Work Fight or Pray - Vestige of the Medieval in Our Tax Code

Originally published on Passive Activities and Other Oxymorons on December 29, 2010.
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§ 119 Meals or lodging furnished for the convenience of the employer.
§ 134 Certain military benefits.
§ 107 Rental value of parsonages

One of the reasons I don't mind long drives is the Teaching Company.  They allow me to take courses I never got to in college, with no papers to do.  I'm a little torn about this, but I would say that Teofilio L. Ruiz is about the best that they have, which is saying a lot.  He lectures about Medieval Europe.  The thing that sticks in my mind from several of his lectures is the tripartite division of Medieval society.  Those who work, those who fight and those who pray.  The merchants and artisans in the cities were a fringe element irrelevant to the overwhelming majority who worked growing food, of which there was rarely enough.  The fighters and prayers owned just about everything and paid no taxes.

It's odd to see that division in our tax code, but the sections above lay it out pretty clearly.  When it comes to housing, it would seem that Section 119 is sufficient.  If your employer provides you with a place to live, so that you will be near at hand, the value of that place to live is excludible from your gross income.  If that place happens to be a room in a hotel for the manager, a rectory or fifteen square feet on a nuclear submarine, the principle is the same.  That's not the way it is, though.  The military and the clergy are special.  Since at least historically, housing tended to go with their jobs, monetary allowances paid in lieu of actual housing are exempt from tax.  Since the military is paid by the same entity that collects the taxes, ultimately it seems to me that it is a matter of six of one, half a dozen of the other.  Military housing allowances strike me as fairly modest.  Presumably they could be grossed up and made taxable with negligible net effect on either the deficit or military compensation.  Also there is nothing at all troubling about the federal government determining who is entitled to military housing allowances.

Parsonage is another matter entirely.  It involves the government in determining who is or is not "a minister of the gospel".  More significantly, and perhaps surprisingly to many, it is an area of abuse.  Generally speaking, ministry is not viewed as lucrative occupation.  In some cases it is, though.  There is no dollar limitation on the parsonage exclusion.  The last big flap over the parsonage exclusion was in 2002.  There were two clear requirements to the exclusion.  The first is that the entity making the payment designate the amount as a housing allowance.  The second is that the minister spend the money on housing.  The IRS inferred a third requirement namely that the exclusion be no greater than the fair rental value of the home provided.   The Warren case was supposed to be an argument about that requirement.  The Ninth Circuit, much to the chagrin of both parties, asked them to start briefing on the constitutionality of the exemption.  The Court appointed Erwin Chemerinsky as amicus or we might say, in this case, devil's advocate.

Since Reverend Warren and the IRS came to an accommodation, the Ninth Circuit decided to let the hornets nest they had stirred up calm down (WARREN v. COMM., Cite as 90 AFTR 2d 2002-6058) and freed Professor Chemerinsky to pursue other interests. ( I contacted Professor Chemerinsky and he indicated that although still interested in the issue he is no longer involved).  Congress amended 107 to include the fair rental limitation that the IRS thought was already there.

There was not a lot of activity in the parsonage area in 2010.  Just three things that I've been able to find.  The first is not of any great note, but I include it for the sake of completeness.  Rev. Proc 2010-03 was what I call the IRS "Don't even bother to ask" list.  It lists the specific items on which the IRS will not rule and includes:

(11) Section 107.—Rental Value of Parsonages.— Whether amounts distributed to a retired minister from a pension or annuity plan should be excludible from the minister's gross income as a parsonage allowance under § 107.

(12) Section 107.—Rental Value of Parsonages.—Whether an individual is a “minister of the gospel” for Federal tax purposes.

I don't think there is anything new about the IRS reticence in these areas.  Personally, I have significant resentment for item 12.  The IRS refusal to rule in this area substantially reduces the entertainment value of the corpus of private letter rulings.  Their ability to rule on whether an organization is exempt gives us a comic masterpiece like Free Fertility .  Rulings on who is and is not a "minister of the gospel"  would be immensely entertaining.

More significantly there were two court decisions on the parsonage exclusion. The first was courtesy of the Freedom From Religion Foundation.  They are challenging the constitutionality of the parsonage exclusion. I have to say that regardless of the merits of the argument, I find FRF a little disturbing.  Their distaste for religion borders on, well, the religious.  According to their website:


The history of Western civilization shows us that most social and moral progress has been brought about by persons free from religion. In modern times the first to speak out for prison reform, for humane treatment of the mentally ill, for abolition of capital punishment, for women's right to vote, for death with dignity for the terminally ill, and for the right to choose contraception, sterilization and abortion have been freethinkers, just as they were the first to call for an end to slavery.

