Key point. To qualify for a housing allowance, one must be a minister of the gospel, and the allowance must represent compensation for the exercise of ministry.
IRS Letter Ruling 9126048.
The IRS ruled that teachers and administrative staff employed by a church school were not eligible for a housing allowance.
A church operates a private school for kindergarten through eighth grade. All of the teachers are certified by the state, and the school is accredited with the state department of education. The school's teachers and administrative staff are not required to attend a Bible college, seminary, or other theological program. Membership in the church is not required to be employed in either teaching or administrative positions, but employees are 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 noted that a housing allowance is available only to a "minister of the gospel" and must represent compensation for service performed in the exercise of ministry.
minister of the gospel
The IRS acknowledged that "a balancing test of factors is used to determine whether a person is considered a minister of the gospel," citing the Tax Court's decision in Knight v. Commissioner, 92 T.C. 199 (1989). In the Knight case, the Tax Court concluded that in deciding if a person is a "minister" for tax purposes, there are five factors that must be considered, each of which comes from the income tax regulations: (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"; and (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 purposes. 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 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 it decision by referring to a 1970 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 nonordained 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.
The reference to the Knight case by the IRS is very significant. The Knight case contains perhaps the best analysis of the term "minister" since the Tax Court applied a "balancing test," noting that a minister need not actually perform every category of ministerial service described in the income tax regulations. In some rulings the IRS has omitted any reference to this important decision. The recent private letter ruling takes a different view. This is an important acknowledgment, for it will mean that more bona fide ministers will be considered "ministers" for tax purposes.
services performed in the exercise of ministry
The IRS noted that the income tax regulations provide the following examples of services performed in the exercise of ministry, "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 functions at theological seminaries." It cited a 1968 case in which the Tax Court ruled that a "commissioned" Baptist minister of education was not a minister of the gospel because (1) his commissioning was only a "paperwork procedure" designed to qualify him for a housing allowance, without changing his authority or duties, and (2) "the evidence fell far short of showing that the prescribed duties of a minister of education are equivalent to the services performed by a Baptist minister. Lawrence v. Commissioner, 50 T.C. 494 (1968).
The IRS concluded that "the teachers and administrative staff of the school failed the minimum requirement of [being ordained, commissioned, or licensed]. The school hired the employees as teachers and administrative staff and not as ministers of the gospel. Furthermore, none of the prescribed duties of the teachers and administrative staff are equivalent to the services performed by a church minister. Accordingly, the teachers and administrative staff do not qualify for an exclusion under the parsonage allowance." IRS Letter Ruling 200318002 (2003).
Application
. There are five important points to note about this ruling:
1. Private letter rulings are binding only on the taxpayers involved in the ruling. They have no precedential effect in other cases. Nevertheless, attorneys and CPAs often view them as reflecting the likely view of the IRS on the issues involved.
2. The IRS applied the "balancing test" approach to defining a "minister of the gospel" that was first applied by the Tax Court in the Knight case in 1989. The balancing test is perhaps the best available definition of a "minister of the gospel."
3. Many churches operate primary or secondary schools, or colleges. This case suggests that not all teachers and administrative staff employed by such 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."
4. 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." Treas. Reg. § 1.107-1(a). To illustrate, the IRS has ruled that an ordained rabbi employed full-time as a religious instructor by a synagogue-controlled private school was eligible for a housing allowance. The rabbi taught Judaic studies, led daily worship services with the students in the school, trained students to conduct religious services, taught students to read the Torah, assisted with Bar Mitzvah training, and provided consultation to students, faculty and administrators of the school with respect to Jewish religious practices. He also taught students on the subjects of Jewish law, liturgy, holidays, customs, ethics and values. The IRS concluded that the rabbi was a minister who was engaged in the exercise of ministry, and therefore he was eligible for a housing allowance.
5. Persons who qualify as a minister must be consistent with respect to the four special tax rules that the tax code applies to ministers. For example, not only are they eligible for a housing allowance, but they are also self-employed for Social Security, they are exempt from income tax withholding, and they are eligible for exemption from self-employment taxes if they meet several conditions. Conversely, persons who do not qualify as a minister engaged in the exercise of ministry are not subject to any of these rules.
Resource. For a detailed discussion of the eligibility of school staff for a housing allowance, see chapter 3 of Richard Hammar's Church & Clergy Tax Guide.
