Warren v. Comm'r of Internal Revenue, No. 14924–98.
| Decision Date | 16 May 2000 |
| Docket Number | No. 14924–98. |
| Citation | 114 T.C. No. 23,114 T.C. 343 |
| Parties | Richard D. WARREN and Elizabeth K. Warren, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayers, a minister and his wife, petitioned for redetermination of deficiencies arising from limitations on exclusion of housing allowance designated by church. The Tax Court, Colvin, J., held that exclusion for housing allowance for minister of the gospel was limited to amount used to provide home, and not fair market rental value of home.
Decision for taxpayers.
Appeal dismissed, 302 F.3d 1012.
Arthur A. Oshiro, for petitioners.
T. Ian Russell, for respondent.
P is a minister of the gospel within the meaning of sec. 107, I.R.C. The church which employed him designated most or all of his compensation as a housing allowance during each of the taxable years in issue. Ps used the allowance to provide a home for themselves and their children.
The amount they used to provide a home, and exclude from income under sec. 107(2), I.R.C., was more than the fair market rental value of their home. R contends that Ps' exclusion under sec. 107(2), I.R.C., may not exceed the lesser of the amount Ps used to provide a home or the fair market rental value of their home.
Held: The exclusion under sec. 107(2), I.R.C., is limited to the amount used to provide a home, not the fair market rental value of the home.
Respondent determined the following deficiencies and accuracy-related penalties with respect to petitioners' Federal income taxes for taxable years 1993, 1994, and 1995:
+------------------------------------+
¦Year¦Deficiency¦Sec. 6662(a) Penalty¦
+----+----------+--------------------¦
¦1993¦$11,932 ¦$2,386 ¦
+----+----------+--------------------¦
¦1994¦18,061 ¦3,612 ¦
+----+----------+--------------------¦
¦1995¦16,080 ¦3,216 ¦
+------------------------------------+
Petitioner is a minister of the gospel within the meaning of section 107. After concessions, the sole issue for decision is whether the amount of petitioner's housing allowance compensation that is excludable from gross income under section 107(2) is limited to the amount used to provide a home, as petitioners contend, or to the lesser of that amount or the fair market rental value of the home, as respondent contends. We hold that it is limited to the amount used to provide a home.
Unless otherwise indicated, section references are to sections of the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. References to petitioner are to Richard D. Warren.
This case was submitted fully stipulated under Rule 122.
Petitioners are married and resided in Trabuco Canyon, California, when they filed their petition in this case. Petitioner is a minister with a bachelor of arts degree from California Baptist College, a master of divinity degree from Southwestern Theological Seminary, and a doctor of ministry degree from Fuller Theological Seminary.
In December 1992, petitioners bought a residence for $360,000. The annual fair market rental value of petitioners' residence was $58,061 in 1993, $58,004 in 1994, and $59,479 in 1995.
In 1980, petitioner founded the Saddleback Valley Community Church (the church) in his home. Over the years the church used many different facilities to house the congregation. The congregation had grown to more than 18,000 individuals by 1992, and it continued to grow thereafter.
During the years in issue, petitioner served as a duly ordained Baptist minister of the church. He also authored books entitled The Purpose Driven Church, The Power to Change Your Life, and Answers to Life's Difficult Questions, and he owned and operated a tape and book ministry called The Encouraging Word.
Each year, before the fiscal year began, the church's trustees met to designate the amount of compensation to be paid to each of its ministers. The trustees also allocated these amounts between salary and housing allowances. In 1992, the church adopted a fiscal year ending May 31. For the short year from January 1 to May 31, 1993, petitioner received $42,496, all of which the trustees of the church designated as a housing allowance. For the fiscal year ending May 31, 1994, the trustees approved compensation of $85,000 for petitioner and designated the full amount as a housing allowance. For the fiscal year ending May 31, 1995, the trustees approved compensation of $100,000, all of which they designated as a housing allowance. For the fiscal year ending May 31, 1996, the trustees approved compensation of $100,000 and allocated $20,000 for salary and $80,000 for a housing allowance.
