Clergy – Part 1


Church Law and Tax 1989-01-01 Recent Developments

Clergy – Taxes

The Tax Court “reconstructed” the income of two ministers who failed to file tax returns from 1979 through 1983. The ministers, who served as senior and associate ministers of the same church, argued that they had no taxable income to report for the years in question, since: (1) they were “ministers of the Gospel of Jesus Christ … living by the grace and mercy of God, and not by the receipt of taxable worldly income”; (2) they received a receipt at the end of each year describing their annual earnings as “remuneration received for assigned service as agent of the church; not income or wages”; and (3) their sole means of support came from the receipt of nontaxable gifts. The ministers kept no books or records, apparently thinking that this would avoid a determination of their taxable income. The IRS maintained that the ministers had taxable income for the years in question, and that they were liable for taxes and penalties. The IRS “reconstructed” the ministers’ income for the years in question by using “low budget” cost of living figures for families of the same size in the same community. This information resulted in reconstructed annual income of between $10,000 and $16,000 for the years in question. The Tax Court agreed that the ministers had unreported taxable income, but it refused to accept the IRS figures. Instead, it used the ministers’ reported income for 1977 (the last year for which they filed tax returns) with increases for inflation for the senior minister. No inflation adjustment was used for the associate minister because of evidence that much of his support was furnished by his wife’s parents. The Tax Court also assessed penalties for failure to file returns, negligence, intentional disregard of the tax laws, and underpayment of estimated taxes. There are a number of significant observations to make about this decision. First, clergy must not assume that they can avoid taxes by not filing tax returns or keeping records. The IRS has the authority to “reconstruct” the taxable income of taxpayers who fail to file returns or keep records. Second, clergy cannot avoid taxes by characterizing church compensation as “nontaxable gifts” or by using similar terminology. Third, the ministers’ church refused to comply with an IRS subpoena requesting church records pertaining to the ministers’ income. The Tax Court concluded that the refusal of the church and its ministers to produce such records “leads us to conclude that such evidence, if produced, would have been unfavorable to their case.” Fourth, the Tax Court denied that any portion of the ministers’ “housing allowances” were excludable from income since the evidence indicated that the church paid directly all of the ministers’ housing expenses (including furnishings and utilities). McCurry v. Commissioner, 56 T.C.M. 253 (1988).

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