency. The IRS acknowledged that while the minister occasionally performed sacerdotal duties, his overall duties were not basically the conduct of religious worship or the ministration of sacerdotal functions as contemplated by the regulations. Revenue Ruling 68-68. But see Mosley v. Commissioner, T.C. Memo. 1994-457 (1994) above.

EXAMPLE Rabbi L was hired by the United Jewish Appeal (UJA) to serve as its Director of the Rabbinic Advisory Council. The placement bureau of the Rabbinical Assembly, an organization of conservative rabbis, assisted the rabbi in securing this position. Prior to his employment with the UJA, Rabbi L served as a rabbi of various congregations and was provided housing by these congregations. The services Rabbi L performed with the UJA were in substantial part rabbinic in nature. He served as a consultant to the UJA and its staff regarding matters of Jewish law and practices. He functioned as staff chaplain, providing rabbinic counseling to staff and conducting services at meetings. He performed sacerdotal functions, conducting weddings and funerals for the staff and families. He directed religious services and observances at all UJA conferences and meetings and conducted study sessions on Jewish customs and practices for the executive staff of the UJA. He communicated with rabbis around the world regarding the importance of the concept of charity and enlisted their support for programs sponsored by the UJA. In this respect he conducted seminars for various rabbinic groups and delivered Sabbath sermons to various congregations.

The Tax Court concluded that Rabbi L was engaged in service performed in the exercise of ministry and, accordingly, was eligible for a housing allowance. It observed:

The services petitioner performed with the UJA, though different than that of a rabbi of a specific congregation, were clearly rabbinic or “ministerial” in nature. . . . ​[Rabbi L] performed many religious or sacerdotal functions similar to those performed by a rabbi with a defined congregation. [He] served as staff chaplain to the UJA and its staff, explaining matters of Jewish law and practices and conducting weddings and funerals for the staff and families upon their request. In addition, he directed religious services and observances at all conferences and meetings and conducted study sessions on Jewish customs and practices for the executive staff of the UJA. Thus, based on the entire record, we are convinced that the services petitioner performed for the UJA were in the exercise of his ministry within the meaning of the regulations. Libman v. Commissioner, 44 T.C.M. 370 (1982).

EXAMPLE Pastor N is an ordained minister who teaches theology at a church-operated seminary. He rarely conducts religious worship or administers sacerdotal functions. Is he a minister engaged in service performed in the exercise of ministry? The answer is yes. As noted above, the income tax regulations specify that “examples of specific services the performance of which will be considered duties of a minister . . . ​include . . . ​the performance of teaching and administrative duties at theological seminaries.” Treas. Reg. § 1.107-1(a).

EXAMPLE The IRS ruled that teachers and administrators employed by an interdenominational seminary that was not an integral agency of a particular church or denomination were not engaged in the exercise of ministry and, accordingly, were not eligible for a housing allowance. The IRS acknowledged that the income tax regulations define service performed in the exercise of ministry to include “the performance of teaching and administrative duties at theological seminaries.” It further acknowledged that the regulations provide that “services rendered by an ordained minister in the conduct of religious worship or the ministration of sacerdotal functions are considered services in the exercise of a ministry whether or not it is performed for a religious organization or an integral agency thereof.” However, the IRS concluded: 

[T]he information submitted does not show which religious activities qualify in accordance with the tenets and practices of a particular religious body constituting a church or church denomination. Since the employer is an interdenominational seminary, it is difficult to envision how the duties of the faculty could in any significant amount be said to constitute the conduct of religious worship or the ministration of sacerdotal functions of a particular denomination. IRS Letter Ruling 7833017.

EXAMPLE The IRS ruled that ordained ministers of the gospel who are employed as teachers and administrators by a seminary that is not an integral agency under the authority of a religious body constituting a church or church denomination are not engaged in the exercise of ministry and, accordingly, are not eligible for a housing allowance (unless they serve by virtue of an assignment from their church or denomination, as explained in the next section of this chapter). Revenue Ruling 63-90.

EXAMPLE The IRS ruled that some full-time teachers employed by parochial schools of a particular church denomination qualified as “duly ordained, commissioned, or licensed ministers of a church” for purposes of federal tax law. The IRS concluded:

[T]he male teachers, although not duly ordained as pastors, are, in performing full-time services for the church by teaching, preaching, and, when needed, acting for or assisting an ordained pastor in the conduct of religious services, duly ordained, commissioned, or licensed ministers of a church for purposes of [federal tax law], and that their services are performed in the exercise of their ministry. . . . ​The female teachers whose services appear to be restricted to the teaching of the religious principles of the church and to the direction of the musical portion of the church services, do not qualify as duly ordained, commissioned, or licensed ministers of a church. Revenue Ruling 57-107. See also IRS Letter Ruling 7939023. But compare IRS Letter Ruling 8614010.