I think they are pulling a little bit of a rhetorical fast one there in combining "free thinking" and being free from religion.  The abolition of slavery in the United States had a very strong religious impulse behind it, although many of the radical abolitionists became alienated from the denominations that they were born into.  We even have an American religion that is more or less based on free thinking in Unitarian Universalism.  I've met UU ministers who don't believe in God, but I've never known one to turn down a parsonage exclusion.

At any rate little as I am drawn to FRF, they do seem to have the stronger argument.  Personally, it doesn't bother me at all for the state to tilt the playing field a little in the favor of religion in general.  The FRF types seem to think that you have prayers at the inauguration and next thing you know it's the Spanish Inquisition.  I mean really nobody expects the Spanish Inquisition.  Apparently, though current First Amendment jurisprudence is not as easygoing as I am.  Here is part of the government's argument in its motion to dismiss:

Sections 107 and 265(a)(6)constitute constitutional accommodations of religious practice by eliminating discrimination between ministers and similarly situated taxpayers. Sections 107 and 265(a)(6) are part of a governmental policy of neutrality toward religion, and government neither advances nor inhibits religious practice through these provisions.

The government argument goes that lots of taxpayers get the convenience of the employer exclusion.  In order for clergy to get the exclusion, the IRS might have to go poking around in the rectory, which could be intrusive.  So to make all ministers equal Congress added the housing allowance.  I get the argument but I don't think it is really strong.

Then came the Driscoll case.  From everything I've read Phil Driscoll is a really nice guy.  As I write this I'm listening to him on pandora.  Nice sound.  But a parsonage exclusion of $195,000 for his second home! Ministers who are half of two income households can have 100% of, admittedly often low, compensation excluded.  Consider Terry and Robin, the couple of indeterminate gender and marital status I introduced several months ago. (Their role is to help me avoid awkward pronoun problems) In this example Terry is a UU minister and Robin is an attorney.  Terry makes $40,000 and Robin makes $200,000.  If they stretched on the house that they bought,  Terry would negotiate for the entire $40,000 to be excludible.  If I was on the congregation's ministerial compensation committee, it would be my idea. The portion of it that was interest and real estate taxes would still be deductible against Robin's income.  Thanks to Driscoll, now when Terry gets a better job they can exclude a $100,000 compensation package so they can buy a house on the Cape.  I really don't think that this type of tax gaming is good for the morale of the clergy. The tax free nature of housing allowances gives an extra twist to church financial debacles as in this story about the Crystal Cathedral.. People like me will encourage the tax gaming because that's our job.  We don't expect the tax system to be fair or make sense.  I think, though, that the cause of religion, in the broadest sense of the word, would be well served if members of the clergy would come out against their special tax status.  I'm not holding my breath.

The tax blogosphere still hasn't heated up on this issue.  I noted posts by two attorneys in a bonus post earlier this month. They focus on statutory construction, which is the key to the Driscoll case. The Driscoll case loses much of its drama if you leave out the numbers.  Robert Flach has taken note of the discussion in his What's the buzz post and has promised to weigh in on it.  That should generate some more interest.

Blowing My Own Horn

Originally published on Passive Activities and Other Oxymorons on January 4th, 2011.
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Philip A. Driscoll, et ux. v. Commissioner, 135 T.C. No. 27

I seem to have taken the lead in the tax blogosphere in noticing this case.  It concerns the parsonage exclusion for a second home.  My post on it may be hindered by one of my meandering lead ins, but other than that it is the only post I've seen so far that explores the story behind the story. (For example, nobody else connects this case to 
Reverend Phil's visit to a federal facility in 2007).  John F. Rogers of TaxTales notes the importance of statutory construction and going to other Code sections for support (The key to the case was that "home" also means "homes").  He is of the opinion that this is a "big win" for pastors.  I'll have to agree to disagree with him on that one.  I don't think many pastors have second homes and even some who do might hesitate to ask their congregation to include them as part of the housing package.  The other parsonage decision of 2010 holds that various and sundry members of the Freedom From Religion Foundation have standing to challenge the constitutionality of the parsonage exclusion.  Maybe one case doesn't have anything to do with the other, but something as egregious as this can't help the pro-parsonage side of the argument.

James Edward Maule's post on the case also focuses on the statutory language analysis.  His view of the big picture is more similar to mine :

What’s left are several questions for the future. First, will the IRS appeal, and if so, will it prevail? Second, will the IRS continue to issue notices of deficiency in these sorts of cases, knowing that it would lose in the Tax Court but hoping that it would prevail on appeal to a different Court of Appeals? Third, might the Supreme Court end up dealing with this issue? Fourth, will the Congress amend section 107 to respond to the Tax Court’s decision, and, if so, what will it do? Fifth, might the Congress repeal section 107, the existence of which is difficult to justify under any sort of tax policy analysis? 

