Court Says Love Offerings are Taxable

By Trey Lewis

In 2012, Pastor Jackson’s church had approximately 25 to 30 active members, seven ministers, and the church held services three days each week. In addition to being the senior pastor, Pastor Jackson served on the church board and he was listed as the registered agent for the church. 

Pastor Jackson had previously informed the church’s board of directors that he did not want to be paid a salary for the services he performed as pastor, however, he also mentioned that he would not be opposed to receiving “love offerings,” gifts, or loans from the church.

Pastor Jackson and his wife (who also served as a board member) managed the church’s checking account, and they jointly signed all of the church’s checks. That same year in 2012, Pastor Jackson and his wife signed numerous checks (made payable to Pastor Jackson) that contained handwritten notations such as “Love Offering” or “Love Gift” on the memo line.

Later that year, the church bookkeeper (a long time church member) prepared and sent Pastor Jackson a Form 1099-MISC reporting that he had received $4,815 in nonemployee compensation from the church.

As a result, Pastor Jackson appeared before the Tax Court for not properly reporting this income on his personal taxes. I will tell you what the court concluded in this case involving Pastor Jackson, but before I do, we need to address the confusion among pastors surrounding the taxability of love offerings.

Are love offerings taxable or nontaxable?

The confusion surrounding the taxability of love offerings stems primarily from the term itself. The term “love offering” implies a gift that is given out of love and respect for the recipient. Because of this, pastors typically tend to think that love offerings are gifts. However, the IRS does not view love offerings in the same way. Herein lies the conflict.

Internal Revenue Code (IRC) 61(a) defines taxable income as “all income from whatever source derived, including compensation for services.”

However, IRC section 102(a) excludes “gifts” from taxable income. While the members of the church giving the love offering and the pastor who receives the love offering may view it as a gift, the IRS will view the same love offering as taxable income because of what section 102 says shortly after excluding “gifts” from taxable income.

The confusion surrounding the taxability of love offerings stems primarily from the term itself.

IRC section 102(c)(1) says that "any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross taxable income.

Therefore, here is what we have before us:

• “all income” is taxable income (section 61(a))
• except for “gifts” (they are not taxable income (section 102(a))
• unless those gifts are given by an employer to the benefit of an employee (section 102(c)(1)).

We know what is taxable income, but we are also given an exception to taxable income. Then we are given an exception to the exception. 

While love offerings are indeed taxable income, with a tax code that is convoluted and disconcerting, it is no wonder there exists so much confusion among pastors surrounding love offerings.

Now that we understand the taxability of love offerings, let us return to Pastor Jackson’s case.

What happened in Pastor Jackson’s case?

Before we find out what the court concluded, there is a little more of Pastor Jackson’s story to tell you.

When Pastor Jackson and his wife filed their taxes for 2012, they filed a joint return, claiming a deduction for a charitable contribution of $6,478 to the church. Pastor Jackson, however, did not include on their tax return the $4,815 of nonemployee compensation reported on Form 1099-MISC as an item of income.

Pastor Jackson never denied or disputed that he had received the $4,815 from his church, however, he insisted that the amounts transferred to him were improperly reported as nonemployee compensation. He and his wife contended that the $4,815 received from the church represented nontaxable love offerings, gifts, or loans.

Here is what the court had to say:

The record shows that the transfers were made to compensate [Pastor] Jackson for his services as pastor. As [Pastor] 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. 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 [Pastor] Jackson. In light of these facts, [the pastor’s] subjective characterization of the transfers as nontaxable ‘love offerings’ and ‘love gifts’ is misguided.

[Pastor Jackson] did not offer the testimony of any members of the congregation (including the other directors) or [the church bookkeeper] 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.

In conclusion, we hold that the amounts that [Pastor] Jackson received from the church in 2012 represented compensation for services and, thus, constituted taxable income to him under section 61(a)(1). (Emphasis added.)

In this case, the court took into account various factors in determining its ruling. With that being said, there are several invaluable takeaways for every pastor from this case.

Takeaways from this case for pastors

1. You bear the burden of proof.

You have most likely heard of the presumption of innocence, which means that a defendant is innocent until proven guilty. Unfortunately, with regard to taxation, you are generally guilty until proven innocent.

(Recommended reading: "Tither Denied Deduction Because Church was not 501(c)(3)")

U.S. Code Rule 142 says, in regard to taxation, “the burden of proof shall be upon the petitioner.” In other words, if you were audited and the IRS claimed that there was a tax deficiency in your tax filings, then the IRS’ finding is generally presumed correct, and the burden of disproving that lies upon you.

The court considered this rule and Pastor Jackson was unable to disprove the IRS’ initial determination.

2. With love offerings, it is all about the donor’s intent.

In Pastor Jackson’s case, the court stressed that the donor’s intent must be assessed. 

In Commissioner v. Duberstein, the Supreme Court stated that, 

The mere absence of a legal or moral obligation to make the payment does not establish that it is a gift. . . . 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. In this regard, the most critical consideration is the transferor's “intention.” (Emphasis added.) 

Regarding Pastor Jackson, the court determined the facts demonstrated the intent of the donors and the church was to compensate him for the services he performed as pastor.

(Recommended reading: "How to Handle Designated Donations Given to Your Ministry")

3. Too many pastors have inadequate compensation agreements.

Unfortunately, the truth is that there are too many pastors who have inadequate compensation agreements with their churches. The reasoning for this is typically because pastors and their churches simply do not know how to properly establish a pastoral compensation agreement.

If you are receiving income from your church, do you have a compensation agreement? If so, are you confident it was set up right?

What many pastors and churches do not realize is that there is a proper way to structure compensation. If Pastor Jackson had a properly established and structured compensation agreement with his church, then there is a very good chance that he would not have had to pay taxes on the “love offerings” he received.

If you are receiving income from your church, do you have a compensation agreement?

Strengthening your pastoral compensation agreement

When it comes to pastoral compensation, there are many nuances to consider. If you are in need of creating a pastoral compensation agreement, or you need help improving yours, then click on the link below to find out more information.

If you have questions and would like to speak with one of our team members, then give us a call at 877-494-4655. It would be our honor to help you! 

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• “Can Donations from a Bankrupt Donor Cost Your Church?”
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• “What You Need to Know About Your Pay”

Sources:

• Jackson v. Commissioner, No. 2034-15S, 2016 Tax Ct. Summary
• Commissioner v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190 (1960)

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