• Key point. Ministers who are employed as teachers or administrators at schools that qualify as “integral agencies” of a church are eligible for a housing allowance.
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. A minister was employed by a school that was sponsored by six congregations. Each of the six sponsoring congregations appointed two of their members to serve on the school board. Each congregation chose how its representatives were selected and the length of time they served on the board. The sponsoring congregations, through their appointed board members, were responsible for establishing school policies, purchasing equipment and supplies, maintaining facilities, and approving and signing teacher contracts. The school board elected its own officers from among its members. The treasurer of the school board was responsible for maintaining the financial records of the school and for presenting monthly financial statements to the school board. Representatives from each sponsoring congregation who served on the school board reported the financial operations of the school back to their congregations. The sponsoring congregations made annual cash contributions to the school for each school year, with each congregation setting its own level of support. In the event that it ever would become necessary to dissolve the school, the school’s bylaws provided that all properties would become the sole property of the sponsoring congregations.
At the beginning of each academic year, the minister submitted a request to the school board that a portion of his annual compensation be designated as a housing allowance. The minister’s request was based on his estimated housing expenses for the new year. The school board approved such requests for housing allowances at the beginning of each academic year. The minister asked the IRS for a private letter ruling addressing his eligibility for a housing allowance.
The IRS began its ruling by noting that a housing allowance was available to a “minister of the gospel” to the extent that it represents compensation for “services performed in the exercise of ministry.” The IRS did not dispute the minister’s status as a minister of the gospel, and so the question was whether or not the minister’s duties constituted the exercise of ministry. If they did, he was eligible for a housing allowance. The IRS quoted the following definition of “services performed in the exercise of ministry” that appears in the income tax regulations:
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 …. 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.
The IRS then observed:
In considering whether a minister serving on the faculty of a college is performing services in the exercise of his ministry, it is necessary to determine (a) whether the college employing him is itself a religious organization under the authority of a religious body constituting a church or church denomination or, (b) if the college is not such a religious organization, whether the college is operated as an integral agency of such a religious organization.
The IRS concluded that the school in this case was an integral agency of the 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 8 criteria to consider in deciding whether or not a church-related institution is an integral agency of the church. Revenue Ruling 72-606. These criteria include (1) whether the religious institution incorporated the agency; (2) whether the corporate name of the agency indicates a church relationship; (3) whether the religious organization continuously controls, manages, and maintains the agency; (4) whether the trustees or directors of the agency are approved or must be approved by the religious organization or church; (5) whether trustees or directors may be removed by the religious organization or church; (6) whether annual reports of finances and general operations are required to be made to the religious organization or church; (7) whether the religious organization or church contributes to the support of the agency; and (8) whether, in the event of the dissolution of the agency, its assets would be turned over to the religious organization or church. The IRS stressed that “the absence of one or more of these characteristics will not necessarily be determinative in a particular case.”
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 ….
[A]n ordained, commissioned or licensed minister who is performing services in the control, conduct or maintenance of an integral agency of a church is engaged in performing services in the exercise of his ministry for [tax] purposes …. 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 ….
In the present case, the school is an integral agency of the church. The taxpayer is an ordained minister of the church who teaches on the faculty of the school. We therefore conclude, on the basis of the preceding authorities, that the services performed by the taxpayer are in the exercise of his ministry … and constitute the duties of a minister of the gospel …. The taxpayer is therefore entitled to exclude from his gross income amounts that are properly designated as a housing allowance ….
Application. This ruling will provide helpful guidance to ministers who are employed as teachers or administrators by church-affiliated colleges and seminaries. Unfortunately, this case will be of no help for ministers employed by seminaries and colleges that do not have a close church affiliation. In 1978 the IRS ruled (Letter Ruling 7833017) 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. IRS Letter Ruling 200002040.
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