Rev. Rul. 76-323

Advice has been requested whether, under the circumstances described below, amounts received by two members of a religious order during the time they secured employment outside the order are includible in their gross incomes and subject to the 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). Advice has also been requested whether any amounts includible in gross income that are turned over by the members to the order are deductible from gross income under section 170 of the Code.

Pursuant to the regulations of the order, all members must secure employment outside the order and turn over all their remuneration for such employment to the order, less the money, if any, retained for their living expenses. Pursuant to such regulations, member A sought and secured employment with a plumbing company, and member B sought and secured employment with a construction company on a construction project in a distant state. Because of the distance of member B's employment from the residence maintained by the order, member B secured living quarters near the job; member A was able to continue living in the residence. Each member retained full status as a member of the order with all privileges and duties associated therewith. The members were still under the authority of the superiors of the order and had to account to them for all the remuneration earned and living expenses incurred.

The religious order is an organization described in section 170(c)(2) of the Code, contributions to which are deductible.

Section 61 of the Internal Revenue Code of 1954 provides that 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, in pertinent part, 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 constitutes income to the person performing the services.

Moreover, as a general rule, an assignment or similar transfer by a taxpayer of compensation for personal services to another individual or entity is an ineffectual method of relieving a taxpayer of Federal income tax liability on the transfer 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.

Section 170 of the Code provides, subject to certain limitations, a deduction for gifts and contributions to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

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 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.

Income Tax Aspects: In the instant case, the members were performing services for others in order to earn money to benefit the religious order by paying the remuneration over to it. The members were not acting as agents of the order, but were receiving compensation on their own behalf and transferring it to the order.

Accordingly, each member is required to include in gross income the entire remuneration received, whether or not retained for living expenses, as long as such remuneration is not excludable under any provision of the Code. However, since the religious order is an organization described in section 170(c)(2) of the Code, contributions to which are deductible, each member is entitled to a charitable contribution deduction in the manner and to the extent provided by section 170 of the Code for the amounts donated to the religious order.

Employment Tax Aspects: 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 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 for or on behalf of the religious order as its agent. In determining whether particular services are of the type that are ordinarily the duties of members of the order, consideration will be given to the established activities of the organization. Ordinarily, a member is performing services as the agent of the religious order only if the order is engaged in the performance of the services as a principal. Ordinarily an 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 the third party with respect to the performance of such services.

In the instant case, the services performed were not of the type ordinarily required by members of a religious order. In addition, the members were employees and agents of the plumbing company and construction company, respectively, and were not acting for or on behalf of the religious order in performing their services. Accordingly, although the members were required by the order to obtain outside employment, and to turn over to the order the wages earned, the services performed by the members as employees of the plumbing company and the construction company are not considered the exercise of duties required by such order.

Accordingly, the entire remuneration received by member A and member B is subject to the taxes imposed by the Federal Insurance Contributions Act and the Collection of Income Tax at Source on Wages. The employers are liable for the payment of any such taxes due.

Compare Rev. Rul. 68-123, 1968-1 C.B. 35, which holds that amounts received from a hospital by a registered nurse who is a member of a religious society exempt from Federal income tax under section 501(c)(3) of the Code are excludable from gross income under section 61(a) and are not wages subject to Federal income tax withholding.