EXAMPLE The IRS ruled that a minister who was employed as an administrator at a religious school was not a minister for federal tax purposes, since the school was not an integral agency of a church. A group of concerned parents joined together for the purpose of establishing a religious school. The articles of incorporation of the school specify that the school is independent and autonomous and not subject to ecclesiastical control from any convention, conference, association, council, group, church, or individual. The administrator’s duties included conducting worship services three times each week for the students; ministering to the spiritual needs of parents and students through counseling; preaching in various churches as a representative of the school; attending ministerial meetings as the head of the school; establishing programs for the spiritual, mental, and physical development of students; disciplining the students; and acting as the business agent for the school. The IRS concluded that the school was not an integral agency of a church, and accordingly, the administrator was not engaged in the performance of services in the exercise of ministry. The IRS acknowledged that the income tax regulations specify that 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. However, the IRS noted that while the administrator performed religious services and sacerdotal functions on occasion, his “regular, full-time duties were administrative duties.” IRS Letter Ruling 8646018. But see Mosley v. Commissioner, T.C. Memo. 1994-457 (1994).

EXAMPLE An ordained rabbi is employed full time as a religious instructor by a synagogue-controlled private school. In this capacity the rabbi teaches Judaic studies, leads daily worship services with the students in the school, trains students to conduct religious services, teaches students to read the Torah, assists with Bar Mitzvah training, and provides consultation to students, faculty, and administrators of the school with respect to Jewish religious practices. The rabbi also instructs students on the subjects of Jewish law, liturgy, holidays, customs, ethics, and values. The rabbi is a minister, and he is engaged in service performed in the exercise of ministry. Accordingly, he is eligible for a housing allowance. IRS Letter Ruling 9126048.

EXAMPLE The IRS ruled that teachers and administrative staff employed by a church school were not eligible for a housing allowance. A church operated a private school for kindergarten through eighth grade. All of the teachers were certified by the state, and the school was accredited with the state’s Department of Education. The school’s teachers and administrative staff were not required to attend a Bible college, seminary, or other theological program. Membership in the church was not required to be employed in either teaching or administrative positions, but employees were required to attend a church. The school’s board adopted a resolution granting teachers and administrative staff a housing allowance. The school later asked the IRS for a private letter ruling confirming that the teachers and administrative staff were eligible for a housing allowance.

The IRS ruled that the teachers and administrative staff were not eligible for a housing allowance. It observed:

A review of the duties and responsibilities of the teachers and administrative staff reflect the typical duties and responsibilities found in secular schools. These duties do not include duties performed by ministers of the gospel which generally are: performing the Lord’s supper, baptism, marriage, moderating of church sessions, sitting on church boards of government, conducting worship services, performing funeral services and ministering to the sick and needy. Ministers of the church are either ordained or licensed. The school states that the teachers and administrative staff are commissioned as ministers of the gospel and that the commissioning took place after the date each employee began his or her duties at school. The commissioning process consists of a job interview and hiring process which culminates in the signing of an employment contract and the first day of work. The school represents that when the board approves the candidate for the teaching or administrative position, they instruct the administrator to commission the candidate by calling him or her to be a teacher or administrative staff member and that the commissioning takes place on each employee’s date of hire.

The IRS concluded that the teachers and administrative staff were not ministers of the gospel, since they were not ordained, commissioned, or licensed.

While it is true that the church commissioned them as ministers of the gospel, the IRS concluded that this was not sufficient to make them ministers for tax purposes. It explained its decision by referring to a 1968 Tax Court ruling:

In Kirk v. Commissioner, 51 T.C. 66 (1968) the Tax Court stated that the term “commission” means “the act of committing to the charge of another or an entrusting.” The court held that [a non-ordained church employee] was not commissioned because no congregation or other body of believers was committed to his charge. The duty of spreading the gospel, either by sermon or teaching, was not formally entrusted to his care. He was merely a nonordained church employee. Furthermore, all the services performed by him were of a secular nature.

This case suggests that not all teachers and administrative staff employed by church schools are eligible for a housing allowance, especially if (1) they are not required to attend a Bible college, seminary, or other theological training program; (2) membership in the church is not required to be employed in either teaching or administrative positions; (3) all of the services they perform are “of a secular nature”; and (4) “none of the prescribed duties of the teachers and administrative staff are equivalent to the services performed by a church minister.”

Of course, some teachers and administrative staff employed by church schools will qualify for a housing allowance. The income tax regulations themselves specify that “examples of specific services the performance of which will be considered duties of a minister . . . ​include . . . ​the performance of teaching and administrative duties at theological seminaries.” IRS Letter Ruling 200318002 (2003).

EXAMPLE The IRS ruled that a university was an integral agency of a religious denomination, and therefore its faculty, managers, executives, and administrators who were ordained, licensed, or commissioned ministers were eligible for a housing allowance.