My fellow bloggers, being attorneys, probably enjoy words more than numbers.  So they don't mention that for 1999, the portion of Reverend Driscoll's parsonage exclusion attributable to his second home was $195,778.72.  The ministry is not a church.  The website makes it seem more like a record label.  In 2009, Reverend Driscoll drew a salary of just $77,440 as president and $283,082 as parsonage.  The 2009 data is from the 990.  We don't have any way of telling whether Reverend Driscoll excluded it all.  Since 2002 the exclusion is limited to rental value plus utilities.

My own tax policy analysis is that a case can be made for the exclusion on a free exercise theory.  Clergy who are required to live in a residence should be able to exclude its value under 119 (Lodging provided for the convenience of the employer).  Denominations with a strong congregational polity but significant diversity in belief, like Unitarian Universalists might want their clergy to have a significant sphere of privacy. They would be put at a disadvantage to other denominations.  The other thing is that the exclusion has been around a long time and it might really foul up some small congregations to eliminate it.    The answer to the abuses of the exclusion is to put a dollar limit on it.  We already have a table in place for the military.  It seems to top out below $4,000 per month.

I'm working on a more comprehensive post, but I am putting this one out now in a cynical attempt to build traffic.

Parsonage Exclusion - Shouldn't Enough be Enough?

Originally published on Passive Activities And Other Oxymorons on December 19,2010, this post commences my fascination with the parsonage exclusion - Code Section 107, which provides for an unlimited exemption from income tax of the housing allowances, in-kind or cash , of "ministers of the gospel".  When I did a recap of my coverage on the issue in November 2013, there were over twenty posts and there have been more since.  IRS won on appeal to the Eleventh Circuit in the Driscoll case, but of much greater interest has been Freedom From Religion Foundation's constitutional challenge.  As of this point, FFRF has won in District Court and government has appealed to the Seventh Circuit.

Covering the parsonage issue has made me some of my best blogging buddies including Robert Baty and Reverend William Thornton.
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Philip A. Driscoll, et ux. v. Commissioner, 135 T.C. No. 27

Foxes have holes, and birds of the air nests; but the Son of man hath not where to lay his head.

Robert Harris's book 101 Things Not to Do Before You Die is a fantastic blend of humor and wisdom.  One particular piece of advice which actually caused me to change my regular behavior was:

Don't accumulate nonfunctional pens.

Following the form of most of his advice he describes a person who reaches into a jar of ballpoint pens, tests the pen to see if it works, finds it doesn't  and then puts it back.  What do you say about such a person ? Don't be one of them !

Check your pens and let go of the ones that no longer serve you - even if it is painful.  Keep only the ones that you can reach for with confidence.  This way when you feel the urge to write or draw or doodle, you can get started without needless delay and frustration.

There is another piece of advice, one  that I generally don't follow.  Although he is referring to sports on TV, I think it has broader implications.  That advice is :

                                           Don't be a passive spectator

When you're watching two teams, always pick one to pull for.  Cheer and boo.  Laugh and cry.  Eat and drink.  And experience not just the game, but the competition.

In my blog, I have adopted an attitude of - It is what it is.  Before long it will be something different.  Deal with it.  Other tax bloggers seem to enjoy advocating for one side or the other.  The Tax Court's decision in Phillip A. Driscoll has motivated me to finally do some serious booing.  The issue is the parsonage exclusion.  I have previously written about an effort to have the exclusion declared unconstitutional.  I think my post on the constitutionality of the parsonage exclusion took a pretty balanced view.

The case of Phillip Driscoll is another matter.  Reverend Driscoll heads Mighty Horn Ministries.  The ministry is not apparently classified as a church since it files Form 990.  If you look at the website, it strikes one more as being a record label, albeit one that specializes in religious music.  Since 2007, perhaps coincidental with the Reverend's visit to a federal facility because of a misunderstanding about taxes, the organization has been officially known as Phil Driscoll Ministries. Their 990 is available on guidestar.org (registration is free). In 2009, it had gross receipts in excess of $3,000,000.  Officers salaries were fairly modest $77,440 to President Phillip Driscoll, $5,700 to Jamie Driscoll the VP and $31,700 to Lynn Driscoll.  The Reverend Phil, however, had expense accounts and "other allowances" totalling $283,032.  This nicely ties with the item in other expenses labelled parsonage.  If you know anything about airplanes, take a look at the depreciation schedule on page 21 of the adobe file and you can let me know if I should get cranked up about that.  The mission of Phil Driscoll Ministries (a/k/a) Mighty Horn is:

Spreading the gospel of Jesus Christ to approximately 500,000 people annually through concerts and other ministry opportunities.

