Judge Rules IRS Can Tax Gifts Made Directly to Pastors
By Aaron Earls
While church members may want to give their pastor a financial gift to show appreciation, a recent court ruling says the IRS can still get their cut.
A Minnesota tax court ruled that contributions made by congregants as “gifts” to their pastor are still taxable income, according to the Evangelical Council for Financial Accountability.
As pastor of Holy Christian Church, a non-denominational congregation in Saint Paul, Minnesota, Wayne Felton received what he believed to be nontaxable gifts from members.
In both 2008 and 2009, congregants gave Felton more than $200,000 as direct gifts.
Members could use special color-coded envelopes to indicate if they wanted the money to be counted as a tax-deductible contribution to the church or if the money was to go directly to the pastor as a gift without the same tax benefits for the donation.
Wayne Felton only filed tax returns for those two years after the IRS contacted him.
In his ruling, Judge Mark Holmes “rendered a decision that may be the most thorough judicial analysis of the law surrounding ‘love gifts’ for pastors that has ever been published,” according to Mike Batts of Batts, Morrison, Wales & Lee, a certified public accountant firm.
Holmes wrote that the dispute between the tax laws and Felton “has deep roots in Christian history and both parties can see their positions staked out as far back as St. Paul.”
Batts said Holmes seemed sympathetic to Felton and recognized “the law in the area of gifts for ministers is not abundantly clear,” but he agreed with the IRS’ position.
Noting “our tax system is somewhat more complicated than the ancients’,” Holmes outlined numerous court cases dealing with conflicts over the taxable nature of certain financial gifts, including many made to pastors and religious figures.
Holmes concluded, “When comparatively so much money flows to a person from people from whom he provides services (even intangible ones), and to whom he expects to provide services in the future, we find it to be income and not gifts.”
The judge didn’t make any rulings on a housing allowance the church provides Felton and his wife, only to note the allowance has only recently been found unconstitutional by one court and is currently on appeal to the U.S. Seventh Circuit Court.
Aaron is the senior writer at Lifeway Research.