Is It Taxable? May I Deduct it?
Every year someone will ask (usually more than someone) "Does the minister have to report a Christmas gift from the congregation for tax purposes?" Often, along with that question comes the query "Is my gift to the staff Christmas gift tax-deductible?" We asked an expert, Sheri Simon, who is a CPA and has a Master's Degree in non-profit tax law. Here is what she had to say. She also included the specific IRS publication guidelines on the subject. In an even more generous act, she has included her contact information if you need more clarification.
Questions regarding Christmas gifts to staff and ministers:
Are gifts to staff and ministers made by a member of the congregation deductible on their tax return?
Yes, they can be, providing…
In order for any gift to be tax deductible by the taxpayer (donor), it must be made to a qualified organization (church), and not to a specific individual. But you can deduct a contribution to a qualified organization that helps needy or worthy individuals if you do not indicate that your contribution is for a specific person. The way churches most commonly handle this issue is to have a line item in their budget for Christmas gifts to staff and ministers. The budget line-item allows the church to determine the gift given and the taxpayer to donate to a qualified organization and not to a specific person. See IRS Publication 526 for more details.
Are Christmas bonuses considered income to staff and ministers?
No, they don’t have to be, providing…
A minister/staff usually receives compensation from the employing church or church agency for personal services but may also receive bonuses or "special gifts." Under Treas. Reg. § 1.61-2(a)(1), all are includible in gross income. Fees for weddings, funerals, etc., given directly to the church rather than to the minister are not considered compensation to the minister. You need to look at the facts and circumstances of each transfer. Some transfers are obvious gifts while others might actually be compensation for services. The most significant fact is the intention of the taxpayer (donor). A gift in the statutory sense are proceeds from a "detached and disinterested generosity," "out of affection, respect, admiration, charity or like impulses." And in this regard, the most critical consideration, is the taxpayer's (donor’s) "intention." "What controls is the intention with which payment, however voluntary, has been made." Again, the budget line-item allows the donor to specify the intention. In most court cases we find that when bonuses are given they are tied directly to compensation (i.e. based upon a % of salary or years of service) and therefore considered compensation, whereas “special gifts” are based upon what was actually collected from donors for that specific purpose and are considered more charitable in nature. See IRS Minister Audit Technique Guide for more details.
Should you have need of additional information or clarification, feel free to contact me at firstname.lastname@example.org or (502) 657-6421.
Sheri Hume Simon, CPA MST
IRS Publication 526, Charitable Contributions (August 05, 2015)
Contributions You Cannot Deduct
There are some contributions you cannot deduct and others you can deduct only in part.
You cannot deduct as a charitable contribution:
A contribution to a specific individual,
A contribution to a non qualified organization,
The part of a contribution from which you receive or expect to receive a benefit,
The value of your time or services,
Your personal expenses,
A qualified charitable distribution from an individual retirement arrangement (IRA),
Certain contributions to donor advised funds, or
Certain contributions of partial interests in property.
Detailed discussions of these items follow.
Contributions to Individuals
You cannot deduct contributions to specific individuals, including the following.
Contributions to fraternal societies made for the purpose of paying medical or burial expenses of members.
Contributions to individuals who are needy or worthy. You cannot deduct these contributions even if you make them to a qualified organization for the benefit of a specific person. But you can deduct a contribution to a qualified organization that helps needy or worthy individuals if you do not indicate that your contribution is for a specific person.
Example. You can deduct contributions to a qualified organization for flood relief, hurricane relief, or other disaster relief. However, you cannot deduct contributions earmarked for relief of a particular individual or family.
Payments to a member of the clergy that can be spent as he or she wishes, such as for personal expenses.
Expenses you paid for another person who provided services to a qualified organization.
Example. Your son does missionary work. You pay his expenses. You cannot claim a deduction for your son's unreimbursed expenses related to his contribution of services.
Payments to a hospital that are for a specific patient's care or for services for a specific patient. You cannot deduct these payments even if the hospital is operated by a city, state, or other qualified organization.