The IRS based its ruling on the following factors: (1) The university is an official regional school of the denomination. (2) The denomination exercises indirect control over the university. While it does not appoint each member of the board, it does appoint 15 members that comprise a majority of the board. (3) The university’s president is also a member of the board and must be approved by the board of directors of the denomination. (4) Even though the trustees and the employees of the university are not required to be members of the denomination, they must affirm their agreement with the denomination’s Statement of Faith and offer to resign if they no longer agree with it. (5) The denomination approves all amendments to the university’s articles of incorporation, bylaws, and mission statement. (6) The university teaches all subjects from a biblical perspective, and its graduate degree programs prepare men and women for positions as pastors, missionaries, and other religious posts. “Accordingly,” the IRS concluded, “the denomination exercises indirect control over the university.” (7) The university is required to provide annual reports, financial statements, and annual audits to the denomination. (8) During the three previous fiscal years, the university received contributions from the denomination totaling 12.8 percent of the total gifts it received during that period. (9) The university’s articles of incorporation specify that if it were to cease operations, dissolve, or terminate its affiliation with the denomination, its property would become the property of the denomination. “Accordingly,” the IRS concluded, “the university is an integral agency of the denomination.”

The IRS further noted:

An ordained, commissioned or licensed minister who is performing services in the control, conduct or maintenance of an integral agency of a religious organization is engaged in performing services in the exercise of his ministry. . . . ​Revenue Rulings 70-549 and 71-7 hold that ministers who serve on the faculty of a college that is an integral agency of a church but do not perform any ecclesiastical duties are engaged in performing services in the exercise of their ministry and hence are eligible to exclude a portion of their compensation as a rental allowance under section 107 of the Code. Revenue Ruling 62-171 holds that ordained ministers of the gospel who teach or have positions involving administrative and overall management duties in parochial schools, colleges or universities which are integral agencies of religious organizations are performing duties as ministers of the gospel for purposes of section 107 of the Code and hence are eligible to exclude a portion of their compensation as a rental allowance. In the present case, the university is an integral agency of the denomination. Accordingly, ordained, commissioned, or licensed ministers of the denomination who teach or serve in faculty, executive, management, or administrative positions are performing services in the exercise of their ministry for purposes of section 107 of the Code. The ministers are therefore entitled to exclude from their gross income amounts that are properly designated as rental allowances under section 107 of the Code and the applicable regulations. IRS Private Letter Ruling 200803008 (2007).

The income tax regulations contain two special definitions of the phrase service performed in the exercise of ministry. These are explained on the following pages.

If a minister is performing service for an organization that is operated as an integral agency of a religious organization under the authority of a religious body constituting a church or church denomination, all service performed by the minister in the conduct of religious worship, in the ministration of sacerdotal functions, or in the control, conduct, and maintenance of such organization is in the exercise of his ministry. What is an integral agency of a church or religious denomination? The IRS (in Revenue Ruling 72-606) has listed eight criteria to be considered in determining whether a particular institution is an integral agency of a religious organization:

EXAMPLE Pastor T is an ordained minister employed in an administrative capacity by a nursing home. The institution is affiliated with but not controlled by a religious denomination. Although the old-age home had a corporate name that implied a church relationship and its articles of incorporation directed that upon dissolution all assets would be turned over to the sponsoring denomination, these facts were not sufficient to support a finding that the home was an integral agency of the denomination. Pastor T’s administrative services in the control, conduct, and maintenance of the institution are not services performed in the exercise of ministry. Accordingly, he does not qualify for a housing allowance or any of the other special rules summarized above. Revenue Ruling 72-606. See also IRS Letter Ruling 8329042.

EXAMPLE A college was ruled to be an integral agency of a church because of the following factors: (1) the board of directors of the college was indirectly controlled by the church because each board member had to be a member in good standing of the congregation; (2) every teacher was a member in good standing of the congregation; (3) the majority of students were members of the church; (4) all subjects taught at the college, whether in natural science, mathematics, social science, languages, etc., were taught with emphasis on religious principles and religious living; and (5) the college had a department that performed all of the functions for ministerial training that a seminary offers. Accordingly, ordained ministers employed in teaching or administrative positions at the college were engaged in the exercise of ministry and were eligible for the special benefits (including a housing allowance) discussed above. Revenue Ruling 70-549. See also IRS Technical Advice Memorandum 9033002 and IRS Letter Rulings 5907134570A, 7907160, 8011047, 8004087, 80929145, 8922077, 9144047, and 9608027.

