Tax Court Addresses Housing Allowances for Clergy with Two Homes

Driscoll v. Commissioner, 135 T.C. No. 27 (2010)

In 2010, the United States Tax Court ruled that a minister could apply a housing allowance to expenses incurred in two homes that he owned. The facts of the case and the court’s ruling are summarized below.


An ordained minister was employed by a parachurch ministry. He owned a principal residence in Tennessee, and a second “vacation home” in the same state. At no time did he use either home for commercial purposes (i.e., as rental property). The ministry designated a housing allowance for him each year that he used for the payment of expenses on both homes, including mortgage payments, utilities, furnishings, improvements, and maintenance, such as lawn care, painting, and repairs.

The IRS audited the minister’s tax returns for four years, and determined that the minister was not entitled for any of those years to exclude from taxable income the portion of his housing allowance that he used to pay housing expenses for his second home. The minister appealed to the Tax Court.

In support of his position that a housing allowance can be applied to the expenses associated with two homes, the minister argued:

The only limitation expressed by Congress in section 107 [of the tax code] was that amounts excluded from gross income be used to provide a property used as a dwelling place by the minister. The IRS has stipulated that the second home was so used, and that the amounts at issue were expended in connection with the acquisition and maintenance of that property. Accordingly, there is no basis under the statute to require the minister to include the amounts related to the second home in his gross income.

The IRS acknowledged that the minister’s second residence is a “home,” albeit a second home. Nonetheless, it argued that because section 107, its legislative history, and the regulations all “refer in the singular to ‘a home,’ rather than ‘homes’ in the plural,” a minister is entitled to have an excludible housing allowance for only one home.

The Tax Court’s opinion

The Tax Court began its opinion by noting that “we must decide an issue of first impression, namely, whether the minister is entitled for each of the years at issue to exclude from gross income the portion of the parsonage allowance that the ministry paid to him during each of those years with respect to a second home.”

“We are not persuaded by those authorities that Congress intended to allow, let alone did allow, in section 107 an excludible housing allowance only for a single home or one home of a minister.”

The Tax Court (in a “regular” opinion by the entire Court) rejected the IRS position, noting that it was “substituting in section 107, its legislative history, and the regulations the phrase ‘a single home’ or the phrase ‘one home’ for the phrase ‘a home’ that appears in the statute and the other authorities on which the IRS relies. We find nothing in section 107, its legislative history, or the regulations which, as the IRS points out, all use the phrase ‘a home,’ that allows, let alone requires, the IRS, or us, to rewrite that phrase in section 107. We are not persuaded by those authorities that Congress intended to allow, let alone did allow, in section 107 an excludible housing allowance only for a single home or one home of a minister.”

The Court pointed out that the IRS position was inconsistent with section7701(m)(1) of the tax code which states that “in determining the meaning of any Act of Congress, unless the context indicates otherwise … words importing the singular include and apply to several persons, parties, or things.”

The Court concluded:

Section 107 requires only that amounts paid as part of a minister’s compensation be used to rent or provide a home, i.e., a dwelling house of the minister, in order to be excluded from the minister’s gross income. In the present case, during each of the years at issue, the ministry paid the minister as part of his compensation [a housing allowance] which he used to provide for himself [two homes]. Those facts satisfy the requirements in section 107 for the exclusion from gross income of the portion of the housing allowance with respect to the minister’s second home. We hold that the portion of the allowance that the ministry paid to the minister as part of his compensation during each of the years at issue and that he used during each of those years to provide for himself a second home satisfies the requirements in section 107 that an allowance be paid to him as part of his compensation and be used to provide a home. Accordingly, we hold that his is entitled for each of the taxable years at issue to exclude from gross income under section 107 the housing allowance with respect to the second home.”

