Contact:
Amy Hereford, CSJ, MS, JD
CSJ Ministries
6400 Minnesota Ave.
St. Louis, MO 63111-2807
Phone: 314-266-1814
Contact on Skype
Copyright 2009
Tax Rulings
Computation of wages and Election of Coverage by Religious orders - Excerpt from Internal Revenue Code Section 3121 (i) and (r)
1099 Requirement for Healthcare Providers - Rev. Rul. 70-608; 1970-2 C.B. 268
Timing of FICA Payments - Rev. Rul. 74-85; 1974-1 C.B. 338
Taxation of Compensation to Religious - Rev. Rul. 77-290; 1977-2 C.B. 26
Taxation of Military Chaplain's Compensation - Rev. Rul. 79-132; 1979-1 C.B. 62
Taxation of Compensation to Religious - Rev. Rul. 80-332; 1980-2 C.B. 34
Charitable Contributions - Rev. Rul. 83-104; 1983-2 C.B. 46
Retirement Income of Religious - Rev. Rul. 83-126; 1983-2 C.B. 24
Taxation of a Employee Annuities - PLR 8217161
Taxation of a Member on Exclaustration - PLR 7008310550A
Excerpt from Internal Revenue Code Section 3121 (i) and (r)
(i) Computation of wages in certain cases…
(4) Service performed by certain members of religious orders For purposes of this chapter, in any case where an individual is a member of a religious order (as defined in subsection (r)(2)) performing service in the exercise of duties required by such order, and an election of coverage under subsection (r) is in effect with respect to such order or with respect to the autonomous subdivision thereof to which such member belongs, the term ''wages'' shall, subject to the provisions of subsection (a)(1), include as such individual's remuneration for such service the fair market value of any board, lodging, clothing, and other perquisites furnished to such member by such order or subdivision thereof or by any other person or organization pursuant to an agreement with such order or subdivision, except that the amount included as such individual's remuneration under this paragraph shall not be less than $100 a month.
(r) Election of coverage by religious orders
(1) Certificate of election by order
A religious order whose members are required to take a vow of poverty, or any autonomous subdivision of such order, may file a certificate (in such form and manner, and with such official, as may be prescribed by regulations under this chapter) electing to have the insurance system established by title II of the Social Security Act extended to services performed by its members in the exercise of duties required by such order or such subdivision thereof. Such certificate of election shall provide that -
(A) such election of coverage by such order or subdivision shall be irrevocable;
(B) such election shall apply to all current and future members of such order, or in the case of a subdivision thereof to all current and future members of such order who belong to such subdivision;
(C) all services performed by a member of such an order or subdivision in the exercise of duties required by such order or subdivision shall be deemed to have been performed by such member as an employee of such order or subdivision; and
(D) the wages of each member, upon which such order or subdivision shall pay the taxes imposed by sections 3101 and 3111, will be determined as provided in subsection (i)(4).
(2) Definition of member
For purposes of this subsection, a member of a religious order means any individual who is subject to a vow of poverty as a member of such order and who performs tasks usually required (and to the extent usually required) of an active member of such order and who is not considered retired because of old age or total disability.
(3) Effective date for election
(A) A certificate of election of coverage shall be in effect, for purposes of subsection (b)(8) and for purposes of section 210(a)(8) of the Social Security Act, for the period beginning with whichever of the following may be designated by the order or subdivision thereof:
(i) the first day of the calendar quarter in which the certificate is filed,
(ii) the first day of the calendar quarter succeeding such quarter, or
(iii) the first day of any calendar quarter preceding the calendar quarter in which the certificate is filed, except that such date may not be earlier than the first day of the twentieth calendar quarter preceding the quarter in which such certificate is filed.
Whenever a date is designated under clause (iii), the election shall apply to services performed before the quarter in which the certificate is filed only if the member performing such services was a member at the time such services were performed and is living on the first day of the quarter in which such certificate is filed.
(B) If a certificate of election filed pursuant to this subsection is effective for one or more calendar quarters prior to the quarter in which such certificate is filed, then -
(i) for purposes of computing interest and for purposes of section 6651 (relating to addition to tax for failure to file tax return), the due date for the return and payment of the tax for such prior calendar quarters resulting from the filing of such certificate shall be the last day of the calendar month following the calendar quarter in which the certificate is filed; and
(ii) the statutory period for the assessment of such tax shall not expire before the expiration of 3 years from such due date.
Rev. Rul. 70-608; 1970-2 C.B. 268
Sec. 6041
Sec. 6109
IRS Headnote
Requirements for filing information returns on Forms 1099 and 1096 with respect to payments made directly to doctors or other suppliers of health care services are clarified; Revenue Ruling 69-595 supplemented.
Full Text
Rev. Rul. 70-608
Section 1. Purpose
The purpose of this Revenue Ruling is to clarify matters pertaining to the filing of information returns on Forms 1099 and 1096 for payments to health care providers. Such returns are required under section 6041 of the Internal Revenue Code of 1954, the regulations thereunder, and Revenue Ruling 69-595, C.B. 1969-2, 242.
Sec. 2. Background
Revenue Ruling 69-595 provides that persons making payments of fees aggregating $600 or more during any calendar year in the course of their trade or business under plans, programs, or policies of insurance or medical assistance to doctors and other suppliers of health care services, are required to file Forms 1099 (revised as 1099-Med. for this purpose) and 1096 with respect to such payments made directly to doctors and other suppliers. However, under the authority of section 7805(b) of the Code, except for payments made under Medicare and Medicaid programs, the provisions of Revenue Ruling 69-595 will not be applied with respect to payments made prior to January 1, 1971. The purpose of this nonretroactive application was to permit a joint Internal Revenue Service--insurance industry study of systems and procedures for retrieving and reporting information necessary to the preparation of information returns.
