The Deason Rule

The United States Tax Court reaffirmed the so-called Deason rule in a recent decision.

In 1964, the Tax Court ruled that section 265 of the Code (which denies a deduction for any expense "allocable" to tax-exempt income) prevented a minister from deducting his unreimbursed transportation expenses to the extent that they were "allocable" to his tax-exempt housing allowance. Deason v. Commissioner, 41 T.C. 465 (1964).

To illustrate this principle, assume that a minister receives compensation of $30,000, of which $10,000 is an excludable housing allowance, and incurs unreimbursed business expenses of $3,000. Since one-third of the minister's compensation is "tax-exempt" ($10,000 of $30,000) he should not be permitted to deduct one-third of his business expenses since they are "allocable" to tax-exempt income and their deduction would amount to a "double ...