The Tax Court issues an important decision—Haimowitz v. Commissioner, T.C. Memo. 1997-40 (1997)
Article summary. The Tax Court recently addressed the issue of whether an administrator of a Jewish synagogue qualified for a housing allowance. The Court ruled that the administrator did not qualify since he was not ordained, commissioned, or licensed, and there was no evidence that a housing allowance had been properly designated. This feature article reviews the Court’s decision and addresses its relevance to other religious workers.
The tax code contains a number of special provisions that apply to “ordained, commissioned, or licensed ministers.” One of those special provisions is the housing allowance. Stated simply, a portion of a minister’s compensation that is designated in advance by an employing church as a housing allowance is excluded from taxable income for income tax reporting purposes, to the extent it is used for housing expenses and does not exceed the fair rental value of the home (furnished, including utilities). This is one of the most significant tax benefits available to ministers.
There are three requirements that must be met in order for a church worker to be eligible for a housing allowance: (1) the recipient must be a minister, (2) the housing allowance must represent compensation for services performed in the exercise of ministry, and (3) the allowance must be properly designated. In many cases, it is obvious whether or not these requirements are met. But in some cases it is not. In a recent decision the United States Tax Court addressed this question. The case involved the question of whether or not a “synagogue administrator who was neither a rabbi nor a cantor qualified for a housing allowance.” The court’s decision provides helpful guidance to all religious organizations. This feature article will review the facts of the case, summarize the court’s ruling, and evaluate the relevance of the ruling to other religious organizations and workers.
A temple administrator of a Jewish synagogue participated for many years in a retirement plan maintained by the synagogue. After his retirement he did not report distributions from the retirement plan as taxable income since they were designated by the plan as a housing allowance. The IRS audited the administrator and determined that the retirement distributions were fully taxable since the administrator did not qualify for a housing allowance. The administrator appealed to the tax court.
The administrator had worked for the same synagogue for thirty years until his retirement. He was a college graduate, with a degree in social studies, but he never attended a religious seminary. Following his retirement he was recognized as a “fellow in synagogue administration” by the Synagogue Administrators Association.
The administrator’s responsibilities with the temple varied over time. He was hired initially as an executive director, performing mostly administrative functions such as hiring and recruitment tasks. The temple had a rabbi and a cantor working for it, both of whom performed the temple’s religious functions. The administrator never fulfilled the role of either. However, he eventually performed more religious duties for the temple as a “religious functionary”. These “religious” duties included the following:
• Over the course of his thirty years with the temple, he assisted about 500 students with their bar mitzvah preparations, though most of the training was conducted by the cantor and rabbi. The cantor would teach the students how to chant their Torah portions, and the rabbi would rehearse with them on the pulpit. The administrator would then attempt to “enhance” the students’ performance for a week or two before the ceremony. This included such duties as helping students with memorization of blessings, Torah readings, and elocution.
• He performed as the temple’s marriage ceremony director. He would meet with engaged couples to discuss wedding preparations. His advice was mostly organizational in nature and related to the specific details of planning a wedding. While he frequently participated in the wedding ceremony as a witness to the contract he never officiated.
• He assisted the rabbi with various tasks during the religious services. This included the duty of assigning certain responsibilities to congregants who performed these tasks during services. He also performed the following other activities for the temple: He managed cemetery lots that the temple made available to its congregants; he visited and conducted services for mourners; and he provided weekly speakers for senior citizens.
The retired administrator did not claim that he was a rabbi or cantor. Rather, he asserted that he qualified as a “minister of the gospel” because he performed duties as a “religious functionary” for the temple.
the court’s ruling
The Tax Court began its opinion by noting that
a “minister of the gospel” may exclude from gross income “the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” In order for a minister to exclude a parsonage allowance, three criteria must be met: (1) the minister must provide services which are ordinarily the duties of a “minister of the gospel”; (2) the excluded amounts must actually be used to rent or otherwise provide a home; and (3) the rental allowance must be properly designated.
