Tax Break for Clergy Questioned

Tax Break for Clergy Questioned

By LAURA SAUNDERS

For the Wall Street Journal

The U.S. Tax Court approved tax-free allowances of $408,638 for a minister's second home, including 'mortgage payments … lawn care, painting and repairs.'

As Congress scrutinizes every nook and cranny of the budget for possible revenue, a surprising court decision is allowing clergy members to buy or live in multiple homes tax-free.

The U.S. Tax Court ruled that Phil Driscoll, an ordained minister and Grammy Award-winning trumpeter who went to prison for tax evasion, didn't owe federal income taxes on $408,638 provided to him by his ministry to buy a second home on a lake near Cleveland, Tenn.

Under a provision of the tax code known as the parsonage allowance, first passed in 1921, an ordained clergy member may live tax-free in a home owned by his or her religious organization or receive a tax-free annual payment to buy or rent a home if the congregation approves.

The Tax Court ruling, made final in March, extends the parsonage allowance to an unlimited number of homes, which may be owned either by the religious organization or the clergy member.

In a 7-6 ruling, a panel of Tax Court judges sided with Mr. Driscoll's argument that the word "home" is equivalent to "homes," just as "child" is interpreted to mean "children" elsewhere in the tax code.

The Internal Revenue Service declined to comment on the decision. In May, the agency appealed it to a federal appeals court in Atlanta.

Experts say the parsonage allowance was originally included as a way to minimize taxes on clergy members, whose compensation was often meager. It still is widely used for that purpose, church officials said, although the IRS doesn't track usage of the benefit.

"For most of them the housing allowance is modest because their compensation is modest," says Daniel Gary, an attorney with the United Methodist Church in Nashville.

Similarly, D. August Boto, general counsel of the Executive Committee of the Southern Baptist Convention, says for leaders of the organization's 46,000 churches "the housing allowance is critically important for making ends meet—it is not a luxury."

Some members of the clergy are taking advantage of a little-known tax break that allows them to avoid the IRS when they are buying a "parsonage," even when it is a palatial mansion or their second home. Laura Saunders has details on The News Hub.

However, some experts are concerned that the new ruling opens the door for the allowance to be applied to multiple homes used by leaders of wealthier ministries.

John "Buck" Chapoton, a former assistant secretary of the Treasury for tax policy, said he believes the decision to broaden the parsonage allowance to include multiple homes "invites abuse." He is now a partner at investment-management firm Brown Advisory in Baltimore.

The issue also is receiving congressional scrutiny.

Sen. Charles Grassley (R., Iowa), a member of the Senate Finance Committee, said he wants to ensure that the spirit of the provision isn't violated.

"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 ministers," he says.

Before the Driscoll decision, most tax experts believed the parsonage allowance only applied to one home, says Ellen Aprill, a professor at Loyola Law School in Los Angeles who studies tax issues involving religious institutions.

There is no restriction on the value of the home that can be claimed under the exemption. The chief limit is that the annual payment to buy or rent the home may not exceed its rental value, Ms. Aprill says.

In January, the Senate committee released the results of an investigation into several high-profile ministries that raise money through radio, television and the Internet. It cited evidence of large parsonage allowances at several groups, although the groups declined to answer questions submitted by the committee, citing constitutional protections.

According to the report, Kenneth and Gloria Copeland, who lead Kenneth Copeland Ministries in Fort Worth, Texas, live in an 18,280 square-foot lakefront parsonage on 25 acres. The report said county officials valued the church-owned property at $6.2 million in 2008.

David Middlebrook, a lawyer for Mr. Copeland, says the house is "a wholly owned and appreciating asset of Kenneth Copeland Ministries.…The ownership and operation of the parsonage is completely in accordance with IRS rules and regulations."

Mr. Driscoll, who won the Tax Court ruling, leads Mighty Horn Ministries of Greensboro, Ga., which had income of more than $6 million from 2005 to 2009, according to tax filings.

Mr. Driscoll turned to the ministry after a popular music career that included playing a trumpet solo on the last "Ed Sullivan Show" in 1971 and composing for Joe Cocker and the band Blood, Sweat and Tears.

In 2005, a federal grand jury accused him of diverting ministry funds for personal expenses. Prosecutors said he used ministry funds from 1996 to 1999 for luxury cars, funeral bills for his mother and other personal items.

A Chattanooga, Tenn., jury convicted Mr. Driscoll in 2006 of conspiracy and tax evasion. He was sentenced to a year in prison and ordered to pay nearly $25,000 in court costs. He also paid $426,398 in extra tax and penalties.

Prosecutors alleged that he also evaded taxes related to his second home, since he already owned one residence bought with ministry funds.

Mr. Driscoll's lawyer argued the wording of the tax code was vague and could apply to more than one home. The judge in the criminal case agreed with Mr. Driscoll's argument, and the dispute wound up in U.S. Tax Court. Mr. Driscoll declined to comment.

Write to Laura Saunders at laura.saunders@wsj.com