For many years, the issue has been debated about whether a minister could claim the ministerial housing allowance to cover two different homes at the same time. This situation has arisen when a pastor, who owns a home in one location, is transferred to a new location, and has to buy another home prior to his original home selling. The question also has arisen when a pastor, nearing retirement, buys a retirement home in another location but still has a home near his current church.
Section 107 of the Internal Revenue Code, provides that in the “case of a minister of the gospel, gross income does not include (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.”
In simplified terms, the first part of Section 107 says that the value of a parsonage is not taxable income to a minister and the second part says that even money provided to the minister to rent or buy his own home is not taxable, assuming that the money is used for that purpose. The Internal Revenue Service and most experts knowledgeable about ministerial taxation issues have believed that the statute only applied to one home since the language says “a home” in both provisions.
However, a recent decision by the United States Tax Court, in a case involving a Cleveland, Tennessee minister, has taken a different approach. In Driscoll vs. Commissioner (135 T.C. No. 27), the Tax Court, in a divided opinion, held that the minister/taxpayer could claim the ministerial housing allowance for two homes under Section 107. In the Driscoll case, the minister had one home in Cleveland that was his primary residence and another residence that the Tax Court called a “second home” on the Ocoee River just outside of Cleveland. When the minister claimed the ministerial housing allowance on both homes, the IRS rejected the exemption on the “second home.” However, the Tax Court held that the IRS had no authority under Section 107 of the Tax Code to reject the minister’s claim and therefore ruled that the minister was eligible to have the ministerial housing allowance on both homes.
However, before running out and buying a second home or claiming your current second home under your housing allowance exclusion, you need to be aware of several important issues regarding the Driscoll decision. First of all, this case may not be over. The IRS is most likely not going to “acquiesce” in the Court’s ruling, meaning that they will not apply this case as precedent in similar situations involving other taxpayers – and further, the IRS will most likely appeal the Tax Court’s decision.
Secondly, when you look at the Driscoll case, do not think that you can claim unlimited amounts for housing. For instances, in 1999 the Tax Court allowed Driscoll to claim more than $283,000 as ministerial housing allowance on both homes. It is important to remember that the tax years in question in the Driscoll case were considered under the law that existed prior to the Clergy Housing Allowance Clarification Act of 2002 (Public Law No: 107-181). With the passage of the 2002 provision, the ministerial housing allowance is limited to the lesser of the housing amount designated by the church, the amount actually spent by the minister on housing, or the fair rental value of the property in question. Had the Housing Clarification Act been in place during the tax years in question for Driscoll, most likely the amount that he was able to exclude from income tax liability as housing allowance would have been drastically lower.
Thirdly, even if the Driscoll decision is accepted by the IRS and not appealed, it can only be used by ministers in years to come. Since the ministerial housing allowance cannot be designated or amended retroactively, the “two homes” decision by the Tax Court can only be applied in future years.
Fourth, the Driscoll decision seems to intimate that they would not have reached the same decision had ether of the “homes” been rented out, even partially during the year. Having both homes available to the minister during the entirety of the years in question seemed to be very important to the court.
Finally, if you and your tax preparer decide to follow the ruling in the Driscoll decision, you should be advised that you are taking a very aggressive tax position. Should the IRS not acquiesce, you could be assessed penalties and interests on taxes not paid.
As an editorial note, I am concerned that the Driscoll decision may do more harm than good in the long run when it comes to maintaining the ministerial housing allowance. Not only were exorbitant amounts claimed by Driscoll for housing allowance, but also the majority of ministers do not have the ability to own two homes. Opponents of the ministerial housing allowance will use the amounts claimed in the Driscoll case and the discussion of a “second” or “vacation” home to turn public opinion against those who have tried to follow the letter of the law over the years. With the housing allowance under attack, I am concerned that the Driscoll situation only gives our opponents ammunition to claim that this is a benefit that is out of control with no accountability.