Application of the Minister's Housing Allowance to Minister Employees of Religious Organizations

John R. Wylie, Esq., Steve L. Gaines, Esq., and Stuart J. Lark, Esq.

I. Introduction

The Internal Revenue Code ("IRC") allows ministers in certain circumstances to exclude from their taxable income an amount attributable to housing costs. This provision, often called the Minister's Housing Allowance ("MHA"), offers ministers significant tax savings. For example, taking into consideration the fair rental value of a furnished house together with utilities and other costs, the MHA may eliminate as much as $15,000 or more from minister's taxable income. To obtain this benefit, the MHA requires employers to designate a portion of a minister's salary as a housing allowance. However, employers are generally willing to make this designation for qualifying ministers because the tax savings accrue to the qualified ministers without any cost to the organizations.

Although Congress probably created the MHA originally to accommodate ministers living in parsonages adjacent to the churches they serve, the statutory wording does not so limit the benefit. In fact, ministers employed in a wide variety of positions, both within and outside of traditional church organizational structures, have successfully taken advantage of the MHA. However, regulations issued by the Treasury Department, as applied in various cases, clearly indicate that individuals are not eligible for the MHA based solely on the fact that they have some claim to the status of "minister," regardless of the nature of their employment.

As with many IRC provisions, qualification for the MHA is often based on a balancing of many factors and cannot be identified with precision. However, the circumstances surrounding the employment of ministers by a Christian ministry organization ("Ministry") often place the issue of MHA qualification in the gray area of uncertain qualification. Unfortunately, in some situations where it would seem like a minister should qualify, the particular facts do not, in fact, satisfy the requirements. There are other situations, though, which may appear unlikely to qualify but which do satisfy the requirements. Therefore, both the minister employees and the employing Ministries need to consider carefully, with assistance by experienced legal counsel, their particular circumstances to determine whether the MHA benefits may apply.

This memorandum discusses the various factors considered by the Internal Revenue Service ("IRS") and the courts in determining whether particular circumstances of employment satisfy the threshold requirements for the MHA. These factors include both the basis for the individual's designation as a "minister" and the nature of the individual's employment. The discussion analyses the weight of these various factors and the particular combinations of factors that are likely to satisfy the MHA requirements. The analysis indicates that ministers employed by a Ministry may qualify for the MHA based on any of several possible relationships between the institution and a body recognized as a church or church denomination. Further, ministers who are assigned to work at a Ministry by the church that granted them ministerial status may also qualify for the MHA. Finally, some ministers may qualify based on the particular duties associated with their employment at the Ministry.

II. Executive Summary (Overview of the MHA Threshold Requirements)

The MHA is stated in section 107 of the IRC, which provides:

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.

As specified in the associated Treasury Regulations ("Regulations"), an individual seeking to qualify for the MHA must have a bona fide status as a "minister" and must perform services which are ordinarily the duties of a minister. Neither the IRS nor the courts have given much attention to the bona fides of the status of "minister." In general, an individual claiming the status of "minister" should base that claim on the fact that he or she has been ordained, commissioned, or licensed by a credible church or denomination. If that is not possible, the individual may be able to demonstrate that he or she conducts religious activities associated with the activities of a minister within his or her particular church or religious organization and is considered to be a spiritual leader within such organization, although the IRS will probably challenge any claim not supported by an official designation.

In contrast to the status of "minister," both the IRS and the courts have given significant attention to the services which are ordinarily the duties of a minister. Services qualifying for the MHA can be grouped into four categories:

1. Typical ministry services (e.g., conduct of religious worship, performance of sacerdotal functions, etc.). Sacerdotal functions include the administration of sacraments and have been broadly defined to include any activity the main thrust of which is to fulfill a basic tenet of a religious faith. A minister whose employment involves the conduct of a significant amount of these services will qualify for the MHA, regardless of whether or not the minister is employed by a church or religious organization. Within many Christian organizations ministers employed to serve as chaplains or pastors for the institution may qualify for the MHA under this category. However, if the employment consists primarily of counseling, the minister may not qualify (unless the counseling occurs in traditional ministry settings such as hospitals or prisons).
   