EXAMPLE Pastor F is an ordained minister who serves as a professor of religion at Texas Christian University. He occasionally officiates at weddings, preaches sermons, and performs other sacerdotal functions, but these activities are not part of his employment at the university. The university has a close relationship with a Christian church (Disciples of Christ), but the church does not control or manage the university either directly or indirectly. In fact, the university only satisfies the last of the five factors listed in Revenue Ruling 70-549 (see preceding example). In addition, the university satisfies only two of the eight criteria cited in Revenue Ruling 72-606 (cited above). Accordingly, the university is not an integral agency of the church, and Pastor F is not eligible for any of the special provisions discussed above (including a housing allowance). Since he was not working for an integral agency of a church, he had to satisfy all three elements of the definition of service performed by a minister in the exercise of his ministry in order to qualify. He failed to satisfy all three elements with respect to his employment by the university. Flowers v. Commissioner, 82-1 USTC para. 9114 (N.D. Tex. 1981).

EXAMPLE Pastor B, a duly ordained minister, is engaged by a public university to teach history. She performs no other service for the university, although from time to time she performs marriages and conducts funerals for relatives and friends. The university is neither a religious organization nor operated as an integral agency of a religious organization. Pastor B is not performing services for the university pursuant to an assignment or designation by her ecclesiastical superiors. The service performed by Pastor B for the university is not in the exercise of ministry. However, service performed by Pastor B in performing marriages and conducting funerals is in the exercise of ministry. Only as to the latter kinds of services will the four special tax provisions apply.

EXAMPLE The IRS ruled that a minister who was employed as a guidance counselor and teacher by a church-affiliated school was eligible for a housing allowance. The IRS concluded that the school was an integral agency of six sponsoring churches, and therefore the services performed by the minister on behalf of the school were in the exercise of his ministry and qualified for a housing allowance.

The IRS based this conclusion on a 1972 ruling in which it listed eight criteria to consider in deciding whether a church-related institution is an integral agency of the church. Revenue Ruling 72-606. The IRS concluded that the school was an integral agency of the sponsoring churches:

Each of the six sponsoring congregations appoint [sic] two of their members to serve on the school board, and each is free to remove and/or replace its own representatives at will. The sponsoring congregations, through their respectively appointed board members, establish school policies, purchase equipment and supplies, maintain facilities, as well as approve and sign teacher contracts. The school board elects its own trustees and officers from among the board members appointed by the congregations. Each member of the school’s staff is required to sign a “Statement of Faith” embracing church doctrine. The treasurer of the school board presents monthly financial statements to the school board, and it is the responsibility of the members to report the financial operations of the school back to their respective congregations. The six sponsoring congregations provide annual cash contributions to the school. Additionally, four of the sponsoring congregations house branches of the school in their church facilities. In the event of dissolution of the school, its assets would become the sole property of the sponsoring congregations.

As a result, the minister was eligible for a housing allowance. IRS Letter Ruling 200002040.

EXAMPLE Pastor W works in an administrative capacity for the headquarters of his religious denomination. Such employment constitutes service performed in the exercise of ministry even if Pastor W does not perform sacerdotal functions or conduct religious worship as part of his employment, since he is engaged in the control, conduct, and maintenance of a church organization. Revenue Ruling 57-129.

EXAMPLE The IRS ruled that a faculty member at a church-affiliated college qualified for a housing allowance since the college was an integral agency of a religious denomination under the criteria enumerated in IRS Revenue Ruling 72-606 (see above). In particular, the IRS noted:

The IRS concluded:

In the present case, the university is an integral agency of the denomination. Accordingly, ordained, commissioned, or licensed ministers who teach or serve in faculty, executive, management, or administrative positions are performing services in the exercise of their ministry for purposes of section 107 of the Code. The ministers are therefore entitled to exclude from their gross income amounts that are properly designated as rental allowances under section 107 of the Code and the applicable regulations. IRS Private Letter Ruling 200925001 (2009).

EXAMPLE A church-affiliated family-services ministry was organized to provide homes for orphaned children as well as foster-care services. The IRS concluded that it was sufficiently related to its sponsoring church to be an “integral agency,” and therefore ministers employed as “managers, executives, supervisors, and administrators” were eligible for a housing allowance. The IRS concluded, on the basis of the criteria listed in Revenue Ruling 72-606, that the ministry was an integral agency of the church. As a result, ministers employed by the ministry as “managers, executives, supervisors, or administrators” were eligible for a housing allowance on the basis of section 1.1402(c)-5 of the tax regulations, which specifies that an ordained, commissioned, or licensed minister who is performing services in the control, conduct, or maintenance of an integral agency of a religious organization is engaged in performing services in the exercise of his ministry. IRS Letter Ruling 201023008 (2010).

As noted above, the income tax regulations specify that if a minister, pursuant to an assignment or designation by a religious body constituting his church, performs service 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 ministration of sacerdotal functions, is in the exercise of his ministry.

The regulations further provide that “if a minister is performing service for an organization which is neither a religious organization nor operated as an integral agency of a religious organization and the service is not performed pursuant to an assignment or designation by his ecclesiastical superiors, then only the service performed by him in the conduct of religious worship or the ministration of sacerdotal functions is in the exercise of his ministry.”

The regulations contain the following two examples:

EXAMPLE. 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. 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.

