Ten Tax-Related Changes Churches and Clergy Should Understand in 2020

There were several important tax developments in 2019 that affect tax reporting by ministers, church staff, and churches for the upcoming tax-filing season as well as reporting and records-keeping requirements in 2020 and beyond.

The top ten developments are explained in this article as well as the 2020 Church & Clergy Tax Guide, which also further covers 65 other key developments.

1. Status of the housing allowance

For years, the Freedom From Religion Foundation (FFRF), a not-for-profit atheist organization, has attempted to invalidate Section 107(2) of the tax code, the provision permitting clergy to receive an annual housing allowance designated by their employing house of worship—and not pay federal income taxes on the designated amounts. The FFRF argues the tax law is a constitutionally impermissible preference for religion, since leaders of secular nonprofit organizations are not eligible to receive the same benefit.

A valuable benefit. The congressional Joint Committee on Taxation estimates the 65-year-old benefit is worth a combined $700 million annually. At the local level, the housing allowance is the single-most valuable benefit to clergy. It proves especially valuable to those who lead small and mid-sized congregations in small towns and rural areas, although clergy leading large and mega-sized churches also are eligible. Overall, the majority of senior and solo pastors nationwide seek an allowance from their employing congregations and receive one.

In 2013, Barbara Crabb, a federal district court judge in Wisconsin, agreed with the FFRF’s argument. On appeal, however, the US Court of Appeals for the Seventh Circuit in Chicago dismissed that case without deciding the merits, stating the FFRF leaders lacked legal standing to bring the lawsuit.

In 2017, after those leaders gained standing and renewed their challenge in the same jurisdiction, Judge Crabb again sided with the FFRF. The decision was again appealed to the Seventh Circuit. In March of 2019, a three-judge panel unanimously reversed Judge Crabb’s decision and affirmed the constitutionality of the housing allowance. The panel based its ruling on two grounds:

1. The Lemon test

First, it applied the so-called Lemon test, which dates back to a 1971 Supreme Court ruling in Lemon v. Kurtzman, 403 U.S. 602 (1971), in which the Court announced a three-part test for evaluating claims that a state or federal law, such as the housing allowance, constitutes an impermissible establishment of religion under the First Amendment’s nonestablishment of religion clause. Under the Lemon test, a law challenged on establishment clause grounds is valid if it meets three conditions: First, a clearly secular purpose; second, a primary effect that neither advances nor inhibits religion; and third, the law does not foster an excessive entanglement between church and state.

The Seventh Circuit, in evaluating the housing allowance, concluded that all three elements were met, and so the housing allowance did not violate the First Amendment’s ban on an establishment of religion.

The court concluded that there was not one, but three legitimate secular purposes underlying the housing allowance.

First, it eliminates discrimination against ministers found elsewhere in the tax code that allow employers to provide housing benefits to secular workers. The housing allowance simply treats ministers like secular workers.

Second, it eliminates discrimination among ministers. The point here is that for many years the only tax benefit for ministerial housing was the exclusion of the fair rental value of a church-provided parsonage from taxation. Ministers who did not live in a parsonage, but instead owned or rented a home, received no tax benefit. The housing allowance was enacted by Congress in 1954 to address this discrepancy and provide parity between ministers who lived in parsonages and those who did not.

And finally, a third secular purpose was the avoidance of excessive entanglement between church and state.

2. Historical significance

The Seventh Circuit panel also based its decision on a second ground that it called the “historical significance test.” According to several other rulings by the Supreme Court, the establishment clause must be interpreted with reference to historical practices. In other words, the longer a practice has gone unchallenged, the more likely it will survive a challenge under the establishment clause. A perfect example of this is a 1983 Supreme Court decision upholding the constitutionality of legislative chaplains. The Court pointed out that the very first session of Congress, in which the First Amendment’s establishment clause was drafted, also provided funds for congressional chaplains. That’s pretty strong evidence that congressional chaplains do not constitute an unconstitutional establishment of religion. The appeals court noted that there are over 2,500 state and federal laws providing tax exemptions of various sorts to religion, and this practice, dating back to the founding of the nation, reinforced the constitutionality of the housing allowance.

