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Issues that affect ministers and churches
Secular Income and Vows of Poverty
Federal
State:
Key point. Attempts to avoid taxes on wages earned from secular employment by taking a vow of poverty and assigning the wages to a "religious order" are considered fraudulent by the IRS and courts, and result in substantial penalties.

A federal appeals court rejected a minister's attempt to avoid taxation of his secular income by taking a vow of poverty and "assigning" his income to a religious order. A man (the "defendant") was designated as a minister by a mail-order religious order, took a vow of obedience and a vow of poverty, and transferred title to all of his property to the order. He also assigned to the order all income earned from his secular employment, either endorsing their employment checks in favor of the order or directing his employer to deposit his earnings directly into various accounts of the order. The minister's home, now owned by the order, was designated as a parsonage, and his mortgage and other expenses were paid for by the order.

The order's Minister's Handbook, which the defendant drafted, states: "When ministers take the Vow of Poverty, even the IRS recognizes that they have no income and that any income that they would receive belongs to the religious order. If a minister under a Vow of Poverty has no income, nor assets, then it would be futile for someone to sue them. If a minister has no income, then there is no income tax."

A federal district court ruled that the minister's secular employment resulted in taxable income, and this ruling was affirmed by a federal appeals court. The court conceded that secular income may be exempt from income tax and self-employment tax if a person is a member of a religious order who (1) has taken a vow of poverty, (2) receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and (3) renounces the earnings and gives them to the order. The court stressed that the tax code "provides tax-exempt status to a minister's earnings only when the minister earns the income as an agent of the church and not in his individual capacity."

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