                        T.C. Memo. 1997-490



                      UNITED STATES TAX COURT



        HENRY W. RADDE AND SUSAN K. RADDE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14427-96.                 Filed October 29, 1997.



          P worked as an ordained minister for the United
     Methodist Church.
          Held: Among other things, for Federal income tax
     purposes, P is to be treated as an employee of the
     United Methodist Church.



     Joe K. Gordon, for petitioners.

     Audrey M. Morris, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in and

additions to petitioners’ joint Federal income taxes as follows:
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                                           Addition to Tax
          Year        Deficiency           Sec. 6651(a)(1)

          1985            --                    $1,200
          1990          $5,685                   1,421
          1991           5,658                     234


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.    References to petitioner in the singular are to

Henry W. Radde.

     After settlement of some issues, the primary issues for

decision are:    (1) Whether, for Federal income tax purposes,

petitioner is to be treated as an employee of the United

Methodist Church (hereinafter sometimes referred to as the church

or the Methodist church) or as a self-employed minister, and

(2) whether, for self-employment tax purposes, the stipulated

fair rental value of parsonages provided to petitioners includes

an amount relating to utility and other household expenses of the

parsonages.


                          FINDINGS OF FACT

     Many of the facts have been stipulated and are so found.

When the petition was filed, petitioners resided in Hurst, Texas.

     During the years in issue, petitioner worked as an ordained

minister for the United Methodist Church.         As such, petitioner

agreed to abide by and practice the precepts contained in the
                                - 3 -

Book of Discipline of the United Methodist Church (the

Discipline).   The Discipline sets forth guidelines and specific

duties that petitioner was required to follow in order to retain

his position as a minister for the church.

     Under the Discipline, bishops were authorized to and did

appoint petitioner to various positions within the church.

Petitioner was required to accept the appointments in order to

retain his position as a minister for the church.

     During the first 5 months of 1990, petitioner was appointed

and served as senior pastor for the First United Methodist Church

in Hurst, Texas.   As senior pastor in Hurst, petitioner was

required to and did perform typical duties of a pastor.

Petitioner conducted worship services, preached, visited and

counseled parishioners, performed baptisms, weddings, and

funerals, and oversaw the general welfare of the church.

     As senior pastor, petitioner reported to and was supervised

by a district superintendent.   Petitioner submitted reports to

the district superintendent regarding the number of baptisms,

number of new members, attendance, finances, and other church

matters.

     Petitioner’s congregation organized an executive council and

a pastor-parish relations committee to provide guidance and

direction to petitioner as their minister.   Petitioner worked

with this committee to implement various programs for the church.
                               - 4 -

     To a degree, petitioner was allowed to set his own schedule.

Generally, petitioner was not required to be in the church during

specific hours.   Petitioner, however, was required to follow the

guidelines set forth in the Discipline as to the doctrine

petitioner preached and as to the many duties petitioner

performed.   Although petitioner was allowed to select specific

topics for weekly sermons, petitioner was required to preach the

theology of the United Methodist Church.

     The majority of petitioner's duties were performed in the

church or in an office provided to him, although some duties were

performed in a house that was provided by the church to

petitioners as a parsonage.

     During the first 5 months of 1990, as senior pastor in

Hurst, Texas, petitioner received $25,000 in cash compensation

from the church in Hurst, and petitioners received the parsonage

in which petitioner and his family resided.   Petitioner

designated $2,167 of the $25,000 in cash compensation as relating

to utility and other household expenses of the parsonage.

     From June 1990 through 1991, petitioner was appointed and

served as district superintendent for the Waco District of the

Central Texas Conference of the United Methodist Church (the

Conference).

     As district superintendent in Waco, petitioner supervised

56 local Methodist churches and more than 40 pastors, made

periodic reports to the supervising Methodist bishop, attended
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the Conference cabinet meetings, handled administrative duties

associated with the district, occasionally preached at a local

Methodist church, and counseled parishioners.   Petitioner set

goals for and discussed the condition of the district with a

superintendent’s committee.

     The majority of petitioner's duties as district

superintendent were performed in the district office, in a local

Methodist church, and in the supervising bishop's office.

Occasionally, some of petitioner’s duties were performed in a

home that was provided to petitioners as a parsonage.

     During the latter 7 months of 1990 and for 1991, as district

superintendent, petitioner received $34,443 and $61,558,

respectively, in cash compensation from the Conference, and

petitioners also received from the Conference the parsonage in

which petitioner and his family resided.   During this period,

petitioner designated $2,050 in 1990 and $3,500 in 1991 of the

above cash compensation as relating to utility and other

household expenses of the parsonage.   Petitioner also received

from the Conference an additional $2,333 in 1990 and $4,000 in

1991 in cash compensation as relating to utility and other

household expenses of the parsonage.