The FFRF chose not to appeal the decision by the Seventh Circuit.

Looking ahead

It is possible that the FFRF or another organization hostile toward the clergy housing allowance will sue in another court in an attempt to invalidate the housing allowance. Predicting the future status of a tax benefit such as the housing allowance is a difficult task. But I believe a solid case can be made for the continuation of this benefit for years to come, based on the compelling logic of the Seventh Circuit’s decision (which was based squarely on rulings by the Supreme Court). Any developments will be addressed in future coverage on ChurchLawAndTax.com.

In the meantime, how should churches and pastors respond to this ruling? Consider the following:

• Continue designating housing allowances for ministers. The housing allowance remains valid and active for all churches and qualifying clergy across the country. For detailed guidance, see chapter 6 in my annual Church & Clergy Tax Guide.

• The fair rental value of church-provided parsonages remains a nontaxable benefit.

• Monitor developments in the event another legal challenge is raised.

• Anticipate what would happen, were a future legal challenge to prevail, invalidating the housing allowance. Churches and clergy should note the following for preventive purposes:

• Many ministers would experience an immediate increase in income taxes. As a result, they would need to be prepared to increase their quarterly estimated tax payments to reflect the increase in income taxes in order to avoid an underpayment penalty. Note that there would be no effect on self-employment taxes for which the housing allowance is not tax-exempt.

• Ministers considering the future purchase of a new home would not want to base the amount and affordability of a home mortgage loan on the availability of a housing allowance exclusion unless and until the outcome of a future legal challenge was final.

• Many churches would want to increase ministers’ compensation to offset the adverse financial impact. Thousands of ministers have purchased a home, and obtained a mortgage loan, on the assumption that the housing allowance would continue to be available as it has for more than a half century. The sudden elimination of this tax benefit would immediately thrust many clergy into a dire financial position with a mortgage loan based on a tax benefit that would be no longer available. Many church leaders would want to reduce the impact of such a predicament by increasing compensation. Such an increase could be phased out over a period of years to minimize the impact on the church.

2. Tax Court addresses parsonage allowances and “love gifts” to pastors

The United States Tax Court has issued an opinion addressing two important clergy tax issues: the parsonage allowance and the taxability of gifts to a pastor. Brown v. Commissioner, T.C. Memo. 2019-69 (2019).

Let’s summarize the facts of the case, review the court’s opinion, and assess the importance of the case to pastors and churches.

Parsonage allowance

A pastor founded an independent church and served as its long-time pastor. His wife served as administrator of the church and its preschool, and its elementary and secondary schools. In time, the church expanded and created a network of pastors and churches.

The pastor and his wife received what they claim was a parsonage allowance from the church. According to the pastor, the church board determined and approved this allowance annually. In 2007, it was made in the form of two payments of $1,750 deposited each month (equaling $3,500 per month) into the pastor’s personal checking account. For 2008 and 2009, the total parsonage payments are unclear. The church also paid the couples’ utility bills and other personal expenses.

The Internal Revenue Service (IRS) audited the pastor’s tax return and ruled that his income could not be reduced by a parsonage allowance. The Tax Court agreed. The Court began its opinion by noting:

Section 107(2) [of the tax code] says that a minister does not have to include in gross income “the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” This exclusion is limited to the amount used “to rent or provide a home” and may “not exceed the fair rental value of the home.” This means the exclusion does not apply to money used for food, domestic help, or expenses of a business or investment property.

The Court concluded that the “real problem” for the pastor was “the law’s requirement that a parsonage allowance be designated, and “this means that the allowance must be specified in amount at some point before a minister receives it—a minister can’t just dip into church funds to pay his housing expenses as they arise. And a payment that isn’t designated isn’t excludable from income.”

The Court acknowledged that

tax law has no rubric for designating an allowance—it can be a sum of money written into an employment contract, a line item in a church’s budget, a notation in the minutes of the church’s board, or any other document that proves official action was taken. It doesn’t even need to be in writing. Libman v. Commissioner, T.C. Memo. 1982-377 (1982). But to qualify as a designation, it must clearly identify the payment of a rental allowance as distinct from a salary or other compensation. Kizer v. Commissioner, T.C. Memo. 1992-584 (1992).

