Is It Taxable Income or Is It TAX FREE MONEY For the Pastor?

I received a telephone call about 2 weeks ago from a pastor and the pastor said that a woman in his church wanted to give the church a large amount of money, but the money was for the church staff (NOT for church expenses). She wanted to bless the pastor and staff with a gift. She wanted the church staff to receive a gift and not have to pay any taxes on the money.

About 2 weeks prior to this telephone call, I taught a class at Gateway Seminary (Northern CA campus) and we talked about gifts to ministers, when gifts were more than just turkeys and hams gifts.

If an employer gives a "bonus" or "love gift" to an employee, it is simply additional salary. When a donor gives money to the church, receives a receipt for a deductible contribution to the church, and the church pays the bonus or gift to the employee, it is taxable compensation to employee.

Before anyone throws up their hands, and says that the staff must pay taxes on the money that they receive, other avenues need to be explored prior to giving any of the money to the staff.

There are some items the staff needs to consider and some of the items could be different for each staff.

Look at items where the staff can receive money and they do not have to pay any income tax on or any SE tax would need to be paid. (even if they have not opted out of Social Security or filed IRS Form 4361)

Accountable Reimbursement: If the staff has some accountable reimbursements that they have not been reimbursed for yet, pay these first. No income tax or SE tax needs to be paid on reimbursements. (receipts will be required)

Medical Expense Reimbursement: An amount set aside to be used for reimbursement of non-covered medical expenses. No Income Tax or SE Tax

Group Life Insurance: Life insurance of $50,000 or less. No Income Tax or SE Tax

Education Benefit Options: SEE: Section 117(a) -Scholarship Grants Program; Section 127 – Assistance Program; Section 132(d) – Working Condition Fringe Benefit: For all of these Education benefits there needs to be a written plan. No Income Tax or SE Tax

Retirement Plans (403b (9) No Income tax need to be paid, No SE tax needs to be paid, Church can match amount. Amount can be withdrawn as housing allowance upon retirement –No Income Tax or SE tax. When an employer pays the premium for a qualified retirement plan 403(b), it is not taxable income to an employee during his working years.

There are strict guidelines for each retirement plan. Prior to making any contribution, whether it be by the employee or the employer, make sure the plan is set up properly Tax

Insubstantial or De Minims Value fringe benefit: Employers are permitted to exclude from gross income (as a de minims fringe benefit) the value of a gift that is given by an employer if the value is insignificant (i.e., turkey, ham, etc.) (Revenue Ruling 59-58). This DOES NOT apply to gift certificates or similar items that can readily be converted to cash, regardless of the amount involved. The church can give some length of service awards that we will discuss later, that can be tax free, but it is for a very limited amount.

Church members are free to make personal gifts to ministers and it may or may not be tax free income. If the gift is organized by church leaders, it becomes taxable income.

Examples: Gift as Income

The value of a boat, motor and boat-trailer received in payment for services as a minister was includable in gross income (O.F. Potito, CA-5, 76-2 USTC P9494, 534 F2d 49. Cert. den., 429 US 1039).

A minister that had cash transfers from church members, deposited in her personal account, were taxable income in consideration for services rendered by her, rather than non-taxable gifts. The court ruled that special offerings made to a minister on her birthday, Mother's Day, church's anniversary and Christmas were taxable compensation for services rendered. Members of the local church transferred cash to their minister on four separate occasions. Gifts accumulated to more than $40,000 annually. The offerings were not spontaneous and voluntary, but rather a highly structured program for transferring money to the minister on a regular basis (C.E. Banks, 62 TCM 1611, Dec. 47,832(MJ, TC Memo. 1991- 641).

Church Paying Taxes: To the extent that a church pays any amount toward its minister's obligation for income tax or self-employment tax, the minister is in receipt of additional income which must be included in the gross income and considered in determining income and self- employment tax liability (Rev. Rul. 68-507, 1968-2 CB 485).