     In 1990 and 1991, petitioner incurred approximately $10,605

and $19,314, respectively, in expenses relating to his work as a

minister.
                                - 6 -

     Although petitioners timely filed applications for automatic

extension of time to file their Federal income tax returns,

petitioners untimely filed their joint Federal income tax returns

for 1985, 1990, and 1991.    Petitioners’ 1985 joint Federal income

tax return was untimely filed on September 30, 1992.

Petitioners’ 1990 and 1991 joint Federal income tax returns were

untimely filed on February 8, 1993.

     On petitioners’ 1990 and 1991 joint Federal income tax

returns, petitioners reported the compensation that petitioner

received as a senior pastor and as a district superintendent as

that of a self-employed minister.   Petitioners therefore treated

the $10,605 and $19,314 in expenses relating to petitioner’s work

as a minister as fully deductible business expenses on Schedule C

of their respective Federal income tax returns.

     For self-employment tax purposes, petitioners reported as

self-employment income total net income on the Schedule C’s of

$31,814 for 1990 and $31,365 for 1991, plus $3,600 for 1990 and

$7,500 for 1991.   The latter two amounts apparently reflect

petitioners’ estimate, on their income tax returns, of the rental

value of the parsonages and of the additional amounts petitioner

designated and received in cash as relating to utility and other

household expenses of the parsonages.   The total income that

petitioners reported for 1990 and 1991 as petitioner’s self-

employment income for petitioner’s work as a minister was $35,414

and $38,865, respectively.
                               - 7 -

     On audit, for Federal income tax purposes, respondent

determined that petitioner was to be treated as an employee of

the United Methodist Church and not as a self-employed minister.

Respondent therefore disallowed petitioners’ claimed Schedule C

business expenses of $10,605 and $19,314 for 1990 and 1991,

respectively, relating to petitioner’s work as a minister.

Respondent determined that these expenses should be deducted only

as miscellaneous expenses on Schedule A of petitioners’ income

tax returns and allowable only to the extent that the expenses

exceed 2 percent of petitioners’ adjusted gross income.

     For self-employment tax purposes, respondent determined that

petitioners’ calculation of self-employment income was

underreported.   Respondent increased petitioner’s total self-

employment income to $52,870 for 1990 and $50,903 for 1991.

Respondent’s adjustments, a number of which are now agreed to,

were based primarily on an increase in the value of the

parsonages and an increase in the amounts petitioners reported as

relating to utility and other household expenses of the

parsonages.   Respondent, for 1985, 1990, and 1991, also

determined the late filing additions to tax against petitioners.

     The parties now stipulate that in 1990, the parsonage in

Hurst had a fair rental value of $500 per month, and that in 1990

and 1991, the parsonage in Waco had a fair rental value of $1,200

per month.
                               - 8 -

                              OPINION

     For Federal income tax purposes, an ordained minister of a

church may be treated as an employee or as a self-employed

individual.   The resolution of this issue affects the manner and

extent to which related expenses may be deducted on a minister’s

income tax return.   If a minister is treated as an employee of

the church, the minister’s expenses will be deductible only on

Schedule A of the income tax return subject to a 2-percent floor.

If a minister is treated as a self-employed individual, the

minister’s expenses will be fully deductible as business expenses

on Schedule C of the income tax return.

     Whether a minister, for Federal income tax purposes, is

treated as an employee or as a self-employed individual has no

effect upon a minister’s self-employment tax liability because

under section 1402(c)(2)(D) a minister’s income is treated as

self-employment income.   However, in order to determine whether

petitioner’s expenses are deductible for income tax purposes on

Schedule A or Schedule C of petitioners’ income tax returns, we

must determine whether petitioner is to be treated as an

employee.

     Whether an employer/employee relationship exists in a

particular situation involves a question of fact.   Weber v.

Commissioner, 103 T.C. 378, 386 (1994), affd. per curiam 60 F.3d

1104 (4th Cir. 1995); Professional & Executive Leasing, Inc. v.

Commissioner, 89 T.C. 225, 232 (1987), affd. 862 F.2d 751 (9th
                               - 9 -

Cir. 1988).   The common-law definition of employee controls.

Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322-323 (1992);

Weber v. Commissioner, supra at 386.

     Relevant factors used to analyze whether an individual is to

be treated as an employee include the following:   (1) The degree

of control exercised by the principal over the details of the

work; (2) the degree of investment by the individual in the

equipment used in the work; (3) the opportunity for profit or

loss; (4) whether or not the individual is subject to discharge;

(5) whether the work is part of the principal’s regular business;

(6) the permanency of the relationship; and (7) the intent of the

parties.   Weber v. Commissioner, supra at 387; Professional &

Executive Leasing, Inc. v. Commissioner, supra at 232; Simpson v.

Commissioner, 64 T.C. 974, 984-985 (1975).