But this was a problem for the pastor:

He introduced a log of the checks written by the church for a parsonage allowance in 2007, and the log shows that he received a check for $1,750 twice a month for the entire year. Accompanying the log were images of the checks, each one bearing “For: Comp and Parsonage” on its memo line. The pastor, however, did not introduce such a log for 2008 or 2009. At the beginning of 2008 there are around six checks from the church for $1,750 with “Comp and Parsonage” written on the memo line, but the designation of subsequent payments is unclear. There’s a “parsonage” check written by the church at the very end of March 2008 for $8,000—an amount well beyond the typical payments—and one final check for $1,750 in April 2008. This is the last check that specifies on the memo line that it was for “parsonage.” And while we have found other bimonthly checks for the pastor in his bank statements for both years, there’s nothing that would let us find it more likely than not that they were payments for a parsonage allowance.

This makes the question of whether the church properly designated these payments difficult and proof that the pastor actually spent the money on housing even harder to find. The pastor testified that the church board approved his parsonage allowance at the start of each calendar year based on loan documentation that he provided. We could find no specific resolution that granted the pastor a parsonage allowance, but at least for 2007 we find that the church’s practice of a regular payment of a regular amount, as supported by the pastor’s testimony, is sufficient evidence of official action and payment “distinguished from salary or other remuneration” for 2007. We cannot make a similar finding for 2008 and 2009, as the payments became irregular and unsupported by any check register or notation in the church’s records.

The court then addressed a second problem, that there was insufficient evidence that the pastor used the parsonage allowance to pay housing expenses:

But even given the regularity of the 2007 payments, the pastor has failed to show that he used the parsonage allowance for housing alone and that the allowance did not exceed the sum of their mortgage payments and utilities. The pastor actually testified that the church pays his personal utility bills directly, leading us to wonder whether it also pays his mortgage directly in addition to the $1,750 check (and increased amounts thereafter) that the pastor received twice a month. Beyond the pastor’s testimonial estimates of his phone and utility bills, there is nothing in the record about the pastor’s actual housing expenses, and therefore we can’t be sure that he and his wife weren’t spending their allowance on food, vacations, or even the cash needs of his unrelated businesses. This goes for what we know were the 2007 parsonage allowance payments and what we can only guess were the 2008 and 2009 payments. We therefore find in favor of the [IRS] on this issue. . . .

Congregational gifts to the pastor

The second part of the Tax Court’s memo addresses the church’s use of an envelope system to collect and properly record offerings from its members.

The church has a single envelope form for this purpose, with blank lines for congregants to fill in their contact information, if they choose, and spaces for different contribution categories next to which they can list a dollar amount. These categories include “tithe,” “offering,” “building fund,” and “special gift.” The church further defines the terms as follows:

• a “tithe” means “a tenth of a member’s income”;
• an “offering” is whatever a donor would like to give to the church;
• the “building fund” is for donations in support of church construction and maintenance; and
• “special gifts” are offerings made with a “special intention,” such as for a family member, or to a specific person on the church’s staff.

A special gift designated for the pastor (or anyone else) is noted on the envelope. If one of these special gifts was by check or credit card, it would first go into the church’s account, and the bookkeeper would later make a check out to the pastor. Not all contributions made to the pastor were made through the envelope system, and therefore not all were recorded by the church.

For each of the three years examined by the IRS, the pastor received well in excess of $100,000 in gifts from members, both by personal check and in offering envelopes denoted as “special gifts” for the pastor.

The IRS determined that these “love gifts” made to the pastor by the church were taxable income. The Tax Court agreed that the love gifts were taxable.

The court started with the “basics”:

Section 61(a)(1) [of the tax code] says that gross income includes “compensation for services, including fees, commissions, fringe benefits, and similar items.” That’s quite the spread, but Congress enacted section 102 to leave gifts off the table. Section 102(a) excludes from gross income “the value of property acquired by gift,” but section 102(c)(1) eliminates this exclusion for “any amount transferred by or for an employer to, or for the benefit of, an employee.”