Amounts received as clothing and food allowance in exchange for an individual's ministerial services constituted taxable income to the minister. The amounts could not be considered a rental allowance or meals furnished for the church’s convenience. (D. Kalms, 64 TCM 153, Dec. 48,244(M), TC Memo. 192-394).

Example: First Church's board votes to award a "Christmas bonus" in the amount of $1,500 to Reverend A. The bonus is to be paid out of the church's general fund. Reverend A. has received taxable compensation.

First Church collects a Christmas offering for Reverend A. The congregation makes checks payable to the church. All the donors know that Reverend A is going to receive the gift, tax law general treats this as a gift to a specific individual so the gifts would not be deductible. The offering is presented to Reverend A in a single check by the church treasurer. Reverend A. has received taxable compensation.

First Church collects a Christmas offering for multiple staff and employees. If the church leaders (not staff) determine the recipients and the allocation as to whom and the money is disbursed, all of the donors would be given tax-deductible receipts for their contributions. The offering presented to the staff and employees has received taxable compensation.

First Church collects a Christmas offering for Reverend A. Donors are told to make their checks out to Reverend A. or give cash, and that the money would be given directly to Reverend A. and no charitable contribution credit would be given. The offering would be considered taxable (see Swaringer v. Commissioner, TC. Summary Opinion 2001-37 (2001): Pomeroy v. Commissioner, 2003-2 USTC 50,568 (D. Nev. 2003).

Eighth Circuit Court - Rule - Taxable Income: A minister went to a church in 1963. In 1966, members of the congregation started making non-cash gifts to the minister. Then the gifts became cash gifts. By 1987, the gifts became a regular practice of the church and were made three times a year. Two weeks prior to the designated time for giving the gift the associate pastor would make an announcement to the congregation, then collect all the gifts in cash. They were given to the minister as an anonymous gift. Members of the church said the gifts were given out of "love, respect and admiration" for the minister.

The court ruled that these "gifts" were taxable income due to the following:

1. The gifts were taken in a regular and structured manner. The gifts were made by the congregation as a whole, not by individual members.
2. The minister probably would have had to leave the church if not for the gifts.
3. The court ignored statements by the members and looked at the objective nature of the gifts (Goodwin, (1995 CA-8) 76 AFTR2d, 95-5437).

BENEVOLENCE: When an employer helps an employee or a member of an employee's family in need, it is considered taxable compensation. When a non-employee is helped, it is benevolence.

Expenditures of funds given "to or for the use of the church" must be used in the furtherance of the church's exempt purpose (IRC 170).

INUREMENT: The basic principle is that the money given to the church is to further the church's exempt purpose. The church should always spend money in that regard. If an employee of the church receives any economic benefit from the church, it is generally considered taxable income.

Churches are prohibited from engaging in activities that result in the church's income or assets going to "insiders" (i.e., church board members, officers, trustees, employees, ministers, etc.). The prohibition against inurement is absolute, so any amount may be subject to excise tax or the loss of the organization's nonprofit status. (See Losing Your 501 (c)(3) status)

DON’T DO THIS

Rev Wayne Felton – No tax payments on gifts of over $200,000 a year, ($258,001 for 2008 and $234,826 for 2009) for 2 years – gifts from his church. (Felton V. Commissioner, TC Memo 2018-168)

Had to pay back taxes on the money plus a 20% penalty. The money was considered income to the pastor and not gifts from church members.

Bishop Anthony Jinwright - Guilty of Conspiracy, Tax Evasion, Filing False Tax Returns over 6 years. Imprisoned 8 years – 9 months – 2010. Failed to report $2.3 Million (2002-2007) Fail to report LOVE Offerings, Used the church Credit Card for personal benefit and not report it.

Rev Gregory L. Clark – Prisoner #26439 – Sentenced 21 months, failing to pay $36,000 – not knowing that some “gifts” made to him by the church were taxable, is no excuse, for the law, which Clarke acknowledged. He filed false tax returns, $110,000 “Love Offerings” not reported. ($60,000 was a Love Offering from his own church)