Minister's Housing Allowance Only Properly Designated for One Year--and Even Then the Taxpayer Could Not Document He Paid Housing Expenses
The taxpayer in the case of Brown v. Commissioner, TC Memo 2019-69[1] ran into a number of issues, but a key one was failing to meet the requirements to exclude certain payments received as a minister from the taxpayers’ income as a housing allowance.
IRC §107 provides:
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 and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
Reverend Brown was the founder and pastor of the Christian Joy Center and he claimed to have received payments from the church that met the requirements of IRC §107(2) as a housing allowance.[2]
A key issue to having a valid housing allowance is found in Reg. §1.107-1(b) which provides:
(b) For purposes of section 107, the term “home” means a dwelling place (including furnishings) and the appurtenances thereto, such as a garage. The term “rental allowance” means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken prior to January 1, 1958, by the employing church or other qualified organization, or if such amount is designated as rental allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization when paid after December 31, 1957. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.
The Tax Court describes the specifics of this designation requirement:
This means that the allowance must be specified in amount at some point before a minister receives it — a minister can’t just dip into church funds to pay his housing expenses as they arise. And a payment that isn’t designated isn’t excludable from income. See id.; see also Boyer v. Commissioner, 69 T.C. 521, 534 (1977). Tax law has no rubric for designating an allowance — it can be a sum of money written into an employment contract, a line item in a church’s budget, a notation in the minutes of the church’s board, or any other document that proves official action was taken. Sec. 1.107-1(b), Income Tax Regs. It doesn’t even need to be in writing. See Libman v. Commissioner, T.C. Memo. 1982-377, 44 T.C.M. (CCH) 370, 372 (1982). But to qualify as a designation, it must clearly identify the payment of a rental allowance as distinct from a salary or other compensation. Kizer v. Commissioner, T.C. Memo. 1992-584, 1992 WL 238781, at *2-*3.
Mr. Brown had trouble documenting this designation. What the taxpayers introduced were a series of checks, but even the checks weren’t clear:
They introduced a log of the checks written by the CJC for their parsonage allowance in 2007, and the log shows that they received a check for $1,750 twice a month for the entire year. Accompanying the log were images of the checks, each one bearing “For: Comp and Parsonage” on its memo line. The Browns, however, did not introduce such a log for 2008 or 2009. At the beginning of 2008 there are around six checks from the CJC for $1,750 with “Comp and Parsonage” written on the memo line, but the designation of subsequent payments is unclear. There’s a “parsonage” check written by the CJC at the very end of March 2008 for $8,000 — an amount well beyond the typical payments — and one final check for $1,750 in April 2008. This is the last check that specifies on the memo line that it was for “parsonage”. And while we have found other bimonthly checks for the Browns in their bank statements for both years, there’s nothing that would let us find it more likely than not that they were payments for a parsonage allowance.[3]
The Court did find enough evidence for one year for the designation of an allowance, but not for the other years:
This makes the question of whether the CJC properly designated these payments difficult and proof that the Browns actually spent the money on housing even harder to find. Reverend Brown testified that the CJC’s church board approved his parsonage allowance at the start of each calendar year based on loan documentation that he provided. We could find no specific resolution that granted Reverend Brown a parsonage allowance, but at least for 2007 we find that the CJC’s practice of regular payment of a regular amount, as supported by Reverend Brown’s testimony, is sufficient evidence of official action and payment “distinguished from salary or other remuneration” for 2007. See sec. 1.107-1(b), Income Tax Regs. We cannot make a similar finding for 2008 and 2009, as the payments became irregular and unsupported by any check register or notation in the CJC’s records.[4]
But even with the designation, the taxpayer must still be able to show the minister paid housing expenses at least equal to the designated payment. Otherwise some or all of the allowance will be taxable.
Example
Peace Church’s board designated that $15,000 of the compensation paid to Rev. Fisher would be for the pastor’s housing allowance. Rev. Fisher paid $11,000 in mortgage payments during the year and incurred $3,500 in utilities, which represented all of the pastor’s housing costs.
The pastor can exclude $14,500 of the housing allowance from his income for the year. However, $500 of the allowance must be included in income, since it is in excess of the amount that the pastor paid for housing expenses during the year.
In this case that documentation issue proved a problem for the taxpayer. As the Tax Court noted:
But even given the regularity of the 2007 payments, the Browns have failed to show that they used their parsonage allowance for housing alone and that the allowance did not exceed the sum of their mortgage payments and utilities. See sec. 107(2); Rasmussen v. Commissioner, T.C. Memo. 1994-311, 1994 WL 317491, at *3-*4. Reverend Brown actually testified that the CJC pays his personal utility bills directly, leading us to wonder whether the CJC also pays the Browns' mortgage directly in addition to the $1,750 check (and increased amounts thereafter) that the Browns received twice a month. Beyond Reverend Brown's testimonial estimates of his phone and utility bills, there is nothing in the record about the Browns' actual housing expenses, and therefore we can't be sure that he and his wife weren't spending their allowance on food, vacations, or even the cash needs of his unrelated businesses. This goes for what we know were the 2007 parsonage allowance payments and what we can only guess were the 2008 and 2009 payments.[5]