What is a gift? According to the Supreme Court, “a gift in the statutory sense . . . proceeds from a detached and disinterested generosity . . . out of affection, respect, admiration, charity or like impulses.” Commissioner v. Duberstein, 363 U.S. 278 (1960). . . . Recognizing that this definition may not be easy for a trial court to apply, the Court held that the most critical consideration is the transferor’s intention at the time the payment was made. But the Court warned that the transferor’s characterization of his intention “is not determinative”—instead, “there must be an objective inquiry as to whether what is called a gift amounts to it in reality.” The Supreme Court’s test “does not draw a bright line, but caselaw helps us. . . .”

The court referred to a federal appeals court decision in a criminal case in which the court concluded that the following jury instruction accurately stated the law:

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. United States v. Terrell, 754 F.2d 1139 (5th Cir. 1985).

The court applied four factors in deciding if the payments by church members to the pastor constituted taxable income or tax-free gifts.

1. Donations in exchange for services

Donations by church members to their pastor, either directly or by giving them to their church for later distribution to the pastor, are almost always taxable compensation to the pastor since they typically are viewed as attempts to more fully compensate the pastor for services rendered. As the Supreme Court has observed:

What controls is the intention with which payment, however voluntary, has been made. Has it been made with the intention that services rendered in the past shall be requited more completely, though full acquittance has been given? If so, it bears a tax. Has it been made to show good will, esteem, or kindliness toward persons who happen to have served, but who are paid without thought to make requital for the service? If so, it is exempt. Bogardus v. Commissioner, 302 U.S. 34, 45 (1936).

The court also referred to the following cases:

• Schall v. Commissioner, 174 F.2d 893 (5th Cir. 1949). A federal appeals court stressed that “a contribution is a gift only if it is not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection or regard or pity, or from general motives of philanthropy or charity.”
• Goodwin v. United States, 67 F.3d 149, 152 (8th Cir. 1995). Courts are unlikely to find contributions to be gifts when the congregation makes such contributions in order to keep its “successful minister” at a “relatively low salary.”
• Banks v. Commissioner, 62 T.C.M. 1611 (1991). Church members’ special donations weren’t gifts since they were given out of a desire to reward the pastor for her services and a hope that she would continue as their pastor.
• Wallace v. Commissioner, 219 F.2d 855 (5th Cir. 1955). “If services have been performed by the recipients, it may well be said the presumption is that the payment is for the services and not a gift.”

The pastor insisted that the gifts received from members of the congregation were not for services rendered or for future services hoped for. The court disagreed. It referred to the testimony of the church bookkeeper:

[The bookkeeper] described the church’s envelope system and told us that the special gift line on the envelopes “are just if someone decides they want to just give a gift to the pastor for whatever reason.” She continued on to specify that “some people would like to give for whatever they’re sowing towards,” such as “for the healing of a family member” or some other special intention. The memo lines of the many, many checks in the record from congregants . . . include a great number of phrases such as “love seed,” “first fruits,” and “pastor’s offering.” Some are more learned, including a cite to chapter 4, verses 17-18 of St. Paul’s letter to the Philippians. . . .

The court concluded:

We do not doubt that the church’s faithful made these offerings to their pastor in some considerable part for the graces that they have received for their faithfulness. . . . The pastor may not have explicitly agreed to provide future services in exchange for these contributions, but we find that they were made by congregants who meant to keep their pastor preaching where he is. He provides the “fruit,” or “intangible religious benefits,” and the congregants’ “seeds,” or contributions, are in some secular sense in exchange for them.

The court concluded that the first of four factors (donations for services) “tilts towards income.”

2. Donation requests

The court noted that “evidence of regular requests for donations to a pastor supports a finding that any donations made in response are income and not gifts. It cited the following cases in support of this principle:

• Goodwin v. United States, 67 F.3d 149, 152 (8th Cir. 1995). An associate pastor announced “special occasion” days where those who wished to contribute a special occasion gift to the pastor could do so.
• Banks v. Commissioner, 62 T.C.M. 1611 (1991). The Tax Court ruled that special offerings made to a minister on her birthday, Mother’s Day, the church’s anniversary, and Christmas were compensation for services rather than nontaxable gifts. The amount pledged by individual members was determined at open meetings at the church.

