Tax court ruling

Tax Court rules minister may exclude parsonage allowance for two homes.
Driscoll, (2010) 135 TC No. 27

Deciding an issue of first impression, a divided Tax Court has ruled that a minister may exclude under Code Sec. 107 the parsonage allowance he received for a second residence as well as his principal residence. The Court said both fell within the definition of “a home” for purposes of the exclusion.

Background. For the years at issue in the case (‘96 through ‘99) Code Sec. 107 provided that the gross income of a minister of the gospel doesn’t 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.

Facts. Philip A. Driscoll was an ordained minister who worked for Mighty Horn Ministries, Inc., later known as Phil Driscoll Ministries, Inc. Mr. Driscoll’s employer was a Code Sec. 501(c)(3) organization exempt from tax under Code Sec. 501(a).

From ‘96 through ‘99, Driscoll and his wife owned a principal residence as well as a lakeside home. Both properties were used a residence by the Driscolls (i.e., neither was ever used for commercial purposes, such as rentals). Driscoll’s employer paid him a parsonage allowance for both of his residences, and the Driscolls excluded the allowance from their income.

IRS said the Driscolls could not exclude under Code Sec. 107 the portion of the parsonage allowance that they received for their lakeside home. It argued that because the Code and Reg. § 1.107-1 refer to “a home” (rather than “homes”), the parsonage exclusion is limited to a single home only.

The Driscolls argued that the only limitation in Code Sec. 107 is that a property be used as a residence by a minister, a condition that Mr. Driscoll met for both properties. As a result, they concluded that the parsonage allowance for both homes should be excluded.

Taxpayer victory. Siding with the Driscolls, a divided Tax Court concluded that what IRS sought to do was substitute the phrase “a single home” or “one home” for the phrase “a home” that appears in the Code and other authorities on which IRS relied. The Tax Court found no basis for IRS’s position. To the contrary, it pointed out that pre-amended Code Sec. 7701(m)

(1) (i.e., current Code Sec. 7701(p)(1)—which provides that “words importing the singular include and apply to several persons, parties, or other things”- rejects respondent’s position that the phrase “a home” in Code Sec. 107 means a “single home” or “one home.” The Tax Court concluded that, as pertinent to the case, Code Sec. 107 required only that amounts paid as part of a minister’s compensation be used to rent or provide a home, i.e., a dwelling house of the minister, in order to be excluded from the minister’s gross income.

Four Tax Court judges concurred with the majority opinion and one concurred in the result only. Two other judges agreed with a concurring opinion. Five judges agreed with a dissenting opinion that would have held for IRS, mainly on the ground that exclusions from income are to be narrowly construed and that in common usage a person has one “home,” a word that has a connotation of singularity.

RIA observation: For tax years beginning after 2001, Code Sec. 107(2) provides that the gross income of a minister of the gospel doesn’t include 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. It remains to be seen whether a court considering the same issue for a post-2001 year would conclude that use of “the home” in Code Sec. 107(2) meant that the parsonage applied to one home only.