Sec. 3. Clarification
The study resulted in recommendations that the Service supplement Revenue Ruling 69-595 with respect to certain problem areas confronting persons required to file information returns. Such problems and the position of the Service with respect thereto are stated below:
Situation 1. Payments to health care providers may be made (a) by a person whose name is shown on the check or draft as the payer (Payer of Record); (b) by a person that is the ultimate provider of the fees being paid (Source Organization); or (c) by a person that is processing the claim and preparing the check or draft in the name of another person (Processing Organization). Sometimes these three persons are one and the same, but frequently two or three different persons are involved.
Under the above circumstances, the Service will look to the person identified as the payer on the check or draft as the one responsible for filing information returns. Such returns may be filed by an agent of the payer.
Situation 2. In many cases checks or drafts in payment for health care services are issued in the joint names of the provider of the health care services and the recipient of the services.
The provider of the health care services shall be treated as the payee of the assigned payment and his name and identifying number shall be shown on Form 1099-Med.
Situation 3. A person making payment for health care services that requires the use of a claim form containing a space for the identifying number of the provider of the health care services or the insertion of the identifying number on a check or draft will be deemed to have made a request for an identifying number under section 6109 of the Code and the regulations thereunder. Any claim form so used shall contain a provision that the identifying number is required to be furnished under authority of law.
Situation 4. Payments to persons providing health care services, including proprietary hospitals, physicians and dentists, often include charges for injections, drugs, dentures, and similar items. In such cases the entire payment is subject to information reporting. Amounts paid to pharmacies for prescription drugs are not subject to information reporting.
Situation 5. Banks and other corporations often act on behalf of doctors and dentists in billing and collecting for health care services, charging a certain percentage of the collections for their services. In such cases the banks and corporations are required to file information returns on the gross amounts collected on behalf of the doctors and dentists if such amounts aggregate $600 or more for the calendar year. Compare Rev. Rul. 67-197, C.B. 1967-1, 319.
Sec. 4. Effect on Other Documents
Revenue Ruling 69-595 is hereby supplemented.
Rev. Rul. 74-85; 1974-1 C.B. 338
IRS Headnote
Deposit requirements; religious order; vow-of-poverty members. A religious order that has elected social security coverage for its vow-of-poverty members, whose wages subject to the FICA are in the form of non-cash support, is considered to have adopted an assumed payroll accounting period and an assumed payday of monthly or less for the purpose of meeting the deposit requirements of section 6302 of the Code.
Full TextRev. Rul. 74-85 Advice has been requested as to the deposit requirements under section 6302 of the Internal Revenue Code of 1954 for religious orders that have elected under section 3121(r) to have social security coverage extended to their members who have taken a vow of poverty. The question of the deposit requirements for the taxes due with respect to a vow-of-poverty member results from the fact that such member is generally not paid any monetary remuneration on a regular pay-period basis, but derives his "wages" subject to FICA tax in the form of non-cash support, including the fair market value of any board, lodging, clothing, and other perquisites furnished to him by the religious order. Many of the religious orders also employ lay personnel who are paid actual wages upon which the religious order properly withholds and deposits the taxes as required by law. Under section 3121(i)(4) of the Code and section 31.3121(i)-4 of the Employment Tax Regulations the value of the perquisites furnished by a religious order to its vow-of-poverty members, for the purpose of computing the FICA tax, is never less than $100 per month.
Under section 31.6302(c)-1(a) of the Employment Tax Regulations, the time for making deposits is determined by reference to the payment of wages within the fixed depositing dates set forth in the regulations. The adoption of payroll accounting periods and payment dates is generally a matter left to the discretion of the employer. In the case of a vow-of-poverty member of a religious order described above, there is no fixed pay period or pay date. For purposes of determining whether a religious order has met the deposit requirements of section 6302 of the Code with respect to the FICA taxes for its vow-of-poverty members, the order may consider that such members are "paid" on a monthly basis. If the only employees of the religious order are its vow-of-poverty members, the order shall, for purposes of determining the amount required to be deposited and the proper deposit due date, adopt an assumed payroll accounting period and an assumed payday of monthly or less. However, if the order has adopted a payroll accounting system in which its lay members are paid more frequently than monthly, the same payroll accounting period and payday may be used with respect to its vow-of-poverty members also. Accordingly, the deposit requirements under section 6302 of the Code are met by a religious order electing social security coverage for its members under section 3121(r) if its members, who have taken a vow of poverty, are considered to have been paid on a basis of monthly or less and the order deposits the proper amounts computed on such a basis.
Rev. Rul. 77-290; 1977-2 C.B. 26
Section 61 -- Gross Income Defined
Section 511 -- Unrelated Business Income Tax
Amplified by Rev. Rul. 80-332
Amplified by Rev. Rul. 79-132
IRS Headnote
Gross income; members of religious order; outside earnings remitted to order. An attorney, a member of a religious order, who has taken a vow of poverty and is instructed by the order's superiors to obtain employment with a law firm in the state is an agent of the employing firm, not the religious order, and must include the remuneration remitted to the order in gross income and the remuneration is wages subject to the FICA and income tax withholding. A secretary, a member of the same order, who has also taken a vow of poverty and is instructed by the order's superiors to perform services in the business office of the church that supervises the order if an agent of the religious order and is not required to include the remuneration remitted to the order in gross income and the remuneration is not wages subject to the FICA and income tax withholding; however, the remuneration is income to the order and may be subject to the tax imposed by section 511 of the Code. O.D. 119 superseded and Rev. Rul. 76-323 clarified.