     Section 31.3401(c)-1(b), Employment Tax Regs., defines the

employer/employee relationship as follows:


          (b) Generally the relationship of employer and
     employee exists when the person for whom services are
     performed has the right to control and direct the
     individual who performs the services, not only as to
     the result to be accomplished by the work but also as
     to the details and means by which that result is
     accomplished. That is, an employee is subject to the
     will and control of the employer not only as to what
     shall be done but how it shall be done. * * * In
     general, if an individual is subject to the control or
     direction of another merely as to the result to be
     accomplished by the work and not as to the means and
     methods for accomplishing the result, he is not an
     employee.
                               - 10 -

     In Weber v. Commissioner, supra, we concluded that a

Methodist minister was to be treated as an employee for Federal

income tax purposes.

     Petitioners contend that petitioner was self-employed and

that Weber v. Commissioner, supra, should be applied on a

prospective basis only, not to petitioner for the years at issue

herein.   Petitioners emphasize that petitioner set his own hours

and was not required to account for his time or to submit

detailed reports of his activities.     We disagree.

     The structure of the United Methodist Church provides

several levels of supervision for its ministers.       As senior

pastor in Hurst, Texas, petitioner was supervised by a district

superintendent and was required to abide by the Discipline and to

report statistics concerning his congregation.     Petitioner worked

with an executive council and a pastor-parish relations committee

consisting of members of his congregation.     When petitioner

served as a district superintendent, his duties involved those

typically associated with an employee.     Petitioner supervised 56

churches and more than 40 pastors and reported directly to the

Conference bishop.

     As a minister of the United Methodist Church, petitioner

agreed to abide by the duties set forth in the Discipline.         In

giving sermons, petitioner was required to preach the doctrine of

the United Methodist Church.
                              - 11 -

     Petitioner was appointed by a bishop to positions he held.

Under the Discipline, in order to remain a Methodist minister

petitioner was required to accept such positions.

     Petitioners have failed to distinguish the instant case from

the facts of Weber v. Commissioner, supra.

     We conclude that for 1990 and 1991, petitioner should be

treated as an employee of the United Methodist Church.

Petitioners’ expenses of $10,605 for 1990 and $19,314 for 1991

relating to petitioner’s work as senior pastor and as district

superintendent (subject to further adjustments agreed to by the

parties) are not allowable for income tax purposes as Schedule C

business expenses but only as miscellaneous itemized deductions

on Schedule A, subject to the 2-percent floor.

     As explained, even though petitioner, for Federal income tax

purposes, is to be treated as an employee, for self-employment

tax purposes, petitioner’s cash compensation and the fair rental

value of the parsonages and the amounts petitioner received

relating to expenses of the parsonages are subject to self-

employment taxes.   Sec. 1402(a)(8); sec. 1.1402(a)-11(a), Income

Tax Regs.   Accordingly, for self-employment tax purposes, all

amounts received by petitioner as compensation are to be treated

as self-employment income including the stipulated fair rental

value of the parsonages and the amounts petitioner received

relating to expenses of the parsonages.
                              - 12 -

     Petitioners allege that this stipulated fair rental value of

the parsonages already includes an amount reflecting the amounts

petitioner either designated or received in cash relating to

their utility and other household expenses.   Accordingly,

petitioners claim that the adjustment that respondent made with

respect to the parsonages and related items should now be reduced

by the amounts that petitioner either designated or received in

cash relating to their utility and other household expenses.

     Petitioners bear the burden of proving that respondent’s

adjustments are incorrect.   Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).

     Petitioners have not proven that the stipulated fair rental

value of the parsonages already includes amounts petitioner

designated or received in cash relating to the utility and other

household expenses of the parsonages.   In calculating

petitioner’s self-employment income, no reduction is to be made

to respondent’s adjustments relating to petitioner’s self-

employment tax liability.


Addition to Tax

     Section 6651(a)(1) provides for an addition to tax for

failure to timely file a Federal income tax return.   The addition

to tax is 5 percent of the amount required to be shown as tax on

the return for every month the return is late, but not exceeding

25 percent.   This addition to tax will not be imposed if it is
                              - 13 -

shown that the failure to file is due to reasonable cause and not

due to willful neglect.

     Petitioners argue that in 1983 petitioner’s father’s death

and a difficult move caused petitioner to become seriously

depressed and provided reasonable cause for petitioners’ failure

to timely file their joint Federal income tax returns for 1985,

1990, and 1991.

     Petitioners have failed to establish reasonable cause.    Rule

142(a); Welch v. Helvering, supra.     Petitioners have not

established that petitioner’s alleged depression constitutes

reasonable cause for their failure to timely file their Federal

income tax returns.   Petitioners did timely file applications for

automatic extension of time to file U.S. individual income tax

returns, which shows that petitioners were aware of their tax

obligations.   For 1985, 1990, and 1991 petitioners are liable for

the additions to tax under section 6651(a)(1).

     To reflect the foregoing,


                                           Decision will be entered

                                     under Rule 155.
