Proof a Minister Opted Out of Self-Employment Tax

Ministers are allowed to opt out of Self Employment tax by filing Form 4361 with the IRS. Some refer to this as Social Security. There are a number hoops and hurdles a minister must jump through in order to opt out. Once the Form 4361 is approved, it is irrevocable unless Congress allows it.

An approved Form 4361 is very difficult to replace. Without the approved form, it is hard to convince the IRS and the Social Security Administration that the minister is exempt from Self Employment tax. The courts have allowed the exemption without an approved form where the minister has retained proof that he filed the form.

When I prepare a ministers tax return, I ask if they have opted-out and for a copy of the approved Form 4361. Occasionally a minister will not have a copy of their approved Forms 4361. To make matters worse, they also do not have any evidence of filing the form with the IRS. In the past, I have had little guidance to give to them regarding how to obtain a duplicate of the approved form. However, the IRS recently published a Minister Audit Techniques Guide reviewing all the rules regarding ministers for its agents.

An IRS agent can confirm the exemption by:

1. For ministers who filed the Form 4361 after 1988, the agent can order a transcript for the year under audit. Included on this transcript should be an indicator that tells the agent the minister is exempt from Self Employment tax.
2. If the transcript is not an option, the agent can contact the Taxpayer Relations Branch at the IRS Service Center where the Form 4361 was filed and request a copy of the form.
3. The last option is to contact the Social Security Administration in Baltimore and ask them to provide confirmation of a minister's exempt status.

If you are a minister and cannot locate your approved Form 4361, please call Kenneth Hoffman at 954-591-8290 or email him for assistance in obtaining a copy of your approved Form 4361. It is better to know for sure you are exempt, then to discover you are not exempt when a large tax bill is sent your way.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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Are Pastoral Accounts Income To Pastor?

A recent Tax Court case held that amounts deposited into a “pastoral account” maintained by husband-and-wife pastors in the name of their unincorporated church were not deductible as charitable contributions. Gunkle v. Commissioner, TC Memo 2012-305(11/1/12), involved tax deficiencies levied against Bruce and Sherilyn Gunkle, two Texas ministers who formed and operated the City of Refuge Christian Fellowship (“CRCF”).

Bruce was a graduate of the US Naval Academy with a masters degree in theology from Antioch University. He and his wife served as pastors and conducted religious services for CRCF during the taxable year in question. Some 17 years earlier, Bruce had formed, and for a number of years headed, a qualified section 501(c)(3) organization with a similar name.

Acting on the advice of promoters (the Gardners) who were subsequently enjoined by a federal court from participation in an abusive tax shelter program promising unwarranted tax benefits from the use of a device they called a “corporation sole,” Bruce terminated his tax-exempt charity and formed CRCF as a corporation sole. This action was taken to permit the new entity to operate without interference by the government and corporate directors. Bruce and his wife took vows of poverty and CRCF agreed to “provide for all their needs as Apostle and as pastors of the church.” Those needs were to be met through funds placed by CRCF in a bank account known as their pastoral account. Deposits to the account were made by church members and nonmembers, and Bruce’s Social Security checks were also deposited therein.

The Gunkles had full control over that account, and wrote all of the checks drawn on the account, many of which were for groceries, car payments and other personal expenses. On their 2007 income tax returns, they did not report any income from CRCF. They claimed a deduction of $13,917 for charitable contributions, of which $8,926 was claimed for contributions to CRCF. That tax return was prepared and signed by Frederick Gardner, who had apparently masterminded the corporation sole scheme for CRCF.

The arrangement didn’t work out as planned. IRS disallowed the claimed charitable deductions, and charged the Gunkles with $63,000+ in unreported income The Tax Court agreed. Amounts deposited in the pastoral account were held taxable to the Gunkles as income, and the charitable deductions were disallowed because they retained control of those funds and benefited from them. They claimed, but failed to show, that CRCF had characteristics of a religious order. On top of all that, the court upheld the imposition of a penalty of $3,252.40 under Code §6662(a).

The Court noted that in very similar circumstances it held that deposits made into the account of a purported church were includable in the taxpayers' gross income where the taxpayers were the owners of the bank accounts, exercised complete control over the funds in the accounts, and used those funds for personal expenditures.

