Commission Recommendations - Clergy Housing Exclusion

 

Religious and Charitable Organizations

  1. For the good of our country’s moral fabric, religious organizations and their leaders must represent the best examples of faith and good moral conduct in all areas of financial activity. The vast majority of them do. Religious organizations and their leaders most certainly should not attempt to skirt the law for financial gain. Operating on the high road of integrity includes making reasonable and appropriate determinations as to who is a minister consistent with the polity of each religious organization and making appropriate decisions regarding clergy housing or related allowances. For a religious organization or its leaders to intentionally abuse the law is shameful and damaging to its mission and to the religious community as a whole. On the other hand, when individual organizations and leaders set their bar high—and even raise the bar—it inspires others to do the same. We encourage all religious organizations and their leaders to help raise the bar of reasonable and ethical conduct in this area.

IRS/Treasury

  1. Given the dual tax status of many members of the clergy (e.g., the common circumstance in which a minister is an employee for income tax purposes but subject to the self-employment tax for Social Security purposes), and the fact that the clergy housing exclusion applies to income tax but not to Social Security tax, much confusion exists among members of the clergy regarding the applicability of the exclusion under current tax law. Accordingly, the IRS should improve the tax forms, worksheets, and educational guidance for members of the clergy in connection with the clergy housing exclusion.

    We recommend the following specific improvements:

    1. Clergy housing allowances paid pursuant to Section 107(2) should be required to be reported by paying organizations on Form W-2 or Form 1099, whichever is applicable. The amount should be reported for information purposes in a manner so as not to imply that it is subject to income tax.
    2. A good-faith estimate of the value of an organization-provided parsonage pursuant to Section 107(1) should be required to be reported by larger religious organizations1 on Form W-2 or Form 1099 (whichever is applicable) by the organization providing the housing. The amount should be reported for information purposes in a manner so as not to imply that it is subject to income tax.

    3. The IRS should develop helpful, understandable forms or worksheets for use by clergy to address issues uniquely related to the housing exclusion in preparing Form 1040, including the following:

      1. determining the portion, if any, of a housing allowance that is not exempt under Section 107(2) (for example, if the amount designated as a housing allowance by a religious organization exceeds the amount spent by the minister in providing a home, the minister is required to report the excess as taxable income, even though it is not reported by the payer as such on Form W-2 or Form 1099);
      2. determining the portion, if any, of a minister’s unreimbursed business expenses that are not deductible pursuant to Section 265, as applied in Deason, Dalan, and McFarland;2 and
      3. determining the gross amount (before applicable expenses) of the housing allowance or the rental value of an organization-provided parsonage, if any, that is subject to self-employment tax and reportable on Schedule SE.
  2. In recognition of the recent unanimous Supreme Court ruling in Hosanna-Tabor,3 great deference should be given by the IRS to determinations made by religious organizations, pursuant to their sincerely-held religious beliefs, as to who is a minister for their organizations.

Congress

  1. Congress should not apply a dollar limit to the clergy housing exclusion under Section 107 of the Internal Revenue Code because attempting to do so would create more challenges than it would solve.
  2. In recognition of the recent unanimous Supreme Court ruling in Hosanna-Tabor,4 great deference should be given by Congress to determinations made by religious organizations, pursuant to their sincerely-held religious beliefs, as to who is a minister for their organizations. Congress should not attempt to limit the clergy housing exclusion to a more select group of individuals.
  3. Congress should not expand the clergy housing exclusion in an attempt to protect its constitutionality.
 

1 The Commission recommends that religious organizations that are required to file fewer than 25 Forms W-2 and fewer than 25 Forms 1099 in a particular tax year be excepted from the requirement to report the estimated rental value of parsonages on Forms W-2 and 1099. We encourage smaller organizations, as a best practice, to report that information if they have the practical means to determine the estimated fair rental value.
2 See Deason v. Comm’r, 41 T.C. 465 (1964); Dalan v. Comm’r, 55 T.C.M. (CCH) 370 (1988); McFarland v. Comm’r, 64 T.C.M. (CCH) 374 (1992). These cases address the fact that business expenses are not deductible to the extent that they are allocable to income that is tax-exempt due to the clergy housing exclusion.
3 Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC, 132 S. Ct. 694 (2012).
4 Id.