IRS Publication - Minister Audit Technique Guide ( October 2, 2015)
Income To Be Reported
A minister usually receives compensation from the employing church or church agency for personal services but may also receive bonuses or "special gifts." In addition, the minister may receive fees paid directly from parishioners for performing weddings, funerals, baptisms, masses and other contributions received for services. Under Treas. Reg. § 1.61-2(a)(1), all are includible in gross income, along with expense allowances for travel, transportation, or other business expenses received under a nonaccountable plan. If the church or church agency pays amounts in addition to salary to cover the minister's self-employment tax or income tax, these are also includible in gross income. Rev. Rul. 68-507, 1968-2 C.B. 485.
Fees for weddings, funerals, etc., given directly to the church rather than to the minister are not considered compensation to the minister. Contributions made to or for the support of individual missionaries to further the objectives of their missions are includible in gross income. Rev. Rul. 68-67, 1968-1 C.B. 38.
A minister's compensation package often includes a designated parsonage allowance, that is, the use of church owned housing, a housing allowance, or a rental allowance. This is treated differently for income tax and self-employment tax purposes, and is discussed in detail below in the section on Parsonage allowance.
Gift or Compensation for Services
You need to look at the facts and circumstances of each transfer. Some transfers are obvious gifts while others might actually be compensation for services.
IRC § 61(a) provides that gross income includes all income from whatever source derived unless specifically excluded by the Code. Compensation for services in whatever form received is definitely included in income. IRC § 102(a) excluded from gross income the value of property acquired by gift. Whether an item is a gift is a factual question and the taxpayer bears the burden of proof. The most significant fact is the intention of the taxpayer. The Supreme Court provided guidance in this area in two key cases which were summarized in Charles E Banks and Rose M Banks v. Commissioner, T.C. Memo. 1991-641 as follows:
"In Commissioner v. Duberstein, 363 U.S. 278, 4 L. Ed. 2d 1218, 80 S. Ct. 1190 (1960); at 285-286, the Supreme Court stated the governing principles in this area: the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. And, importantly, if the payment proceeds primarily from "the constraining force of any moral or legal duty," or from "the incentive of anticipated benefit" of an economic nature, it is not a gift. And, conversely, "where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it." A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity," "out of affection, respect, admiration, charity or like impulses." And in this regard, the most critical consideration, is the transferor's "intention." "What controls is the intention with which payment, however voluntary, has been made."
The intention of the transferor is a question of fact to be determined by "the application of the fact-finding tribunal's experience with the mainsprings of human conduct to the totality of the facts of each case." Commissioner v. Duberstein, supra at 289. We must make an objective inquiry into the circumstances surrounding the transfer rather than relying on the transferor's subjective characterization of the transfer. Commissioner v. Duberstein, supra at 286; Bogardus v. Commissioner, 302 U.S. 34, 43 (1937).
In the Charles E Banks and Rose M Banks v. Commissioner, T.C. Memo. 1991-641, case a structured and organized transfer of cash from members of the church took place on four special days of each year. Prior to making the transfers, members of the Church met amongst themselves to discuss the transfers. The amounts of the transfers were significant. Several members testified in Court. Their testimony indicated "the primary reason for the transfers at issue was not detached and disinterested generosity, but rather, the church members' desire to reward petitioner for her services as a pastor and their desire that she remain in that capacity." The Court ruled the transfers were compensation for services hence included in gross income.
In Lloyd L. Goodwin v. U.S., 870 F. Supp 265, 269 (S.D. Iowa 1994), aff'd 67 F. 3d 149 (8th Cir. 1995), a similar situation existed. Cash was collected from the congregation as a whole on established special occasion days. The collection was done by the congregation leaders in a structured manner. The fact was revealed that the congregation knew that it probably could not retain the pastor's service at his relatively low salary without the additional payments. The Court ruled the funds as compensation for services, not gifts.
There are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services. Rev. Rul. 55-422, 1955-1 C.B. 14, discusses the fact pattern of those cases which would render the payments as gifts and not compensation.
The Tax Court had ruled in Potito v. Commissioner, T.C. Memo 1975-187, aff'd 534 F2d 49 (5th Cir. 1976), that the value of a boat, motor and boat trailer was included in gross income as payment for services. The taxpayer, a minister, had not produced any evidence regarding the intention of the donors that the transfer of the property was out of "detached and disinterested generosity".