As occasionally happens to me further research has shown that a case I have found of interest is actually a late act in old news.  Reverend Driscoll did time in 2007 for tax evasion.  At least one commentator believes the real villain in that case was the IRS.  In his post Welcome Home Phil, James Paris speculated that Phil was being persecuted for his Christianity.  You can find similar comments in the Christian music realm of the blogosphere.  Apparently Reverend Driscoll is quite a celebrity with even Bill Clinton trying to help him avoid prison time.  It will be interesting to see if this tax court decision is seen as something of a vindication of him.

At issue were parsonage exclusions covering the years 1996 to 1999 totalling just over $400,000.  The largest being $195,778.72 in 1999.  This was not Reverend Driscoll's entire parsonage allowance.  This was the portion attributable to his second home (for parts of 1998  it was "second homes").  Just a little bit of tax history here.  The parsonage exclusion goes back to the Revenue Act of 1921.  It excludes from income the rental value of a residence provided to a "minister of the gospel".  This exclusion might have been rendered redundant by the subsequent creation of an exclusion from income for lodging provided to employees for the convenience of the employer.  In the classic "parsonage" or, if you are Catholic, "rectory", situation, presumably the convenience of the employer standard would be met.  It's convenient for the congregation to have the minister living next to the church in a house maintained by the church.  Maybe not so convenient for the minister's spouse or the minister's kids.

Here is where we get into the tension between the establishment clause and the free exercise clause.  Some denominations and congregations might think, perhaps with some encouragement from the clergy, that it is not such a good idea to have the minister live in a house owned by the church.  Since you wouldn't want to treat them differently than other denominations or congregations the parsonage exclusion was expanded to include "rental allowances".  There is no dollar limitation on such rental allowances and no limit on the relationship that they can bear to taxable compensation.  The money just has to be spent on providing housing.  If the housing allowance is used to pay deductible expenses they are still deductible.

The question the tax court had to decide in this case was whether a parsonage allowance should be allowed with respect to a second home.  In 2002, the Code was amended to limit the exclusion to the fair rental value of a home.  Prior to that it would presumably have been legitimate to have a $500,000 parsonage exclusion that was used to be buy a house.  Since the parson would have basis in the house it could be subsequently sold for $500,000 with no taxable income.  The case which prompted the Code change was not nearly that extreme.

Interestingly the question of whether the parsonage allowance can apply to a second home has never been addressed before.  The court was left to try to figure out what Congress was up to when it first enacted this thing in 1921.  They didn't get very far:

One commentator has suggested that the in-kind exclusion grew out of “the general respect held by Congress and the public for churches,”

What they came down to was statutory construction.  The language in Section 107 says "provide a home", but when you go to the definition section of the Code you find :

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;

So providing a home includes providing two or, in this case for part of the time, three places to live.  And of course Reverend Driscoll in 2007 had free housing provided by the federal government, although that was just for himself.

I really don't think this type of thing does the cause of religion much good.  I doubt that it is good for the clergy to have their own special tax gimmick that while appearing modest can be gamed to exclude from income tax as much as 100% of above average incomes in some cases.  If 107 were simply repealed it would not cause the taxation of clergy who are provided a place to live by their congregations.  They would be covered by the convenience of the employer exception even if the residence had a theoretically high rental value (conceivably a bishop's residence or the like).

There is another option, which as far as I know is original with me, although whenever I think that it turns out that I am wrong.  Code Section 134 excludes from income a number of military benefits including a housing allowance. A rationale similar to that for the parsonage exclusion can be made here.  Members of the military are frequently and perhaps more so traditionally provided with housing at a place convenient to the employer, think Fort Apache. It is reasonable that a cash allowance in lieu of that benefit would be exempt.  From a policy viewpoint the military housing exclusion is less troubling, since there is nothing disturbing about the federal government deciding who is entitled to it (Unless you are a far out militia type).  Perhaps more significantly, since it is paid by the federal government, it is limited.  The allowance varies by whether the service member has dependents, by region and as you might expect rank.  If you look at the table, though, you will see that the variation by region is the most dramatic with junior enlisted ranks in Alaska having housing allowances greater than a general in Alabama.  My recommendation is that the parsonage allowance be limited to no more than the highest military allowance anywhere.  You could come up with something more complicated than that.  The important thing is that there be some dollar limit.

Dropping back to my normal persona as amoral tax advisor congregations and ministers might consider whether there is an opportunity here to further pump up housing allowances.  I don't know how many clergy members own multiple homes, but I will predict that as word of this decision gets out, the number will increase.  A cautionary note.  The Tax Court was divided on this opinion.