Petitioner received the following amounts from the church as compensation for the calendar years in issue: $77,663 for 1993, $86,175 for 1994, and $99,653 for 1995. Petitioners used $77,663 in 1993, $76,309 in 1994, and $84,278 in 1995 to provide a home for themselves and their children by paying expenses for mortgage, utilities, furnishings, landscaping, repairs, and maintenance and real property taxes and homeowner's insurance premiums.1 Based on these expenditures, petitioners excluded from income on their 1993 return all of petitioner's compensation from the church and reported as income $9,866 in 1994 and $19,654 in 1995.
The amounts remaining in dispute are the differences between the rental values of petitioners' home and the amounts petitioners excluded from their returns. The following table summarizes relevant financial information:
+-----------------------------------------------------------------------------+
¦ ¦ ¦ ¦Amount ¦Rental ¦Amount in dispute (i.e.,¦
¦Taxable¦Compensation¦Housing ¦excluded ¦value ¦amount excluded less ¦
¦year ¦received ¦expenditures¦from ¦of home¦rental value of home) ¦
¦ ¦ ¦ ¦income ¦ ¦ ¦
+-------+------------+------------+----------+-------+------------------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+------------+------------+----------+-------+------------------------¦
¦1993 ¦$77,663 ¦$77,663 ¦$77,663 ¦$58,061¦$19,602 ¦
+-------+------------+------------+----------+-------+------------------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+------------+------------+----------+-------+------------------------¦
¦1994 ¦86,175 ¦76,309 ¦76,309 ¦58,004 ¦18,305 ¦
+-------+------------+------------+----------+-------+------------------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------+------------+------------+----------+-------+------------------------¦
¦1995 ¦99,653 ¦84,278 ¦79,999 ¦59,479 ¦20,520 ¦
+-----------------------------------------------------------------------------+
Petitioners reported that petitioner had net Schedule C, Profit and Loss From Business, income from his tape and book ministry of $183,635 in 1993, $217,770 in 1994, and $221,401 in 1995, and total income (not including the housing allowance paid by the church to the extent excluded by petitioners from their gross income) of $187,652 for 1993, $219,919 for 1994, and $241,238 for 1995. 2
Respondent contends that the exclusion under section 107(2) may not exceed the lesser of the amount used to provide a home or the fair market rental value of the home. Respondent contends that permitting a greater exclusion in the reporting of compensation would be contrary to the “rental” language in the statute and also contrary to the concern for equality among ministers stated in the legislative history accompanying enactment of section 107(2) in 1954. We disagree for reasons stated next.
Compensation for services is generally included in gross income for purposes of calculating Federal income taxes. See sec. 61(a)(1). However, section 107 provides the following exception:
SEC. 107. RENTAL VALUE OF PARSONAGES.
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 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.
Contrary to respondent's position, neither section 107(2), the regulations promulgated thereunder, nor the related legislative history, limits the amount that may be excluded from income as a parsonage allowance under section 107(2) to the fair market rental value of the residence occupied. A rental allowance excludable under section 107(2) may be used (1) to rent a home, (2) to purchase a home, and (3) to pay expenses directly related to providing a home. See sec. 1.107–1(c), Income Tax Regs. Section 107(1) limits the exclusion to the rental value of a home furnished as part of a minister's compensation. In contrast, no fair rental value limit is stated in section 107(2) or the regulations issued thereunder.
We have previously held that, under section 107(2), the fair rental value of a minister's home is not excludable to the extent that it exceeds the amount the minister uses to provide housing. See Reed v. Commissioner, 82 T.C. 208, 214, 1984 WL 15533 (1984). In Reed, we were not required, and thus declined, to decide the issue here; i.e., whether the exclusion under section 107(2) is limited to the lesser of fair rental value or the amount used for housing. See id . We said:
The trouble with petitioners' analysis is that the Congress, faced with the “rental value” language...
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