The Internal Revenue Code has a long history of favorable tax treatment for “ministers of the gospel”. I do not prepare income tax returns for ministers or churches, but there is a good summary of the rules in a December 2005 article in the CPA Journal.
UPDATE: See Below
Here are some of the special privileges:
A church is able to provide their minister with a housing allowance – which is not subject to income tax – to pay for mortgage, property taxes, insurance, utilities, and upkeep of his home. However, the mortgage interest and property taxes that are normally deductible on his tax return can still be deducted even if they are included in the non-taxable housing allowance.
A minister is also treated differently for Social Security and Medicare. The full compensation, both their salary and the housing allowance, are treated as subject to self employment tax. This means that rather than the employer (the church) paying half and the employee (the minister) having half deducted from their check, the minister is liable for the full 15.3% (less deductible expenses).
A minister can, however, opt out of the social security system. If he asserts opposition to the acceptance of public insurance payments for retirement, disability, death, or medical care, then all compensation is excluded from self employment tax.
Confused yet? Then let me give you an example:
Suppose that a church compensated its minister a salary of 23,000 plus a housing allowance of 33,000. Now suppose that at least $20,000 of the allowance went for mortgage interest and property taxes (or even less if he had a wife or kids). Since the housing allowance is not subject to income tax and since the itemized deductions (and exemptions) offset the salary, the minister would pay no income tax.
The minister would also have the option of paying no Social Security or Medicare and thus would pay nothing in taxes.
To compare this tax-free $56,000 to compensation for, say, an administrator of a secular counseling referral service, a comparable salary would be about $72,000.
Obviously there is a huge advantage for both the minister and the church. So there is a great incentive for a church to pay its employees as “ministers of the gospel”, especially when seeking to maximize the impact of your limited funds.
Therefore the IRS has a fairly rigid definition of “minister”. Simply being religious or “in ministry” or even being an employee of a legitimate church is not enough. The Tax Court in 1987 set down a list of five attributes of a minister:
* Performing sacerdotal functions;
* Conducting worship services;
* Controlling or maintaining the organization;
* Considered a spiritual leader; and
* Ordained, licensed, or commissioned.
While these are not tick-box definitions, they do lay out a pretty good understanding of what the IRS recognizes as a minister. The IRS is not amused by those who seek to avoid taxes by falsely claiming to be a minister.
There can be legitimate debate as to whether the tax code should be as it is. It is true that most ministers perform a great deal of good to their parishioners and to their community at large. It is also true that most ministers operate from very limited resources and often put the care for the poor and needy as a far higher priority than their own personal comforts. But others can point out the separation of church and state is a principal that is incompatible with preferential tax treatment based on religion.
The objective of this thread is not to debate whether the tax code should be changed, but to instead discuss whether the lead ex-gay ministry is in compliance with the law:
Is Exodus International complying with the Tax Code?
Exodus’ 2004 tax return clearly indicates that Alan Chambers receives a “minister housing allowance under Section 107 of the Internal Revenue Code”. But does Exodus behave in a manner that could be considered a church or could need a minister? Exodus lists four programs which they perform:
* The annual conference to train ministers
* Various educational programs and publications
* Referral and counseling
* Grants to other organizations
None of these activities appear to be similar to the traditional functions performed by a church. None of these appear to be eligible for the preferential tax treatment as intended by the Internal Revenue Code.
But even supposing that Exodus could convince the IRS that it is a church, would Alan qualify as a “minister of the gospel”? Alan does not appear to regularly conduct church services or have a congregation. He does not regularly perform sacraments nor would he be considered to be the spiritual leader of any church body.
The CPA Journal suggests that Alan would not qualify:
Ministers claiming a housing allowance have the burden of proving that their duties exemplify those of a minister in their faith. Those with extensive counseling or administrative responsibilities would not qualify as ministers under the Tax Court’s ruling in Haimowitz. … Thus, administrators and counselors would typically fail to meet at least three of the five factors specified in Wingo. These employees would not qualify as ministers under IRC section 107 without a preponderance of other duties that exemplify those of a minister.
Perhaps a tax attorney with a strong familiarity with the provisions relating to ministers can clarify why Exodus could treat Alan as a minister for tax purposes. But it appears to me personally that Exodus may be in violation of the Internal Revenue Code.
Another “minister” has discovered that the IRS is not amused by tax fraud. Kent Hovind operated a theme park called Dinosaur Adventure Land in Florida where he championed creationism and disputed evolution by offering “proof” that dinosaurs and people lived together. Hovind also did not pay employee taxes.
Kent Hovind is accused of failing to pay $473,818 in federal income, Social Security and Medicare taxes for employees of his Creation Science Ministry between March 31, 2001, and Jan. 31, 2004.
The ministry includes Dinosaur Adventure Land, a museum and a science center.
The indictment alleges Hovind paid his employees in cash and called them “missionaries” to avoid paying payroll and FICA taxes.
Hovind’s responses suggest a less than penitent or truthful attitiude
When asked where he lived, Kent Hovind replied, “I live in the church of Jesus Christ, which is located all over the world. I have no residence.”
He called his home on Cummings Road, which backs Dinosaur Adventure Land, a “church parish.”