Relevance to church leaders

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. This case suggests that in some cases a housing allowance may be applied to the housing-related expenses incurred in the ownership of both homes. Here are some important considerations to keep in mind:

1. This was a “regular” Tax Court case. The United States Tax Court consists of 19 judges, each appointed by the President for a 15-year term. Although the principal office of the Tax Court is located in Washington, D.C., the court conducts trials in most large cities in the United States, usually with only a single judge present. After hearing a case, the assigned judge submits his or her opinion to the Chief Judge, who then decides whether the case should be reviewed by the full court. In most cases, the Chief Judge will decide that a full review by all 19 judges is not necessary. In that event, the opinion will stand and typically be issued as a “memorandum” decision of the Tax Court. “Regular” decisions generally are reviewed by the full court, and for this reason are generally regarded as being of greater precedential value. As a result, the fact that this was a regular opinion that was reviewed by the full court enhances its precedential value.

2. The court did not directly address the question of whether a housing allowance can be applied to a second home that is used for commercial purposes (i.e., rented to another person or family). However, it stressed that the minister’s second home was not used for commercial purposes, and so it can reasonably be assumed that the court considered this to be a requirement. This makes sense, since a second home that a minister rents to another person or family can hardly be considered the minister’s “home.”

3. Will this case benefit ministers in the preparation of their 2010 tax returns? In many cases the answer is no since housing allowances cannot be designated retroactively. As a result, a church cannot retroactively amend a minister’s housing allowance for 2010 to account for the expenses of a second home. However, many ministers request that their employing church designate a housing allowance that is greater than their estimated housing expenses for the new year, and these ministers may have a “surplus” allowance that can be used to partially offset expenses on a second home.

4. Churches should take this ruling into account when designating a minister’s housing allowance for 2011 and future years.

5. Housing allowances can be amended prospectively, so churches that fail to take this ruling into account when designating a 2011 housing allowance for their minister may amend the allowance during the year. However, any amendment only operates prospectively.

6. The IRS often will “acquiesce” or “not acquiesce” in Tax Court regular decisions. It is possible that it will “not acquiesce” in this ruling, meaning that it does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. Ministers should recognize that the IRS may well choose nonacquiescence in this case, which would have the effect of exposing ministers who rely on the case to future audit risk. It is for this reason that ministers should not rely on the case without first consulting with a tax professional.

7. One judge noted that the income tax regulations specify that “in order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.” The judge observed, “This consideration necessarily involves factual questions of why the remuneration was provided and whether it was reasonable compensation and may indirectly raise issues of private benefit and personal inurement, none of which were considered here.”

8. One judge dissented from the court’s decision. He pointed out that a housing allowance is excluded from taxable income only “to the extent used … to provide a home,” and concluded:

However many homes or second homes a minister may have, he can use only one of them at a time. If a minister were to use an allowance to provide a principal residence for himself and were to use a second allowance to pay for a second house that he never occupied, the [housing allowance] exclusion would be manifestly inapplicable to the second allowance because it was not ever “used … to provide a home.” That second allowance did not “provide [him] a home” if he did not ever live at the residence for which it paid.”

On the other hand, if a minister were to split his year between two “homes” in both of which he did live (but only part time), it could be said that the allowances given for each of those residences did “provide a home” for part of the year. However, those allowances would be excluded (as the statute says) only ” to the extent used by him … to provide a home.” To the extent that a minister uses an allowance to pay the rent of the house he is actually inhabiting, he is using the allowance to “provide a home.” But to the extent he makes his “home” elsewhere and uses an allowance to pay the rent on an empty house, he is not using the allowance to “provide a home.” The “to the extent” limitation in section 107 assures that a minister can exclude an allowance from income only to the extent he uses it to “provide a home”—i.e., a house where he actually lives. If a minister divides his year between two homes paid for by two allowances, then a portion of each may be excluded from income.

The dissenting judge also was concerned that under the Court’s opinion a minister could apply a housing allowance to any number of homes, noting that “the chance that Congress thought it was permitting the exclusion of multiple parsonage allowances [when it enacted the housing allowance exclusion] seems remote.”

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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