Can you give
someone money and not have it considered income?
Of course
you can.
One way to
do it is to die and leave money as a bequest.
That is a
bit extreme for the average person, including me.
Another way
is to give someone a gift. Granted, if the gift is large enough, you may have
to report it. You do not actually write a check to Uncle Sam until your
cumulative lifetime gifting exceeds $11,180,000, but you do have to file paperwork.
Can you make
a gift to an employee?
Much harder.
The Code
does allow some de minimis things, such as holiday hams – but even that has to
be under $75.
Oh, and it
cannot be in cash, whether less than $75 or not. Cash taints the deal.
There is a
narrow exemption for length of service or safety awards, but let’s pass on
those details.
To a tax
geek, the general answer is that anything you give an employee is taxable.
I was
looking at a case a couple of weeks back that introduced a spin on this
concept.
We have a pastor
at a Minnesota church.
For the two
years at issue he turned down a salary.
He did take
a housing allowance.
And then it
got interesting.
The church
used donation envelopes. They were different colors, with each color having a
different meaning.
The basic
envelope was white. That was the weekly offering. It included a space where you
could designate the amount of the donation that was for the pastor.
There were
gold envelopes for special projects and events.
Then there
were the blue envelopes. Blue envelopes were “gifts” to the pastor, and
congregation members were instructed that those could not be deducted on their
tax returns. The church did not track blue envelope donations, nor did the
church make blue envelopes commonly available. If you wanted one, you had to
ask for one.
For tax
years 2008 and 2009, the pastor received the following;
2008 2009
White envelopes $40,000 $40,000
Housing allowance $78,000 $78,000
Blue envelopes $258,001 $234,826
When the
IRS learned of this, they wanted tax on the blue envelopes.
What do
you think?
Here is
the Bible:
When I preach the gospel, I may make the gospel of Christ without charge, that I abuse not my power in the gospel.” 1 Cor. 9:18
Here is the
Court:
To decide this case, we must descend from the sacred to the profane."
What sets up
the tension in this case is that the term “gift” has a different meaning for
tax than for common law. For common law, a gift is made voluntarily and without
legal or moral obligation.
Tax views a
gift as made from “detached and disinterested generosity” or “out of affection,
respect, admiration, charity or like impulses.”
Huh? What is
the difference?
The
“disinterested generosity.”
That standard can
be hard enough to pin down when reviewing a transaction between two individuals.
How much harder can it get when reviewing a transaction between a group and an
individual?
But that is
what the Court had to decide.
The Court walked
us through its decision process.
(1) Were donations provided in exchange
for services?
The pastor did provide services, and to a reasonable
person those blue envelopes look like an incentive for him to keep providing
them.
Looks like a vote for income.
(2) Did the pastor request the donations?
To his credit, the pastor referred to white envelopes
when talking about tithes. He did not talk about blue envelopes, and a
congregation member had to ask for one as they were not generally available.
Looks like a vote for a gift.
(3) Were the donations part of a
routinized program?
That depends. Is the existence of
blue envelopes per se evidence of a “routinized program?”
Can mere existence of a program rise
to the level of a “routine?”
One can discern some routine no
matter what the facts are, as the repetition of any action can be described as a
“routine.” However, is that truly the intent of this test?
Call this one a push.
(4) Did the pastor receive a separate salary
and what was the relationship of that salary to the personal donations?
The Court was very uncomfortable
here:
We cannot ignore the sheer size of blue-envelope donations in 2008 and 2009, or the facts that they are very similar in amount in both years – within 10% of each other. We find it more likely than not that this means there was a ‘regularity of the payments from member to member and year to year ….’”
Oh, oh. We have our tie-breaker.
The Court had to discern the intent
of the group, an almost mythical challenge. It saw blue-envelope donations total
almost seven times the amount of white-envelope donations and asked: could it
be that the congregation was trying to keep its popular and successful preacher?
CTG: I’ll play along: why, yes they were.
If they paid him more and donated less, perhaps they would not be as concerned.
CTG: By that reasoning, had he won the recent billion-dollar lottery they would not have to pay him at all.
But he needs a certain amount just to pay his bills.
CTG: True, but how many parents across the fruited plain are giving their post-college kids money to live on? Is that income too?
The relationship between a parent and child is different.
CTG: The relationship between a faithful and his/her religious leader can also be different.
But being a minister is his job. Anything he receives for doing his job is – by definition – income.
CTG: Thank you. This is the clearest statement of your reasoning thus far. Why four criteria? Seems to me you could have fast-forwarded to the last one – the only one that really mattered.
The Court decided the pastor had
income. He owed tax.
Register my surprise at zero, none,
nada. I knew the ending of this movie from the first scene.
Our case this time was Felton v Commissioner.