Full Text
Rev. Rul. 77-290
Advice has been requested whether, under the circumstances described below, amounts received as remuneration by a member of a religious order under a vow of poverty from employment outside the order are includible in the member's gross income, for Federal income tax purposes, and subject to taxes imposed by the Federal Insurance Contributions Act and the Collection of Income Tax at Source on Wages (chapters 21 and 24, respectively, subtitle C, Internal Revenue Code of 1954).
A and B are members of a religious order and, as a condition of membership in the order, have taken vows of poverty by which all claims to earnings from personal industry are renounced and the earnings belong to the order. The vow of poverty is revocable upon leaving the order, but only as to amounts earned by A or B after leaving the order.
A is licensed as an attorney in State X and was instructed by the superiors of the order to secure employment with a law firm in State X. A secured employment as an associate with a law firm and, as requested by A, the law firm made the salary payments directly to the order. B is a trained and experienced secretary and was instructed by the superiors of the order to accept salaried employment with the local business office of the church that exercises general administrative supervision over the order. B accepted employment in the church's business office and remitted to the order all remuneration received from the church.
Section 61 of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived, including compensation for services. In addition, section 1.61-2(c) of the Income Tax Regulations provides that where, pursuant to an agreement or understanding, services are rendered to a person for the benefit of an organization described in section 170(c) and an amount for such services is paid to such organization by the person to whom the services are rendered, the amount so paid is income to the person performing the services.
In Order of St. Benedict of New Jersey v. Steinhauser, 234 U.S. 640 (1914), a religious order sought to establish its ownership of the personal property of a deceased member. The Supreme Court of the United States held that, where a privilege of withdrawal from the order is reserved to a member, an agreement between a religious order and its members that the gains and acquisitions of members are the common property of the order is enforceable as to the earnings and property acquired by a member prior to withdrawal from the order.
However, it is a basic principle of Federal income tax law that an assignment or similar transfer of compensation for personal services to another individual or entity is ineffectual to relieve the taxpayer of Federal income tax liability on such compensation, regardless of the motivation behind the transfer. See Lucas v. Earl, 281 U.S. 111 (1930); Helvering v. Horst, 311 U.S. 112 (1940), 1940-2 C.B. 206; Helvering v. Eubank, 311 U.S. 122 (1940), 1940-2 C.B. 209.
O.D. 119, 1 C.B. 82 (1919), states in its entirety that
A clergyman is not liable for any income tax on the amount received by him during the year from the parish of which he is in charge, provided that he turns over to the religious order of which he is a member, all the money received in excess of his actual living expenses, on account of the vow of poverty which he has taken.
Members of religious orders are subject to tax upon taxable income, if any, received by them individually, but are not subject to tax on income received by them merely as agents of the orders of which they are members.
The conclusion of O.D. 119 is supported by two principles, the first of which is that a member of a religious order under a vow of poverty is not immune from Federal income tax by reason of such vow, but is subject to Federal income tax to the same extent as any other person on income earned or received individually. Thus, income earned or received by a taxpayer as a principal, and not as an agent, is taxable to the taxpayer. See Francis E. Kelley, 62 T.C. 131 (1974), where an individual member of a religious order under a vow of poverty was taxed on amounts received in an individual capacity. The second principle stated in O.D. 119 is that where an agent receives income on behalf of a principal, the income is not taxable to the agent but to the principal.
Thus, in cases where a member of a religious order receives income as an agent of the order, and, pursuant to a vow of poverty, remits the income to the order, such income is the income of the order and not of the member. In such cases, the tax imposed by section 511 of the Code may be applicable to the income of the order.
Section 3121(b)(8)(A) of the Federal Insurance Contributions Act excepts from the term "employment" service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of the ministry or by a member of a religious order in the exercise of duties required by such order.
Section 3401(a)(9) of the Code, relating to income tax withholding, excepts from "wages" remuneration paid for services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of the ministry or by a member of a religious order in the exercise of duties required by such order.
Sections 31.3121(b)(8)-1(d) and 31.3401(a)(9)-1(d) of the Employment Tax Regulations provide that service performed by a member of a religious order in the exercise of duties required by such order includes all duties required of the member by the order. The nature or extent of such service is immaterial so long as it is a service that the member is directed or required to perform by ecclesiastical superiors.
Rev. Rul. 76-323, 1976-2 C.B. 18, states, in part, that in order for the employment of a member of a religious order to constitute the exercise of duties required by such order within the meaning of the Employment Tax Regulations, the services performed in such employment must be of the type that are ordinarily the duties of members of the order and must be performed by the member as part of the duties that are required to be exercised for or on behalf of the religious order as its agent. It also states that ordinarily a religious order is not engaged in the performance of services as a principal where the legal relationship of employer and employee exists between the member and a third party with respect to the performance of such services.
However, where a member of a religious order is directed to perform services for another agency of the supervising church, or an associated institution, the member will be considered an agent of the order.
In the instant case, A is an employee and agent of the law firm and is not acting as an agent for or on behalf of the religious order in performing legal services for the law firm. In addition, the private practice of law by A for individual clients as an associate of a law firm is not the performance of services of the type ordinarily required by members of the religious order.
Accordingly, for Federal income tax purposes, A is required to include in gross income the entire remuneration paid by the law firm to the extent such remuneration is not excludable from gross income under any provision of the Code. Further, for Federal employment tax purposes, the entire remuneration received by A from the law firm is subject to the taxes imposed by the Federal Insurance Contributions Act and the Collection of Income Tax at Source on Wages.
With respect to B, services performed in the business office of the church at the direction of B's ecclesiastical superiors are services performed for another agency of the church as an agent of the religious order.
