• Key point. Ministers must file an application for exemption from self-employment tax (Form 4361) by the due date of their federal tax return for the second year in which they have net earnings from self-employment of $400 or more, any portion of which comes from the performance of services in the exercise of ministry.
• Key point. Many churches and denominations recognize one or more levels of ministry that are inferior to full ordination, such as "licensed" ministry. Persons who are recognized as a minister under a status inferior to full ordination may still be recognized as ministers by the IRS. As a result, the special tax rules that apply to ministers may apply to them.
The Tax Court upheld the revocation by the IRS of a minister's exemption from self-employment tax on the ground that the minister's application was not timely filed. While enrolled in college, a student (John) was licensed as a "student local pastor" for the United Methodist Church (the Church) and served in a local church in 1983 and 1984. His earnings exceeded $400 each year. John thereafter attended seminary, and during this time he was licensed and served as the local pastor of a church from 1985 to 1987. In 1987, he was ordained a deacon in the Church. In 1990 he was ordained an elder. The ordained ministry of the Church consists of deacons and elders. An individual can be licensed as a local pastor even though the individual has not been ordained a deacon or elder.
In 1989, John filed an application for exemption from social security (self-employment) taxes by filing a Form 4361 with the IRS. Form 4361 asks the applicant to list the date he or she was "ordained, licensed, etc." John answered this question by inserting "May 25, 1987," the date that he was ordained as a deacon. Form 4361 also asks the applicant to list the first 2 years after becoming a minister that he or she had net self-employment earnings of $400 or more, any part of which came from services as a minister. John reported that 1988 and 1989 were the first 2 years after the date of his ordination in which he had "net self-employment earnings of $400 or more, any part of which came from services as a minister." Relying upon the information reported on the form, the IRS granted John's application for exemption from self-employment tax.
The IRS later audited John, and a question arose over the validity of his exemption from self-employment tax. The IRS claimed that the services John performed as a local pastor in 1983 and 1984 constituted the performance of services as a "licensed" minister, even though John was not yet an "ordained" minister. Because he earned more than $400 from the performance of such services in those years the IRS asserted that the exemption application (Form 4361) was not timely because it was not filed by the due date of John's 1984 federal income tax return.
John argued that his exemption application was timely because he did not perform services as a minister until he was ordained a deacon in 1987. John claimed that providing services as a licensed local pastor in previous years did not constitute the performance of services as a minister because the authority of a local pastor is not as extensive as the authority of an ordained deacon.
The Tax Court agreed with the IRS, and ruled that John was not exempt from self-employment tax since he failed to file the Form 4361 on time. The court observed:
[John's] argument that the period for filing the application for exemption did not begin to run until the date of his ordination, is incorrect. The phrase "duly ordained, commissioned, or licensed minister", as used in the relevant statutory scheme, is a disjunctive phrase. The statute applies if the individual is either an ordained minister, a commissioned minister, or a licensed minister. Whether an individual performs services as an ordained, commissioned, or licensed minister depends upon the type of services performed, not just on the official title of the person performing those services.
The court quoted from the income tax regulations' definition of "service performed in the exercise of ministry":
An individual acting pursuant to authority derived from his or her status as a duly ordained, commissioned, or licensed minister of a church, who in the exercise of his or her ministry: (1) Presides over the ministration of sacerdotal functions; (2) conducts religious worship; and (3) participates in the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination, performs services as a minister ….
The court concluded that John's services as a local pastor in 1983 and 1984 satisfied this definition, and therefore his Form 4361 was due by April 15, 1985 (the due date of his federal tax return for the second year in which he had net earnings of $400 or more from services performed in the exercise of ministry). The court observed:
As a licensed local pastor, [John] was authorized by the Church to preside over the ministration of sacerdotal functions, such as Baptism, Holy Communion, and marriage. [John] agrees that [he] performed these services during 1983 and 1984, but he argues that as a local pastor he was authorized to do so only as long as his license was in effect, and only within the boundaries of his charge. We recognize that [John's] authority as a licensed local pastor was limited by the duration of his license and the designated charge to which it applied. Nevertheless, subject to those limitations, during 1983 and 1984, he presided over the ministration of sacerdotal functions and therefore for those years acted in a manner consistent with the "performance of service by a duly ordained, commissioned, or licensed minister." [John] does not dispute that as a licensed local pastor he conducted religious worship during 1983 and 1984.
John insisted that as a licensed local pastor he was considered a lay person who had no "voice or vote" on official matters of the Church. As a result, he claimed that during 1983 and 1984 he could not, and did not, "serve in the control, conduct and maintenance" of the Church. The court disagreed, noting that "to perform services in the control, conduct, and maintenance of the church or organizations within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or denomination." During 1983 and 1984, as a licensed local pastor, John served "in the control, conduct, and maintenance" of his charge, "even though as a licensed local pastor he might not have done so with respect to the Church as the governing organization."
The court concluded:
In 1983 and 1984, as a licensed local pastor, [John]: (1) Presided over the ministration of sacerdotal functions; (2) conducted religious worship; and (3) served in the control, conduct, and maintenance of his charge within the Church. Therefore, during those years he performed services as a minister …. That being so, and because for each of those years he had net earnings of at least $400 derived for the performance of services as a minister, to be effective, his application for exemption from the tax on self-employment income should have been filed prior to the due date of his 1984 federal income tax return. Because it was not so filed, [the government's] determination that [John's] earnings as a minister are not exempt from the tax on self-employment income … is sustained for each year in issue.
Application. Many churches and denominations recognize more than one level of ministry. To illustrate, in many denominations, ministers can be either licensed or ordained, with ordained status representing the highest level of ministry. This case demonstrates that the time limit for filing an exemption from self-employment tax may begin when a minister receives the initial recognition of ministry even though this level is inferior in some respects to full ordination. But this conclusion has additional ramifications. It also means that such a minister is performing service in the exercise of ministry, and as a result he or she is subject to the other special tax rules that apply to "ministers" under federal tax law. These include (1) eligibility for the parsonage and housing allowance exclusions; (2) self-employed status for social security (if not exempt); and (3) exemption of wages from income tax withholding (ministers pay their income taxes using the quarterly estimated tax procedure, unless they elect voluntary tax withholding). Brannon v. Commissioner, T.C. Memo. 1999-370.