Rulings

The IRS and the courts have addressed “assignments” of ministers in a few rulings that are summarized below.

Boyer v. Commissioner, 69 T.C. 521 (1977)

The Boyer case is the leading judicial interpretation of the assignment language in the regulations. In the autumn of 1969 Pastor Boyer, a Methodist minister, began teaching data processing at a community college having no affiliation with the United Methodist Church. At the end of his first year of teaching at this college, Pastor Boyer had the college send his ordaining body (Annual Conference) a letter requesting that he be assigned to the college as a professor. The Conference sent the college a letter appointing Pastor Boyer as professor but did not negotiate with the college as to Pastor Boyer’s salary or duties and paid no portion of his compensation. The purpose of this appointment was to qualify Pastor Boyer for a housing allowance. The Tax Court, in rejecting Pastor Boyer’s eligibility for a housing allowance, remarked:

[Pastor Boyer] began teaching at [the college] in 1969; [the college] requested his assignment . . . ​in May 1970, after he had completed an academic year at the institution. His assignment . . . ​was virtually pro forma—the ratification by the church of employment previously begun. In contrast, we believe that the “assignment” referred to in the regulations must be significant, in that the minister must have been assigned by the church for reasons directly related to the accomplishment of purposes of the church. Unless we read these regulations to require a genuine church-related purpose in the church’s assignment of the minister, bootstrapping of the type attempted here by petitioner would enable any ordained minister, merely by obtaining a pro forma “assignment” after he secures secular employment, to qualify for the ministerial rental exclusion. The special benefits of section 107 would follow him through a purely secular career. We do not believe that Congress intended any such result. More 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.

The court further concluded that the regulations “contain an implicit requirement that the assignment by the church must be to further the purposes of the church” and that Pastor Boyer’s assignment to the college “did not qualify as an assignment which transformed his secular duties at a state university school into service in the exercise of his ministry.”

This case suggests that an assignment of a minister by his or her ordaining body, to satisfy the requirements of the regulations, must satisfy two requirements: (1) the assignment must precede and initiate the minister’s new work assignment; and (2) the assignment must be directly related to the accomplishment of the purposes of the church or other ordaining body. Retroactive assignments, occurring after a minister has served for a period of time in a new position, do not fulfill these requirements. As the court noted, more is required than “pro forma” assignments involving little more than “perfunctory ratification by religious authority.”

Tanenbaum v. Commissioner, 58 T.C. 1 (1972)

A rabbi was employed by the American Jewish Committee as its National Director of Interreligious Affairs. The Tax Court ruled that he was not eligible for a housing allowance, since his duties did not involve the conduct of religious worship or the performance of sacerdotal functions. The court made the following comments regarding assignment:

In addition, the [rabbi] was not assigned to the American Jewish Committee by any religious body constituting his “church.” In accepting his position with the American Jewish Committee, he functioned as an independent contractor, separate and apart from any association with a religious group.

The [rabbi] argues that the [assignment] test cannot be met by him because the Jewish faith does not have a hierarchical order, and consequently, does not assign rabbis to occupy positions such as his. He contends that this test focuses primarily upon the type of activity involved and that his work with the American Jewish Committee is of a type covered by the regulation. We cannot agree. The [assignment] test unequivocally requires that the [minister] be working “pursuant to an assignment or designation by a religious body constituting his church” . . . ​and in the instant case the [rabbi] clearly was not.

This case demonstrates that an “assignment” is not effective unless a religious body has the authority to assign a minister to a position in furtherance of its mission and does so on its own initiative (rather than merely ratifying a position the minister unilaterally secures). Many Protestant churches and denominations have no legal or ecclesiastical authority to assign ministers to any position, and any attempt by them to do so would be ineffective. The organizational documents of a church or denominational agency should be reviewed carefully to determine whether it has the authority to assign ministers. Further, the practice of the church or denominational agency should be studied. Does it have an established practice of assigning ministers to their positions? If not, it is unlikely that any assignment would be recognized by the courts or by the IRS.

Libman v. Commissioner, 44 T.C.M. 370 (1982)

The Tax Court ruled that a rabbi employed by the United Jewish Appeal was eligible for a housing allowance because he performed ministerial duties and not because of any assignment. The court rejected the validity of a purported assignment of the rabbi by his “Rabbinical Assembly,” since it lacked any authority to assign rabbis. The court observed that “since the Jewish faith does not have a hierarchical order and consequently does not assign rabbis to occupy positions such as this (although rabbinic organizations may assist in placement), under a strict reading of the regulation it is difficult for [the rabbi] or someone similarly situated to pass this test.”

Once again, the implication is clear—religious bodies cannot assign clergy in order to qualify them for a housing allowance unless they have the ecclesiastical authority to do so and this authority is validated by actual practice.

