Clergy Compensation Comes Under US Tax Court Scrutiny

The Provisum Group CPAs can help with tax advice

I recently learned of another court ruling that further clarifies how clergy are compensated.  Now I am no accountant and I encourage you to always consult a licensed CPA, like those at The Provisum Group, for tax advice.

The US Tax Court & Board of Tax Appeals recently released a decision against two Minnesota husband-wife pastors, who claimed that they did not receive any income from their church but rather gifts directly from their congregation.

As a charismatic congregation with a tradition of giving gifts directly to clergy, Reverend and Mrs. Felton, the clergy at issue in the case, were uncomfortable with the practice called “shake-hand money” but wanted to respect their congregation’s spirit of generosity. They developed a system that relied on different colored envelopes where white envelopes went towards traditional tithes and offerings and blue envelopes replaced the practice of “shake-hand money.” The Felton’s earnestly believed that these blue envelope gifts were simply gifts and not considered taxable income. The Internal Revenue Service thought otherwise.

In 2008 and 2009, the Felton’s were comfortably living on income from a business, also owned by the Pastors, and only asked the church to provide them a housing allowance. This threw up a red flag to the IRS.

While there is no written rule about how much of your salary can be drawn in a housing stipend, my accounting team advises all of my clients that it be no more than 50% of your clergy compensation. If audited by the IRS, clergy are required receipts for every penny spent of the housing allowance received from their church or ministry.

As the IRS began digging into the Feltons’ finances, they learned about the colored envelope system and slapped them with a tax bill and penalties for the “substantial understatement” of their income. In early October of 2018, Judge Mark Holmes of the US Tax Court & Board of Tax Appeals ruled that the IRS was correct in their assessment of the Feltons’ taxes and in doing so provided more guidance in what is considered a “love gift” and what is to be counted as clergy income.

As ministry leaders, we are called to be blameless and above reproach in all things. If you are unsure if your housing allowance or love gift practices are in compliance with IRS guidelines, give my team a call at The Provisum Group. Our team of accounting professionals can help get your books in order and keep you in compliance with government regulations. Feel free to contact us HERE.

You can read the Felton v. Commissioner decision HERE.

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