One of the largest tax benefits available to "ministers of the gospel" (priests, rabbis, ministers, pastors, etc.) is the parsonage exclusion. This provision allows these individuals to receive the value of lodging or a cash allowance used to provide lodging on an income tax-free basis.
But, "Can a minister exclude the value of two parsonages from his/her income?" This question has been discussed among the religious community for a while now, but only recently has an official answer been decided. The answer: "No, he/she can't."
Code Sec. 107 states, "In the case of a minister of the gospel, gross income does not include the rental value of a home furnished to him as part of his compensation; or 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."
The question about two homes first arose when the IRS disallowed an ordained minister's exclusion of a parsonage allowance from his income because the parsonage allowance was for both his primary residence and a lake home. The IRS argued that the exclusion from income under Code Sec. 107 only applies to one home and not multiple homes. The minister argued that the only qualification in the Code was that the home be used as a residence by the minister and that this was true of both of his homes. He argued that the Code would have used the term "principle residence" or the word "single" instead of "a" when describing home if the intention was for it to only apply to one home.
The case Commissioner vs. Driscoll was first argued before the Tax Court. The Tax Court ruled in favor of the minister in a split decision. It stated that the IRS had no basis for its position that "a home" meant "a single home" or "one home." It referenced Code Sec. 7701 and a cross-reference to the Dictionary Act, arguing that "words importing the singular include and apply to several persons, parties, or other things." Therefore, the Tax Court said that the IRS couldn't limit "a home" to only one home, as long as the other qualifications for the parsonage exclusion were met.
However, the IRS appealed the case to the Eleventh Circuit Court and it reversed the Tax Court's decision. The Eleventh Circuit Court ruled that the Tax Court improperly applied Code Sec. 7701 and the Dictionary Act, arguing that they misinterpreted the intent and history of Code Sec. 107 and the exclusion. The Eleventh Circuit Court ruled in favor of the IRS, stating that Code Sec. 107 was intended to and only applies to one home.
The Supreme Court declined to review the case on October 1, 2012, leaving the Eleventh Circuit Court's ruling unchanged. Therefore, the precedent is set that the exclusion of the parsonage allowance from gross income set forth in Code Sec. 170 only applies to one residence and not multiple homes.
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