Originally published on Forbes.com Feb 9th, 2014
Can mathematics professors and basketball coaches lower or raise their income tax by changing their religion? Can the IRS tax women teachers more than men teachers drawing the same pay from the same school? The answer to both these questions is “Yes”. It is pretty disturbing and it is why I tend to be supportive of Judge Barbara Crabb’s decision that Code Section 107(2) is unconstitutional. Code Section 107(2) provides that cash allowances designated as housing allowances paid to “ministers of the gospel” are exempt from income tax.
Constitutional Does Not Equal Sound Tax Policy
Recent commentary by Professor Edward Zelinsky has driven home for me how important the issue of Code Section 107 is to the integrity of our tax system. Activists and advocates tend to use the Constitution like a drunk uses a lamppost, more for support than illumination. Professor Zelinsky, who being a law professor and all probably knows more about First Amendment jurisprudence than I do, has a very nuanced view. He argues that 107(2) is both constitutional and bad tax policy. The long version of Professor Zelinsky’s explanation is in this recent article in Tax Notes. A shorter version appears on the Oxford University Press blog.
….contrary to the District Court’s conclusion, Section 107 has secular purpose and secular effect. Section 107 manages the entanglement which is inevitable when the modern government decides whether or not to tax the modern church. Moreover, Section 107 accommodates the autonomy of religious institutions and actors by declining to tax both clerical housing provided in kind and parsonage allowances paid to clergy in cash. Section 107 should be understood, not as subsidizing the church, but as separating the church from the state. The economic benefit of tax exemption is a by-product of that separation.
On the other hand, he believes that the exclusion of cash allowances is bad tax policy. In a much longer piece (download required), Professor Zelinsky wrote:
There is no compelling argument for establishing tax parity among those ministers who receive in-kind housing and those who receive cash housing allowances as the Code creates no similar parity for nonclerical employees receiving taxable cash and nontaxable employer-provided lodging.As a matter of tax policy, Section 107(2) is inadvisable since parsonage allowances, paid and received in cash, pose neither valuation nor liquidity challenges for taxpayers or the tax system.
A Detour Into Medieval History
To illustrate why we need reform in this area,it is worth considering what happened with a much earlier benefit of being in the clergy. It goes back to 1172, when Henry II needed to apologize for telling his knights that he kind of sort of would not mind so much if they murdered Archbishop Thomas Becket. As part of the deal he agreed that members of the clergy would not be tried in civil courts, but could be tried by special church courts.
It developed that the church courts were a lot more lenient than the civil courts generally assigning a penance and letting you off entirely if you swore you didn’t do it and could find twelve minions who would back you up. So on the one hand you might be facing five Hail Mary’s and an Our Father. On the other hand, you might be facing hanging or beheading. Actually, the penance might have been stiffer than I said, but still it was a much better deal to be a member of the clergy. So that is what people accused of a crime would say they were.
It started off that you had to show up with a funny haircut wearing a robe, but eventually you just had to show that you knew how to read. It got even easier because somebody hacked the reading test and put out the word that they always asked you to read the same thing Psalm 51 – “O God, have mercy upon me, according to thine heartfelt mercifulness”. So all you had to do was memorize something. Psalm 51 became known as the “neck verse”. Of course, if the judge had it in for you, he would make you read a different verse and then you were probably screwed because most people could not read.
It will probably never get that bad with “minister of the gospel” status under 107(2) but at least since the 1970s we have been heading in that direction.
Who Is A Minister Gospel?
The IRS defines ministers of the Gospel by what they do:
Examples of specific services the performance of which will be considered duties of a minister for purposes of section 107 include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries.
The IRS will not issue advance rulings on whether or not someone is a minister of the gospel.
The idea that the IRS has to decide whether or not you are a minister of the gospel in order to properly administer the tax law is very creepy, which is the number one reason that we need to reform the law. The two examples that I find most disturbing are the “basketball ministers” at colleges that are considered an integral part of the Churches of Christ and the controversy in the Orthodox Jewish community about women teachers. I got Professor Zelinsky’s comments on both those issues, but a bit of background is in order.
Congressional Micromanagement Creates A Travesty
Revenue Ruling 70-549 seems pretty innocuous. It talks about an ordained minister who serves as a department head of a college, which is, in practice, operated as an integral agency of a church. The Service was “encouraged” to issue this ruling by Congressman Omar Burleson, who was known for taking good care of his district. Abilene Christian College, which was in the Congressman’s district and now houses his papers, was facing an IRS audit. Burleson and another Texas Congressman, George Bush, were ready to propose legislation but, Burleson encouraged the IRS to solve the problem, administratively. In his letter to Treasury General Counsel, Paul Eggers, he wrote:
Admittedly, Abilene Christian College is not organically connected to the Church. In practice, however, this relation strictly exists. The College and other like institutions do not employ any teachers who are not members of the Church, and all Board of Trustee members must be members of the Church in good standing.
