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Failure to File Correct IRS Form Subjects Minister's Income to Self-Employment Tax.
(Parker's Federal Tax Bulletin: August 23, 2013)
A minister who took a vow of poverty was liable for self-employment tax on payments made on his behalf by his church because he failed to timely file an exemption certificate or designate the payments as a parsonage allowance. Rogers v. Comm'r, T.C. Memo. 2013-177 (8/1/13).
Donald Rogers was a pastor for the Pentecostals of Wisconsin (PoW). PoW was registered as a nonstock corporation, and Donald was its registered agent. Donald signed a vow of poverty, which stated that any donation/honorarium or endowment given to Donald personally would be considered the property of PoW and, in turn, PoW would provide for Donald's needs. In 2007, in return for his ministerial services, PoW paid Donald's personal credit card bills, utility bills, and home mortgage payments for a total of $43,200. Donald and his wife, Vyon, timely filed their joint 2007 federal income tax return. They reported wage income and itemized deductions for home mortgage interest and charitable contributions. They did not report any income from amounts paid by PoW on their behalf or file a certificate of exemption from self-employment tax. The IRS issued a notice of deficiency based on the couple's failure to report taxable income from amounts paid by PoW on their behalf and assessed an accuracy-related penalty.
Code Sec. 61 defines gross income as all income from whatever source derived, including compensation for services. Under Code Sec. 107, gross income does not include, in the case of a minister of the gospel, the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.
A duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry is engaged in carrying on a trade or business and is subject to self-employment tax unless the minister timely files Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners.
OBSERVATION: Form 4361 must filed by the due date of the individual's return (including extensions) for the second year in which the individual has received at least $400 of net earnings from self-employment, any of which was ministerial income.
Donald argued that, while members of religious orders who have taken a vow of poverty are subject to tax on income received in their individual capacities, they are not subject to tax on income received merely as agents of the orders of which they are members.
The Tax Court held that the payments made by the church on Donald's and Vyon's behalf constituted income to the couple. Because Donald and Vyon failed to timely file an exemption certificate, they were liable for self-employment tax on the payments. Since the home mortgage payments made by the church on Donald's behalf were not designated as a parsonage allowance, the couple was not entitled to exclude the mortgage payments under Code Sec. 107. In rejecting Donald's argument that he received the payments as an agent of the church, the court noted that Donald did not receive a salary from a third party or remit any income to the church by assignment. The mortgage payments made by PoW applied to a house owned solely by the couple, and the personal credit card and utility payments served only to benefit the couple in meeting their basic living expenses.
The court found that Donald and Vyon would be liable for an accuracy-related penalty after final computations of the deficiency if the total understatement of income exceeded $5,000. The couple's mistake of law that the church's corporate sole structure and vow of poverty would exempt them from tax was insufficient to show that they acted reasonably and in good faith in failing to report the income. Additionally, they could not show that they reasonably relied on the advice from a tax professional. The court noted that the couple was not negligent and, if the understatement was less than $5,000, they would not be subject to the penalty.
For a discussion of the taxation of minister income, see Parker Tax ΒΆ15,520.
Parker Tax Publishing Staff Writers
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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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