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. On the other hand, the Tax Court said, in Banks, T.C. Memo. 1991-641, donations collected on regularly scheduled special occasions and given to a minister as purported gifts were held to be compensation, in part because they were pursuant to a "highly structured program." Consequently, the Tax Court applied a four-factor test drawn from case law to objectively determine the donors' intent:
- Whether the donations were provided in exchange for services;
- Whether the minister or other church authorities requested the donations;
- Whether the donations were part of a routine, highly structured program and given by individual church members or the congregation as a whole; and
- Whether the minister received a separate salary from the church, and, if so, its amount in relation to the donations.
The Tax Court found that the first factor pointed toward considering the donations as income. Felton was not retiring, like the minister in Mutch, and donors understood that their contributions would help allow him to continue to provide them intangible religious benefits. However, in considering the second factor, the court noted that Felton and other church officials did not solicit the donations, and members had to ask for a blue envelope, which the court said pointed toward gift treatment.
Unlike Banks, where donations were made on regular special occasions by the entire church membership acting together, these donations were made by members individually throughout the two years. Nonetheless, the blue envelopes and their treatment constituted a system that evinced a structured program, the court found, indicating income treatment. Also suggesting they were income, the blue-envelope total amounts each year were high in relation to reported compensation, the court noted — more than double the combined parsonage allowance and white-envelope "pastoral" donations in 2008, and nearly so in 2009.
Having found for the IRS, the court also upheld an accuracy-related penalty. Although the law may not be clear-cut in such instances, the Feltons did not cite any case law favorable to them. There was no evidence in the record to show that they knew of any such authorities when they self-filed their returns, the court said, nor evidence demonstrating other efforts to determine their correct tax liability.
- Felton, T.C. Memo. 2018-168
— By Paul Bonner, a JofA senior editor.