Letter Ruling Alert Rendering Unto Caesar by Lloyd II Mayel; - - PDF document

Rendering Unto Caesar by Lloyd II Mayel; Caplin & Drysdale

Introduction As any taxpayer can tell you, our nation's tax laws are not written in English, at least not any English they know. One of the stark- est examples of this fact is section 107 of the code, the parsonage exclusion from gross in-

• come. Section 107 provides: "In the case of

a minister of the gospel, gross income does not include- (1) the rental value of a home furnished to him as part ofhis compensation;

• r (2) the rental allowance paid to him as

part

• f his compensation, to the extent used by

him to rent or provide a home." It is not surprising to fmd terms such as "rental value" and "compensation" in the code; "minister of the gospel" is another matter. But before the reader imagines EO Division Director Marcus Owens donning ecclesiastical robes and a bishop's miter (and before zealous civillibertari- ans call their lawyers about the apparent establishment of the Christian faith in, of all places, the Internal Revenue Code ), be assured that "minister of the gospel" is another example

• f a tax "term of art" that is not defined in Webster's.I

However, as the religious nature of this term indicates, section 107 has required the government to carefully navigate the line between its proper role, as interpreter and enforcer of the code, and the role of religious bodies to define who is and who is not a minister. PLR 199910055 (December 10, 1998) shows the difficulty the IRS faces in walking this line, while at the same time providing helpful guidance regarding subordinate "ministers" serving in religious bodies. Facts denomination, an ordained deacon could perfonn weddings and funerals, could assist an elder in administering the sacraments, and could participate fully as a clergy dele- gate in the governance of the denomination. Certain qualifications were required for the position, including a recommendation from the appropriate Regional Conference of the denomination and an affinnative vote of the ministerial members of the Regional Con- ference! As part of the creation of this new order, the National Conference of the denomina- tion established transitional rules allowing "diaconal ministers," lay persons conse- crated by a bishop but not considered by the denomination to be members of the clergy, to become ordained deacons. In

• rder to take advantage of these rules, a diaconal minister

had to meet certain requirements, including having completed a minimum of three years in an approved service appointment, being in good standing with his or her Regional Conference, and satisfying certain educational requirements. The three employees at issue served as the Minister of Education, the Minister of Music, and the Minister of Stew- ardship for the church. Each employee had served as a dia- conal minister for at least three years and had been ordained pursuant to the transitional rules for becoming an ordained deacon. As ordained deacons, each employee helped plan the worship services, assisted with the sacraments, officiated at weddings and funerals, and preached at Sunday worship

• services. The ruling did not discuss whether they had per-

fonned any of these duties before being ordained. In addition to these common duties, each employee also had specific responsibilities as indicated by their titles. The Minister of Education was responsible for planning and su- pervising Christian education programs for youth and adults; the Minister of Music was responsible for coordinating all choir and music activities; and the Minister of Stewardship was responsible for perfonning financial and managerial functions as well encouraging members of the congregation to give of their time, talents and money to the church and the

• community. As part of the educational requirements for be-

coming ordained deacons, each employee had completed certain graduate theological courses; the Minister of Stew- ardship had also received a masters degree in theological studies. The church that requested the ruling is a member of a well established, worldwide Christian denomination. With more than 1,000 members, the church has a significant staff, num- bering over 50 employees. The ruling request focused on whether three particular employees were "ministers of the gospel" for purposes of section 107 and "duly ordained, commissioned, or licensed" ministers performing services "in the exercise of' their ministries for purposes of section 1402(c)(4) (relating to exemption from self-employmenttax) and 3121(b)(8)(A) (relating to exemption from Federal In- surance Contributions Act (FICA) tax). The denomination, after many years of deliberation, ap- proved a new order of "ordained deacons" (previously, only "elders" could be ordained). Unlike a lay member of the

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Letter Ruling Alert

The Exempt Organization Tax Review

May 1999-

• Vol. 24, No.2

sition that an individual is a minister ifhe performs the duties listed in Reg. section 1. 1402(c)-5(b)(2) and is recognized as a minister or religious leader by his denomination. In Hai- mowitz v. Commissioner, 73 T.C.M. (CCH) 1812 (1997), the court held that a synagogue administrator, who had been employed by his temple for 30 years and had been recognized as a "Fellow in Synagogue Administration" by the Synagogue Administrators Association, was not a minister because he did not perform most religious rites and ceremonies, because his "fellow" designation simply reflected secular and not religious duties, and because there was no evidence that he was considered a religious leader. Relying on these rulings and court decisions, the Service concluded that the three employees at issue were ministers

• f the gospel within the meaning of section 107

and ministers performing services in the exercise of their ministries for purposes of section 1402(c)(4) and 3121(b)(8)(A). The Ser- vice rested its conclusion on two findings. First, each of the employees conducted worship, assisted in the sacraments, and participated in the control, conduct, and maintenance of their denomination, thus satisfying the requirements of Reg. section 1402(c)-5(b)(2). Second, the denomination consid- ered each

• f the employees to be a religious leader who could

perform substantially all of the denomination's religious func- tions within the scope

• f the denomination's tenets andprac-
• tices. In the case
• f the Minister of Stewardship, the Service

distinguished the Haimowitz case by noting that unlike the synagogue administrator in that case, here the Minister of Stewardship was formally ordained and regularly performed

• r assisted

in religious rites and ceremonies. The Service also carefully limited this ruling in three ways. First, it stated that "the mere designation of an individual as a minister" is not sufficient to render a person a minister for purposes of sections 107, 1402(c)(4), and 3121(b)(8)(A). Second, it noted that Rev.