The pastor insisted that he “doesn’t try to manipulate anybody,” or “coerce anyone” into giving a gift, and that “it’s got to be solely on their heart . . . not someone sort of guiding and steering them in that direction.” The court noted that the church had at least two major days for giving to the pastor each year: his birthday and “Bishop’s Day.” The number of checks received on these days “were a disproportionately large share of all those given to the pastor each year,” which led the court to find that “these special gift-giving days were broadcast to and well known by the congregants.”

The court concluded that “this factor tilts towards income.”

3. Routinized, highly structured program

The court explained the third factor: “Even if congregants claim to have made contributions out of love, admiration, and respect, not out of a sense of obligation or fear that the pastor would leave, they are not gifts as a matter of tax law if made and gathered by congregation leaders in a routinized, highly structured program,” and made on behalf of the whole congregation. The court concluded that this was the case:

There’s evidence that the church had a routinized and highly structured system. Its bookkeeping system smoothly aggregated contributions made to the church but intended for the pastor personally: The donations were organized by form, with credit-card donations and checks written to the church for the pastor pooled, totaled, and distributed to him in a single check from the church. All other donations made out to him directly were bundled and passed along to him.

The court concluded that this factor “tilts towards income.”

4. Ratio of church salary to personal donations

The court noted that

the record is full of checks from congregants and the church giving thousands and thousands of dollars in pastoral offerings each year, not to mention the other hefty checks from the church for parsonage, “mortgage,” “vehicle,” “vacation expenses,” and “medical” expenses, among other things. And this doesn’t even include the thousands of dollars in cash deposits for which we cannot identify a source. . . . . We struggle to see how such large sums of money can be gifts, especially given our findings on the other three factors. . . .

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. . . . And so we find that the contributions from the church’s congregants are taxable income to the pastor.

What this means for clergy and churches

This case is important for four reasons.

First, it is one of the few courts to address the tax status of “gifts” made to pastors. There is a lot of confusion regarding such transfers, with many churches assuming they are nontaxable gifts rather than taxable compensation. This court squarely laid down the following principle: “When comparatively so much money flows to a person from people for whom he provides services . . . and to whom he expects to provide services in the future, we find it to be income and not gifts.”

Second, the court applied a four-factor test to assist in the task of characterizing payments to clergy as taxable compensation or nontaxable gifts:

1. 1. whether the donations are objectively provided in exchange for services;
   2. whether the minister (or other church authorities) requested the personal donations;
   3. whether the donations were part of a routinized, highly structured program, and given by individual church members or the congregation as a whole; and
   4. whether the cleric receives a separate salary from the church and the amount of that salary in comparison to the personal donations.

Third, the court ruled that the pastor had acted in good faith in relying on the tax advice of his CPA and therefore, while liable for back taxes and interest, he was not liable for any penalties.

Fourth, the court stressed two important requirements for a housing allowance: First, the allowance must be designated in advance by a church board or congregation; and second, the allowance must be, in fact, used for housing expenses.

3. Revoking an exemption from Social Security

Will Congress give ministers another opportunity to revoke an exemption from Social Security? It does not seem likely, at least for now. No bills were introduced in Congress in 2019 that would have authorized ministers to revoke an exemption from Social Security.

4. Inflation adjustments for 2019

Some tax benefits were adjusted for inflation for 2019. But many remained unchanged due to the low rate of inflation. Key changes affecting 2019 returns include the following:

• The alternative minimum tax exemption amount for tax year 2019 for single taxpayers is $71,700 and begins to phase out at $510,300. The exemption amount for married couples filing jointly is $111,700 and begins to phase out at $1,020,600.

• For estates of any decedent passing away in calendar year 2019, the basic exclusion amount is $11,400,000.
• For 2019, the foreign earned income exclusion will be $105,900.
• The maximum earned income credit amount will be $6,557 for taxpayers with three or more qualifying children for 2019.

