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By David I. Kempler, Esq., and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
In Comr. v. Driscoll, No. 11-12454 (11th Cir. 2/8/12), the Eleventh Circuit held that the exclusion from gross income for a parsonage rental allowance is only available for the expenses attributable to a single residence. This ruling reversed the Tax Court's decision in Driscoll v. Comr., 135 T.C. 557 (2010). Any clergy member who applied a housing allowance to more than one home in reliance on the Tax Court's decision should consult with a tax professional.
Section 61(a) defines gross income as "all income from whatever source derived." This broad provision is subject to certain statutory exceptions, including the "parsonage allowance" contained in §107. For the tax years in question, §107(2) provided that for "a minister of the gospel, gross income does not include … the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home."
During each of the years 1996 through 1999, Taxpayers owned a principal residence and a second residence on a nearby lake. Husband was an ordained minister employed by a ministry that was an organization described in §501(c)(3) and exempt from tax under §501(a). For each of the years at issue, the ministry filed Forms 990, Return of Organization Exempt From Income Tax, in which it claimed an amount described as "parsonage allowance" representing the total amount that the ministry paid during each of those years with respect to Taxpayers' two residences, including mortgage payments, utilities, furnishings, improvements and maintenance, such as lawn care, painting and repairs. On the Forms 1040, U.S. Individual Income Tax Return, filed by Taxpayers for each of the years 1996 through 1999, Taxpayers did not include the parsonage allowance in gross income.
The IRS issued a timely notice of deficiency claiming that Taxpayers were not entitled to exclude from gross income under §107(2) the portion of the parsonage allowance that the ministry paid during each of those years with respect to Taxpayers' lake house. Taxpayers then petitioned the Tax Court for redetermination of the deficiency. A divided Tax Court held that Taxpayers were entitled to exclude from their income the parsonage allowance allocated to their second house under §107(2). The IRS then appealed the Tax Court ruling to the Eleventh Circuit.
In reaching its conclusion, the Tax Court majority opinion relied on the fact that the §7701(p)(1)(1) cross-references the Dictionary Act, 1 USC §1, for the proposition that singular terms in the Code also include their plural forms. However, the Eleventh Circuit noted that §7806(a) also states that any cross references "are made only for convenience, and shall be given no legal effect." Moreover, as the U.S. Supreme Court has explained in U.S. v. Hayes, 555 U.S. 415, 422 n. 5, (2009), by its own terms the Dictionary Act does not apply if "the context indicates otherwise." Therefore, the Eleventh Circuit reasoned that the Dictionary Act's singular-to-plural provision should only apply if the context of §107(2) reasonably supported such an application.
The parsonage allowance income exclusion was first enacted in the Revenue Act of 1921, P.L. 67-98, §213(b)(11), 42 Stat. 227, 239 (1921). The exclusion, as originally enacted, applied only to "a dwelling house" provided in kind, and did not exempt cash allowances that a minister received for housing expenses. In the Internal Revenue Code of 1954, Congress reenacted the parsonage allowance income exclusion as §107. In so doing, Congress changed "a dwelling house" to "a home" and added the rental allowance provision of §107(2), which granted ministers an income exclusion for cash allowances to rent or provide a home.
Taxpayers argued that if Congress had intended to limit the income exclusion under §107(2) to one's principal place of residence, it could have added language to that effect. For example, §121 excludes from gross income gains relating to a taxpayer's "principal residence." However, the Eleventh Circuit concluded that the references to "principal residence" in these other provisions did not require the conclusion that "home" in §107 to imply a plural meaning.
Taxpayers also argued that "a home" under §107(2) does not necessarily mean "one home," but rather that "a" was used as an indefinite article to mean "no particular home." However, the Eleventh Circuit concluded that, while "a" may indeed mean "no particular home," "a" maintains a singular connotation, especially when the context indicates a singular meaning. The Eleventh Circuit also noted that the terms "a" and "home" as defined in the dictionary had singular connotations. The Eleventh Circuit further noted that there was a consistent use of the singular in the legislative history regarding the enactment of §107, and concluded that this demonstrated that Congress intended for the parsonage allowance exclusion to apply to only one home.
Finally, the Eleventh Circuit noted that the Supreme Court stated in Comr. v. Schleier, 515 U.S. 323, 328 (1995), that income exclusions should be "narrowly construed." In light of that directive, the Eleventh Circuit concluded that any ambiguity in §107(2) should not be construed to favor a more expansive reading of the parsonage allowance income exclusion. Therefore, the Eleventh Circuit held that the reference to "a home" in §107(2) was to a singular home, and the exclusion from gross income for a parsonage rental allowance is only available for the expenses attributable to a single residence.
Parsonage allowances long have been used to help offset expenses associated with the housing a member of the clergy while actively ministering to a community. While the Eleventh Circuit's decision does not affect allowances for one home, it negates the ability to apply an allowance toward more than one. This may affect a number of clergy members who have moved to serve a specific community and could not sell their homes after the economic downturn, chose to maintain a second residence to use for after their retirement or whose ministry requires being based in more than one location. Because of the far reaching effects of this decision, Driscoll's attorney has announced that that the Driscolls plan to petition for an en banc rehearing of the Eleventh Circuit by March 23, 2012.
For more information, in the Tax Management Portfolios, see Crimm, 484 T.M., Tax Issues of Religious Organizations, and in Tax Practice Series, see ¶1110, Compensation in General.
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