LITTLE-KNOWN TAX LEGALITIES
Richard R. Hammar
April 1, 1989
Just when we think we've gotten a handle on the regulations, they're reworked. At this time of year when taxes inevitably enter our thoughts, here are six considerations to keep in mind.
Business expense deductions
A recent Tax Court ruling (Dalan v. Commissioner, T.C. Memo. 1988-106) may limit how much of business and professional expenses clergy can deduct. In essence, it says you cannot deduct the percentage of business and professional expenses attributable to the housing allowance portion of your income. The IRS in recent years had instructed its agents not to raise the issue enforced in an earlier Tax Court ruling, Deason v. Commissioner, 41 T.C. 465 (1964), but Dalan appears to be reversing the position. Let's look at the history.
Section 265 of the Internal Revenue Code states basically that when a percentage of your income isn't taxable (such as a housing allowance), an equal percentage of your deductions aren't allowable. Therefore, if a pastor's $30,000 pay package is composed of $20,000 in salary and $10,000 in housing allowance, the pastor could deduct only two-thirds of his expenses, the part allocable to his salary.
This application of Section 265 was upheld in Deason in 1964, which kept Pastor Deason from deducting the full amount of his unreimbursed automobile expenses since part of his income-his housing allowance-was tax-exempt. But this ruling was disregarded by the IRS. For several years, pastors were allowed to deduct their full expenses from their taxable income.
Then came Dalan in 1988, reversing the leniency and causing pastors to reduce their deductible expenses. If the Dalan case indeed reflects a change in the IRS's longstanding position, then pastors seeking deductions for unreimbursed business and ...
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