The holiday season provides a prime opportunity for many church congregations and other worshipping groups to show their appreciation through financial gifts for the pastors, rabbis, priests or imams (collectively “ministers”) who faithfully serve their constituents. Often known as “love offerings,” the gifts are typically collected from the members and may be several hundred or even thousands of dollars. Do such love offerings amount to taxable income for the ministers, or are they nontaxable gifts?
A federal tax court recently addressed this issue in Jackson v. Commissioner, citing attorneys Ryan Oberly and Michael Mosher’s 2012 article A Gift Not So Simple – Current Tax Issues Associated with “Love Offerings.”[1] As the court ruled, the answer depends on the transferor’s intent, not the taxpayer’s subjective intent. More specifically, are the “love offerings” made to compensate the recipient for his or her services and are therefore taxable, or are they better characterized as nontaxable gifts of generosity made to show affection, respect, or charity? When the recipient is employed by the organization that serves the group of givers – e.g., a church congregation – this taxability question must be addressed.
The Jackson Case – Clearly Compensation
According to the U.S. Tax Court’s ruling, Pastor Jackson told his church leadership that he did not want any salary for his pastoral services, but he would accept “love offerings” on a regular basis as expressions of the church congregation’s gratitude for his service. Consequently, the church collected funds and paid him as requested (and even allowed him to sign the checks!). For the tax year in question, the church paid him a total of $4,815 and issued him an IRS Form 1099-MISC for this “nonemployee compensation.”
Despite the relatively small dollar amount involved, the IRS pursued him and contended that the payments were unreported taxable compensation. On Pastor Jackson’s appeal, the tax court sided with the IRS. Applying the linchpin tax case of Commissioner v. Duberstein, 363 U.S. 278 (1960), the Court focused on the congregation’s intent, not the pastor’s characterization, to determine that the transfers were clearly compensation for pastoral services. Of particular importance was the pastor’s own admission that he chose to accept “love offerings” as a substitute for a salary. The frequency of the monetary transfers, the fact that they were made from the entire congregation, and the church’s issuance of a Form 1099 all further demonstrated objectively that the “love offerings” actually constituted taxable compensation. Jackson was thus a fairly egregious case.
Gifts to Clergy: Simple and Not So Simple
Considering this outcome, how should financial gifts and love offerings be handled by worshipping groups, and what steps can congregations take to protect the ministers who serve them?
First, such gifts may be paid as taxable income, such as a year-end bonus. Such approach is definitely simple and most conservative from a tax perspective.
Second, if gifts are to be nontaxable, then per the Supreme Court’s Duberstein guidance, such gifts should reflect a “detached and disinterested generosity” of the givers, seeking to express “affection, respect, admiration, charity, or like impulses” (rather than compensation for services rendered). Of key importance are the following aspects: (a) the gifts should be one-time only, or at least only for very special occasions; (b) they are best generated from efforts of those other than church leaders, particularly to distinguish the gifts from otherwise regular compensation; (c) the gifts are best made from a collection taken up from those who wish to express affection and care, not from a church’s bank account; and (d) the gift funds are collected on grass-roots, informal basis rather than through official church channels.
Note too that such gifts will consequently not be tax deductible to the givers, as the gifts are given directly to the minister and not made through the religious institution. In the event that the congregants wish to make such gifts through the religious institution, the gifts likely should be treated as taxable income to the recipient.
In short, whether a well-meant love offering constitutes taxable income for a minister or not depends on the facts and circumstances surrounding the gift. As the Supreme Court noted in Duberstein, the challenge in drawing a bright line to distinguish gifts from taxable income “does not lend itself to any more definitive statement that would produce a talisman for the solution of concrete cases.” Consequently, leaders of worshipping groups should carefully consider whether a love offering or other gift is truly nontaxable income or perhaps should be treated as taxable income.
Sample Scenarios
Consider the following three scenarios that were drawn from the Oberly/Mosher article.[2] These scenarios illustrate the IRS’s facts and circumstance test and provide helpful pointers for worshipping groups consistent with the above recommendations.
Scenario One: Spontaneous Giving
Spontaneous or ad hoc transfers directly from members to a minister may be qualified gifts and therefore excludable from the religious leader’s taxable income. For example, after a particularly inspiring sermon or worship service, a church member gives his pastor twenty dollars as a spontaneous expression of appreciation. In this case, the member-pastor relationship does not change the member’s detached and disinterested gift into taxable compensation. The pastor did not request the gift and no services were expected to be rendered in exchange for the transfer. Furthermore, the member as an individual and the minister have no employer / employee relationship. In this limited circumstance, a gift should not be taxable income.
Scenario Two: Special Occasions
In addition to spontaneous transfers, transfers to a minister on certain special occasions may be a nontaxable gift. As in scenario one, here the gift is also made from the members directly to minister. Consider the following example: The members of a synagogue collect $20,000 and give the funds directly to a retiring rabbi as a measure of goodwill, esteem, and kindliness, in appreciation for his faithfulness through the years.[3] The transfer is not facilitated by the synagogue’s board of directors or staff, it does not take place through the synagogue’s accounts, and the synagogue has no expectation of additional services from the rabbi. In such a case, a strong likelihood exists that the transfer would be considered a gift, as opposed to taxable compensation.
Contrast the synagogue example above with a reported tax court case in which church members were encouraged to make extra contributions four times each year for the benefit of their pastor.[4] Cash gifts were collected, handed directly to the pastor, and deposited into her personal checking account. The IRS determined that over three years, the church collected $131,994 in such special gifts. The Tax Court concluded the donations were a part of a highly-structured and regularly conducted program to provide compensation to the pastor in consideration for services rendered, and were thus taxable income.
Scenario Three: Organizational Involvement
Under this scenario, the religious institution facilitates collections for ministers, collects the funds, deposits them into the institution’s accounts, and then disburses them to the minister. Such transfers are definitely taxable income for services rendered. In addition, if the recipient is an insider and therefore a “disqualified person,” under Section 4958 of the Internal Revenue Code (which is likely the case), a failure to contemporaneously report the transfers as compensation may constitute an “automatic excess benefit transaction” under that Section of the Code, triggering substantial potential penalties for the organization, its Board, and the minister.
The Bottom Line
As illustrated by the above scenarios, a worshipping group’s special Christmas or year-end love offering to a beloved pastor, rabbi, imam, or other minister may, in fact, be taxable compensation, however generously intended. A worshipping group that seeks to treat such gift love offerings as nontaxable should be careful to distance the religious organization’s involvement, keep them as special gifts, avoid other indicia of taxable income, and consult experienced professionals in case of doubt. Such measures are critical for both the worshipping group’s and minister’s legal protection and peace of mind.