Source: Charitable Gift Planning News, Issue 2012-17 (Nov. 3, 2012)

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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Can A Church Amend A Pastor's Housing Allowance

While neither the IRS nor the courts have addressed this question, it seems perfectly reasonable to conclude that the church can amend its housing allowance designation during the course of the year if changed circumstances render the allowance inadequate. However any changes to an allowance cannot be applied retroactively.

For example, the church runs on a fiscal calendar year that runs January to December. A proposed adjustment is made in October. The adjustment would apply for the months of October, November, and December; everything prior to October (January to September) would operate under the original housing allowance amount set heading into the fiscal year.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

Minister Housing Allowance

Ministers must qualify to exclude a housing allowance from taxable income. Under Code Section 107 of the Internal Revenue Code, a minister who satisfies all conditions contained in Section 107 may exclude from taxable income the qualifying amount of housing allowance. While many ministers are familiar with the concept, they frequently forget the detailed terms and conditions associated with this benefit.

Only qualified ministers may receive housing allowance. The IRS reserves this benefit for ordained, licensed, or commissioned ministers of the gospel who received their credentials from a church. Generally, specialized ministerial licenses do not qualify for a housing allowance.

In addition, the minister must be performing the duties of a minister during his work time. The Internal Revenue Regulations generally define the duties of a minister. The duties of a minister employed by a church generally include leading a worship service, performing sacerdotal functions, and managing the church or some significant segment of the church. A different test applies when the minister works outside the church.

Few churches use the term sacerdotal to describe a minister’s duties. The term sacerdotal originally arose within the Roman Catholic faith to describe those duties performed by the priests. Today, most churches define sacerdotal to include those duties normally expected of a minister by that church. Certainly, sacerdotal duties include performing weddings and funerals. But it also includes prayer, Bible study, preaching, teaching, counseling, leading church services, visiting the sick and infirm, and spreading the gospel through various means and media.

Once the individual is duly qualified as a minister and is performing ministerial duties, then the mechanical parts of the housing allowance must be performed. First, out of the minister’s total compensation, the church is responsible for designating in writing an amount as a housing allowance. This amount can range up to 100 percent of the minister’s compensation. The board or compensation committee should annually pass a resolution setting a fixed dollar amount of each minister’s housing allowance. The board or compensation committee may adjust the housing allowance during the year, but the adjustment will only apply prospectively. If the church provides a parsonage for the minister, the church is responsible for setting the fair rental value of the parsonage as furnished, plus utilities, and providing that information to the minister.

Second, the minister must track all cash expenses related to owning, occupying, or maintaining his primary residence. The minister will need to retain receipts should the IRS question his housing allowance. We urge all minsiters and clergy to keep a separate checkbook to keep track of their housing allowance and expenses.

Finally, the minister must determine the fair rental value of his home as furnished, plus utilities. The minister should not use a real estate professional associated with the church where he is serving.

The minister may exclude from taxable income the lowest of the amount designated by the church, the amount spent by the minister owning, occupying, and/or maintaining his primary home, or the fair rental value of the home as furnished, plus utilities.

As a side note, the housing allowance is taxable for self-employment taxes unless the minister has elected out of Social Security.

If you have any questions about this topic, tax law changes, have questions about the IRS and your church, or want to become a client, please call us at 954-591-8290 or use our Contact form.

Minister Housing Allowance Update

Driscoll was an ordained minister and worked for Phil Driscoll Ministries, Inc.  The ministry paid Driscoll a housing allowance to maintain both his principal residence and his lake house.  The IRS denied the housing allowance allocable to the second house and issued a notice of deficiency with regards to the amounts that the IRS determined was improperly excluded from Driscoll’s income. 

Driscoll petitioned the Tax Court, which held that Driscoll could exclude from income amounts used to provide his second home.  The Tax Court reasoned that singular terms in the Code also include their plural forms, and, therefore, the language in section 107 of the Code referring to “a home” could include more than one home. 

The 11th Circuit held that the “singular-to-plural” provision should only apply if the context of section 107(2) of the Internal Revenue Code supports such an application.  The 11th Circuit looked at the definitions of the word “home” and concluded that the word “has decidedly singular connotations.”  In support of the court’s decision, the legislative history of section 107(2) was examined and words such as “the” or “a” always preceded the word “home”; therefore, the court held that “home” was always intended to mean one home.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.