   
2. Executive, managerial, and administrative services for a church, or for a religious organization under the authority of a church (as used in this memorandum, the term "church" includes church denominations). These services may not be inherently religious in nature but nevertheless are deemed to serve the purposes of a church based on the relationship between the religious organization and the church. A qualifying relationship may take many forms but must reflect some element of authority for the church over the religious organization. In the case of a Ministry, the requisite authority may be reflected (i) in a corporate provision giving the church the power to appoint and/or remove a majority of the directors of the Ministry, or (ii) in a requirement that a majority of the directors be members of the church. The requisite authority may also be present where the institution relies on the church for a substantial portion of its income and is required to submit financial reports to the church. Those issues are discussed further below.
   
   Where a qualifying relationship exists between a Ministry and a church, ministers employed by the Ministry in teaching and administration positions may qualify for the MHA.
   
   
3. Services performed on assignment or designation from the ordaining church. Any services performed by a minister pursuant to a bona fide assignment from the minister's ordaining church organization in theory qualify for the MHA, regardless of the nature of the services or the kind of organization for whom the services are provided.
   
   
4. Teaching and administrative services provided for a theological seminary. Employment with a Ministry that is a theological seminary qualifies for the MHA regardless of the nature of the employment or the relationship between the Ministry and a church body.

It is important to recognize that these are alternative qualifying services, any one of which will qualify. Certain minister employees of a Ministry may qualify for the MHA by performing typical ministry services as part of their employment. For other minister employees, a Ministry may wish to consider carefully, with the advice of legal counsel, whether it may satisfy the requisite requirements (discussed above and in more detail below) for a qualifying relationship between the Ministry and a church. If it appears that the necessary relationship criteria exist, then most, if not all, of the ministers employed by the Ministry would probably qualify for the MHA. As an alternative, the Ministry may consider encouraging ministers on its staff to obtain letters of assignment from the church organizations that have granted them ministerial status. However, with this approach the Ministry should be careful to ensure that both the designations as "minister" and the letters of assignment reflect bona fide religious purposes and are not merely obtained for tax purposes. Under either the church relationship or assignment approach, ministers employed by the Ministry may be able to qualify for the MHA even if they do not perform typical ministry services and even if the Ministry is not a theological seminary. We would be happy to review the particular circumstances of any Ministry to determine whether any of its minister employees may qualify for the MHA.

III. Minister Status Requirement

To qualify for the MHA, an individual must demonstrate, as an initial matter, that he or she is a "minister."[1] However, the term "minister" is not defined precisely and, therefore, may result in some ambiguity. Five criteria have been used for determining whether an individual may be treated as a minister. According to this criteria, a minister is one who:

1. administers sacraments;
2. conducts worship services;
3. performs services in the control, conduct, or maintenance of a religious organization;
4. is ordained, commissioned or licensed; and/or
5. is considered to be a spiritual leader by his or her religious body.

Unfortunately, the law is not clear as to whether a minister must satisfy all of these criteria. At least two cases and one IRS ruling suggest that a minister must satisfy all of these tests; however, the IRS regulations and at least one other case suggest that the determination of status as a minister requires a balancing test after consideration of each of these five factors.

In the large majority of cases, a minister employee of a Ministry will probably base his or her status as a minister on an ordination, commission, or license obtained from a church or church denomination. Provided this certification is credible (i.e., issued by a church organization established for bona fide religious purposes and not merely for the purpose of obtaining tax advantages), the status of the individual as a minister will probably not be challenged by the IRS. However, particularly with respect to commissioning and licensing, it is important to ensure that the certification is focused on the performance of ministerial type tasks. Some churches and religious organizations will commission or license members to perform certain duties also performed by ministers in the context of worship services or otherwise. Members having a commission or license may conduct these activities without the full authority of a minister. In contrast, other churches and religious organizations may "commission" members to perform certain tasks (e.g., short term missions projects) which may not be equated with ministerial type duties in the eyes of the IRS or a judge.