• Rul. 59-270, relating to unordained

ministers of education and music, was not in any way modi- fied or overruled. Third, it noted that it had rejected an initial submission by the church asking that the Service rule that all

• rdained

deacons were ministers

• f the gospel

because it needed to examine the facts relating to each individual deacon.~ Comment

• Reg. section 1.

1402(c)-5(a)(2) refers to a "duly ordained, commissioned, or licensed minister." Paragraph (b)(2) of the same regulation provides a list of duties similar to that pro- vided in the section 107 regulations: "the ministration of sacerdotal functions and the conduct of religious worship, and the control, conduct, and maintenance of religious or- ganizations (including the religious boards, societies, and

• ther integral agencies of such organizations), under the

authority of a religious body constituting a church or church denomination." What constitutes "religious worship" and "the ministration of sacerdotal functions" depends on the tenets and practices of the particular religious body at issue. Reg. section 1.1402(c)-5(b)(2)(i). Reg. section 31.3121(b)(8)-1(a) and (b) contains similar provisions. While section 107 does not contain the phrase "ordained, commissioned, or licensed," the Service has concluded that in order for an individual to be a minister for purposes of section 107 as well as under sections 1402(c)(4) and 3121(b)(8)(A), one of these terms must apply to that person. See

• Rev. Rul. 59-270, 1959-2 C.B. 44. Relying on Rev. Rul.

78-301, 1978-2 C.B. 103, the Service stated in the instant ruling that if a church or church denomination ordains some "ministers of the gospel" and licenses

• r commissions others,

the licensed or commissioned minister must perform substan- tially all the religious functions within the scope

• f the tenets

and practices of his religious denomination to be treated as a "minister" for section 107 purposes. The Service also noted that it had previously held that neither a minister of music nor a minister of education qualified as a "minister of the gospel," despite performing services related to the office and functions of a minister of the gospel, because neither minister had been licensed, ordained or commissioned. Rev. Rul. 59-270, 1959-2 C.B. 44. The Service also cited two court rulings. In Wingo v. Commissioner, 89 T.C. 922 (1987), the taxpayer tried, un- successfully, to claim that he had not been a minister during a particular period in order to avoid a Service claim that he had filed his exemption from self-employment tax under section 1402(e) late. The Service cited this case for the propo- May 1999-

• Vol. 24, No.2

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IRS Conclusions and Rationale

ardship had also received a masters degree in theological studies.

In detelmining whether these ordained deacons qualified as "ministers" under sections 107, 1402( c )( 4 ), and 3121(b)(8)(A), the Service applied the law as developed under section 107 and the related regulations under section

• 1402. Section 107 is silent as to the definition of a "minister
• f the gospel," but Reg. section 1.107-1(a)

provides generally that ministers of the gospel ordinarily perfolm duties such as "the perfolmance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the perfolmance of teaching and administrative duties at theo- logical seminaries." The section 107 regulations also state that further guidance about the duties ordinarily perfolmed by a minister of the gospel can be found in Reg. section 1. 1402(c)-5.

IRS Letter Rulings

This ruling provides helpful guidance regarding what is required for a mid-level "minister" to qualify as a minister for tax purposes. However, at the same time it indicates that the Service may want a significant amount of evidence before recognizing that such an individual is in fact a minister. Perhaps most importantly, the ruling goes into some detail regarding the lengthy process for creating the new order of "ordained deacon" and the list of qualifications required for the position. This discussion apparently reflects the Service's concern about "cheap ordination," as noted in its closing cautions about the scope of the ruling. While the Service cannot legitimately usurp the right of a religious body to determine who is and who is not a "minister," it also has the authority and responsibility to ensure that someone is truly a "minister" before allowing them to receive the significant tax benefits offered by sections 107, 1402(c)(4), and 3121(b)(8)(A). The Exempt Organization Tax Review

IRS Letter Rulings

Endnotes

I For example, religious leaders of faiths other than Christianity can be considered "ministers of the gospel" for section 107 purposes. See, e.g., Rev. Rul. 78-301,1978-2 C.B. 103 (Jewish Cantor); Rev.

• Rul. 58-221,1958-1 C.B. 53 (assistant to Jewish rabbi).

2While the ruling does not identify the denomination, the facts match those of the United Methodist Church, which created a new Order of Deacon in 1996.