Accordingly, for Federal income tax purposes, B is not required to include in gross income remuneration from the church's business office that is remitted to the religious order. Further, for Federal employment tax purposes, the entire remuneration received from the church's business office is not subject to the taxes imposed by the Federal Insurance Contributions Act and the Collection of Income Tax at Source on Wages.
Rev. Rul. 76-323 is clarified. O.D. 119 is superseded since the conclusion set forth therein is restated under current law in this Revenue Ruling.
Rev. Rul. 79-132; 1979-1 C.B. 62
Section 61
IRS Headnote
Military chaplain; member of religious order; vow of poverty. Remuneration received from the Armed Forces by a military chaplain who is a member of a religious order, has taken a vow of poverty, and is required by the order to serve in the Armed Forces and turn over the remuneration to the order, is includible in the chaplain's gross income and is subject to the FICA and income tax withholding; Rev. Rul. 77-290 amplified.
Full Text
ISSUES
1. Are amounts received as remuneration by a military chaplain who is a member of a religious order and who has taken a vow of poverty includible in the chaplain's gross income under section 61 of the Internal Revenue Code of 1954?
2. Is the remuneration of the chaplain excepted from "wages" under section 3401(a)(9) of the Code for purposes of income tax withholding?
3. Are the services of the chaplain excepted from "employment" by section 3121(b)(8) of the Code relating to the Federal Insurance Contributions Act?
FACTS
A military chaplain, an officer in the Armed Forces of the United States, is a member of a religious order and has taken a vow of poverty. Pursuant to the regulations of the order the chaplain is required by the order to serve in the Armed Forces and remuneration earned by the chaplain is turned over to the order. The chaplain is commissioned as an officer and is subject to the rules, regulations, and directions of the Armed Forces and enjoys the rights and privileges granted to all members of the Armed Forces such as leave and medical care.
LAW AND ANALYSIS
Section 61 of the Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived, including compensation for services. In addition, section 1.61-2(c) of the Income Tax Regulations provides that where, pursuant to an agreement or understanding, services are rendered to a person for the benefit of an organization described in section 170(c) and an amount for such services is paid to such organization by the person to whom the services are rendered, the amount so paid is income to the person performing the services.
Moreover, it is a basic principle of federal income tax law that an assignment or similar transfer of compensation for personal services to another individual or entity is ineffectual to relieve the taxpayer of federal income tax liability on such compensation, regardless of the motivation behind the transfer. See Lucas v. Earl, 281 U.S. 111 (1930); Helvering v. Horst, 311 U.S. 112 (1940), Ct. D. 1472, 1940-2 C.B. 206; Helvering v. Eubank, 311 U.S. 122 (1940), Ct. D. 1473, 1940-2 C.B. 209. See also Rev. Rul. 77-290, 1977-2 C.B. 26, which provides that a member of a religious order under a vow of poverty is not immune from federal income tax by reason of such vow, but is subject to federal income tax to the same extent as any other person on income earned or received individually. Income earned or received individually by the member is taxable income of the member.
Section 3121(b)(8)(A) of the Code excepts from the term "employment" service performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of the ministry or by a member of a religious order in the exercise of duties required by such order.
Section 3401(a)(9) of the Code, relating to income tax withholding, excepts from "wages" remuneration paid for services performed by a duly ordained, commissioned or licensed minister of a church in the exercise of the ministry or by a member of a religious order in the exercise of duties required by such order.
Sections 31.3121(b)(8)-1(d) and 31.3401(a)(9)-1(d) of the employment tax regulations provide that service performed by a member of a religious order in the exercise of duties required by such order includes all duties required of the member of the order. The nature or extent of such service is immaterial so long as it is a service that the member is directed or required to perform by ecclesiastical superiors.
Rev. Rul. 76-323, 1976-2 C.B. 18, states that in order for the employment of a member of a religious order to constitute the exercise of duties required by such order within the meaning of the employment tax regulations, the services performed in such employment must be of the type that are ordinarily the duties of members of the order and must be performed by the member as part of the duties that are required to be exercised for or on behalf of the religious order as its agent. The vow of poverty itself does not cause the member to be considered an agent; rather, an agency relationship is established when it appears, based on all the facts and circumstances, that the payer of the income is looking directly to the order, rather than to the individual member, for the performance of services.
Ordinarily, a religious order is not engaged in the performance of services as a principal where the legal relationship of employer and employee exists between the member and a third party with respect to the performance of such services. Accordingly, although the chaplain was required by the order to enter the Armed Forces, to perform religious work while in the Armed Forces, and to turn over to the order the wages earned, the direct relationship between the Armed Forces and the individual chaplain establishes an employer-employee and an agency relationship between them so that the service performed by the member as a chaplain is not considered the exercise of duties required by such order.
HOLDINGS
1. The chaplain is required to include in gross income the entire remuneration received to the extent such remuneration is not excludable from gross income under any provision of the Code.
2. The remuneration is subject to income tax withholding.
3. The services of the chaplain are not excepted from "employment" by section 3121(b)(8) of the Code.
EFFECT ON OTHER REVENUE RULINGS
Revenue Ruling 77-290, 1977-2 C.B. 26, is amplified.
Rev. Rul. 80-332; 1980-2 C.B. 34, 1980-49 I.R.B. 8.
Earnings of Members Remitted to Religious Organization
Section 61 — Gross Income Defined
Section 501 — Tax-exempt Organizations
Earnings of members remitted to religious organization. A member of a religious organization who has taken a vow of poverty and is instructed by the organization's superiors to obtain outside employment must include the remuneration remitted to the organization in gross income, and the remuneration is subject to FICA and income tax withholding. Another member of the organization who has also taken a vow of poverty and is instructed to perform services in the business office of the church that supervises the organization is not required to include the remuneration remitted to the organization in gross income, and the remuneration is not wages subject to FICA. An organization that is substantially dependent on wages earned by some of its members from outside employment does not qualify for exemption under section 501(d) of the Code. Rev. Rul. 77-290 amplified.