IRS conceded that the administrator used the retirement distributions for housing expenses, but it insisted that he did not qualify for a housing allowance with respect to these distributions since (1) at the time he contributed toward the retirement plan he was not a “minister of the gospel,” and (2) the retirement distributions were not properly designated by the temple as a housing allowance. The court addressed these two claims separately.
minister of the gospel
The court noted that the tax law does not define the phrase “minister of the gospel”, and there is no clear meaning of the term in the legislative history. Further, the income tax regulations “define only what a minister does, but not what a minister is”:
[T]he regulations list the following services which are considered those of a minister: (1) the performance of sacerdotal functions; (2) the conduct of religious worship; and (3) the performance of services in control, conduct, and maintenance of religious organizations. We also consider important whether the taxpayer was duly ordained, commissioned, or licensed, and whether the particular church or denomination recognized that person as a minister or religious leader.
Did the retired administrator’s duties as a “religious functionary” fall within the three types of services of a minister as described in the regulations? The court concluded that they did not:
As the temple’s employee, most of [the administrator’s] responsibilities related to some aspect of the Jewish religion. We note, however, these duties were more organizational than religious in nature and did not require performance from one who held ministerial authority.
Equally revealing, however, were the religious rites and ceremonies [he] did not perform. [He] admitted that he never fulfilled the role of either rabbi or cantor. The record displays his lack of such responsibility. [He] assumed responsibility over the bar and bat mitzvah students only in the last week or two of their training and only to enhance the efforts of the rabbi and cantor. The rabbi and cantor, however, held the main parochial responsibilities for the students’ training.
Further, [the administrator] acted as the marriage ceremony director and participated in wedding ceremonies as a witness. His responsibilities as director, however, were mostly secular in nature. While [he] participated in wedding ceremonies, he never officiated. Further, [he] assisted the rabbi with various functions during religious services. It was the rabbi, however … who actually led those services for which [the administrator] assisted. Finally, although [the administrator] visited and conducted services for mourners, he, presumably, did not officiate at the funerals.
[W]ith the sole exception of conducting services for mourners [the administrator] did not regularly perform those duties that ministers of the Jewish faith customarily perform.
The court also concluded that the administrator was never “ordained, commissioned, or licensed” as required by the regulations. He had admitted that he was not an ordained rabbi or commissioned cantor. Further, the fact that he was recognized as a Fellow in Synagogue Administration was not relevant, for two reasons. First, he “did not hold this title while he performed his duties with the temple. Rather, he received this honor … about 7 years after he left the temple.” Second, even if he had received this honor while performing services for the temple, it would not have established that he was ordained, commissioned, or licensed as a recognized religious official of the Jewish religion. Rather, as the title Fellow in Synagogue Administration suggests, the designation “reflects that [he] merely performed duties as an administrator, a primarily secular function.”
Finally, the court concluded that there was no evidence that the temple considered the administrator to be a religious leader.
The court concluded:
[W]e find that [the administrator] failed to demonstrate that he was a “minister of the gospel” as specified in the regulations and case law. As a judicial body we are loath to evaluate ecclesiastical authority in the various religious disciplines. We emphasize that our opinion is based on the record before us, and our finding should not diminish the importance of [the administrator’s] contributions to his community.
designation of rental allowance
The court also ruled that the administrator failed to qualify for a housing allowance since he did not establish that a housing allowance had ever been properly designated. The court noted that to qualify for a housing allowance “the amount paid to a minister, to rent or otherwise provide a home, must be designated as a [housing] allowance pursuant to official action taken in advance of such payment.” The income tax regulations specify that a designation “may be evidenced in an employment contract, in minutes of or in a resolution by a qualified organization, or in any appropriate instrument evidencing such official action. Without official designation, no exclusion is allowable.”
The court concluded that the administrator failed to demonstrate that the temple properly designated any portion of his retirement income as a housing allowance: “Completely missing from the record were details of the employment arrangement in which he and the temple were engaged. In fact, [he] presented no evidence which even [remotely] relates to the notion of official designation.”
relevance to other religious organizations and workers
What is the relevance of this ruling to other religious organizations and workers? Consider the following points:
1. Qualifying for a housing allowance. The court correctly noted that eligibility for a housing allowance requires that two conditions be met:
• the person is a minister of the gospel
• the housing allowance is provided as compensation for services performed in the exercise of ministry
2. Minister of the gospel. The first condition that must be met in order to qualify for a housing allowance is ministerial status. The recipient must be a minister of the gospel. The court concluded that the administrator did not qualify for a housing allowance since he was not a minister of the gospel. In reaching this decision, the court made a number of important observations that will be useful to other religious organizations in evaluating whether an employee is a minister of the gospel for tax purposes:
• While the tax code limits housing allowances to ministers of the gospel, neither the code nor the income tax regulations define this term.
