• The Tax Court ruled that a minister was eligible for a housing allowance even though his church board failed to record its “designation” of the allowance in the official minutes. A minister left his church and assumed the role of minister in another church. When he interviewed with the board of the new church, the subject of compensation was addressed. The board was not unfamiliar with housing allowances, since it had designated annual housing allowances for the previous minister. The recording secretary of the board recalled later that the board and the minister agreed that the total compensation package would be $600 per week, and that a housing allowance was to be included in this amount. He recalled that the board agreed to designate a housing allowance in the same amount the minister was receiving at his former church ($6,250 per year). The minister recalled that the board agreed to designate a housing allowance equal to the allowance of the church’s former minister ($11,000 per year). Another board member recalled the board’s discussion of a housing allowance, but could not remember what amount had been declared. Two other board members could not recall any discussion of a housing allowance. When the recording secretary (who was new at the position) prepared the minutes of the meeting, he did not mention a housing allowance. The church board met with the minister on a second occasion to offer him the position, and the recording secretary did not recall any discussion of the housing allowance at this meeting (although the board confirmed that the total compensation package would be $600 per week). The church did not designate a housing allowance for the minister in the church minutes or in any other church document. The IRS audited the minister, and denied any housing allowance exclusion on the ground that no allowance had been properly designated. The minister appealed, and the Tax Court ruled that the minister could claim a housing allowance in the amount of $6,250 for each of the years in question. The court began its noting that federal law permits clergy who own their homes to exclude from their income (for federal income tax purposes) that portion of their compensation that is designated in advance by their church as a housing allowance, to the extent the allowance is used to pay for housing-related expenses (and does not exceed the fair rental value of the home, furnished including utilities). The court further observed that the income tax regulations specify that the designation of a housing allowance may be evidenced in an employment contract, in minutes, in a resolution, in a budget, or in any other appropriate instrument evidencing such official action. The designation of an allowance must be made prior to the payment of the allowance. The court noted that the issue in this case was “whether the [secretary’s] error in failing to include information regarding a parsonage allowance in any church document serves to show that the designation did not take place, and if we hold that there was such a designation, the amount of the parsonage allowance.” In concluding that the church board had designated a housing allowance, though it was not set forth in any written document, the court observed:
It is clear that there was discussion about a parsonage allowance for [the minister], and that all of the members of the board of directors [of the church] who testified recollected that he was taking a cut in total compensation to come to their church. The recording secretary, the person whose obligation it was to keep the minutes of the various meetings, had a clear recollection of the discussion and thought that [the minister] was to receive the same amount as a parsonage allowance that he received at [his former church]. We further note that there would be no particular economic reason for the church not to designate a parsonage allowance, since [the minister’s] total compensation was fixed at $600 per week. The focus of the members of the board of directors who testified was on the total figure to be paid to [the minister] as compensation, rather than upon the components such as parsonage allowance that made up that figure.
The court referred to a 1982 decision (Libman v. Commissioner) in which it ruled that “there is no requirement that the parsonage allowance designation be in writing. Rather, we held, the designation requirement is satisfied upon satisfactory proof of official action.” In the present case, the court concluded that:
We believed the recording secretary, as well as the [minister], in regard to the agreement about a designated parsonage allowance. We found both of them to be credible witnesses. There is some conflict, however, in regard to the precise amount of the allowance. The recording secretary, a member of the board of directors, believed that it was to be the same amount the [minister] was receiving from [his former church], $6,250; [the minister] believed that it was to be in the same amount as received by his predecessor [at his new church], about $11,000. We hold that the [church] designated $6,250 as a parsonage allowance for [the minister], even though [he] mistakenly believed it to be a greater amount.
What is the significance of this case to ministers and church boards? It demonstrates that the designation of a housing allowance may be accomplished through oral agreement at a church board meeting, even if that understanding is not reflected in the minutes of the meeting or in any other document. As the court observed, the key issue is whether or not there is “satisfactory proof of official action.” While written evidence of a housing allowance constitutes the best evidence of “official action,” this is not necessary according to the Tax Court. However, note the following: (1) Our recommendation is that housing allowances be designated in writing. This Tax Court’s decision should not be interpreted as encouraging oral and unrecorded designations of housing allowances. The problem with oral and unrecorded designations is that they can be difficult to prove after the fact. Accordingly, the Tax Court’s decision should be viewed as a potentially helpful precedent in the event that a church board agrees upon a housing allowance but fails to record its action in writing. It should not be viewed as encouraging this method of designating housing allowances. (2) It is essential that housing allowance designations be in advance of the payment of the allowance. This ruling in no way alters this important limitation. In other words, church boards that in fact have not designated an allowance cannot retroactively do so. (3) The court made the point that a housing allowance designation “costs” a church nothing. There is no “economic reason” for a church not to designate a housing allowance for its minister, since the housing allowance is a component of the minister’s total compensation package. In other words, if a church agrees to pay a minister a fixed annual salary, it can simply designate a portion of this fixed amount as a housing allowance. This costs the church nothing. Kizer v. Commissioner, T.C. Memo. 1992-584.
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