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Section 1.265-1(c), Income Tax Regs., provides:
(c) Allocation of expenses to a class or classes
of exempt income. Expenses and amounts otherwise
allowable which are directly allocable to any class or
classes of exempt income shall be allocated thereto;
and expenses and amounts directly allocable to any
class or classes of nonexempt income shall be allocated
thereto. If an expense or amount otherwise allowable
is indirectly allocable to both a class of nonexempt
income and a class of exempt income, a reasonable
proportion thereof determined in the light of all the
facts and circumstances in each case shall be allocated
to each.
The issue of whether petitioner’s ministry expenses are
deductible against his tax-exempt parsonage income has been
examined by this Court before. In McFarland v. Commissioner,
supra, we held that ministry expenses incurred by the taxpayer
were indirectly allocable to a class of nonexempt income and a
class of exempt income when the taxpayer’s only business activity
was his ministry and he received both taxable compensation and
tax-exempt parsonage allowance. Likewise, in Dalan v.
Commissioner, supra, the Court held that section 265(a)(1) barred
the deduction of the taxpayer’s ministry expenses to the extent
the expenses were allocable to his tax-exempt ministry income
even though the taxpayer had nonexempt income from his job as a
guidance counselor. See Deason v. Commissioner, supra (minister
taxpayer denied deduction for automobile business expenses when
virtually all income earned during year was tax-exempt parsonage
allowance under section 107.)
Petitioner’s circumstances are not factually distinguishable
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Last modified: May 25, 2011