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exempt parsonage allowance and are therefore nondeductible.
Petitioners’ position is that the Court should not deny deduction
of petitioner’s business-related ministry expenses simply because
he received a tax-exempt parsonage allowance.
Section 265 provides:
SEC. 265(a). General Rule.--No deduction shall be
allowed for--
(1) Expenses.--Any amount otherwise allowable as a
deduction which is allocable to one or more classes of
income other than interest (whether or not any amount
of income of that class or classes is received or
accrued) wholly exempt from the taxes imposed by this
subtitle, or any amount otherwise allowable under
section 212 (relating to expenses for production of
income) which is allocable to interest (whether or not
any amount of such interest is received or accrued)
wholly exempt from the taxes imposed by this subtitle.
Tax-exempt income is defined as “any class of income * * * wholly
exempt from the taxes imposed by subtitle A of the Code.” Sec.
1.265-1(b), Income Tax Regs. The result is that expenses
allocable to tax-exempt income are nondeductible. McFarland v.
Commissioner, T.C. Memo. 1992-440. Section 265 applies to
petitioner’s parsonage allowance. Deason v. Commissioner, 41
T.C. 465, 468 (1964); Dalan v. Commissioner, T.C. Memo. 1988-106.
Petitioner received both nonexempt income and a tax-exempt
parsonage allowance for his ministry work. The ministry expenses
petitioner attempts to deduct were incurred while petitioner was
earning both nonexempt income and a tax-exempt parsonage
allowance. This is precisely the situation section 265 targets.
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