• The Tax Court denied a charitable contribution deduction to a church trustee for alleged contributions made to his church. In 1972, the trustee (who also served as choir leader and youth director of his church) purchased a home jointly with the church’s pastor. A few years later, the trustee transferred his interest in the home to the pastor. However, the trustee continued to live in the home. In 1983, the trustee claimed an income tax deduction for cash contributions to the church in the amount of $9,354.10. Attached to the trustee’s tax return was a letter from the pastor which stated: “Please be advised that the amount of monies reflected below indicates your contributions given to the church during the Year: Tithes (20%) of $ 3,346.22, church dues of $36, freewill offerings of $468, and building fund drive for 1983 of $5,503.88, for a total of $ 9,354.10.” The IRS later audited the trustee’s 1983 return and denied a deduction for the claimed contributions. The IRS based its action on the ground that the trustee received direct personal benefits from the church in exchange for his “contributions” (including housing and support). Accordingly, the IRS asked the trustee to respond to several questions. When the trustee refused to do so, the IRS subpoenaed several documents pertaining to the trustee’s personal financial records as well as the records of the church. The trustee failed to respond to this subpoena, and a court ordered him to respond. The trustee still refused to respond. The case went to trial, and the Tax Court agreed with the IRS that no deduction was allowable. The court noted that a charitable contribution is a gift given to a charity with no expectation of a return benefit. The court continued:

In this case, petitioner testified that he lived with [the pastor]. He testified that he paid no rent to the church or pastor and he paid nothing for the running or maintenance of the household, such as utilities, real estate taxes, etc. [The trustee] presented no evidence of his personal living expenditures above and beyond the alleged “contributions” made to the church. Furthermore, the record contains no information about the income and expenditures of the church and, accordingly, we do not know whether funds received by the church were used to defray expenses in the running of [the pastor’s] house. Based upon the record in this case, it is reasonable to infer that any monies contributed by [the trustee] were used in the running of [the pastor’s] household. It is further reasonable to infer that any “contributions” made by [the trustee] to the [church] benefitted him and were in anticipation of such housing or other benefits and, thus, did not proceed from “detached and disinterested generosity.” Based on the record before us, we hold that [the trustee] has failed to prove that he made a “contribution or gift” to the church during 1983 ….

The court added that the trustee failed another requirement of a valid charitable contribution—that the contribution must be made to a tax-exempt organization. The court pointed out that one of the requirements for tax-exempt status is that no part of the net earnings of the organization inures to the benefit of a private individual. The court concluded that “we infer that any contributions made by [the trustee] to the [church] were used to pay his personal living expenses and, therefore, inured to his benefit.” Finally, the court assessed negligence penalties against the trustee, along with a $2,000 penalty for maintaining a frivolous position before the Tax Court.

What is the significance of this ruling? Consider the following points: (1) The decision illustrates that no charitable contribution deduction will be allowed if the donor expects to receive a benefit in return for the “contribution.” This principle applies in several contexts, including attempts by parents to deduct “contributions” for tuition they pay to a church school in which their child is enrolled, or payments to a pastoral counselor for counseling services. (2) The tax-exempt status of a church is jeopardized if any of the church’s assets are distributed to a private individual other than as reasonable compensation for services rendered, or in the furtherance of the church’s exempt purposes. This is an extremely important point that churches must keep in mind before distributing monies for the personal support of private individuals. Again, exceptions to this rule would be compensation, and distributions (such as benevolence distributions, or missionary support) in direct furtherance of the church’s exempt purposes. (3) Federal law currently permits the Tax Court to assess penalties of up to $25,000 for maintaining frivolous positions before the court (the court only assessed $2,000 in this case). (4) The court also assessed a penalty against the trustee for intentional disregard of tax law, noting that “this Court has repeatedly sustained the [penalty] involving an alleged charitable contribution to a ‘church’ where, in fact, the funds were used for personal and family expenses.” Williamson v. Commissioner, 62 T.C. 610 (1991).

© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0691