[This is an usually long post, but I couldn't think of a way to split it. It's a complicated topic.]
For what ought to be a very simple concept, the housing allowance can be surprisingly difficult to apply in a Church of Christ setting. Let me explain.
What is the “housing allowance”?
Originally, the rule was that a minister didn’t have to pay income tax on the rental value of a house provided him by the church — often called a “parsonage.” Congress extended the same treatment to a minister who owns his own house. In that case, the church has to classify a part of his salary as a “housing allowance.”
A minister may exclude from his income the lesser of –
- The amount of the minister’s salary designated by the church in advance as a housing allowance.
- The amount he actually spends on housing.
- The fair rental value of the housing.
The housing allowance is solely an income tax exclusion and does not apply to self-employment taxes, that is, to the amount paid for Social Security equal to 15.3% of his income. Not all states recognize the housing allowance for state income purposes, but many do.
Who qualifies for the housing allowance?
The short answer is a “minister” who is engaged in the “services which are ordinarily the duties of a minister.” These are not the same tests. To qualify for the allowance, you have to pass both tests. A minister cannot use the housing allowance against wages paid by a secular institution. A non-minister doing ministerial services doesn’t qualify.
Now, among the Churches of Christ the problem is that we define ministers by the job they do. There is no ordination process independent of hiring. To be a preacher — the position that is most obviously a “minister” — requires no particular education or certification. All that’s required is that the elders hire the man as a minister. Ordination and hiring are the very same things!
Who is a “minister”?
In Wingo v. Comm’r, 89 TC 911 (1987), the Tax Court specified five factors (three activities and two attributes) used to identify a minister as defined under IRC section 107.
- Performing sacerdotal functions;
- Conducting worship services;
- Controlling or maintaining of religious organizations (including the religious boards, societies, and other integral agencies of such organizations) under the authority
of a religious body constituting a church or church denomination.
- Considered a spiritual leader; and
- Ordained, licensed, or commissioned.
According to the Tax Court, all five requirements must be met. However, in a more recent decision, the Tax Court softened the standard, leaving it somewhat vague.
In Knight v. Comm’r, 92 TC 199 (1989), the Tax Court approved a minister who was not ordained by his church, could not administer the sacraments, and could not participate in church government. The court, however, held that he was a minister because he was licensed by the church, conducted worship services, and was considered a spiritual leader, thus meeting three out of the five factors.
The opinion stated that meeting the definition of “minister” is not simply an arithmetical test; having a majority of the factors in the taxpayer’s favor may not be sufficient. Instead, failure to meet one or more of the factors must be weighed by the court in each case. At a minimum, the minister must be licensed, commissioned, or ordained.
In lawyer-speak, this is a “facts and circumstances” test. If you pass all five, you’re set. If you pass less than all five, the court will look at the totality of the facts and see whether, within your own denomination, you fit the spirit and purpose of the rule.
“Sacerdotal” means in the nature of priest. Of course, Churches of Christ, like all Protestant churches, teach the priesthood of believers. Therefore, we have to look by analogy to the Catholic and Orthodox Churches for what priests do. At that’s mainly administering sacraments, which many Protestant denominations refer to as “ordinances.” We just say “baptism” and the “Lord’s Supper.”
Of course, in the Churches of Christ, any baptized believer may preside over either of these events — except many churches would deny this authority to women. But even they might allow a woman to conduct a baptism or communion service in an all-female assembly.
Leading in worship is generally permitted to any male member, even a baptized child — except a woman — subject to the same exception.
Controlling or maintaining a religious organization is more difficult to apply, as in Church of Christ ecclesiology, the elders are in control. But the ministers do in fact “maintain” the local congregation in many ways and they certainly control major programs of the church, such as worship or the youth ministry. The IRS has interpreted this test to mean “You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization’s activities” (IRS Publication 517).
“Spiritual leader” would include anyone in the Churches of Christ hired as a “minister.” There will be many leaders without such a title, but anyone worthy of the title is certainly a leader.
Regarding, ordination, licensing, or commissioning, well, the Churches of Christ have no process at all other than hiring someone as a minister. That’s it.
Now, many churches teach that “every member is a minister” — which is theologically quite sound but doesn’t really fit what Congress was aiming at, and in my opinion, to argue that merely being a member makes one a minister for housing allowance purposes is an abuse of the rule. I don’t see how the ordinary pewsitter meets more than two of the tests.
On the other hand, it would seem that an elder on staff, that is, an elder on the payroll of the church to perform pastoral duties would certainly qualify. We actually ordain elders!
Generally, an employee engaged solely in counseling or in administrative duties, such as bookkeeping, isn’t going to qualify, even if called the “minister of bookkeeping” because the employee isn’t hired to be a spiritual leader.
The same analysis creates problems when dealing with the head of the church’s Monday – Friday preschool. In that church, is that man or woman a “spiritual leader” on the order of a minister? Does she participate in meetings of the ministers? Does she meet with the elders the same as other ministers? Is she perceived by the congregation as being in a ministerial role comparable to the preacher?
