Wayne R. Felton and Deondra J. Felton, 2018 T. C. Memo. 168, filed 10/10/18, has Judge Mark V Holmes quoting Holy Writ, a commendable departure from his sometimes picturesque style. Alas, at the end of the day, the blue envelopes stuffed with cash are income to the Rev. Wayne, founder and beloved pastor of the Holy Christian Church of Minneapolis, MN.

Rev. Wayne’s church had three envelopes: white, gold and blue. White envelopes were for  operational offerings – keeping the lights on, paying Rev. Wayne a salary (although for years he didn’t take one), and operating costs. These were readily available, and the contents thereof made their way into the church’s books of account. Gold envelopes contained cash and checks for special programs and retreats, and these likewise were booked.

The blue envelopes were special gifts to Rev. Wayne, and weren’t booked. Rev. Wayne disliked the “shake-hand” money pressed into the pastoral hand as the worshipers filed out of the church, so the blue envelopes were made available upon request, but not generally handed out. Judge Holmes obliges us with copies of the blue envelope and white envelope, and tables differentiating between the two and the proceeds of each.

For each of the years at issue, the blue envelopes contained better than $200K. Nisht azay gefaylach, as they say around the Holy Christian Church never. These sums never made it into the church’s books, onto Rev. Wayne’s Sched C or 1040, but they appeared on the SNOD.

Well, gifts aren’t taxable per Section 102(a), right?

Well, no, they aren’t, if they are gifts and not disguised salary and wages.

To begin with, there is no bright-line test. While a gift must be made from motives of disinterested love and benevolence, subjective intent does not decide. Ultimately, the tribunal’s experience with the mainsprings of human conduct must be applied to the facts and circumstances of the individual case.

But judicial precedent is a restraint on judicial vagaries. And while gifts to religious leaders are commonplace, Fifth Circuit has a pattern jury instruction that sums up the tax angle. “The federal income tax is levied on income received by ministers. When an individual provides ministerial services as his trade or business, controls the money he receives in that business, and receives no separate salary, the income of that business is taxable to the minister. Voluntary contributions, when received by the minister, are income to him. Payments made to a minister as compensation for his services also constitute income to him. If money is given to a minister for religious purposes, any money used instead for the personal benefit of the minister becomes taxable income to him.” 2018 T. C. Memo. 168, at p. 20. The case from which this is taken is United States v. Terrell, 754 F.2d 1139, at p. 1148-49 (5th Cir. 1985).

Per contra, as my high-priced colleagues would say, there are a couple cases (this is Judge Holmes, after all) where ministers got substantial payouts, but they were either ill or retiring, and weren’t expect to continue ministering to the payor flocks.

But payments substantially in excess of salary, made routinely, on behalf of the congregation generally and not individually, are income.

“From personal observation at trial we think it highly likely that Reverend Felton would follow his vocation whether he and his church got envelopes of any color. But we also think that the exhortation by the Supreme Court…to focus on objective evidence of a donor’s intent means we have to ask whether the donations are of the magnitude and type that would make us doubt that what is called a gift amounts to one in reality.” 2018 T. C. Memo. 168, at p. 29 (Citation omitted).

Now the blue envelope payments were made by individuals, not by the congregation generally, and weren’t solicited. But the amount and regularity of the blue envelope money (varying only 10% in the two years at issue), amounting to almost double Rev. Wayne’s handsome parsonage allowance plus his stated salary, speak louder than testimony.

“As another former seminarian is widely thought (though unlikely actually) to have said: ‘Quantity has a quality all its own.’ When comparatively so much money flows to a person from people for whom he provides services (even intangible ones), and to whom he expects to provide services in the future, we find it to be income and not gifts.” 2018 T. C. Memo. 168, at p. 34.

And Rev. Wayne, who prepared his own tax returns and filed them late (and only after the IRS came calling), never showed he made any effort to ascertain his liability. Late-filing plus substantial understatement (five-and-ten) chops for Rev. Wayne.