An individual may be able to claim the status of a "minister" without having been ordained, commissioned, or licensed. In such a case, the status would be based on the actual ministerial duties of the individual, and not on an official designation. However, the IRS has not been receptive to such assertions and has ruled in at least one case that an individual's status as a member of a religious order, without more, is not enough to qualify as a "minister." An individual asserting "minister" status will have a significantly stronger argument if he or she has received some kind of formal designation permitting him or her to perform functions such as the sacraments of baptism and communion, and that the formal designation was based on some special training. A Ministry considering the MHA for an employee that is not ordained, commissioned, or licensed should probably seek a ruling from the IRS first.

IV. Qualifying Services Requirement

According to the Regulations, to qualify for the MHA a minister must receive the compensation "as remuneration for services which are ordinarily the duties of a minister of the gospel." §1.107(a). These services, which are discussed in two separate sections of the Regulations, generally include the performance of sacerdotal functions and the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries. Id., §1.1402(c)-5(b)(2). In addition, the Regulations also indicate that services performed on assignment from the ordaining church qualify for the MHA. §1.1402(c)-5(b)(2)(v). Based on the definitions in these sections and their application in various situations, the Regulations essentially provide four basic categories for qualifying services under the MHA:

1. Typical ministry services (e.g., conduct of religious worship, performance of sacerdotal functions, etc.).
2. Executive, managerial, and administrative services for a church or for a religious organization under the authority of a church.
3. Services performed on assignment or designation from the ordaining church.
4. Performance of teaching and administrative services at theological seminaries.

As discussed below, typical ministry services under category 1 have been broadly defined and may arguably cover a wide range of activities within Ministries. However, extending the definition beyond traditional notions of conducting worship and administering sacraments poses a risk of disqualification. Fortunately, minister employees of a Ministry who are not performing a significant amount of typical ministry services as part of their employment duties may nevertheless be able to qualify for the MHA under either category 2 or 3.

The following sections discuss the particular characteristics of categories 1 through 3.[2] As with many of the legal issues affecting the housing allowance, the definitions in these categories are not entirely clear under the law. Very fine lines are often drawn in applying ambiguous legal principles. The context of the actual facts and circumstances may be the persuasive factor in a particular set of circumstances. As a result, there is substantial room for disagreement about whether a particular set of facts and circumstances should qualify for the housing allowance. Although instructive, any particular case or ruling generally cannot be regarded as conclusive authority.

1. Typical Ministry Services
   
   In determining what constitutes the conduct of religious worship and the ministration of sacerdotal functions, the Regulations provide only the guidance that the interpretation of these concepts depends on the tenets and practices of the particular religious body constituting the minister's church or church denomination. §1.1402(c)-5(b)(2)(i). There are apparently very few cases and rulings that discuss in much detail the concept of conduct of religious worship. It appears that there has been little dispute as to when a minister is conducting religious worship. For example, in the case of James Wingo v. Commissioner, 89 T.C. 922 (1987), the court noted that the minister satisfied the second prong, conducting religious worship, when he served as the local pastor who was in charge of a local church. Apparently, the court believed that a single minister in charge of a traditional local church congregation by definition must be conducting religious worship.
   
   In contrast to religious worship, the ministration of sacerdotal functions is subject to more substantial interpretational issues. In some cases, the conclusions regarding the performance of sacerdotal functions appear to be somewhat circular in that sacerdotal functions may be the functions that a minister performs. However, one key element of the ministration of sacerdotal functions appears to be the administration of the sacraments of the particular religion. This element is complicated, though, by the fact that what constitutes a "sacrament" can vary between different churches and denominations.
   
   Further, although administration of the sacraments seems to qualify as a sacerdotal function and appears generally to be relatively easy to identify (or at least we think that we know them when we see them), there are cases and rulings which recognize that sacerdotal functions are broader than just administration of the sacraments. The Tax Court has indicated that "minister of the gospel" refers to "a person who is ordained, commissioned, or licensed with the authority to perform sacerdotal functions, including the administering of the sacraments, preaching, and conducting religious services of worship." Kirk v. Commissioner, 51 T.C. 66 (1968). In the recent case of Maurice A. Mosley, T.C. Memo 1994-457 (1994), the Tax Court seemed to be concluding that most of what a president and vice-president do in a parachurch organization constitutes performance of a sacerdotal function if the main thrust of the activity can be tied to fulfillment of a basic tenet of the religion in furtherance of which the parachurch organization was founded. In PLR 9124059, the IRS noted that officiating at weddings and administering the sacraments qualified as sacerdotal functions, but refused to find that spiritual counseling or leading Bible study groups and discussion groups qualified as a sacerdotal function.
   