The title doesn’t determine the result, but the title has an impact. A woman working in campus ministry as an “event coordinator” doesn’t receive the same “ordination” as a “campus minister” and so surely doesn’t qualify for the housing allowance. However, if the elders call her a “minister” or the equivalent in that church, we have to look at the other elements of the test.
Finally, the fact that you were once a minister doesn’t mean you’re one today. You’re only “ordained” as long as you have some sort of authorization from your church that means the five tests above. If you were ordained as a minister in your 20s, quit the ministry, and now serve as a church bookkeeper, you are no longer a minister (except for retired ministers, discussed below.)
What are the duties of a minister?
To qualify for the housing allowance, a minister must earn his pay performing the duties of a minister. This is a similar test to being a minister, but is independently applied. It’s not the same. You can pass one and flunk the other, and if so, you don’t qualify.
Under Treasury Regulations section 1.1402(c)-5, these duties include:
1) the ministration of sacerdotal functions,
2) the conduct of religious worship,
3) the direction of organizations within the church (that is, the denomination), and
4) performance of teaching and administrative duties at theological seminaries.
Any one of these four will work. The minister doesn’t have to do all four (so long as he still qualifies as a minister!). The first two are pretty easy to satisfy for a minister employed by a church. The tests are harder to apply to a female, as noted above.
In Revenue Ruling 71-7, 1971-1 C.B. 282, the IRS determined that a duly ordained minister, who is employed as a member of the faculty of a church-related college and whose duties do not include the conduct of religious worship or the ministration of sacerdotal functions, is performing services as a “minister of a church in exercise of his ministry.” In such as case, it’s necessary to determine –
(a) whether the college employing him is itself a religious organization under the authority of a religious body constituting a church or church denomination, or
(b) if the college is not such a religious organization, whether the college is operated as an integral agency of such a religious organization.
Although not publicly stated by the IRS in this ruling, the IRS found that Abilene Christian University is an “integral agency” of the Church of Christ denomination.
Many will take offense at that conclusion, due to our insistence that (a) we’re not a denomination and (b) the universities are independent of the churches and just happen to provide invaluable services to the Churches of Christ. But the IRS looks more realistically at the relationship of the institution to the denomination.
Since we have no denominational hierarchy, it’s not possible for one of our nonprofits to qualify under test (a) unless it’s operated under the authority of a congregation or group of congregations, such as a separately incorporated campus ministry.
The IRS’s favorable conclusion as to ACU is based on the requirement that the board of directors of ACU be members of the Churches of Christ in good standing, as certified by their home congregations, as well as the chartered purposes of ACU and its work as a de facto seminary.
Revenue Ruling 71-7 also holds that the services performed by the ministers as heads of religious departments and as teachers and administrators on the faculty of a college that was an integral agency of a church constitute the performance of services in the exercise of their ministry for purposes of FICA and SECA. Notice, however, merely being a teacher or administrator is not enough. You must also be a “minister” as discussed above.
In Revenue Ruling 72-606, 1972-2 C.B. 78, the Service considered whether a minister who served as the administrator of an old age home affiliated with a religious organization was eligible for the housing allowance. The revenue ruling holds that the minister cannot exclude the rental allowance from his gross income under section 107 because the old age home is not an integral agency of a religious organization. The IRS utilized a number of criteria to determine whether a church-related institution is an integral agency of a religious organization, including –
(1) whether the religious institution incorporated the institution;
(2) whether the corporate name of the institution indicates a church relationship;
(3) whether the religious organization continuously controls, manages and maintains the institution;
(4) whether the trustees or directors of the institution are approved or must be approved by the religious organization or church;
(5) whether trustees or directors may be removed by the religious organization or church;
(6) whether annual reports of finances and general operations are required to be made to the religious organization or church;
(7) whether the religious organization or church contributes to the support of the institution;
(8) whether, in the event of the dissolution of the institution, its assets would be turned over to the religious organization or church.
The absence of one or more of these characteristics will not necessarily be determinative in a particular case.
In a denomination with autonomous congregations, the IRS has looked to whether the institution was formed by congregations and whether the board of the institution is somehow controlled by sponsoring congregations.
Therefore, a Church of Christ-affiliated nonprofit may well be an “integral agency” if a majority of its board is somehow overseen by one or more congregations of the Churches of Christ, and of course, many nonprofits are overseen by the elders of a given church.
Let’s take some examples.
1. A congregation’s preacher works part-time for a local Church of Christ orphanage. The orphanage meets the standards to be an “integral agency.” The preacher can clearly qualify a part of his salary with the orphanage for the housing allowance — although he can’t double dip. The total allowable exclusion can’t be doubled just because he works two jobs.
2. A PE coach at a Church of Christ-affiliated high school works part-time as a youth minister in his church. The high school qualifies as an integral agency. He can claim a housing allowance from the high school as well as from the church.
3. A biology teacher at the same high school is a devoted member of her Church of Christ congregation. She volunteers for the nursery, leads the ladies Bible class, and has six Bible studies going with potential converts. However, she carries no title within her congregation and isn’t involved in the formalities of leadership — she doesn’t attend staff meetings with the elders, her name is not listed with the ministers who are on the payroll as church staff, and she isn’t included in church visioning efforts any more than any other member. I don’t think she qualifies as a minister. Therefore, she doesn’t qualify for the housing allowance.