5. Working after retirement

Many churches employ retired persons who are receiving Social Security benefits. Persons younger than full retirement age may have their Social Security retirement benefits cut if they earn more than a specified amount. Full retirement age (the age at which you are entitled to full retirement benefits) for persons born between 1943 and 1954 is 66 years. If you are under full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn above the annual limit. For 2020, that limit is $18,240. In the year you reach full retirement age, your monthly benefit payments are reduced by $1 for every $3 you earn above a different limit. For 2020, that limit is $48,600, but only earnings before the month you reach full retirement age are counted.

6. Individual coverage health reimbursement arrangements (ICHRAs)

Health reimbursement arrangements (HRAs) are a type of account-based health plan that employers can use to reimburse employees for their medical care expenses. New rules released in 2019 by the US Departments of Labor, US Department of Health and Human Services, and the US Department of the Treasury permit employers to offer a new individual coverage HRA (ICHRA) as an alternative to traditional group health plan coverage, subject to certain conditions.

Among other medical care expenses, ICHRAs can be used to reimburse premiums for individual health insurance chosen by the employee, promoting employee and employer flexibility, while also maintaining the same tax-favored status for employer contributions toward a traditional group health plan.

The new rules also increase flexibility in employer-sponsored insurance by creating another, limited kind of HRA that can be offered in addition to a traditional group health plan. These “excepted benefit” HRAs permit employers to finance additional medical care (for example, to help cover the cost of copays, deductibles, or other expenses not covered by the primary plan) even if the employee declines enrollment in the traditional group health plan.

This significant development will again allow employers to (1) reimburse employees for some or all of the premium expenses incurred for an individual health insurance policy, and (2) use their funds to directly pay the premiums for an individual health insurance policy covering employees. This benefit was commonly used by employers to provide health insurance for employees for over half a century, but was made unlawful by the Affordable Care Act (Obamacare).

For a full discussion of ISCRAs—along with important information on qualified small-employer health reimbursement arrangements (QSEHRAs)—see my article “Churches Can Once Again Reimburse Employee Health Care Costs.”

7. The new “parking lot tax” on churches

Editor’s note: On December 20, 2019, the “parking lot tax” was officially repealed. Churches wanting to claim a refund for unrelated business income tax (UBIT) due to the repeal must file an amended Form 990-T for the applicable year or years. Go to the IRS website for specific guidance.

An obscure provision in the comprehensive tax reform legislation enacted by Congress in 2017 (the Tax Cuts and Jobs Act) purports to impose a tax (the unrelated business income tax) of 21 percent on the value of free parking provided by tax-exempt organizations, including churches, to their employees. Note two developments:

1. 1. The IRS issued guidance on implementing the new rules. I.R. 2018-247.
   2. Legislation was introduced in Congress in 2019, with broad bipartisan support, to exempt churches from this tax. But as of the date of publication no action had been taken.

For now, this four-step analysis can help churches determine whether or not the parking lot tax applies to them.

8. Charitable contribution denied due to failure to comply with substantiation requirements

The IRS audited a taxpayer’s tax return and disallowed a charitable contribution deduction of $250,000 for the taxpayer’s contribution of his home to a religious charity (the “donee”) on the ground that he failed to comply with the substantiation requirements that apply to donations of noncash property valued at more than $5,000.

Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser, and you must attach a “qualified appraisal summary” (Section B of IRS Form 8283) to your tax return. There are some exceptions.

A qualified appraisal is an appraisal document that is made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards; relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property; and does not involve a prohibited appraisal fee (i.e., based on a percentage of the appraised value of the property).

The IRS concluded, and the Tax Court agreed, that these requirements were not met and so the taxpayer’s contribution of his home was not deductible. These deficiencies included: (1) the “appraiser” who appraised the taxpayer’s home was a real estate agent who did not satisfy the tax code’s definition of a “qualified appraiser”; and (2) the appraisal was not performed within the time limits prescribed by the tax code.

The court rejected the taxpayer’s argument that he was entitled to a deduction based on his “substantial compliance” with the tax code’s substantiation requirements. The court concluded that there was no substantial compliance: “On the record before us, we find that the taxpayer failed to carry his burden of establishing that he satisfied all of the charitable contribution deduction substantiation requirements that apply to the charitable contribution deduction that they claimed.” Presley v. Commissioner, T.C. Memo 2018-171 (2018).

