There has been a lot of recent discussion of a case subjecting ministers' housing allowances to tax. Those discussions here and there evidence some of the misunderstandings that come up whenever taxation of churches and charities are discussed. I intend to present some of the key sections of the Internal Revenue Code for people to read and refer to concerning these matters. I think that their contents will come as a surprise to many.
The specific section declared unconstitutional in this most recent case is section 107(2), below, with the relevant parts in bold:
26 USC § 107 - Rental value of parsonages
In the case of a minister of the gospel, gross income does not include—Pretty straight forward ministers are tax exempt as to part of their compensation. This special treatment for "men of the cloth" was held to violate the establishment clause.
(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 and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
This must be taken in the context of the fundamental rule of income tax, everything is taxable and nothing is deductible unless Congress provides otherwise by legislative grace. For example, gross income includes everything.
26 USC § 61 - Gross income defined
(a) General definitionSo, let's skip the tangle of bureaucratic red tape and look at two other provisions that color our thinking in this area.
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
Discussions of such matters often involve various ideas, concepts and opinions derived from some level of understanding (or misunderstanding) of the subject matter of the remaining two sections dealing with churches and charities.
People get to deduct "charitable donations" from their income in computing their taxable income under Section 170.
26 USC § 170 - Charitable, etc., contributions and gifts
(a) Allowance of deductionNote that "religious purposes" is separate and distinct from "charitable purposes". They get special treatment simply because they are churches, regardless of whether or not they ever perform a charitable act of any kind.
(1) General rule
There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.
(c) Charitable contribution defined
For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of—
(1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.
(2) A corporation, trust, or community chest, fund, or foundation—
(A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States;
(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals;
(C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and
(D) which is not disqualified for tax exemption under section 501 (c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
Finally, the one I find most often misspoken about, the exemption from tax provided to certain entities by section 501, specifically 501(c)(3). It should be noted, for the record that there are a boatload of subsequent exemption sections, (c)(4), (c)(5), and on, and on, and on.
26 USC § 501 - Exemption from tax on corporations, certain trusts, etc.
(a) Exemption from taxationSeem familiar? Once again, religious organizations are separate from charitable ones. They are exempt simply because they are religious. As an aside, if you dig you'll find that being a "Church" is enough to get you into the "religious purposes" bag, but that there are a lot of hoops to jump through in order to fall into the "Charitable purposes" bag. Next -See anything in there about being not-for-profit? No, these organizations can be enormously profitable, by normal accounting standards, and a great many are.
An organization described in subsection (c) or (d) or section 401 (a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503.
(b) Tax on unrelated business income and certain other activities
An organization exempt from taxation under subsection (a) shall be subject to tax to the extent provided in parts II, III, and VI of this subchapter, but (notwithstanding parts II, III, and VI of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.
(c) List of exempt organizations
The following organizations are referred to in subsection (a):
(1) Any corporation organized under Act of Congress which is an instrumentality of the United States but only if such corporation—
(A) is exempt from Federal income taxes—
(i) under such Act as amended and supplemented before July 18, 1984, or
(ii) under this title without regard to any provision of law which is not contained in this title and which is not contained in a revenue Act, or
(B) is described in subsection (l).
(2) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under this section. Rules similar to the rules of subparagraph (G) of paragraph (25) shall apply for purposes of this paragraph.
(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
Here's where the not-for-profit thing comes from. Not-for-profit entities pay no tax (there is nothing to tax) but file returns as non-profits to inform uncle that they are non-profits. (They do pay tax on unrelated business income, as do the (c)(3) organizations, but that is a whole other puddle of muck.) So what is it about (c)(3) organizations as opposed to, say (c)(4) or (c)(6) organizations that has everyone tossing that designation around like crazy? Contributions to a (c)(3) organization are deductible under section 170, while contributions to (c)(4) through (c)(whatever) are not. Hence, all the (c)(4), et seq. types try to finagle their way into (c)(3) in order to get their members a deduction. All the (c)(3) organizations tout that fact in order to entice people to contribute to them in order to obtain an individual income tax deduction. That is really all that (c)(3) status is about. That, and the decision by Congress to single out (c)(3) organizations for special treatment