Planting a church? This software is for you!

IRS Enforces Strict "Love Gift" Rules

By Raul Rivera

In 1963, Pastor Goodwin became the pastor of Gospel Assembly Church, with 25 members.  As time progressed, however, the church grew to over 400 members, and during the span of those years, Pastor Goodwin was paid a very modest salary.  In 1987, his salary was $7,800.00. In 1988, it was $14,566, and in 1989, his pastoral salary was $16,835.00.  Every year the church made it a practice to give the congregation a chance to bless the Goodwin's, since as the pastors they had tirelessly worked all year long to meet all of the congregation's spiritual and even emotional needs. 

Over the years it developed into a "regular procedure for making special occasion gifts. Approximately two weeks before each special occasion day, the associate pastor announced before church services, when the Goodwin's were not present, that those who wish to contribute to the special occasion gift may do so." The members gave only cash to preserve anonymity. Contributors placed the cash in envelopes and gave it to the associate pastor or to a church deacon.  It was never done as part of a church service, but rather as an informally planned conspiracy of love, respect, and admiration towards their pastor. The associate pastor then gathered the cash and delivered it to the Goodwin's. The Church did not keep a record of the amount given nor who contributed to each gift. In all of the years that the pastors received such gifts, they did not report them on their tax returns.  The IRS audited the Goodwin's tax return and ordered them to pay taxes, plus penalties and interest.  In keeping with the law, the Goodwin's paid the tax, but then sued in court* to have those taxes returned because they believed the IRS was wrong in assessing the tax (Goodwin v. United States).  

Knowledge is power

Our Ultimate Church Conference is based on the premise that knowledge is power.  Knowing how to properly record and report love offerings and love gifts will have a significant impact on the church and on the minister's personal taxes. Before we go into further details on the Goodwin case, let me teach you the official government stance on what is income and what is a gift. 

Official government position

Section 61 states that gross income means all income from whatever source derived.  Furthermore, section 102(a) states that gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. Here we have two sections of the Code that govern the extent of what is income and what is not income. The Minister Audit Technique Guide instruct an IRS agent that the following must be included as taxable income.

1.     When a minister receives compensation from the church;

2.     When a minister receives bonuses or "special gifts" from the church;

3.     When a minister receives fees paid directly from parishioners for performing weddings, funerals, baptisms, or masses; and

4.     When a minister receives contributions for services.

The Minister Audit Technique Guide goes on further to explain that there are obvious times when a minister might receive a gift, but the guide does not take the time to explain what makes a gift obvious.  The guide does go into detail to explain how to recognize when a love offering or love gift is income. The guide lays out the following:

1.     It instructs the agent that the taxpayer "bears the burden of proof."

2.     It states, "The mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift."

3.     If the payment made to a minister is for services rendered, then it is NOT a gift.

4.     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."

5.     It states that the most significant fact is the intention of the giver.

6.     It instructs the agent that in order to determine the giver's intent, the agent must make an inquiry into the circumstances surrounding the gift rather than relying on the giver's subjective characterization of the gift.  

The Minister Audit Technique Guide cites two court cases that give examples of church members coming together, in an unofficial capacity, to bless their pastor.  In the first case, Charles E Banks and Rose M Banks v. Commissioner, members of the church met amongst themselves to discuss giving gifts to the pastor. The amounts of the gifts were significant. Several members testified in court, indicating that the primary reason for which they gave was because they wanted to reward the pastor for her services and they wanted to make sure that she remained their pastor. 

Ironically, the second case is the Goodwin case mentioned above. In this case, the pastor was receiving a salary from the church.  However, several members of the church got together and privately asked the church congregation to give cash love offerings to the pastor. Then on a specified date they presented it to him.  The court ruled that the pastor was required to report those offerings on his income tax return.

The audit guide omitted certain facts

Based on these guidelines above, it appears that 100% of honorariums, offerings, and gifts given to pastors are always taxable. Under the rules of the Minister Audit Technique Guide, as written, if a member of a church gives a gift to the pastor, it will be very difficult to prove that the intention for giving it was not tied to the pastor in a professional capacity. Conversely, the Goodwin court case also clearly revealed that the government found it too broad of an application of law to state that any gift motivated by a service must be reported as income. The court made clear that there are instances where gifts can be tied to the performance of services and still not be taxable. In rejecting the government's application, it stated the following:

For example, it would include as taxable income every twenty dollar gift spontaneously given by a church member after an inspiring sermon, simply because the urge to give was "tied to" the minister's services. It would also include a departing church member's individual, unsolicited five hundred dollar gift to a long-tenured, highly respected priest, rabbi, or minister . . ."

I spent a significant amount of time last week reviewing the IRS' position on love offerings and love gifts. I was disappointed that the latest version of the Minister Audit Technique Guide omitted one key fact established by the Goodwin case concerning love gifts and taxes.  It is important to repeat myself.  The way that the Minister Audit Technique Guide is written right now makes any AND every offering or gift given to a minister taxable income, when there is clear evidence established by case law that some are not.  The impact of this omission can result in an inconsistent application of the law to ministers who are audited. It is very important for every church minister to know what is and is not taxable and then properly defend the position. 

The official stance at StartCHURCH is that privately motivated gifts, given by individuals because of great sermons and/or other services rendered by a minister are truly gifts under section 102(a). However, when multiple members come together, even though they do it in an unofficial capacity, and make gifts of cash or personal/real property, it will be nearly impossible to prove in an audit that it is not taxable income to the pastor.

Below are some guidelines that may prove helpful in determining the taxability of a gift.

A gift is NOT taxable if:

1.  The gift was motivated out of "detached and disinterested generosity," "out of affection, respect, admiration, charity or like impulses."  Examples are a birthday gift, Christmas present, etc. given individually by members of the church.

2.  It is a gift given under section 74.  Click here to read an article on this topic.

3.  It is a spontaneous gift given to the pastor by individuals directly after a church service in recognition of a great sermon or for other services he or she may have performed. The key word here is spontaneous.  See item five below.

A gift is taxable if:

1.     It is clearly given as compensation for a service.

2.     A love offering is collected by the church and given to the pastor.

3.     The pastor/minister had an expectation, though not stated, that a gift would be given at the conclusion of services rendered.  For example, he/she is invited to preach at a church.  He/she preaches and says that he/she will not charge but knows that the church will collect a love offering.

4.     A group of members come together to bless the pastor for his/her services or to make sure he/she is sufficiently rewarded so that he/she will continue to serve as pastor. 

5.     A church, either from the pulpit or through approved policy by leadership, encourages gifts to be given to the pastor by individuals directly after a church service in recognition of a great sermon or for other services he or she may have performed.  It becomes the same as item 3 directly above in this section.

Reading this article may make you feel like the world of tax compliance for churches and ministries is way too complicated.  I encourage you to press in and learn.  In our Ultimate Church Structure Conference, we discuss this topic in detail.  As I mentioned earlier, knowledge is power.

*Courts do not allow a taxpayer to sue the IRS for damages unless he/she first pays the tax.  The courts reason that if you have not paid that tax, then you have not suffered any harm.


Did you find this blog helpful?


And receive Book 1 of our Grow Trilogy FREE today! This series gives you the strategies you need to get started growing your church plant today!