• The income tax regulations do define “what a minister does.” They list the following functions: (1) the performance of sacerdotal functions; (2) the conduct of religious worship; and (3) the performance of services in control, conduct, and maintenance of religious organizations.
Key point. In deciding whether or not an individual performs the functions of a minister, consideration must be given not only to the religious duties the individual performs, but also to the religious duties that are not performed.
Key point. The court stressed that the performance of some religious functions is not enough to make one a minister for federal tax purposes. The administrator in this case performed a number of religious functions, but these were largely administrative in nature. More importantly, he performed few of the duties of an ordained, commissioned, or licensed minister.
Key point. The court did not say whether all three of the functions mentioned in the regulations must be performed in order for an individual to qualify as a minister for federal tax purpose.
• The regulations also refer to a “duly ordained, commissioned, or licensed” minister, and so this is another “important consideration.”
Key point. The court observed that “[w]e also consider important whether the taxpayer was duly ordained, commissioned, or licensed.” Other decisions of the Tax Court have made clear that this is not merely an “important” consideration, it is absolutely essential. No one can be a “minister” for federal tax purposes who is not, at a minimum, “ordained, commissioned, or licensed.”
• The court added another important consideration in determining whether or not a person is a minister for federal tax purposes-“whether the particular church or denomination recognized that person as a minister or religious leader.”
• The court referred to the fact that the administrator had no seminary training.
• The court referred to two prior Tax Court rulings addressing the definition of the term minister for federal tax purposes—Knight v. Commissioner, 92 T.C. 199 (1989) and Wingo v. Commissioner, 89 T.C. 922 (1987). As noted in prior issues of this newsletter, the Knight decision modified the Wingo decision. As a result, it is unfortunate that the court referred to the Wingo decision, which contains a far more restrictive definition of the term minister.
• The court acknowledged the difficulties associated with any attempt by the civil courts to define ecclesiastical terms: “As a judicial body we are loath to evaluate ecclesiastical authority in the various religious disciplines. We emphasize that our opinion is based on the record before us, and our finding should not diminish the importance of [the administrator’s] contributions to his community.”
4. Designating a housing allowance. The court concluded that even if the administrator were a “minister” for federal tax purposes, he would still be ineligible for a housing allowance since there was no evidence that a housing allowance had ever been properly designated for him. The court noted that to qualify for a housing allowance “the amount paid to a minister, to rent or otherwise provide a home, must be designated as a [housing] allowance pursuant to official action taken in advance of such payment.” The income tax regulations specify that the designation of the allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.”
Key point. Under no circumstances can a minister exclude any portion of an allowance retroactively designated by a church. The designation need not be in advance of the calendar year, but it will only be effective from the date of its enactment.
5. Consistency. “Ministers” are eligible for the following four special tax rules with respect to services they perform in the exercise of their ministry:
• the housing allowance exclusion (and the exclusion of the fair rental value of a church-owned parsonage)
• exemption from self-employment taxes (if several conditions are met)
• self-employed status for social security purposes (if not exempt)
• wages exempt from federal income tax withholding (ministers use the quarterly estimated tax procedure to pay their income taxes and self-employment taxes, unless they elect voluntary withholding of these taxes)
Here is the important point—persons who qualify as “ministers” for federal tax purposes must be consistent with regard to these four special tax rules—if one applies, then they all apply. To illustrate, persons who qualify as a minister for federal tax purposes not only are eligible for a housing allowance, but in addition they (1) are self-employed for social security (they pay self-employment taxes rather than FICA taxes), and (2) are exempt from federal income tax withholding (they use the estimated tax procedure to prepay these taxes).
6. Clergy of other faiths. The court acknowledged that the tax code uses the term “minister of the gospel” and that this term refers to clergy of the Christian faith. However, it insisted that “Congress did not intend to exclude those persons who are equivalent of ministers in other religions” and that “rabbis and cantors of the Jewish faith are considered ministers who can also qualify for the parsonage exclusion.”
7. Value of a Tax Court “memorandum” decision. The court’s decision was a “memorandum” decision, meaning that it was a ruling by only one judge. “Regular” opinions of the Tax Court, such as the Knight case, are of much greater precedential value than memorandum opinions, since they are decisions by the full Tax Court.