   As a result of the ambiguity regarding the definition of sacerdotal functions, it seems that the IRS and the courts are more comfortable with certain standard types of ministerial activities which relate to the sacraments of a particular religion. Therefore, to determine whether a minister's duties may qualify as typical ministry services, it may be helpful to analyze the duties using a four step approach as follows:
   
   
   1. First, identify the religion, and the basic tenets and practices of the religion, in which the minister is performing services.
   2. Second, identify what is considered a sacrament in this particular religion. Webster's Dictionary definition of sacrament is "a formal religious act that is sacred as a sign or symbol of a spiritual reality; especially one believed to have been instituted or recognized by Jesus Christ . … " However, it may be helpful to initiate some additional theological study on this issue.
   3. Third, identify the extent to which the minister's duties constitute the performance of these sacraments or the conduct of religious worship, or any other activity that is clearly ministerial.
   4. Fourth, examine the other duties of the minister and determine:
      1. the strength of the argument that these other duties further a strong tenet or practice of the underlying religion.
      2. the extent to which these services are often performed by individuals who are not ordained, commissioned or licensed ministers and whether the position is required to be filled by such a minister.

The fourth step of this approach considers the potential for arguing that other services performed by the minister also qualify as typical ministry services. The analysis under the fourth step requires an identification of: (i) the religion upon which the Ministry is founded, or the religion in which the minister is ordained, and (ii) the basic religious tenets to which the religion is dedicated. Although there may not be a sound legal basis for the distinction, as a practical matter it may be more difficult for a Ministry to qualify in a manner similar to Mosley if the Ministry is identified only with the greater Christian faith as opposed to a particular denomination. In this regard, if it has not already done so, it may be helpful for the Ministry to clearly articulate the Biblical and theological basis for its various values and programs.

In applying this four-step approach, a Ministry should keep in mind the potential limits of the arguments under step four. For instance, on several occasions, both the IRS and the Tax Court have determined that teaching and administration at an independent religious college or university does not constitute the performance of a sacerdotal function, even if education is a basic tenet of the religion upon which the college is founded. Flowers v. United States, 82 USTC 1 (1982); Colbert v. Commissioner, 61 USTC 449 (1974); PLR 7833017. Hence, a closer link to a basic tenet than the general teaching of secular subjects would probably need to be demonstrated. Finally, it should be kept in mind that it is quite likely that the IRS and perhaps some judges may not agree with the expansive definition of sacerdotal functions provided by the court in Mosley.[3]

2. Services Performed for a Religious Organization or Integral Agency Under the Authority of a Church
   
   In addition to typical ministry services, the Regulations provide that the duties of a minister include "the administration and maintenance of religious organizations and their integral agencies." §1.107(a) (emphasis added). This phrase is expanded in the cross-referenced section of the Regulations which states that service performed by a minister in the exercise of his ministry includes "the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination." §1.1402(c)-5(b)(2). This section indicates that the distinctive characteristic of a qualifying religious organization in the Regulations is that it is under the authority of a church. The Regulations state that this authority relationship is present where the religious organization "is organized and dedicated to carrying out the tenets and principles of a faith in accordance with either the requirements or sanctions governing the creation of institutions of the faith." §1.1402(c)-5(b)(2)(ii).
   
   As highlighted above, the Regulations indicate that ministers can perform qualifying services for integral agencies of qualifying religious organizations. In a frequently cited Revenue Ruling, the IRS suggested several factors which should be considered (though not regarded as conclusive) in determining whether an entity is an integral agency of a qualifying religious organization:
   
   
   1. whether the religious organization incorporated the entity.
   2. whether the corporate name of the entity indicates a church relationship.
   3. whether the religious organization continuously controls, manages, and maintains the entity.
   4. whether the entity's trustees or directors are selected by, or must be approved by, the religious organization or church.
   5. whether the entity's trustees or directors may be removed by the religious organization or church.
   6. whether the entity must make annual reports of finances and general operations to the religious organization or church.
   7. whether the religious organization or church contributes to the support of the entity.
   8. whether, in the event of dissolution of the educational organization, its assets would be turned over to the religious organization or church.