4. A nonprofit Church-affiliated missions support organization hires a retired missionary to coach and support missionaries in the field. He is clearly in a leadership position within his organization, which qualifies as an integral agency.
If he’s in an administrative position, he clearly qualifies as a minister. If he’s an employee coaching missionaries, it’s a tougher call. Most in the Churches of Christ would think of him as a minister as he’s in an oversight position over missionaries. The tax conclusion may actually hinge on whether he ever preaches and leads communion services and whether his board or, better yet, one of the organization’s sponsoring churches, names him a “minister.” After all, some sort of ordination is required.
The reality is that the rules were written for hierarchical denominations with a very formal denominational structure. Fortunately, the IRS has made clear in its rulings that it will adapt the rules to the functional equivalents in a denomination with autonomous congregations. However, the further removed an employee is from a preacher or similar minister, the harder it is to be certain of the outcome just because the rules weren’t designed with us in mind.
There are several IRS rulings regarding what is an “integral agency,” and it should normally be possible for a qualified tax attorney to determine which nonprofits meet that test. Much harder is determining whether a particular individual is a “minister,” as there just aren’t as many examples in the literature to follow.
Many Church of Christ-affiliated institutions have taken the position that under our ecclesiology “every member is a minister,” and so nearly all employees claim the benefit. I seriously doubt that the courts would agree with that result even if the member were to literally meet the tests. After all, a member who doesn’t meet all five of the tests mentioned near the top of this post must meet the spirit of the rules under a facts-and-circumstances weighing of the factors. And no court is going to qualify every member as a “minister” under that test. As we lawyers like to say, “It doesn’t pass the red-faced test,” that is, you can’t stand in front of a skeptical judge and make that argument without having your face turn red!
I know that saying this won’t win me many friends among the university faculties, but the teacher has to be a minister as defined by the IRS. Being a teacher for integral agency certainly satisfies the second test — doing the work of a minister — but it doesn’t automatically satisfy the first test.
A retired minister can qualify for the housing allowance, but the minister’s pay must come from a church or an integral agency. Clearly, the usual distributions from a personal IRA do not qualify, as it’s not a pension from a church. However, a church pension or profit-sharing plan should readily qualify, if the minister was qualified as a minister before he retired and if the pension was earned as a result of his services as a minister.
Amounts rolled over from a non-church pension plan into a church pension plan do not qualify.
I think an IRA-SEP, IRA-SIMPLE, or a 403(b) annuity should qualify, even though the minister controls these funds. In each case, the plan has to be set up by the church as part of the minister’s compensation package. The wisest course is to never, ever commingle retirement money that qualifies with retirement money that does not.
In all cases, the minister has to remember to ask the church to designate a portion of his retirement benefits as a “housing allowance,” even though he is no longer an employee.
1. Believe it or not, these aren’t all the rules. You should see my earlier posts at –
Also IRS Publication 517 is a valuable resource.
Tax attorneys and CPAs should take the trouble to review the revenue rulings, case law, and private letter rulings under IRC sections 107 and 1402. Section 1402 deals with a minister’s election out of self-employment tax, and the courts and IRS refer to the regulations under section 1402 in interpreting section 107.
2. Most nonprofits that support the work of local congregations can qualify as an integral agency, and there is quite a bit of law on the subject. If an organization doesn’t presently qualify, it can likely amend its bylaws or charter to do so.
3. Don’t be a hog. The several cases in this area demonstrate that the IRS does raise this question on audit. Besides, Christians aren’t allowed to play “audit roulette” — that is, we can’t file returns that we know are wrong hoping not to get caught. You need to have a reasonable reporting position. But, of course, the rules are often unclear, and it’s not sin to take a position within the gray. But I think some among us travel in the black.
4. In an unclear case, the employee’s job description or contract should specify that he or she is “ordained” as a “minister of the gospel.” And don’t wait until the audit notice appears in your mailbox. The contract should specifically mention the authority to administer communion and baptism.
5. The position should be called “minister,” not “administrator,” “executive,” or “event coordinator.”
6. Anyone classified as a minister should have all the rights and privileges of a minister in your congregation. They should be listed on the website and church bulletin with the other ministers. They should participate in meetings with the elders the same as other ministers.
7. The minister should regularly preside over communion or baptize someone. Going years without actually administering ordinances would weigh heavily against you. This is especially true of a female claiming minister status.
8. Any organization or individual may apply for a “private letter ruling” in which the IRS gives a definitive interpretation of the law as applied to your facts. You need a good tax attorney to do this, someone used to writing a persuasive brief and who’ll take the time to study the law carefully. This will remove all doubt on the subject.
All legal discussions are informational only, do not create a lawyer-client relationship, and may not be relied on.
Unless expressly stated otherwise on this website, (1) nothing contained in this website was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; (2) any written statement contained on this website relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and (3) any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this website. No one, without our express written permission, may use any part of this website in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.