9. Pledges made by donors to a church are legally enforceable

The Supreme Court of Nebraska ruled that pledges made by donors promising to donate to a church or other charity in the future are legally enforceable. The court concluded:

[F]rom early times academies, colleges, missionary enterprises, churches, and other similar institutions for the public welfare, have been established and often maintained upon private donations and subscriptions [i.e., pledges]. Some early cases advanced the view that a subscription to charity was purely gratuitous, not enforceable at law, and performance was left to the conscience and honor of the subscriber. But many courts, including this court, began to enforce eleemosynary subscriptions [to churches and other charities]. This change flowed from a commendable regard for public policy and a desire to give stability and security to institutions dependent on charitable gifts. Shadow Ridge v. Ryan, 925 N.W.2d 336 (Neb. 2019).

10. Enforcement of restricted contributions

A Connecticut court ruled that only the state attorney general could enforce a restricted contribution to charity. A decedent’s will left $4.8 million to a parochial school. The school closed a few years later due to declining attendance. The donor’s estate sued to enforce the terms of the will. A state court ruled that ordinarily only the state attorney general can sue to enforce a charitable trust:

Connecticut is among the majority of jurisdictions that have codified this common-law rule and has entrusted the attorney general with the responsibility and duty to represent the public interest in the protection of any gifts, legacies or devises intended for public or charitable purposes. . . . As stated by our Supreme Court, “[the] theory underlying the power of the attorney general to enforce gifts for a stated purpose is that a donor who attaches conditions to his gift has a right to have his intention enforced. The donor’s right, however, is enforceable only at the instance of the attorney general. . . .

This exclusivity, vested in the attorney general, is mirrored in the common-law view that other persons—including a donor or settlor—lack standing to enforce the terms of a gift or trust. As observed by our Appellate Court,

at common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust unless he or she had expressly reserved the right to do so. . . . At common law, it was established that equity will afford protection to a donor to a charitable corporation in that the attorney general may maintain a suit to compel the property to be held for the charitable purpose for which it was given to the [charitable] corporation. . . . [T]he donor himself has no standing to enforce the terms of his gift when he has not retained a specific right to control the property, such as a right of reverter, after relinquishing physical possession of it. . . . As a matter of common law, when a . . . donor of property to a charity fails specifically to provide for a reservation of rights in the . . . gift instrument, neither the donor nor his heirs have any standing in court in a proceeding to compel the proper execution of the trust. . . . Where the donor has effectually passed out of himself all interest in the fund devoted to a charity, neither he nor those claiming under him have any standing in a court of equity as to its disposition and control.

The court cited a “special interest” exception to the general rule that only the state attorney general can sue to enforce the terms of a charitable trust:

The rule conferring jurisdiction on the attorney general to enforce charitable trusts is not absolute. . . . Commentators and Connecticut case law recognize a “special interest” exception to the attorney general’s enforcement powers. Beneficiaries with a sufficient special interest in the enforcement of a charitable trust can initiate a suit as to that trust. In order to maintain such an action, the plaintiff must plead sufficient facts to demonstrate that he is entitled to receive a benefit under the trust that is not merely the benefit to which members of the public in general are entitled.

The court concluded that there was no one with a special interest to enforce the will, including the executor of the estate, students, and parents.

Finally, the court considered the special interest exception to be inconsistent with the nature of a gift:

Furthermore, even if the “special interest” exception applied to this case, the plaintiffs have failed to demonstrate . . . that they have a special interest in the decedent’s gift sufficient to confer standing upon them to pursue their claims. The . . . executor of the estate has not demonstrated a special interest in a completed gift made by the estate. The will did not reserve any rights in the donor with respect to the gift, nor did it create a charitable trust of which the executor was made trustee. Moreover, and as noted previously, a gift is characterized by a surrender of control and an irrevocable transfer. To recognize a “special interest” in such a gift on the part of the executor of an estate would be inconsistent with the essential characteristics of the gift itself. Maria J. Derblom v. Archdiocese, 2019 Conn. Super. LEXIS 1029.

To go deeper on these 10 developments, plus dozens more for the 2019 tax-filing season and 2020 calendar year, order Richard Hammar’s 2020 Church & Clergy Tax Guide.