Letter Ruling 8520043

The IRS concluded that a purported assignment of a minister by his church to teach at a college was not effective and did not qualify the minister for a housing allowance. The minister found and accepted his position as a teacher at the college before he was ordained. Shortly after accepting the teaching position, the minister was ordained. His ordaining body approved of his work at the college and gave him annual permission to continue. The IRS observed:

The assignment envisaged in the regulations is more than a formality. In the case of Boyer v. Commissioner, 69 T.C. 521 (1977), a minister found employment as a teacher at a university on his own and later received an “assignment” from his church to that position. In concluding that the “assignment” was not of the type envisaged by the regulations, the court stated as follows:

His assignment . . . ​was virtually pro forma—the ratification by the church of employment previously begun. In contrast, we believe that the “assignment” referred to in the regulations must be significant, in that the minister must have been assigned by the church for reasons directly related to the accomplishment of purposes of the church. . . . ​More 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.

From the facts submitted it is apparent that [your church’s] approval or ratification of your work at the college is not an assignment within the meaning of . . . ​the regulations.

This ruling represents another example of a purported assignment of a minister to a position that the minister previously secured on his own initiative. This does not meet the requirement of the regulations that the assignment must establish the minister’s new position rather than ratify it after the minister on his or her own initiative has already secured it.

Letter Ruling 8826043

The IRS ruled that a pastoral counselor employed by a counseling center was not eligible for a housing allowance despite a purported assignment by his ordaining church. The church, in a letter to the minister, expressed its support of the minister’s counseling practice, expressed its desire to support the minister in his counseling, and endorsed him as a counselor through the counseling practice in order to further the efforts and mission of the church. The IRS observed:

Applying the regulations as interpreted in Boyer v. Commissioner to the facts in this situation, we conclude that the services the minister performs through his counseling practice do not qualify as services in the performance of his ministry. [The regulations require] that services that are not performed for a religious organization be performed pursuant to an assignment or designation by the church. In your case, we find that the counseling services the minister performs are not pursuant to an assignment or designation by the church. Although the church states it commissions and endorses the minister in his counseling practice, this does not constitute an assignment or designation by the church. The church is supportive of the minister’s counseling practice, but we find no evidence to suggest that the church specifically assigned the minister to perform such counseling services on its behalf. Also, it does not appear that the counseling services the minister performs are to directly further the purposes of the church. The minister performs his services free from the church’s control, and he states his purpose is to meet human needs as effectively as possible, using the principles and teachings of his church. The intent of the counseling services is not to further any of the church’s purposes (although the church may benefit from the minister’s counseling). While the minister may provide his counseling services based on his church’s religious beliefs, this does not meet the requirement that the minister be assigned to perform his services in order for them to qualify as services performed in the exercise of his ministry. [Emphases added.]

In this ruling the IRS interpreted the assignment language of the regulations to require that (1) the assignment must result in services being performed by the minister “on behalf of ” the assigning church; (2) the assignment must “directly further the purposes of the church”; (3) the assigned minister, in the performance of his or her duties, must intend to further the church’s purposes; and (4) the assigned minister’s services must remain subject to the assigning church’s control.

Letter Ruling 8930038

The IRS reaffirmed its ruling in Letter Ruling 8826043 (summarized above) and rejected the minister’s claim that a valid assignment can be inferred from the actions of his church. The IRS, in rejecting this view, observed:

Furthermore, the information provided states that the counseling practice was originally associated with the church until the minister established the counseling practice as a sole proprietorship. As stated in a letter from the church to the minister, it was a shared goal of the church and the minister to make the counseling practice an independent counseling ministry in which the minister performs his services free from the church’s control. The minister states that as a matter of religious doctrine, the church does not assign or designate its ministers to any particular work. However, while counseling may be viewed as an integral element by the church of its mission for the community, the services are performed for the general public as well as for church members and in this case are also conducted for purposes of financial independence.

Conclusions

Based on the legal precedent reviewed above, a minister’s eligibility for a housing allowance should not be based on an “assignment” unless the assignment satisfies the following conditions:

EXAMPLE Pastor C, a duly ordained minister, is assigned by his religious denomination to perform advisory service to a publishing company in connection with the publication of a book dealing with the history of the denomination. The publisher is neither a religious organization nor operated as an integral agency of a religious organization. Pastor C performs no other service for his denomination or the publisher. He is performing service in the exercise of ministry, and accordingly, he is eligible for all of the four special tax provisions discussed in this chapter.

To summarize, this means that (1) he is eligible for a housing allowance exclusion; (2) he must pay self-employment taxes (the Social Security tax for self-employed individuals) rather than FICA taxes, assuming that he is not exempt; (3) if he is exempt from Social Security taxes (because his timely exemption application was approved by the IRS), then he pays no self-employment tax on compensation received from the publisher; and (4) his wages are not subject to federal income tax withholding, meaning that he must report and pay his income taxes (and self-employment taxes, if applicable) using the estimated tax procedure (Form 1040-ES).

