Q: Our city government informed our pastor a few years ago that it was going to acquire his home in an eminent domain proceeding. Our pastor objected to this and hired an attorney to fight it. He incurred substantial legal fees in what turned out to be a successful challenge. Now he is asking if the housing allowance designated by our church can be applied to his legal fees. Can they?
What Is Eminent Domain?
Eminent domain is the power of the government to acquire private property for public use, often requiring the owner to vacate the property. In many cases, property owners are compensated, but disputes can arise regarding the fairness of the compensation or the need for the acquisition itself. These disputes sometimes lead to legal challenges, as was the case with your pastor.
Can Housing Allowances Cover Legal Fees in Eminent Domain Cases?
Neither the IRS nor any court has explicitly addressed whether housing allowances can be applied to legal fees incurred in eminent domain cases. However, similar rulings suggest that these legal fees likely do not qualify as “housing-related expenses.”
For example, in cases involving home equity loans, ministers have attempted to apply housing allowances to loan repayments by arguing that the loans were secured by their homes. The IRS and the Tax Court have rejected these claims, stating that housing allowances can only be applied to direct housing-related expenses. Based on this precedent, it is likely that the IRS would also rule that legal fees incurred to prevent a home’s seizure through eminent domain do not qualify as housing-related expenses.
Key Precedent: Rasmussen v. Commissioner
In Rasmussen v. Commissioner, T.C. Memo. 1994-311, the Tax Court ruled that housing allowances could not be applied to loan repayments unless the loans were used exclusively for housing-related expenses. The court stated:
“Exemptions from gross income are to be construed narrowly … and [federal law does not] provide for the exclusion of payments on loans secured by a home if they are not used to ‘provide a home.’ The proceeds of the loans were used to pay personal expenses unrelated to their home. Thus … the portion of the parsonage allowance used to repay the loans was not used for the maintenance or purchase of the home.”
This reasoning likely applies to legal fees in eminent domain cases, as the fees are not direct housing expenses but rather costs incurred to prevent the loss of a home.
What Should Churches and Ministers Do?
Given the lack of specific IRS guidance on this issue, it is advisable for churches and ministers to proceed cautiously. Here are some best practices:
- Consult with a qualified tax professional before attempting to apply a housing allowance to legal fees related to eminent domain cases.
- Document all expenses carefully, specifying how funds are used to provide or maintain housing.
- Recognize that applying a housing allowance to legal fees could expose ministers to audit risks if the IRS challenges the interpretation.
FAQ: Eminent Domain and Housing Allowances
1. What is eminent domain?
Eminent domain is the government’s authority to acquire private property for public use, often with compensation to the property owner.
2. Can a housing allowance be applied to legal fees in an eminent domain case?
It is unlikely, as these fees do not qualify as direct housing-related expenses. The IRS has not provided specific guidance on this matter.
3. What qualifies as a housing-related expense?
Housing-related expenses include costs directly tied to maintaining or providing a home, such as mortgage payments, property taxes, utilities, and maintenance costs.
4. What should a minister do if they face an eminent domain case?
Consult with a tax professional and document all expenses related to the case. Avoid assuming that legal fees qualify for a housing allowance without expert advice.
For more information, refer to IRS.gov or consult a tax professional familiar with clergy tax regulations.