In a widely publicized “memorandum” decision issued by the United States Tax Court in Minnesota on October 10, 2018, the IRS Commissioner’s imposition of income tax, penalties and interest on a pastor who failed to report “pastoral gifts” as income was upheld. According to the Court’s opinion, the fact that the pastor was currently employed, and had a reasonable expectation of continued employment, by the church was the determinative factor. In the specific case, the “gifts” totaled more than $489,000 over two consecutive years – but that’s not the real point.
Prior cases in the Tax Court have led to rulings which held that certain monetary “gifts” to retiring or retired pastors (including monthly payments) who are no longer actively serving their churches can be given free of income tax. Those rulings were not disturbed by the present case.
Churches need to understand what happened in this case and why it probably interferes with their ability to collect “love offerings” for pastors and staff as they have done in the past, perhaps for many years, which is a practice Ministry Specialist Max Herr has been counseling churches to discontinue in most cases for more than two years.
In the Minnesota case, white envelopes were handed out each week to church members for their tithes and offerings, and included a line labeled “Pastoral” on which members could designate a deductible amount for “sowing the seed” efforts. Gold envelopes were offered for special events. Members could obtain special blue envelopes on request that were labeled “Pastoral Gift,” saying no tax deduction would be allowed, and to make checks payable to the pastor directly. You might think this would be the same as handing the pastor an unsolicited birthday card with a check in it, because the church did not count the money, did not deposit it into a church-controlled bank account, but simply passed the unopened envelopes to the pastor.
The Tax Court's View
Though the church was directly involved in the distribution of the envelopes, even though it did not “advertise” their availability, this was essentially the same as if someone had said to the congregation, “Today we’re taking a love offering for the pastor, in appreciation of his faithful service to the church for the past 13 years.” The collection of the money was considered an organized activity of the church, not a freewill act on the part of any member. And therein lies the problem.
A church may realize it is not paying the pastor a salary worthy of his call. It may not be able to pay him much, if anything, as is the situation in too many of our smaller churches. The pastor in this tax case agreed not to accept an annual salary, but received $78,000 as housing allowance. The white envelope “pastoral” contributions were attributed to the pastor at year-end as income, and typically amounted to about $40,000. It’s obvious this church’s situation was different than the majority of our CSBC congregations. Indeed, the church’s annual revenue was more than $1,000,000.
Count "love offerings' as taxable income
While the process of budgeting and compensation is a matter of stewardship, and churches frequently announce in December they are going to collect a “love offering” for the pastor or staff, churches need to STOP the practice of taking “love offerings” for pastor and/or staff immediately, unless they are willing to make a full accounting of the funds and report the amounts received as TAXABLE INCOME to the pastor or staff member. Churches should not tell congregants to “just give the pastor (or staff member) a Christmas card with some money,” because this, too, will look like an organized “commercial” effort to pay the pastor.
Anyone in America is ordinarily welcome to give any other person as much as $15,000 in cash or in-kind (and married persons may combine their giving, for a total of $30,000) as a “gift” without causing an income tax problem. However, with the current, open animosity in our society toward Christians and the church, and seen in various ways at all levels of government, greater scrutiny of gifts vs. income is likely to become part of future involvement of the IRS, and churches should avoid actively inviting trouble.
Although the Tax Court judge in the case seemed sympathetic to some of the biblical perspectives in the pastor’s argument, nevertheless, the judge wrote that “we must therefore descend from the sacred to the profane,” and the matter was decided according to precedent under US tax law, not God’s law. The pastor and his wife now owe a substantial portion of the “gifts” to Uncle Sam as income tax and penalties – and that’s just for the 2008 and 2009 tax years.
If your members want to give the pastor a Christmas gift, just as they might a friend, neighbor, relative or close family member, you have to let them “figure it out” on their own. Please do not give them advice or instructions on how to give “gifts” to staff members. And remember, those “staff appreciation gifts” the church council decides to give out around the Christmas season, well, they are taxable as income too.
If you would like to read the opinion of the Tax Court judge, email Ministry Specialist Max Herr for a copy.