Love Offerings Represented Taxable Compensation for Services to Pastor

Pastor Joseph Jackson receive $4,815 from his congregation in 2012, amounts he claimed represented nontaxable gifts to him as “love offerings” from his congregation.  The IRS contended that these payments represented taxable compensation for services, thus leading to the matter to be decided by the Tax Court in the case of Jackson v. Commissioner, TC Summary Opinion 2016-69.

The pastor’s relationship with the church is described by the Tax Court as follows:

In 2012 Mr. Jackson was the pastor, a director, and the registered agent for Triumph Church of God (church). Mrs. Jackson was also a church director. The church had approximately 25 to 30 active members and as many as seven ministers and offered services three days each week. Mr. Jackson had informed the church’s board of directors that he did not want to be paid a salary for his pastoral services but that he would not be opposed to receiving “love offerings”, gifts, or loans from the church.

Mr. Jackson in 2012 signed various checks from the church during 2012 that were made payable to himself, with various handwritten notations such as “Love Offering” or “Love Gift” on the memo line.

The church’s bookkeeper from 1992 to 2015 issued Mr. Jackson a Form 1099 for 2012 showing the $4,815 of such payments as non-employee compensation.  Mr. Jackson did not report these amounts as income on his return, instead taking the position they were nontaxable gifts.

IRC §102 does provide that gifts are not subject to income tax, providing at IRC §102(a) that “[g]ross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”  The key question, of course, is what exactly represents a gift.

The Tax Court noted that this is not a simple question, stating:

In Commissioner v. Duberstein, 363 U.S. at 284-285, the Supreme Court stated that the problem of distinguishing gifts from taxable income “does not lend itself to any more definitive statement that would produce a talisman for the solution of concrete cases.” The Supreme Court concluded that, in cases such as this one, the transferor’s intention is the most critical consideration, and there must be an objective inquiry into the transferor’s intent. Id. at 285-286. In other words, rather than relying on a taxpayer’s subjective characterization of the transfers, a court must focus on the objective facts and circumstances. Id. at 286.

The Court then begins to make such an objective inquiry into the taxpayer’s contention that the amounts represented nontaxable gifts rather than compensation for services.  The Court found:

Mr. Jackson candidly explained at trial, he had informed the board of directors that he would accept “love offerings” and gifts as substitutes for a salary. Ms. Simmons, the church’s bookkeeper at the time, considered the payments to be compensation as is reflected in the Form 1099-MISC that she issued to Mr. Jackson.  In the light of these facts, petitioners’ subjective characterization of the transfers as nontaxable “love offerings” and “love gifts” is misguided.

Petitioners did not offer the testimony of any members of the congregation (including the other directors) or Ms. Simmons that would allow the Court to conclude that the transfers were anything other than compensation for services. The frequency of the transfers and the fact that they purport to have been made on behalf of the entire congregation is further objective evidence that the transfers represented a form of compensation. See Goodwin v. United States, 67 F.3d 149, 152-153 (8th Cir. 1995) (holding that substantial, ongoing cash payments collected from church congregation and transferred to pastor as “special occasion gifts” constitute taxable income).

This appears to be a case where the taxpayer believed that calling the payments something other than compensation for services would be enough to make the amounts nontaxable.  However, as the Supreme Court pointed out, the real issue is not what the recipient decides the item is, but rather what was the transferor’s motivation in making the payment.

In this case the payments were being made because Mr. Jackson was serving as pastor of the church.  The payment to make sure the congregation had a pastor was a payment for services—and simply calling the payments “love offerings” did not change that fact in the view of the law.