In Droscoll v. Commissioner, 135 T.C. No. 27 (12/14/2011), the issue before the Tax Court was whether the Petitioner, an ordained minister, properly excluded from gross income the parsonage allowance paid to him by his church exempt from tax under Section 501 (a) for a home in Cleveland owed by him as well as for a second home located in a lake summer home area (Lake Home) also owned by him. The years at issue were 1996 through 1999. All of the facts in the case were stipulated, in other words agreed upon before trial. The stipulation included a statement that “each of these properties was used solely as a personal residence and not for any commercial purposes. None of the properties was rented.” Stipulated also was that the parsonage allowance paid was used, “for the acquisition and maintenance of each home, including mortgage payments, utilities, furnishings, improvements and maintenance such as lawn care, painting and repairs.” IRS did not assert in its Deficiency Notice that part of the parsonage allowance excluded was used for non-excludable expenses such as food and servants considered to be not directly related to providing the home under Reg. Sec. 1.107-1 (c).
Thus, only the legal issues were argued and briefed. In its Deficiency Notice IRS included in income the full parsonage allowance paid for maintaining the Lake Home but did not include any of the parsonage allowance related to Petitioner’sCleveland home. In its Deficiency Notice IRS did not allocate the parsonage allowance, as a concurring opinion suggests it might have, based on the number of days each home was actually used as a residence. Neither did IRS assert in its Deficiency Notice that the total compensation paid the Petitioner was unreasonably high in relation to the ministry services performed. Thus, those issues, which might have been raised by IRS, were not considered by the court.
IRS, despite its stipulation to the contrary, argued on brief that the Lake Home was not “a home” as described in Section 107(2) because the phrase “a home” should be interpreted to refer to a single home.. It seems to this writer that IRS tried to shift gears after flubbing the Deficiency Notice and stipulation process.
The court reviewed the history of Section 107, which in its present form (amendments following the years under consideration in this case were not germane to the court’s decision) provides:
Section 107 RENTAL VALUE OF PARSONAGE
In the case of a minister of the gospel, gross income does ot 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.” (emphasis added).
The majority court found nothing in the obscure legislative history to indicate that a home was meant by congress to be interpreted in the singular. The court states: “Respondent (IRS) acknowledges that petitioner’s second residence in Lake Ocoee is a home of petitioners, albeit a second home.”
Based on the stipulated facts and lack of clear legislative history to the contrary, the court majority in a slim 7-6 decision held that the parsonage allowance for the Lake Home was excludable from the minister’s gross income.
The case has come to the attention of congress hungry to close tax loopholes that are unfair and enlarge the deficit. Republican Senator Charles Grassley of Iowa, member of the Senate Finance Committee, was quoted in a recent Wall Street Journal article, “It’s fair to question why a clergy member needs a tax-free allowance for more than one home, and whether tax-exempt churches should subsidize millionaire ministries.” The exclusion was included in the tax law before the advent of huge TV ministries, when the wage of ministers was very low. Thus, the exclusion may be ripe for amendment to limit perceived abuse.
The WSJ article notes that Driscoll, a former musician, was also criminally charged with diverting other ministry funds during the same years 1996 thru 1999 for personal expenses such as luxury cars and other personal items. He was convicted in 2006 of conspiracy and tax evasion and sentenced to a year in prison plus $25,000 in court costs. He was also reported by the WSJ to have paid $426,398 in additional tax and penalties. Charges in the criminal case relating to the parsonage allowance were reportedly dismissed by the judge who agreed with Driscoll that the law regarding the parsonage exclusion was vague and that the exclusion could apply to more than one home. That is why the issue wound up in the Tax Court where the burden of proof regarding the tax deficiency is initially on the taxpayer as opposed to the criminal trial in which the government carried a burden of proof beyond a reasonable doubt. In contention before the Tax Court was a tax deficiency of $405,859 and civil fraud penalty of $304,393. Thus, Driscoll’s victory in Tax Court on the parsonage allowance was significant in terms of the dollars saved in taxes and penalties.
This case illustrates how important is the stipulation process in Tax Court; and, should give pause to CPAs who engage in stipulation negotiations while representing pro se taxpayers at appeals and unknowingly damage a case that does not settle and must go to trial. In Driscoll, however, it was IRS lawyers who were careless with stipulations.
© 2011 by Robert S. Steinberg, Esquire
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