Rev. Rul. 79-132

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.