Equitable Treatment for Vows of Poverty Under the Federal Income Tax , 44 Wash
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Washington and Lee Law Review Volume 44 | Issue 1 Article 4 Winter 1-1-1987 But Reverend, Why Does Your Baptismal Font Have A Diving Board? Equitable Treatment For Vows Of Poverty Under The edeF ral Income Tax J. Timothy Philipps Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Religion Law Commons, and the Taxation-Federal Commons Recommended Citation J. Timothy Philipps, But Reverend, Why Does Your Baptismal Font Have A Diving Board? Equitable Treatment For Vows Of Poverty Under The Federal Income Tax , 44 Wash. & Lee L. Rev. 19 (1987), https://scholarlycommons.law.wlu.edu/wlulr/vol44/iss1/4 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact [email protected]. BUT REVEREND, WHY DOES YOUR BAPTISMAL FONT HAVE A DIVING BOARD? EQUITABLE TREATMENT FOR VOWS OF POVERTY UNDER THE FEDERAL INCOME TAX J. TimOTHY PHIUnPps* I. INTRODUCTION In 1977 the Internal Revenue Service (IRS or Service) issued a revenue ruling' that drastically changed its position concerning the imposition of federal income tax on members of traditional bona fide religious orders who have taken a vow of poverty. Under these vows a member of the order renounces all wealth and promises to give any income to the religious order. The position taken in the ruling (and maintained by the IRS in subsequent litigation) is essentially two-fold. First the IRS concedes that income earned by a member of a religious order2 on account of services performed directly for the order or for the church (or a related entity) with which the order is affiliated and given to the order in conformity with the member's vow of poverty is not includible in the member's income. In such situations the IRS treats the member as having earned the income as an agent of the order, 4 continuing the IRS' pre-1977 policy regarding services performed directly for the order, church, or affiliated entities. Second, however, the IRS contends that if the member performs services for an employer not affiliated with the order's church, the member must include any income received for the services in the member's own gross income, even though all the income is remitted to the order in conformity with the member's * Professor of Law, Washington and Lee University; B.S. 1962, Wheeling College; J.D. 1965, Georgetown University; L.L.M. 1966, Harvard University. The author wishes to thank Adam Elfenbein, J.D. 1986, Washington and Lee University School of Law, who contributed substantially to the completion of this article. The author expresses his appreciation to the Frances Lewis Law Center for its grant supporting the research for this article. 1. Rev. Rul. 77-290, 1977-2 C.B. 26 [hereinafter Rev. Rul. 77-290]. 2. A member of a religious order will sometimes be referred to in this article as a "religious." 3. See Rev. Rul 77-290, supra note 1, at 26. The ruling warns, however, that the income may be taxable to the order as unrelated business taxable income, even though the order qualifies as a tax exempt organization under I.R.C. § 501(c)(3). See I.R.C. §§ 511-13. All Internal Revenue Code citations in this article are to the Internal Revenue Code of 1986 unless otherwise indicated. 4. Rev. Rul. 77-290, supra note 1, at 27. WASHINGTON AND LEE LAW REVIEW [Vol. 44:19 vow of poverty,5 reversing the IRS' pre-1977 policy. The Service, neverthe- less, has conceded that the member may be entitled to a charitable deduction (subject to the usual limitations) for amounts turned over to the order. 6 The Service's reversal of position has been aggressively developed for approximately the last ten years. The IRS previously had been quiescent on the issue of taxing members of religious orders.7 The result of the IRS' post-1977 policy has been that earnings of members of religious orders working on missions related to their religious ministries have become subject to federal income taxation in situations not previously covered by the federal income tax. Reported cases imposing taxes have included a priest working as a chaplairi in a secular hospital,' a nun performing nursing services in a charitable medical clinic, 9 a nun working as a para-legal in a legal-aid clinic, 10 a nun working as a counselor and physical therapist at a research and medical center," a nun working as a librarian in a public library, 12 a nun working as a secretary and counsellor in an alcoholic rehabilitation clinic,' 3 a chaplain at a state hospital for the mentally disabled, 4 and a priest teaching in the Religious Studies Department of a state university. 