The Exempt Organization Tax Review

The Service, at least in its published rulings, has usually imposed a narrower interpretation of the term "minister" than the interpretation adopted by the courts. For example, the Service has indicated that it looks not only to whether a person has been formally "ordained, commissioned, or li- censed" and to the duties the person performs, but also to the requirements for ordination and whether the minister has received any formal religious training. See, e.g., Rev. Rul. 58-221, 1958-1 C.B. 53 (noting that an assistant to a rabbi who qualified as a "minister" for purposes of section 107 had been required to complete postgraduate religious study). The courts have appeared to be slightly less strict, generally only requiring the performance of religious duties pursuant to the tenets of his or her religious body and recognition by that body or denomination that the person is a minister through some type of licensing, commissioning, or ordination. See, e.g., Wingo, 89 T.C. at 937. The courts also appear to recog- nize more readily that traditional models of "ordination" may not work in certain contexts. See, e.g., Silverman v. Commis- sioner, 57 T.C. 727, 731-32 (1972), aff'd; 73-2 U.S.T.C. section 9546 (8th Cir. 1973). An example of where the courts and the Service have disagreed can be found in the rulings and decisions relating to Jewish Cantors. The Service initially held that a Jewish Cantor was not a "minister of the gospel" within the meaning

• f section 107 because he had not been ordained by any

theological seminary, although he led worship at religious services and officiated as Cantor at weddings, funerals, and

• ther religious ceremonies. Rev. Rul. 61-213, 1961-2 C.B.
• 27. This position apparently was based on the theory that to

be "ordained, commissioned, or licensed" an individual must be formally ordained as fully qualified to exercise all of the ecclesiastical duties of a minister. See Rev. Rul. 65-124, 1965-1 C.B. 60. Taxpayers challenged this position in court and prevailed

• n the theory that a minister of the gospel did not need

to be formally ordained as long they were licensed or commis- sioned by some legitimate body to perform most, even if not all, of the religious duties of a minister. Silverman, 57 T.C. 727; Salkovv. Commissioner, 46 T.C. 190 (1966). The Service eventually accepted the Tax Court's rulings, concluding that a Jewish Cantor who had received music education at a Jewish theological seminary, had been certified by the appropriate Jewish organization, and performed substantially all of the religious duties of a "minister" of the Jewish faith qualified as a minister of the gospel under section 107. Rev. Rul. 78-301, 1978-2 C.B. 103, revoking Rev. Rul. 61-213, 1961-2 C.B. 27, and modifying Rev.

• Rul. 65-124, 1965-1

C.B. 60, and

• Rev. Rul. 66-90, 1966-1 C.B. 27. Consistent with the court

decisions, the Service reached this conclusion even though the Cantor only co-officiated with a rabbi during religious serv- ices and had been certified only by a Jewish Cantor organi- zation and not by some "higher ecclesiastical body." The Service's initial reaction to the question of whether Jewish Cantors qualified as ministers for tax purposes indi- cates that the Service may be hesitant to accept non-traditional forms of ordination, commissioning, or licensing. This con- clusion is reinforced by the fact that in the instant ruling, the May 1999-

• Vol. 24, No.2

...+' ...+' ....

Service carefully noted that the position of"ordained deacon" was a result of over 20 years of discussion and fonnal pro- ceedings at the highest levels of the denomination, that the denomination was itself"well established" and "worldwide " , and that each of the employees at issue had met significant qualifications for the position and had received fonnal relig- ious training. But non-traditional fonns of recognizing that an individual is called into ministry are common, and there- fore this hesitancy on the part of the Service could cause unnecessary problems for many individuals who are currently claiming the benefits of sections 107, 1402( c )( 4 ), and 3121(b)(8)(A). For example, there are many new "denominations" (al- though a better term might be "movements") within the Christian faith, particularly in the rapidly growing Pentecostal and charismatic segment

• f the church, which lack the fonnal

process that the Service appears to have valued so highly in this ruling. Ministers are often "ordained," "commissioned"

• r "licensed" by outside

bodies with much less stringent require- ments than existed here,

• r even

by that individual's own con- gregation, and the

• rdaining

body may itselflack the long history upon which the Service appears to place significant weight. However, these ministers are ordained to conduct or assist in all the religious duties nonnally associated with serving as a minister, are viewed as religious leaders by both their con- gregations and the ordaining bodies, and otherwise appear to satisfy the requirements of the relevant code sections. Therefore, a better approach would be, as the courts have generally done, to focus more on the duties perfonned by the purported minister and limit concerns about ordination, com- missioning, and licensing to whether a legitimate religious body of some type has formally recognized the individual involved as a minister. Such criteria should eliminate fraudu- lent situations, where the person involved is unlikely to ac- tually be perfonning significant and substantial religious du- ties or to be able to achieve recognition from a legitimate religious body, while not interfering in the ability of the religious faiths to select their own ministers and to acknow- ledge their roles as religious leaders pursuant to their own tenets and practices. While lengthy organizational histories and stringent requirements certainly indicate that an

• rdaining

body is legitimate, such characteristics should not be a man- datory requirement where other facts, such as the inde- pendence and qualifications of members of the ordaining body, can indicate legitimacy, especially within the context

• f religious traditions where ordination or other recognition

as a minister does not fit the traditional Christian mold. 333

This article first appeared inThe Exempt Organization Tax Review, May 1999, p. 331, published by Tax Analysts (www.tax.org), and has been reproduced here with permission.