Full Text
Rev. Rul. 80-332
ISSUE
Is Rev. Rul. 77-290, 1977-2 C.B. 26, applicable to members of an organization described in section 501(d) of the Internal Revenue Code?
LAW AND ANALYSIS
Rev. Rul. 77-290 holds that a member of a religious order, who has taken a vow of poverty and is instructed by the order's superiors to obtain employment with a law firm in the state is an agent of the law firm, not the religious order, and must include the remuneration remitted to the order in gross income. The remuneration is wages subject to the taxes imposed by the Federal Insurance Contributions Act and income tax withholding.
Rev. Rul. 77-290 also holds that another member of the same order who has also taken a vow of poverty and is instructed by the order's superiors to perform services in the business office of the church that supervises the order is an agent of the religious order and is not required to include the remuneration remitted to the order in gross income. In this situation the remuneration is not wages subject to the FICA and income tax withholding.
Section 501(d) of the Code provides for the exemption from federal income tax of religious or apostolic associations or corporations, if such associations or corporations have a common treasury or community treasury, even if such associations or corporations engage in business for the common benefit of the members.
HOLDING
Although Rev. Rul. 77-290 deals with members of religious orders, the reasoning set forth in Rev. Rul. 77-290 equally applies to members of organizations described in section 501(d) of the Code and of other religious organizations who have taken a vow of poverty.
Furthermore, it should be noted that if an organization is substantially dependent on wages earned by some of its members from outside employment, rather than on an internally operated business, it does not qualify for exemption from federal income tax under section 501(d) of the Code. See Rev. Rul. 78-100, 1978-1 C.B. 162.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 77-290 is amplified.
Rev. Rul. 80-332, 1980-2 C.B. 34, 1980-49 I.R.B. 8.
Rev. Rul. 83-104; 1983-2 C.B. 46.
Charitable Contributions; Private School Operated by Charitable Organization
26 CFR 1.170A-1: Charitable, etc., contributions and gifts; allowances of deduction
Charitable contributions; private school operated by charitable organization. Factual situations illustrate the distinction between qualified charitable contributions and tuition payments made to an organization that operates a private school. Rev. Rul. 79-99 superseded.
ISSUE
Is the taxpayer entitled to a deduction for a charitable contribution under section 170 of the Internal Revenue Code in each of the situations described below?
FACTS
In each of the situations described below, the donee organization operates a private school and is an organization described in section 170(c) of the Code. In each situation a taxpayer who is a parent of a child who attends the school makes a payment to the organization. In each situation, the cost of educating a child in the school is not less than the payments made by the parent to the organization.
Situation 1. Organization S, which operates a private school, requests the taxpayer to contribute $400x for each child enrolled in the school. Parents who do not make the $400x contribution are required to pay $400x tuition for each child enrolled in the school. Parents who neither make the contribution nor pay tuition cannot enroll their children in the school. The taxpayer paid $400x to S.
Situation 2. Organization T, which operates a private school, solicits contributions from parents of applicants for admission to the school during the period of the school's solicitation for enrollment of students or while the applications are pending. The solicitation materials are part of the application materials or are presented in a form indicating that parents of applicants have been singled out as a class for solicitation. With the exception of a few parents, every parent who is financially able makes a contribution or pledges to make a contribution to T. No tuition is charged. The taxpayer paid $400x to T, which amount was suggested by T.
Situation 3. Organization U, which operates a private school, admits or readmits a significantly larger percentage of applicants whose parents have made contributions to U than applicants whose parents have not made contributions. The taxpayer paid $400x to U.
Situation 4. Organization V, a society for religious instruction, has as its sole function the operation of a private school providing secular and religious education to the children of its members. No tuition is charged for attending the school, which is funded through V's general account. Contributions to the account are solicited from all society members, as well as from local churches and nonmembers. Persons other than parents of children attending the school do not contribute a significant portion of the school's support. Funds normally come to V from parents on a regular, established schedule. At times, parents are personally solicited by the school treasurer to contribute funds according to their financial ability. No student is refused admittance to the school because of the failure of his or her parents to contribute to the school. The taxpayer paid $40x to V.
Situation 5. Organization W, operates a private school that charges a tuition of $300x per student. In addition, it solicits contributions from parents of students during periods other than the period of the school's solicitation for student enrollments or the period when applications to the school are pending. Solicitation materials indicate that parents of students have been singled out as a class for solicitation and the solicitation materials include a report of W's cost per student to operate the school. Suggested amounts of contributions based on an individual's ability to pay are provided. No unusual pressure to contribute is placed upon individuals with children in the school, and many parents do not contribute. In addition, W receives contributions from many former students, parents of former students, and other individuals. The taxpayer paid $100x to W in addition to the tuition payment.
Situation 6. Church X operates a school providing secular and religious education that is attended both by children of parents who are members of X and by children of nonmembers. X receives contributions from all of its members. These contributions are placed in X's general operating fund and are expended when needed to support all church activities. A substantial portion of the other activities is unrelated to the school. Most members of X do not have children in the school, and a major portion of X's expenses are attributable to its nonschool functions. The methods of soliciting contributions to X from church members with children in the school are the same as the methods of soliciting contributions from members without children in the school. X has full control over the use of the contributions that it receives. Members who have children enrolled in the school are not required to pay tuition for their children, but tuition is charged for the children of nonmembers. Taxpayer, a member of X and whose child attends X's school, contributed $200x to X during the year for X's general purposes.