In truth and in fact, Abilene Christian College and the few other Church of Christ colleges in the country are integral agencies of a religious organization.Teachers who are ministers perform their duties in accordance with the purposes set forth in section 107 of the Internal Revenue Act of 1954.
The rentals on their homes are a part of their compensation They are truly ministers of the Gospel and should qualify under the Law and regulations the same as other religious bodies engaged in education.
Here is the kicker. The Churches of Christ has a “priesthood of all believers” theology. So everybody who is a member can be a minister and their entitlement to a housing allowance is independent of their role in the colleges – hence “basketball ministers”. The most well-known college that benefits from this arrangement is probably Pepperdine University.
Professor Zelinsky’s comment on Revenue Ruling 70-549 is brief and to the point:
I also find the revenue ruling unpersuasive under the existing regulations and case law.
So even though, under current practice, a botany professor at Pepperdine who joins the Church of Christ becomes eligible for a tax-free housing allowance, while a history professor who converts to Catholicism would lose it, Code Section 107(2) remains constitutional, since the Revenue Ruling that has been followed for over 40 years is just wrong.
The Orthodox Jewish Schools
Many of the teachers at Orthodox schools are ordained as rabbis and thereby entitled to tax-free housing allowances. Then there are women who teach in orthodox schools. There are some that think they can qualify for tax-free housing allowances. Professor Zelinsky believes people taking that position are mistaken:
There are individuals in the orthodox Jewish community who maintain that the graduates of their educational and certification programs for women will qualify for the parsonage allowance. This claim is wrong since, under orthodox Jewish law, women cannot perform the functions of a minister as that term is currently construed.
In the event that the more aggressive tax position spreads among the Orthodox schools, how long will it be before we start asking why we should not give the same treatment to lay teachers in Catholic schools if they are Catholics that is?
The Clergy Tax Reform Act Of 2014
What we really need is the Clergy Tax Reform Act Of 2014. The Act would repeal Code Section 107 in its entirety and the provisions in the withholding, social security, and self-employment sections dealing with ministers. Essentially, clergy would be treated like everybody else. According to Reverend William Thornton, many moderately compensated clergy would feel fine about this solution. The income tax benefit of the housing allowance is often offset by the lack of a FICA match. Reverend William Thornton, who blogs about Southern Baptists issues, wrote to me:
When I have asked my SBC colleagues how they justify their HA, almost always they use the SE tax, as if one offsets the other. That is generally followed by complaints about having to be considered self-employed.
Of course, the burden would fall on the congregations, but frankly, I don’t see why churches should get a better deal than other not-for-profits.
You can follow me on twitter @peterreillycpa.
Afternote – Is This Story Still Not Ready For Prime Time?
When I inquired about the dearth of coverage of the “parsonage allowance” in the New York Times, providing a helpful link, Laurie Goodstein National Religion Correspondent of the New York Times wrote to me:
I’m not sure why the Forbes columnist failed to mention that the decision pertained only to a region of Wisconsin – AND the decision was stayed, so right now it’s affecting no one. That’s probably why it hasn’t gotten a lot of media coverage. But you are right to inquire, because it certainly is an interesting issue, and I’m following it. Potentially, as the case progresses in the courts, it could affect a lot of clergy.
However, we often don’t cover lower court rulings, so at this stage, it wasn’t a high priority for a story, especially since I’ve been tied up with other pieces that were more pressing. But I’m trying to keep up to speed on this, so please do feel free to forward anything you think I ought to see.
Of course that “Forbes columnist” – That was I. That was me. That was the “contributor” to this blog. It happens that I have a sophisticated readership who understands the distinction between a district court decision and a Supreme Court decision. I will have to be more diligent about matters like that if I began attracting New York Times readers, who need obvious things spelled out for them. On the other hand, when the Wall Street Journal finally caught up with me on the Phil Driscoll story (The trumpet playing “minister of the gospel”, whose ministry looks like a record label and whose several hundred thousand housing allowance covered multiple homes), they were more thorough than I had been. It will be interesting to see what the New York Times does on parsonage when they finally get to it.
Thanks To Bob Baty
I have to thank my most loyal commenter Robert Baty, a retired IRS Appeals officer, who pointed me to the Burleson letter. Bob has been relentless on this issue over the years.