Some churches have issued credentials to the spouse of a minister, often at the request of the minister in an attempt to achieve tax “benefits” for the spouse. For example, a church or denomination “licenses” a minister’s spouse so the spouse will be eligible for a housing allowance with respect to distributions from the minister’s retirement account following the minister’s death. Note the following considerations.

First, the IRS has always maintained that churches and denominations can issue ministerial credentials to anyone they choose. As a result, no one will ever challenge or question the inherent right of a church to confer ministerial credentials. But whether the IRS or the courts will recognize a person as a minister for tax purposes is another matter. So, to the extent that the sole purpose for providing ministerial credentials to ministers’ spouses is to enable them to receive housing allowances following the death of a minister spouse, this is an issue that ultimately would be determined by the IRS and the courts.

Second, the IRS ruled in 1972 that church pension boards cannot designate housing allowances for the surviving spouses of deceased ministers. Revenue Ruling 72-249. The IRS observed:

Prior to his retirement and death the husband was a minister of the gospel and pastor of a church. Shortly before he retired, in recognition of his years of past service, the church, through official action of its governing body, authorized the payment of a specific amount each month upon retirement, to be paid for so long as he lived with survivor benefits for his wife. The authorization designated a portion of the payment as a rental allowance. The wife was not a minister of the gospel and she did not perform any services for the church. . . . ​Until his death, and to the extent used to provide a home, the rental allowance paid to the retired minister was excludable from his gross income since it was paid as part of his compensation for past services and it was paid pursuant to official action of his church. However, the rental allowance exclusion does not apply to amounts paid to his widow since it does not represent compensation for services performed by her as a minister of the gospel. Accordingly, in the instant case, it is held that the rental allowance exclusion does not apply to amounts paid by the church to the minister’s wife.

This ruling provides definitive guidance. Eligibility for a housing allowance requires that

A minister’s spouse who is granted ministerial credentials by a church or denomination may satisfy the first requirement but not necessarily the second. The second requirement is satisfied only if the housing allowance represents compensation for services performed in the exercise of ministry (as defined above) by the spouse after he or she was granted ministerial credentials.

EXAMPLE A denominational pension plan asked the IRS for a ruling on the taxability of retirement benefits designated as a housing allowance to be received by a retired minister or a spouse beneficiary of a deceased minister. The IRS referred to Revenue Ruling 72-249 (see above) and concluded, “A housing allowance received by a retired minister from [a church pension board] may be excluded from his or her gross income to the extent allowed by section 107 of the tax code and the regulations thereunder. However, a housing allowance payable through [the pension board] to the spouse beneficiary of a deceased minister is includable in the gross income of that spouse beneficiary.” IRS Letter Ruling 8404101 (1984).

EXAMPLE A church grants a ministerial license to Susan, the 60-year-old wife of Pastor Ron. Susan wanted ministerial credentials so that retirement distributions she will receive from her husband’s pension fund following his death could be designated as a nontaxable housing allowance. Susan has never received compensation for ministerial services. This arrangement will not work. The church or denominational pension plan cannot designate a portion of Pastor Ron’s retirement income as a housing allowance following his death, since this does not represent compensation earned by Susan in the exercise of ministry following her receipt of ministerial credentials.

EXAMPLE Same facts as the previous example. Susan insists that she assisted her husband throughout his ministry and performed essential ministerial functions. Does this mean the church pension fund can designate some or all of the payments made to her from her husband’s account as a housing allowance following his death? No, it does not, since she was not a minister until she was 60 years of age, and thus all of the services she performed prior to that time do not count. Further, she received no compensation for any of these services and did not contribute to her own retirement fund, so there are no funds out of which a housing allowance can be declared for her.

EXAMPLE Pastor Andy and his wife Emily are both ordained pastors. They serve as co-pastors of a church. Both are compensated for the performance of ministerial duties, and both contribute some of their compensation to a church pension fund. At her retirement, Emily can have the pension board designate some or all of the distributions from her account as a housing allowance (subject to applicable legal limits) since she meets both of the requirements for a housing allowance. She is a minister, and the housing allowance represents compensation for services she performed in the exercise of ministry following her receipt of ministerial credentials.

The tax code exempts from Social Security taxes and income tax withholding “services performed . . . ​by a member of a religious order in the exercise of duties required by such order.” Neither the tax code nor the income tax regulations defines the term religious order. To provide some certainty regarding the definition of a religious order, the IRS has identified seven characteristics that traditionally have been associated with religious orders. IRS Revenue Procedure 91-20. The IRS came up with this list by reviewing the court decisions that have addressed the issue. Here are the seven characteristics:

(1) The organization is described in section 501(c)(3) of the Code. (2) The members of the organization vow to live under a strict set of rules requiring moral and spiritual self-sacrifice and dedication to the goals of the organization at the expense of their material well-being. (3) The members of the organization, after successful completion of the organization’s training program and probationary period, make a long-term commitment to the organization (normally, more than two years). (4) The organization is, directly or indirectly, under the control and supervision of a church or convention or association of churches, or is significantly funded by a church or convention or association of churches. (5) The members of the organization normally live together as part of a community and are held to a significantly stricter level of moral and religious discipline than that required of lay church members. (6) The members of the organization work or serve full-time on behalf of the religious, educational, or charitable goals of the organization. (7) The members of the organization participate regularly in activities such as public or private prayer, religious study, teaching, care of the aging, missionary work, or church reform or renewal.

