The Tax Court recently ruled that personal transfers from church members to their pastor constituted taxable income even though not receipted by the church.

A church’s founding pastor received no salary for 13 years. He was financially sustained in three ways:

• Members made donations that exceeded $200,000 annually. The church used blue envelopes for donations by members to the pastor. The pastor first told his congregation about the blue envelopes at the church’s annual business meeting. He explained that if members were so inclined they could donate to him in blue envelopes but they wouldn’t get a tax deduction. All the blue envelopes were handed over to the pastor unopened.
• The pastor also received a housing allowance of $6,500 per month.
• The pastor received fees from speaking engagements in other churches of up to $40,000 annually.

The pastor did not report any of the “blue envelope” donations from members of his church as taxable income on his Form 1040. The IRS audited the pastor’s tax returns, and claimed that these offerings were taxable income rather than nontaxable gifts. The pastor appealed to the Tax Court.