SERVICE RULES THAT TAX-FREE HOUSING ALLOWANCE APPLIED TO MORTGAGE INTEREST AND PROPERTY TAXES WILL BE DEDUCTIBLE BY MINISTERS AND THE ARMED FORCES.

Rev. Rul. 87-32

This revenue ruling reverses the holding of Situation 2 of Rev. Rul. 83-3, 1983-1 C.B. 72, that a minister may not deduct interest and taxes paid on a personal residence if the amounts expended are allocable to a rental allowance excluded from gross income under section 107 of the Internal Revenue Code.

Section 265(a)(6) of the Code (added by the Tax Reform Act of 1986, section 144, 1986-3 (Vol. 1) C.B. ___) provides that no deduction shall be denied under section 265 for interest on a mortgage on, or real property taxes on, the home of the taxpayer by reason of the receipt of an amount as--(A) a military housing allowance, or (B) a parsonage allowance excludable from gross income under section 107.

Section 265(a)(6) of the Code is effective for taxable years beginning before, on, or after December 31, 1986. However, the provision does not allow taxpayers to file an amended return for any taxable years that are otherwise closed. See S. Rep. No. 93-313, 99th Cong., 2d Sess. 61, 1986-3 (Vol. 3) C.B. 60, 61.

Thus the holding of Situation 2 of Rev. Rul. 83-3 is modified to read as follows:

If a minister of the gospel pays interest on a mortgage on, or real property taxes on, the minister's home, then the deductions allowable under sections 163 and 164 of the Code for those payments will not be denied under section 265, even though portions of the amounts expended may be allocable to a rental allowance excluded from gross income under section 107. Section 265(a)(6).

Rev. Rul. 83-3 is further modified by deleting the material relating to the effective date of Situation 2.

These modifications are effective for taxable years beginning before, on, or after December 31, 1986.

If mortgage interest expenses or real property taxes were not claimed as deductions and claiming such deductions would entitle a minister to a refund, a claim for refund may be made by filing an amended return. However, an amended return may not be filed for taxable years that are otherwise closed. See S. Rep. No. 93-313, 99th Cong., 2d Sess. 61, 1986-3 (Vol. 3) C.B. 60, 61. Generally, an amended return must be filed within 3 years from the date the minister's return was filed or 2 years from the date the tax was paid, whichever is later.

This ruling also provides that, under section 265(a)(6) of the Code, no deduction otherwise allowable under section 163 or 164 for home mortgage interest or real property taxes shall be denied under section 265 to members of the military service by reason of their receipt of a subsistence, quarters, or other housing allowance under federal law. The term military service means the Army, Navy, Air Force, Marine Corps, Coast Guard, National Oceanic and Atmospheric Administration, and Public Health Service

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 83-3 is modified.

Rev. Rul. 85-96 is obsoleted.