Revenue Ruling 72-606, 1972-2 C.B. 78.

In spite of the apparent distinction in the Regulations, both the IRS and the courts in practice have used the same criteria for evaluating both religious organizations and integral agencies. That is, in considering whether ministers employed by an entity may qualify for the MHA, the IRS and the courts are not concerned primarily with whether the entity is a religious organization or an integral agency, but rather with the authority relationship between the entity and a church. In Toavs v. Commissioner, 67 T.C. 897 (1977), the Tax Court quoted the Regulatory language addressing the authority of churches over religious organizations and then applied the integral agency criteria of Revenue Ruling 72-606 to determine whether the Regulatory language was satisfied. In Mosley, the Tax Court applied the Regulatory language directly, but also claimed to be following the analysis in Toavs. Likewise, the IRS in its various rulings appears invariably to apply the integral agency criteria, regardless of whether the entity involved might more accurately be characterized as a religious organization. Both the IRS and the Tax Court appear to consider an "integral agency of the church" to be synonymous with a "religious organization under the authority of the church."

Authority Over the Board of Directors

Based on the actions of the IRS and the Tax Court, a Ministry seeking to qualify as having a qualifying relationship with a church should pay close attention to the criteria outlined in Revenue Ruling 72-606 above. Of these criteria, the most important appears to be some significant manifestation of control by the church over the board of directors of the Ministry. Neither the IRS nor the Tax Court has ever held that an organization qualifies under this provision without this degree of control. However, the control requirement can be satisfied in a variety of ways. In PLR 9033002, the IRS held that a religious college was an integral agency where the entire board was appointed by various entities within the controlling church denomination. In contrast, the IRS held in PLR 9608027 that the self-perpetuating board of a religious college was controlled by a church denomination where each board member was required to be a member of a local church within the denomination. The IRS reasoned that each board member was under the control of a local congregation and if expelled by that congregation, could no longer serve on the board. See also, Rev. Rul. 70-549. Also, the IRS has indicated that the church needs only to control a majority of the board. In PLR 9144047, the IRS held that control was satisfied where only 22 of 38 of the board members of a religious organization were directly appointed by the church (the remaining members were appointed by the full board). Finally, sufficient control may be present where the church must approve each board member of the Ministry and has the power to remove any member for cause. PLR 8922077.

The tax court has rejected arguments for board control based on "moral suasion" (Mosley) or on general affiliation criteria by which an organization may be in "fellowship" with a church (Toavs). Further, the a U.S. district court has failed to find sufficient board control where less than one-half of the board members were required to be members of the church and the church had no power to appoint or remove directors. Flowers v. United States, Civil Action 4-79-376-E (ND Texas 1981). Even if all of the directors are, in fact, members of the church, the Tax Court has held that the church does not have control over the board where none of the directors are required to be members of the church and the church does not have the power to approve directors or remove them (Toavs).

Financial Control of the Ministry and Other Criteria

Next to control of the board of directors, the most important factor appears to be financial control. If a church has strong financial control over a Ministry, the Ministry may be held to be a qualifying religious organization even if the church does not have strong control over its board of directors. Strong financial control appears to exist when the organization is required to submit financial reports to the church and the church provides significant monetary support to the organization. PLR 8922077. In most cases where the church has control over the board, it also requires the Ministry to submit financial reports to the church, or it provides a substantial amount of support to the Ministry. See, PLRs 9144047, 9608027, 9033002; Rev. Rul. 70-549. In cases where the Tax Court or the IRS has rejected an organization's argument that it is controlled by a church, it has generally been noted that the organization is not required to submit financial reports to the church. The IRS appears to consider active financial support as a form of control over a Ministry and will look both to support from various entities within the church and from individual church members. If a Ministry relies on these sources for most of its financial support, it has a strong argument that it is a qualifying religious organization.