LAW AND ANALYSIS
Section 170(a) of the Code provides, subject to certain limitations, for the allowance of a deduction for charitable contributions or gifts to or for the use of organizations described in section 170(c), payment of which is made during the taxable year.
A contribution for purposes of section 170 of the Code is a voluntary transfer of money or property that is made with no expectation of procuring a financial benefit commensurate with the amount of the transfer. (See section 1.170A-1(c)(5) of the Income Tax Regulations and H.R. Rep. No. 1337, 83rd Cong., 2d Sess. A44 (1954).) Tuition expenditures by a taxpayer to an educational institution are therefore not deductible as charitable contributions to the institution because they are required payments for which the taxpayer receives benefits presumably equal in value to the amount paid. (See Channing v. United States, 4 F.Supp. 33 (D.Mass), aff'd per curiam 67 F.2d 986 (1st Cir. 1933), cert. denied, 291 U.S. 686 (1934).) Similarly, payments made by a taxpayer on behalf of children attending parochial or other church- sponsored schools are not allowable deductions as contributions either to the school or to the religious organization operating the school if the payments are earmarked for such children. (See Rev. Rul. 54-580, 1954-2 C.B. 97.) However, the fact that the payments are not earmarked does not necessarily mean that the payments are deductible. On the other hand, a charitable deduction for a payment to an organization that operates a school will not be denied solely because the payment was, to any substantial extent, offset by the fair market value of the services rendered to the taxpayer in the nature of tuition.
Whether a transfer of money by a parent to an organization that operates a school is a voluntary transfer that is made with no expectation of obtaining a commensurate benefit depends upon whether a reasonable person, taking all the facts and circumstances of the case into account, would conclude that enrollment in the school was in no manner contingent upon making the payment, that the payment was not made pursuant to a plan (whether express or implied) to convert nondeductible tuition into charitable contributions, and that receipt of the benefit was not otherwise dependent upon the making of the payment.
In determining this issue, the presence of one or more of the following factors creates a presumption that the payment is not a charitable contribution: the existence of a contract under which a taxpayer agrees to make a "contribution" and which contains provisions ensuring the admission of the taxpayer's child; a plan allowing taxpayers either to pay tuition or to make "contributions" in exchange for schooling; the earmarking of a contribution for the direct benefit of a particular individual; or the otherwise-unexplained denial of admission or readmission to a school of children of taxpayers who are financially able, but who do not contribute.
In other cases, although no single factor may be determinative, a combination of several factors may indicate that a payment is not a charitable contribution. In these cases, both economic and noneconomic pressures placed upon parents must be taken into account. The factors that the Service ordinarily will take into consideration, but will not limit itself to, are the following: (1) the absence of a significant tuition charge; (2) substantial or unusual pressure to contribute applied to parents of children attending a school; (3) contribution appeals made as part of the admissions or enrollment process; (4) the absence of significant potential sources of revenue for operating the school other than contributions by parents of children attending the school; (5) and other factors suggesting that a contribution policy has been created as a means of avoiding the characterization of payments as tuition.
However, if a combination of such factors is not present, payments by a parent will normally constitute deductible contributions, even if the actual cost of educating the child exceeds the amount of any tuition charged for the child's education.
HOLDINGS
Situation 1.
The taxpayer is not entitled to a charitable contribution deduction for the payment to Organization S. Because the taxpayer must either make the contribution or pay the tuition charge in order for his or her child to attend S's school, admission is contingent upon making a payment of $400x. he taxpayer's payment is not voluntary and no deduction is allowed.
Situation 2.
The taxpayer is not entitled to a charitable contribution deduction for the payment to Organization T. Because of the time and manner of the solicitation of contributions by T, and the fact that no tuition is charged, it is not reasonable to expect that a parent can obtain the admission of his or her child to T's school without making the suggested payments. Under these circumstances, the payments made by the taxpayer are in the nature of tuition, not voluntary contributions.
Situation 3.
The taxpayer is not entitled to a charitable contribution deduction for contributions to Organization U. The Service will ordinarily conclude that the parents of applicants are aware of the preference given to applicants whose parents have made contributions. The Service will therefore ordinarily conclude that the parent could not reasonably expect to obtain the admission of his or her child to the school without making the transfer, regardless of the manner or timing of the solicitation by U. The Service will not so conclude, however, if the preference given to children of contributors is principally due to some other reason.
Situation 4.
Under these circumstances, the Service will generally conclude that the payment to Organization V is nondeductible. Unless contributions from sources other than parents are of such magnitude that V's school is not economically dependent upon parents' contributions, parents would ordinarily not be certain that V's school could provide educational benefits without their payments. This conclusion is further evidenced by the fact that parents contribute on a regular, established schedule. In addition, the pressure placed on parents throughout the personal solicitation of contributions by V's school treasurer further indicates that their payments were not voluntary.
Situation 5.
Under these circumstances, the Service will generally conclude that the taxpayer is entitled to claim a charitable contribution deduction of $100x to Organization W. Because a charitable organization normally solicits contributions from those known to have the greatest interest in the organization, the fact that parents are singled out for a solicitation will not in itself create an inference that future admissions or any other benefits depend on a contribution from the parent.
Situation 6.
The Service will ordinarily conclude that the taxpayer is allowed a charitable contribution deduction of $200x to Organization X. Because the facts indicate that X's school is supported by the church, that most contributors to the church are not parents of children enrolled in the school, and that contributions from parent members are solicited in the same manner as contributions from other members, the taxpayer's contributions will be considered charitable contributions, and not payments of tuition, unless there is a showing that the contributions by members with children in X's school are significantly larger than those of other members. The absence of a tuition charge is not determinative in view of these facts.