5 Undoubtedly, many similar situations have occurred in which the imposition 6 of tax on the individual religious has not been contested.' The abrupt change in IRS policy during the 1970s was unfair from a policy standpoint and at least questionable from a legal standpoint. This article first discusses the history and background of taxing religious order 5. See id. In Revenue Ruling 77-290, the Service held that a member of a religious order under a bona fide vow of poverty who took a position as an attorney with a private law firm had to include compensation received from the firm and turned over to the member's order. In contrast, a religious who worked directly for her church business office as a secretary did not have to include amounts received on account of those services and turned over to the order. 6. Rev. Rul. 77-436, 1977-2 C.B. 25, 26; Rev. Rul. 76-323, 1976-2 C.B. 18, 19. The amount of the deduction normally would be limited by I.R.C. § 170(b)(1)(A) to 50% of the member's adjusted gross income. See I.R.C. § 170(b)(l)(A). Moreover, the Service has taken the position in at least one letter ruling that the amount of the contribution must be reduced by any amounts the member receives from the order for living expenses. See Priv. Ltr. Rul 8-104-011, reprinted in 11 FED. TAXEs (P-H) 55029 (1981). The ruling is unclear about whether the IRS would include in this reduction the value of goods and services received in kind such as meals and lodging taken in a convent. Id. 7. See infra text accompanying notes 23-35 (discussing Service's vow of poverty policy prior to Rev. Rul. 77-290). 8. Hogan v. United States, 57 A.F.T.R.2d 86-338 (D. Me. 1985). 9. Schuster v. Commissioner, 84 T.C. 764 (1985), aff'd, 800 F.2d 672 (7th Cir. 1986). 10. Luechtefeld v. Commissioner, 54 T.C.M. (P-H) 85,227 (1985). 11. Young v. Commissioner, 54 T.C.M. (P-H) 85,228 (1985). 12. Laurent v. Commissioner, 54 T.C.M. (P-H) 85,229 (1985). 13. Woltering v. Commissioner, 54 T.C.M. (P-H) 85,230 (1985). 14. McEneany v. Commissioner, 55 T.C.M. (P-H) 86,413 (1986). 15. Fogarty v. United States, 55 A.F.T.R.2d 85-416, 6 Cl. Ct. 612 (1984), aff'd, 780 F.2d 1005 (Fed. Cir. 1986). 16. Informal discussion with members of religious orders indicates that some orders have simply chosen not to contest the issue. 1987] VOWS OF POVERTY members and analyzes the most prominent litigated cases. Finally, this article makes suggestions about how the courts or Congress might better resolve the issue. II. HISTORY AND BACKGROUND Vows of poverty, as expressions of religious faith, have long been entrenched in the Western tradition. 7 Members of Roman Catholic Church religious orders traditionally have taken vows of poverty, obedience, and chastity, requiring them to renounce worldly goods, give unquestioning obedience to their religious superiors, and practice sexual abstinence. 8 In the Roman Catholic Church religious order members may be nuns, brothers, or ordained priests. Contrary to a popular misconception, not all ordained priests are members of a religious order who take the traditional vows of poverty, obedience, and chastity. Most ordained priests are so-called "diocesan" priests who perform services for and receive compensation from the diocese in which they are located. The Catholic Church regards the compensation as the priests' to keep and do with as they see fit. The priests are classified as independent contractors for federal tax purposes.' 9 The priests pay federal and state income taxes on compensation received from the diocese and whatever other income they receive. 20 By contrast, the Catholic Church does not consider priests who are members of religious orders to receive compensation in their own right, but rather on behalf of their religious order. These priests are under a religious obligation to give the order any compensation they receive. 2' Nuns and brothers n are under a similar obligation. 17. See generally SACRAMENTUM MuNDi 67-70 (K.Rahner ed. 1970) (discussing religious orders); 12 NEw CATHOLIC ENCYCLOPEDIA 287-93 (McGraw-Hill 1967) (discussing religious life). 18. See generally CODE OF CANON LAW, Part III, Institutes of Consecrated Life and Societies of Apostolic Faith (A. Mitchell trans. 1983) [hereinafter CODE OF CANON LAW]. 19. See Whelan, "Church" in the Internal Revenue Code: The Definitional Problems, 45 FoRIsm L. REv. 885, 889 n.2 (1977).