The other integral agency criteria appear to be used more as support for a determination based on board control and financial control. However, the IRS has mentioned in several cases that disposition of property of the Ministry upon dissolution could be a good indicator of control. In all of the cases discussed above, the property of the Ministry in question would revert to the church upon dissolution. However, reversion upon dissolution alone does not appear to be a sufficient indicator of authority. Rev. Rul. 72-606. Although the fact that the church owns the Ministry may be given significant weight (PLR 9144047), the mere fact that the church incorporated the Ministry, without more, does not appear to indicate sufficient authority (PLR 8520043). Further, the IRS occasionally discusses the name of the Ministry as possibly indicative of a controlling relationship, but this is not likely to be a significant factor.

In summary, a Ministry whose board of directors is controlled, either directly or indirectly (e.g., through church membership requirements), by a church has a strong argument that it is a qualifying religious organization. The less direct and extensive the board control, the more important the other criteria, particularly financial control, become. The case law indicates that there are various ways to satisfy the board control requirements, as well as the other criteria. A Ministry should evaluate, in consultation with legal counsel, all the facts and circumstances surrounding its corporate structure and its relationship with churches before determining the strength of its argument that it is a qualifying "integral agency" or "religious organization."

Qualifying Services

Assuming a Ministry does qualify as an "integral agency" or "religious organization," as a result of its relationship with a church, minister employees of the Ministry will qualify for the MHA provided their employment involves the "control, conduct [or] maintenance" of the Ministry. §1.1402(c)-5(b)(2). The Regulations specify that "the control, conduct, and maintenance of a religious organization [or integral agency] relates to directing, managing, or promoting the activities of such organization." §1.1402(c)-5(b)(2)(ii). There does not appear to be much discussion regarding these requirements in the case law. The IRS has held, with respect to a religious college, that "the minister serving as the head of the department of education, and any other minister serving on the faculty as a teacher or administrator" is performing qualifying service. Rev. Rul. 70-549. These positions qualify even if the ministers do not perform any "ecclesiastical duties." PLR 9033002. Based on these statements, it seems likely that a minister serving in any position of policy-making, management, or instruction within a qualifying Ministry would probably be eligible for the MHA.

3. Services Performed Pursuant to an Assignment
   
   The Regulations provide that all services performed by a minister pursuant to an assignment or designation by his or her church are performed in the exercise of his or her ministry, regardless of whether the organization for whom the services are performed is a qualifying religious organization (or integral agency). §1.1402(c)-5(b)(2)(v). Although the Regulations place no restrictions on the kind of services performed, both the Tax Court and the IRS have paid close attention to the nature of the assignment. Specifically, the Tax Court has ruled that the "assignment must be significant, in that the minister must have been assigned by the church for reasons directly related to the accomplishment of the purposes of the church. … More is required than mere ordained status and the perfunctory ratification by religious authority of secular employment obtained by the minister for non-church related reasons." Boyer v. Commissioner, 69 T.C. 521, 532 (1977). In Boyer, the Tax Court held that a minister who sought a secular position as a teacher at a University on his own and subsequently obtained an "assignment" from his church did not perform services pursuant to a valid assignment. Likewise, the IRS held that a minister who was ordained after he had obtained employment, and whose church merely approved of the continuing employment, had not received a valid assignment. PLR 8520043. Further, the court held in Mosley that ministers who had been "commissioned" by their church to serve world evangelism had not by virtue of the commissioning been assigned to a particular position in a religious organization.
   