The IRS has stated that “generally, the presence of all the above characteristics is determinative that the organization is a religious order” and that “the absence of one or more of the other enumerated characteristics is not necessarily determinative in a particular case. Generally, if application of the above characteristics to the facts of a particular case does not clearly indicate whether or not the organization is a religious order, the [IRS ] will contact the appropriate authorities affiliated with the organization for their views concerning the characteristics of the organization and their views will be carefully considered.” Revenue Ruling 91-20. See also IRS Letter Ruling 9219012 (an organization was a religious order though it did not satisfy one of the seven criteria) and IRS Letter Rulings 9418012 and 9630011 (evangelical organizations were religious orders though they were not directly or indirectly under the control and supervision of a church or convention or association of churches or significantly funded by a church or convention or association of churches).

It is interesting that one of the cases the IRS relied on involved a claim by a Baptist church that the services of its church secretary, organist, custodian, and choir director were exempt from tax withholding since the church was a religious order. In rejecting the church’s claim, the court defined a religious order as “a religious body typically an aggregate of separate communities living under a distinctive rule, discipline or constitution; a monastic brotherhood or society.” Eighth Street Baptist Church, Inc. v. United States, 295 F. Supp. 1400 (D. Kan. 1969).

Under the current IRS definition, few organizations will be able to justify an exemption from FICA or income tax withholding on the ground that they are religious orders. Organizations that currently are relying upon an exemption from FICA coverage or the income tax withholding rules on the basis of religious order status should carefully review the current IRS definition to assess its impact.

EXAMPLE X is a nonprofit corporation organized and operated for the purpose of providing Christian education of the young and care of the sick and elderly in accordance with the historic beliefs of Y Church. Specifically, X provides Christian education in the form of small, self-supporting schools or missionary training centers. The underlying religious philosophy of that educational approach is that Christians should learn to live independently of the world’s support and work cooperatively to support each other. Education at X is part academic and part vocational. Students, faculty, and staff learn and maintain their independence by building and maintaining their campus, growing their own food, and taking care of the sick and elderly in the surrounding community. The educational program also includes intensive religious instruction, worship, and service. Members of X agree to donate their services without compensation and acknowledge that any compensation paid for services they perform as directed by X belongs to X. X represents that members of X are under a vow of poverty. The IRS concluded that X was a religious order since it “possesses the characteristics in Revenue Procedure 91-20 [quoted above] to a substantial degree.” As a result, (1) X and its members were not subject to FICA tax on compensation (including goods, services, and cash allowances) received by a member for services performed in the exercise of duties required by X; (2) X was not liable for FICA tax withholding on compensation it provided to its members for services performed in the exercise of duties required by X; and (3) X was not liable for federal income tax withholding on compensation it paid to its members for services performed in the exercise of duties required by X. IRS Letter Ruling 199938013.

EXAMPLE X is a nonprofit organization that exists for the purpose of propagating the gospel of Jesus Christ. It is exempt from federal income taxes under section 501(c)(3) of the tax code. X also has been recognized by the IRS as an ordaining institution and has a group exemption letter. X operates Y to carry out the goals of X. Y is under the control and supervision of a church. The church is the mother church of the numerous churches operating under X. The church and other churches operated under X provide the funding of Y. Prospective members of Y go through a six-year training program and a probationary period before they are admitted as members. The training program includes 15 hours of instruction per week, daily prayer and study, and daily participation in the ministry. Members are held to a strict level of moral and spiritual discipline, which requires daily prayer and communion with other members and prohibits the ownership of material possessions. They pledge to work full time on behalf of X for the rest of their lives, during which time their lives are not their own but are to be separated sacrificially and entirely in dedication to the goals of X. They are to live their lives in servitude and in obedience to all the commands of God. Members reside within 2 miles of the church in parsonages owned by the church. There, the members conduct themselves as a community by participating daily with each other in the spiritual disciplines of prayer, study, and communion. Members give themselves continually to prayer, study, teaching, counseling, care of the weak, missionary work, and evangelism. The IRS concluded that “Y possesses all the characteristics in Revenue Procedure 91-20 [quoted above] to a substantial degree. Accordingly, based on our consideration of all the facts and circumstances, we conclude that Y is a religious order for federal tax purposes.” IRS Letter Ruling 199937013.