IRS Veteran Carries Fight Against Clergy Tax Abuse into Retirement

Originally Published on forbes.com on February 18th,2012

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Testing The Constitutional Mettle of IRC 107!

 I have written a bit about Code Section 107, the income tax exemption for housing allowances paid to “ministers of the gospel”.  The most recent development was the disallowance of Phil Driscoll’s exemption for his second home.  Robert Baty during his career with the IRS thought the Service never took abuses in this area seriously enough.  He has continued his interest into retirement and has agreed to do a timely guest post on the topic. 

By Robert Baty
IRS Appeals Officer, retired
February 16, 2012

I worked for the IRS for over 30 years, having a special interest for more years than not in Internal Revenue Code Section (IRC) 107, the income tax free ministerial housing allowance.  That interest was developed because of my church background as much as my professional position.  I am neither a CPA nor an attorney; just a career public servant who worked my way up the ladder a bit.  An example of my work can be found beginning on page 6 of the following case:http://www.ustaxcourt.gov/InOpHistoric/Baumann.TCM.WPD.pdf

One day, while working in the Review Staff, a Revenue Agent asked me a question about a case she was working.  It turned out to be the “basketball minister” at a local, private college (university now).  Given my personal and professional background, which at that time was a lot more limited than it is now, I happened to advise the agent that I didn’t think the person was entitled to the housing allowance that was claimed.

And so my close association with the issue began and continues to this day.

As it turned out, the Government conceded the “basketball minister” case after going so far as to have it scheduled for trial in the U.S. Tax Court on a number of occasions.

Why did the Government concede the case?

Despite the local IRS office/District Counsel willingness to litigate the case, the National Office is the one that made the call to pull the plug and keep the case out of court.  The “basketball minister” was allowed the housing allowance based on Revenue Ruling 70-549 which proposes that private schools run by church folks are to be recognized as “integral agencies” of the church; despite the legal and theological facts to the contrary.

Since that time, the IRS has recognized more and more non-church institutions as “integral agencies” so that its employees could register asministers and claim the benefit.  And more and more of those institutions’ employees have been willing to register as ministers so as to claim the benefit.  This is only one area in the administration of IRC 107 that many folks, if not most, would find abusive.

There have been some rare cases where such an institution failed in its effort to obtain “integral agency” status.  Texas Christian University, for example, tried and failed where it was determined less than 50% of its board of directors were members of the Christian Church.  Ronald Flowers, a church-state scholar, was the test case.  He has written an interesting treatise on the subject (having had a change of heart) and proposed, as other tax and legal scholars, that IRC 107 is unconstitutional.

I tried for years to get the IRS to deal with the problem inherent in Revenue Ruling 70-549, but there was no political will to deal with it.  During that time, with Ronald Flowers as my guide, I realized that the more fundamental problem was that IRC 107 was, arguably, unconstitutional. 

It was a hopeless cause. 
Then came Rick Warrenof the Saddleback church, and Professor Chemerinsky.
Professor Chemerinsky let me down.
Nothing was done to cure the fundamental ills of IRC 107.

[See my piece Work, Fight or Pray - Vestige of the Medieval in Our Tax Code for a brief explanation of Professor Chemerinsky's role. PJR]

Despite Senator Grassley’s recent report identifying many abuses and excesses regarding IRC 107, as well as questions as to its constitutional merits, Senator Grassley took no action except to refer the case to a groups of religious folks to think about it for years and come up with some suggestions.

The Freedom From Religion Foundation has now taken up where Chemerinsky left off.  I applaud their effort to test the constitutional merits of IRC 107 judicially.  From all indications, there is no political or legislative will to do so.

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If we were designing things from the ground up I don’t think the parsonage exclusion would be part of the system, but I would hate to see it go, because of the ill effect repeal would have on small congregations.  I think most of the abuse could be eliminated by putting a dollar limit, perhaps based on the military allowance, on cash in lieu.  I find the Freedom From Religion Foundation a little disturbing.  Their hostility toward religion in public spaces is, well, religious. Their previous challenge was thrown out for lack of standing so this time they are paying housing allowances to some of their executives who will be the aggrieved plaintiffs.  Meanwhile they fightinjustices like restaurants giving discounts to people who bring in church bulletins.  Their world view seems to be that you have a national day of prayer and next thing you know it is the Spanish Inquisition.  Really, nobody expects the Spanish Inquisition:

You can follow me on twitter @peterreillycpa.