Rev. Rul. 70-549

Advice has been requested whether, under the circumstances described below, an ordained minister may exclude from gross income, under section 107 of the Internal Revenue Code 1954, the rental allowance paid to him as part of his compensation.

The minister in question serves as head of the department of education at a college that is supported by donations from congregations and individual members of a particular church, as well as by foundation grants, grants and loans from the Federal Government, and tuition paid by the students. The college is governed by a self-perpetuating board of directors, and although they are not appointed by the church or by a central governing body of the church, each director is required by the college charter to be a member in good standing of a congregation of the church. The member's standing will be determined by the congregation of which he is a member. A vacancy (or vacancies) shall occur when a director ceases to meet the above qualifications.

Although the church lacks a central governing body by which it can exercise direct control over its institutions, the college is most rigidly and continuously governed and controlled by the board of directors who are, in turn, under the control of the elders of the church in which they have their membership. The requirement in the college charter that each director must be a member in good standing of a congregation of the church is a method of indirect control which in this case is as effective as having a central governing agency to control the college. Every teacher is a member of the church in good standing and a majority of the students are members of the church. Further, all subjects taught at the college, whether in natural science, mathematics, social science, languages, etc., are taught with emphasis on religious principles and religious living. Furthermore, the college trains ministers of the gospel for the church, has a department of missions offering a degree in this area and, in general, performs all the functions for ministerial training that a seminary offers.

On the basis of these facts, it is held that the college is, in practice, operated as an integral agency of the church and that the minister serving as head of the department of education, and any other minister serving on the faculty as a teacher or administrator, is performing service "in the exercise of his ministry" within the meaning of section 1.107-1 and section 1.1402(c)-5 of the Income Tax Regulations and section 31.3121(b)(8)-1 of the Employment Tax Regulations. Accordingly, such ministers are entitled to exclude from gross income a rental allowance to the extent allowable under section 107(2) of the Code. They are also subject to the self-employment tax on remuneration paid by the college. Moreover, the services performed by the ministers are excepted from "employment" under section 3121(b)(8)(A) of the Code.

Pursuant to the authority provided by section 7805(b) of the Code, this Revenue Ruling will not be applied to require reporting of remuneration received from the college as "net earnings from self-employment" under the Self-Employment Contributions Act for any taxable year beginning before January 1, 1971. Further, withholding of taxes under the Federal Insurance Contributions Act is not applicable to remuneration paid by the college after December 31, 1970.