Driscoll v. Commissioner, 2012-1 U.S.T.C. ¶50,187 (11th Cir. 2012)
In 2010, the United States Tax Court ruled that a minister could apply a housing allowance to expenses incurred in owning two homes. The court acknowledged that section 107 of the tax code, which contains the housing allowance exclusion, refers to a minister’s “home” in the singular, but it concluded that this did not limit the application of a housing allowance to only one home.
In early 2012, a federal appeals court reversed the Tax Court’s opinion, and limited the application of a minister’s housing allowance to expenses incurred in only one home (the principal residence).
The appeals court conceded that the tax code states that singular terms also include their plural forms, but it noted that this rule did not apply if “the context indicates otherwise.” Therefore, the “singular includes the plural provision” should only apply if the context of the housing allowance reasonably supports such an application. The court concluded that it did not, for two reasons:
First, the word “home” is defined by the dictionary as “the house and grounds with their appurtenances habitually occupied by a family; one’s principal place of residence; domicile.” The court concluded that the word “home” according to this definition “has decidedly singular connotations.”
Second, the court concluded that the history of the parsonage and housing allowance exclusions provided additional context for the term “home.” It noted that congressional committee reports describing the parsonage and housing allowance exclusions consistently use singular expressions—”a dwelling house,” “a home,” and “the home,” demonstrating that Congress intended for the parsonage and housing allowance exclusions to apply to only one home.
In further support for its conclusion, the court stressed that income exclusions should be “narrowly construed,” and therefore “we do not believe that this court should construe any ambiguity in [the tax code] to favor a more expansive reading of the parsonage allowance income exclusion.”
Many ministers own two homes. In many cases, this is due to the fact that the minister has accepted a call in another community, purchases a home in that community, but has not yet sold the prior home. In some cases the minister has not moved, but rather decides to purchase a new home in the same community and is in the process of selling the former home. The Tax Court’s decision in the Driscoll case suggested that these ministers, at least in some cases, might be able to apply a housing allowance to the expenses of owning both homes. That option has been eliminated by the federal appeals court’s recent ruling.
What is the impact of this ruling on ministers and churches? Consider two points.
First, ministers who relied on the Driscoll case by claiming housing allowance exclusions on their 2010 or 2011 tax returns that were based on expenses incurred in owning two homes should contact a tax professional to assess options. In most cases, the appropriate response will be preparing and submitting to the IRS an amended tax return (Form 1040X) for these years. The amended return should restate the nontaxable amount of the housing allowance to reflect housing expenses only on the pastor’s principal residence.
Second, many churches have their pastors fill out a housing expense form each year that lists anticipated housing expenses for the following year. The church board uses this form to declare pastors’ housing allowances. It would be prudent to amend this form to clarify that it should only list expenses incurred in owning a principal residence, and not a second home.