EFFECT ON OTHER REVENUE RULINGS
The facts in Situation 4 are essentially the same as in the case of Oppewal v. Commissioner, 468 F.2d 1000 (1st Cir. 1972), on which Rev. Rul. 79-99, 1979- 1 C.B. 108, was based. Certain facts were not stated in that ruling. First, the sole function of the organization was the operation of a school. Second, there was an absence of significant potential sources of revenue for operating the school other than contributions by parents. Third, funds normally came to the organization on a regular, established schedule. Fourth, when solicitations were made, parents were solicited on a personal basis by the school treasurer. Rev. Rul. 79-99 is hereby superseded.
Rev. Rul. 83-104, 1983-2 C.B. 46.
Rev. Rul. 83-126; 1983-2 C.B. 24.
Section 61 — Gross Income Defined
Section 72 - Annuities
IRS Headnote
Members of a religious order; retirement income; vow of poverty. Retirement income received by a member of a religious order who is under a vow of poverty, and who remits such income to the order, is not includible in the member's gross income where the member is receiving the retirement income as an agent of the order.
Full Text
Rev. Rul. 83-126
ISSUE
Is retirement income received by members of a religious order under vows of poverty includible in their gross incomes pursuant to section 61 of the Internal Revenue Code under the circumstances described below?
FACTS
A and B are members of a religious order and, as a condition of membership in the order, each has taken a vow of poverty by which all claims to personal industry are renounced and A's and B's earnings belong to the order. A, a nurse, was instructed by the superior of the order to accept salaried employment at a hospital that is an associated institution of the church that exercises general administrative supervision over the order. B, a teacher, was instructed by the superior of the order to accept salaried employment in a county public school district. B's contract of employment with the public school district was governed by state civil service regulations and incorporated the terms of a union contract between the teacher's union and the public school district. In accordance with A's and B's vows of poverty, all payroll checks received by A and B were endorsed and remitted to the order.
Both A and B participated in qualified retirement plans during the terms of their employment with the hospital and public school, respectively. In 1981, A and B retired from active employment with the hospital and public school, respectively, and both began receiving monthly retirement checks pursuant to their plans. In accordance with their vows of poverty, all retirement checks received by A and B were endorsed and remitted to the order.
LAW AND ANALYSIS
Section 61 of the Code provides that gross income means all income from whatever source derived, including pensions and annuities.
Section 72 of the Code and the Income Tax Regulations thereunder govern the taxability of amounts distributed to a participant pursuant to the terms of a qualified retirement plan.
Rev. Rul. 77-290, 1977-2 C.B. 26, concludes that a member of an order, who is under a vow of poverty, employed in the business office of the supervising church is not required to include in gross income remuneration remitted to the order. The conclusion is based upon the member's status as an agent of the order while employed by the supervising church. Rev. Rul. 77-290 also states that where a member of a religious order is directed to perform services for another agency of the supervising church, or an associated institution, the member will be considered an agent of the order.
Rev. Rul. 77-290 also concludes that another member of the order, who is under a vow of poverty, while employed by a law firm is not acting as an agent for or on behalf of the religious order in performing legal services for the law firm. This member is required to include in gross income remuneration remitted to the order.
In this revenue ruling, A earned the right to the retirement income while acting as an agent of the order. A's retirement does not terminate the principal-agent relationship between the order and A. Therefore, under the circumstances set forth in this revenue ruling, the retirement income received by A and remitted to the order is received as an agent of the order and the income is that of the order, not A.
B, however, during the course of employment, was an employee of the county public school district and was not acting as an agent for or on behalf of the religious order while teaching in the public school district. B did not earn the right to the retirement income while acting as an agent of the order. Therefore, the retirement income received by B and remitted to the order is includible in income by B as provided under section 72 of the Code.
HOLDING
The retirement income received by A as agent of the order is not includible in A's gross income. The retirement income received by B as a former employee of the county public school district is includible in B's gross income.
Internal Revenue Service (I.R.S.)
Private Letter Ruling
January 29, 1982
Section 61 -- Gross Income v. Not Gross Income
61.00-00 Gross Income v. Not Gross Income
61.09-00 Compensation for Services
61.09-13 Retirement Payments, Pensions, etc.
Section 72 -- Annuities: Endowment and Life Insurance (Included v. Not Included in Gross Income)
72.00-00 Annuities: Endowment and Life Insurance (Included v. Not Included in Gross Income)
72.04-00 Employee Annuities
Hospital = ***
Order = ***
Plan = ***
Dear ***
This is in reference to a letter dated October 16, 1980, and subsequent correspondence, submitted by your authorized representative on behalf of Hospital. Reference is also made to a conference held on August 13, 1981, that was attended by your authorized representative and representatives of the Internal Revenue Service. Federal income tax rulings are requested concerning participation in the Plan by members of the Order who staff Hospital.
Hospital is a tax exempt hospital facility and is an associated institution of the church that supervises the Order. Hospital is administered and partially staffed by members of the Order, a religious order exempt from federal income taxation pursuant to section 501(c)(3) of the Internal Revenue Code. Members of the Order have taken vows of poverty. Each year the Order assigns members to work at Hospital and a salary is set for each member so assigned. The Order totals salaries of the members assigned to Hospital and submits a monthly bill; the bill is then paid by Hospital directly to the Order. The members do not receive their pay checks nor do they know the amounts of their salaries.
