SCOTUS Reports

Tag: IRC Section 107

  • Driscoll v. Comm’r, 135 T.C. 557 (2010): Parsonage Allowance Exclusion for Multiple Homes Under IRC Section 107

    Driscoll v. Commissioner, 135 T. C. 557 (2010)

    In Driscoll v. Commissioner, the U. S. Tax Court ruled that an ordained minister could exclude from gross income under IRC Section 107 the portion of a parsonage allowance used for a second home, alongside a principal residence. This landmark decision clarified that the term “a home” in the statute could include multiple residences, thus broadening the scope of the parsonage allowance exclusion. The ruling has significant implications for ministers and religious organizations regarding tax treatment of housing allowances for multiple properties.

    Parties

    Philip A. Driscoll and Lynne B. Driscoll (also known as Donna L. Driscoll) were the petitioners. The Commissioner of Internal Revenue was the respondent. The case was heard in the United States Tax Court under Docket No. 1070-07.

    Facts

    Philip A. Driscoll, an ordained minister, worked for Mighty Horn Ministries, Inc. , later known as Phil Driscoll Ministries, Inc. , an organization exempt from tax under IRC Section 501(a). During the years 1996 through 1999, the Ministries paid Driscoll a parsonage allowance which he used to maintain both his principal residence in Cleveland, Tennessee, and a second home at Parksville Lake Summer Home area near Cleveland, Tennessee. The second home was used solely as a personal residence and was not used for any commercial purposes. Driscoll excluded the entire parsonage allowance from his gross income on his tax returns for those years.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to Driscoll for the years 1996 through 1999, determining that the portion of the parsonage allowance related to the second home should be included in gross income. Driscoll and his wife petitioned the Tax Court to challenge the Commissioner’s determination. The case was submitted fully stipulated under Tax Court Rule 122, and the court’s decision was to be entered under Rule 155.

    Issue(s)

    Whether, under IRC Section 107, petitioners are entitled to exclude from gross income the portion of the parsonage allowance paid to Philip A. Driscoll with respect to a second home?

    Rule(s) of Law

    IRC Section 107 provides that gross income of a minister of the gospel 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. The statute’s legislative history and regulations under Section 107 use the phrase “a home,” which, according to 1 U. S. C. Section 1, can include more than one home unless the context indicates otherwise.

    Holding

    The Tax Court held that the petitioners were entitled to exclude from gross income under IRC Section 107 the portion of the parsonage allowance used with respect to their second home. The court’s decision was based on the interpretation that “a home” in Section 107 could include more than one residence, as supported by the statutory language and the Dictionary Act.

    Reasoning

    The court’s reasoning centered on the interpretation of the phrase “a home” in IRC Section 107. The majority opinion rejected the Commissioner’s argument that “a home” limited the exclusion to a single residence, noting that 1 U. S. C. Section 1 provides that singular words may include the plural unless the context indicates otherwise. The court found no context in the statute, its legislative history, or the regulations that would suggest a limitation to one home. The court also considered the plain meaning of the statute and its consistency with the legislative intent to provide a broad exclusion for housing allowances to ministers. The majority opinion emphasized that the parsonage allowance was used to provide a home, as stipulated by the parties, satisfying the requirements of Section 107. The court dismissed concerns about potential abuse as speculative and not relevant to the facts before it. The concurring opinion supported the majority’s decision but highlighted the narrow scope of the stipulated facts and the absence of consideration for regulatory issues related to the reasonableness of the allowance. The dissenting opinion argued for a narrow construction of exclusions from income, contending that “a home” should be interpreted as a single residence and that allowing exclusion for multiple homes would serve no evident legislative purpose.

    Disposition

    The court’s decision was to be entered under Tax Court Rule 155, reflecting the holding that the petitioners were entitled to exclude the parsonage allowance related to their second home from gross income.

    Significance/Impact

    Driscoll v. Commissioner significantly expanded the interpretation of IRC Section 107 by allowing ministers to exclude from gross income parsonage allowances used for multiple homes. This decision has doctrinal importance as it clarifies the scope of the exclusion under Section 107, impacting the tax planning and reporting of ministers and religious organizations. Subsequent treatment by other courts and IRS guidance will likely further define the boundaries of this exclusion. Practically, this ruling may encourage religious organizations to structure compensation packages more favorably for their ministers, potentially increasing the financial benefits of the parsonage allowance.

  • Reed v. Commissioner, 82 T.C. 208 (1984): Exclusion of Housing Allowance for Ministers Limited to Out-of-Pocket Expenses

    Reed v. Commissioner, 82 T. C. 208 (1984)

    Ministers can exclude from gross income only the amount of a housing allowance actually used for out-of-pocket housing expenses, not the full fair rental value of their homes.

    Summary

    The case involved multiple ministers who received housing allowances from Lubbock Christian College, equating to the fair rental value of their homes but exceeding their actual housing costs. The court held that under Section 107(2) of the Internal Revenue Code, these ministers could only exclude the amount of the allowance used for actual housing expenses. The decision clarified that the exclusion under this section is limited to expenditures made in the same year the allowance is received, not the full fair rental value, thus resolving a key issue in tax treatment for ministers’ housing allowances.

    Facts

    The petitioners, ministers at Lubbock Christian College and also part of the Church of Christ, received housing allowances as part of their compensation. These allowances were designated by the college to equal the fair rental value of the ministers’ homes. However, the allowances exceeded the ministers’ actual out-of-pocket expenses for housing. The petitioners sought to exclude the entire fair rental value from their gross income under Section 107(2) of the Internal Revenue Code.

    Procedural History

    The petitioners challenged the Commissioner’s determination of tax deficiencies. The cases were consolidated for trial, briefs, and opinion in the U. S. Tax Court. The court’s decision was that the petitioners could exclude only the amount of the housing allowance used for actual housing expenses.

    Issue(s)

    1. Whether ministers can exclude the fair rental value of their homes from gross income under Section 107(2) when the designated housing allowance exceeds their actual out-of-pocket housing expenses.

    Holding

    1. No, because Section 107(2) limits the exclusion to the amount of the allowance actually used by the minister to rent or provide a home.

    Court’s Reasoning

    The court interpreted Section 107(2) to require a direct correlation between the amount received as a housing allowance and the amount used for housing expenses in the same tax year. The statute specifies that the exclusion applies “to the extent used by him to rent or provide a home,” indicating a use requirement. The court rejected the petitioners’ argument that excluding only out-of-pocket expenses discriminated against ministers without parsonages, noting that Congress deliberately chose different language for Section 107(2) compared to Section 107(1) (which deals with parsonages). The court emphasized that the legislative intent was clear in requiring actual expenditure for the exclusion to apply, and upheld the regulation’s requirement that the use of the allowance must be in the same year it is received.

    Practical Implications

    This decision sets a clear precedent that ministers can only exclude the portion of a housing allowance that directly corresponds to their actual housing costs. This impacts how ministers and their employers calculate taxable income, requiring accurate tracking of housing expenses. It also affects tax planning for religious organizations, as they must ensure housing allowances do not exceed actual costs to avoid unnecessary tax liabilities. Subsequent cases and IRS rulings have followed this interpretation, reinforcing the need for ministers to substantiate their housing expenditures when claiming exclusions under Section 107(2). This case also highlights the distinction between the treatment of housing allowances under Section 107(2) and the provision of parsonages under Section 107(1).