   In contrast, the IRS allowed an assignment by a church to a religious organization where the assignment was in writing and executed by the assigning church or denomination, it described the work to be performed by the minister and stated that such work furthers the tenets and practices of the church or denomination, and it required the minister to provide annual reports to the church or denomination and allowed the church or denomination to participate in reviewing the performance of the minister. PLR 9720022. While this particular assignment may have more elements than are required for a valid assignment, it does offer insight into factors which should be considered (though not regarded as conclusive) in determining whether an assignment is bona fide:
   
   
   1. whether the assignment is made for reasons directly related to the accomplishment of the purposes and mission of the ordaining church;
   2. whether the assigned position is a religious position;
   3. whether the organization to which the minister is assigned is a religious organization;
   4. the degree to which the ordaining church participates in arranging the assigned services;
   5. the degree of scrutiny and analysis used by the ordaining church in determining whether to approve or continue an assignment;
   6. whether the ordaining church assigns its ministers to similar positions in its own organization;
   7. whether the minister was performing the same job prior to the assignment;
   8. the degree of continuing control that the ordaining church may exert over the assigned minister; and
   9. whether the assigned work is for a for-profit or nonprofit entity.

The PLR also suggests that the likelihood of prevailing on an assignment argument can be improved by various procedures relating to the assignment, including:

10. requiring a letter of assignment (it may be helpful for the Ministry to develop a checklist of desired components of this letter);
11. requiring periodic written reconfirmations of assignments;
12. providing at least annual communication with, and review of the minister's activities by the ordaining church.

As with the other categories of ministry services, the determination of whether services are being performed by a minister pursuant to a valid assignment can be a fact-intensive inquiry based on the balancing of a variety of factors. An institution seeking to participate in the MHA for its minister employees based on assignments should carefully evaluate the nature of the assignments in consultation with counsel.

V. Implementing the MHA

Once a Ministry determines that one or more of its minister employees qualifies for the MHA, it must follow certain procedures to ensure that the MHA is accurately implemented.

1. Designation Requirements.
   
   The Regulations require that the housing allowance must be (1) designated, (2) pursuant to official action, (3) in advance, and (4) by the employing church or other qualified organization. §1.107-1(b). Without such official action, no exclusion from income is allowable. In addition, although there is no apparent absolute legal requirement, it is strongly advisable that the designation be in writing and be made annually. The Regulations give examples of designations evidenced in an employment contract, minutes, budget and any other appropriate instruments as qualifying designations. As a practical matter, it may be desirable to have an officer, or officer equivalent, of the organization approve the housing allowance at least periodically. Further caution suggests it is desirable for the board, board committee or other governing body to routinely approve housing allowances, and to specifically grant authority to designate housing allowances, at least annually.
2. Computation of Housing Allowance Amount.
   
   The actual amount allowed to be excluded from gross income under the MHA is the lesser of:
   1. the fair rental value of the home furnished by the employer, plus utilities;
   2. the actual housing expense incurred by the minister employee; and
   3. the amount designated as a housing allowance by the employer.

The allowance amount excluded from income should be verified by records of the above items maintained by the minister. Further, the Ministry should base the amount designated as an allowance on these records.

3. Other Important Points.
   
   The MHA only applies to the calculation of gross income for standard income tax purposes. However, it does raise issues with respect to other portions of the tax code. For instance, the amount excluded under the MHA is nevertheless subject to self-employment tax unless the minister is otherwise exempt from such tax. Further, it is unclear whether the amount excluded under the MHA can nevertheless be included as part of income for the purpose of calculating the allowable contribution to section 403(b) plans. Based on informal information, it appears that the IRS may be taking the position that the amount excluded under the MHA is not part of income for section 403(b) purposes. However, there does not appear to be any legal support for this position (nor for the opposite position) and the issue may require legislative resolution.

VI. Conclusion

The MHA offers a potentially significant tax benefit to minister employees of a Ministry, a benefit which does not impose any significant cost on the employers. However, the MHA is not available all minister employees merely by virtue of their status as a "minister." Minister employees may be able to qualify for the MHA based on the nature of their employment duties, the relationship of the Ministry to a church or church denomination, or an assignment from their church to the Ministry. Determining whether any of these bases for qualification may apply in a particular situation requires a fact-intensive analysis based on the most recent Regulations, IRS rulings, and case law. A Ministry seeking to provide MHA benefits to its minister employees should carefully evaluate each situation in cooperation with experienced legal counsel.

John R. Wylie, Esq., Steve L. Gaines, Esq., and Stuart J. Lark, Esq. are attorneys in Colorado Springs, CO with Holme Roberts & Owen LLP.