Members assigned to Hospital participate in the Plan. The members earn credit in the Plan for their years of service at Hospital and receive retirement benefits under the Plan upon retirement. The retirement benefits issued to the individual members are endorsed over to the Order in accordance with the members' vows of poverty.
Section 61 of the Internal Revenue Code and the Income Tax Regulations thereunder provide that gross income means all income from whatever source derived, including pensions and annuities. Section 72 of the Code governs the taxability of amounts distributed to a participant pursuant to the terms of a qualified retirement plan. See section 1.72-2(a)(3) of the regulations.
Rev. Rul. 77-290, 1977-2 C.B. 26, concludes that a member of an order, who is under a vow of poverty and employed in the business office of the supervising church, is not required to include in gross income the remuneration remitted to the order. The conclusion is based upon the member's status as an agent of the order while employed by the supervising church. This revenue ruling also states that where a member of a religious order is directed to perform services for another agency of the supervising church, or an associated institution, the member will be considered an agent of the order.
In the instant case, a member earns the right to the retirement income while acting as an agent of the Order. A member's retirement does not terminate the principal-agent relationship between the Order and a member. Therefore, under the circumstances set forth above, retirement income received by a member and remitted to the Order is received as an agent of the Order and the income is that of the Order, not the member. It would follow that the amounts received pursuant to the Plan by a member of the Order is excepted from federal income tax withholding and FICA tax under section 3401(a)(9) and 3121(b)(8)(A) of the Code, respectively.
Based upon the information submitted and the citations of authority above, the following rulings are provided:
1) Retirement benefits paid pursuant to the Plan to members of the Order are not includible in gross income.
2) Retirement benefits paid pursuant to the Plan to members of the Order are excepted from federal withholding and FICA tax under sections 3401(a)(9) and 3121(b)(8)(A) of the Code, respectively.
A copy of this ruling should be attached to Hospital's next information return. A copy has been enclosed for this purpose. In accordance with the Power of Attorney on file, a copy of this letter is being sent to Hospital's authorized representative.
This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Internal Revenue Code provides that a ruling may not be used or cited as precedent.
Sincerely yours,
Anthony Manzanares, Jr.
Chief
Individual Income Tax Branch
Internal Revenue Service (I.R.S.)
Private Letter Ruling
August 31, 1970
Section 3121 -- Definitions
3121.00-00 Definitions
3121.02-00 Employment
3121.02-07 Services of Ministers or Members of an Order
***
Attention: ***
Gentlemen:
This is in reply to your letter dated July 22, 1970, regarding the
status of a member of the *** a religious order, during the period she
has an indult of
exclaustration, i.e., during the period she has permission to live outside
the community and to be exempt from the authority of the superior of
the order.
According to the information submitted with your letter, the *** requested
a ruling from your Administration in the case of a nun who is employed
as a nurse in a *** hospital. The nun may request an indult of exclaustration
but only if her status regarding social security may be changed from
that of a religious who is not entitled to benefits because of her vow
of poverty to that of a 'lay' person who will be entitled to social
security benefits.
Louis G. Fanfani and Kevin D. O'Rourke in their book, Canon Law For
Religious Women, explain that 'an indult of exclaustration is the permission
by which a religious is allowed to remain temporarily outside the convent
and to be exempt for a time from the authority of the superiors of the
religious institute to which she belongs.' *** President of the order,
states that the primary reason for requests by nuns for the indult of
exclaustration is to move gradually into layman or non-religious status
and that exclaustration allows the individual to select her own type
of employment. Also, the individual does not have to make any report
of her activities or account for any of her earnings. However, Fanfani
and O'Rourke point out that 'she remains bound by the vows and all the
obligations of her profession which can be observed under the conditions
in which she now lives . . . the vow of poverty is still in effect but
mitigated so that [she] may administrate and use her own goods, if she
has any, insofar
as this is necessary for the needs of daily life. Nevertheless, she
remains bound by the vow of poverty which she must observe both in letter
and in spirit in accordance with the rule of her religious institute.
If she earns anything it belongs to the community, which in turn should
use this to provide for the support of the religious.'
*** states that, even though the above guideline is given in Canon Law,
in actual practice the exclaustrated religious must live in a manner
compatible with her state of separation from the institute and thus
she does have complete control over her earnings. Further, she is not
required to make any reports to her religious superior. In fact, the
Motherhouse may not know the type of employment in which she is engaged,
or the amount of the individual's earnings.
Under section 3121(b)(8)(A) of the Federal Insurance Contributions Act
(FICA) services performed by a member of a religious order in the exercise
of duties required by such order are excepted from the term 'employment'.
On the basis of the information submitted with your letter, we agree
that the services the nun may perform during the period of her exclaustration
are not excepted from 'employment' under section 3121(b)(8)(A) of the
FICA. We believe this conclusion is apparent from the definition of
the indult of exclaustration. The further question then is what portion,
if any, of the remuneration which the nun receives is 'wages' for purposes
of the FICA.
O.D. 119, C.B. No. 1, 82 (1919), provides, in part, that 'members of
religious orders [who have taken the vow of poverty] are subject to
tax upon taxable income, in any, received by them individually, but
are not subject to tax on income received by them as agents of the orders
of which they are members.'
It is our opinion that, although by Canon Law the nun remains bound
by her vow of poverty during exclaustration, in actual practice her
status changes with respect to the remuneration she receives for her
services. During this period she receives remuneration as an individual
rather than as an agent for the order and does not account therefor
to her religious superior. We believe that, under such circumstances,
the remuneration the nun receives for covered nongovernmental services
is 'wages' for purposes of the taxes under the FICA.
We appreciate having had the opportunity to consider this case.
Sincerely yours,
(signed) Lester W. Utter
Chief
Individual Income Tax Branch
This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code.
