Church Members' Donations to Minister Are Denied Gift Treatment: Objective Evidence Indicates Donors' Intent Was to Provide Compensation, the Tax Court Holds

By Bonner, Paul | Journal of Accountancy, January 2019 | Go to article overview

Church Members' Donations to Minister Are Denied Gift Treatment: Objective Evidence Indicates Donors' Intent Was to Provide Compensation, the Tax Court Holds


Bonner, Paul, Journal of Accountancy


A minister received taxable compensation from members of his congregation rather than personal gifts, despite the contributions' designation as gifts, the Tax Court held.

Facts: The Rev. Wayne R. Felton founded Holy Christian Church in St. Paul, Minn., in 2000. The church grew in numbers and finances. Members were provided different colored envelopes for their donations: white envelopes on which amounts could be designated "tithe," "offering," "pledge," "pastoral," or "other," and gold envelopes for special programs and retreats. All amounts collected in both these envelopes were included in donors' annual contribution statements. Felton did not receive a salary, but he was paid the amounts designated "pastoral" from the white envelopes. During the tax years at issue, the church also provided members blue envelopes labeled "pastoral gift" in which they made donations. These were given unopened to Felton, and the amounts were not reported in donors' contribution statements.

Felton and his wife self-prepared their federal income tax returns for 2008 and 2009. They reported as taxable wages about $40,000 each year from the amounts designated "pastoral" from the white envelopes. They also reported other income from a separate ministry--in all, about $70,000 to $80,000 each year--and excluded under Sec. 107(2) a $78,000 annual parsonage allowance from the church. They did not include in gross income the $258,001 in 2008 and $234,826 in 2009 from the blue envelopes. The IRS examined the returns and determined a deficiency, taking the position that the latter amounts were compensation.

Issues: Sec. 102(a) excludes from gross income property acquired by gift; however, Sec. 102(c)(1) provides that the exclusion does not apply to amounts transferred by or for an employer to, or for the benefit of, an employee. A gift "proceeds from a 'detached and disinterested generosity'" (Duberstein, 363 U.S. 278, 285 (1960)), as determined by an objective inquiry (id., at 286). The Feltons contended that the blue-envelope donations were gifts by members, not Felton's employer, the church, and therefore excludable under Sec. 102(a).

The IRS contended the amounts were not gifts and were includible in income under Sec. 61(a).

Holding: The Tax Court noted that, in previous such cases, donations' labels have not been held determinative of donors' intent. For example, in Mutch, 209 F.2d 390 (3d Cir. 1954), donations called "honoraria" or "salary" were found to be gifts to a minister who was retiring. The Third Circuit held that these donations were motivated by love and affection, that the minister had been well-compensated in the past, and that he was not expected to perform future services. …

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