Originally published on Forbes.com.
Archbishop Wayne Felton and Deondra Felton are the Senior Pastor and Overseer of Women Affairs, respectively, of The Holy Christian Church of St. Paul Minnesota (HCC). As a bishop, Felton serves as Apostolic Overseer of the Communion of Holy Christian Churches which consists of over 150 churches and ministries in the United States, Rwanda, Kenya and Liberia. The couple got behind in their income tax filing and caught up with joint returns for 2008 and 2009.
They were able to work out most of the issues on the returns with IRS, but there was one issue left for the Tax Court. Was the cash and checks that congregants put in blue envelopes on Sundays taxable income or could it be excluded as gifts? Judge Mark Holmes, who is noted for his distinctive writing style, concluded that the blue envelope money is taxable income in his opinion last week. It amounted to $258,001 in 2008 and $234,826 and 2009.
Background
Archbishop Felton started his career in ministry in an established denomination as a “national evangelist” setting up new churches. He and Mrs. Felton then moved to Minnesota independent of the denomination and established Holy Christian Church in West St. Paul. HCC appears to be non-denominational, although you might argue that given the other 150 churches, it is becoming the home church of a new denomination. The Minnesota congregation does not show up in the Hartford Institute for Religion Research as a megachurch, but it does have a megachurch feel in the way it presents itself. Here is an example of a sermon by Archbishop Felton.
HCC has what I call a “strong pastor” model of governance according to Judge Holmes.
Tending to the material needs of such a network of churches requires some skill, of course, and we find that the Feltons run Holy Christian Church in a businesslike manner suitable to its status as a tax-exempt organization. Reverend and Mrs. Felton sit on the church’s executive board, along with deacons and lay members whom Reverend Felton selects. This board, however, is only advisory: Reverend Felton can remove its members at any time for any reason, and the board didn’t hire him, can’t fire him, and doesn’t get to tell him what to do. But [*5] Reverend Felton still respects and follows board decisions. (He and Mrs. Felton, for example, don’t participate in board decisions about their salaries.) He also follows church bylaws and has “never overrode as it pertains to business matters any decision of the executive board.” Church business operations are carefully organized and executed. (Emphasis added)
That “businesslike manner” distinguishes HCC from some other “strong pastor” churches where the pastor’s transactions and the church’s become hopelessly muddled. The “corporation sole”, a vehicle suitable for hierarchical churches, led evangelicals down this dangerous path. The Feltons should get a lot of credit for avoiding the traps that Anthony Jinwright fell into. The Feltons may have taken a position that did not stand up well in the Tax Court, but it was done in an above-board manner. The accuracy penalty stings, but it can be a lot worse.
The Blue Envelopes
A CPA I know who does a lot of work for churches told me off the record:
…..we have this conversation on a daily basis it seems with our clients…We advise them that with respect to payments to them (pastors mostly but often others as well), no matter what the donor or the church want to call them , faith, love, pastor handshake, etc. it is best to treat as taxable compensation . As you well know, based on many of your posts, the tax situation for pastors is so advantageous that for them to try to avoid paying taxes in a manner like this is anything but faith, love etc!
While he was at Tuskegee University, Bishop Felton first learned about the notion of “handshake money” – donations made directly to the pastor on the way out of church. He didn’t like the way that it was done and resolved that he would handle it differently when he had his own church.
Reverend Felton testified that “the offering is raised, we believe in the biblical pattern of bringing your offering, people literally, from the balcony to the overflow room downstairs, bring their offering to the front and that offering is received.” The collection is kept secure until the end of the service, when it is counted and verified. After that, it’s deposited, and the church’s business administrator enters member information and donation amounts into Shepherd’s Staff—accounting software designed for that purpose. The church uses Shepherd’s Staff to produce annual contribution statements for its members.
The allocation of contributions was based on an envelope system.
Congregants used white envelopes for the normal contributions that sustain the church; these envelopes also include a line marked “pastoral”, which Mrs. Felton characterized as the line for those who wanted to “sow a seed” directly to Reverend Felton. Members could grab white envelopes on their way into church, and ushers also notified congregants during services by holding them up and handing them around. The church tracked donations in these white envelopes —including donations marked “pastoral”—in Shepherd’s Staff; it included them in the members’ annual contribution statements, and Reverend Felton got a breakdown of pastoral donations that showed how much income he had to report. The contributions that members made in gold envelopes were used for special programs and retreats. As with the donations made in white envelopes, the church tracked those made in gold envelopes in Shepherd’s Staff and included them in the members’ annual contribution statements.
Blue envelopes came later than white and gold. Reverend Felton was, as we wrote, uncomfortable with “shake-hand” money; he recognized, however, that his congregation wanted to give, and he “didn’t want to necessarily hurt anyone’s feelings.” White envelopes already allowed for pastoral donations, but they caused an unusual problem: Reverend Felton felt that some congregants wanted to make sure they did not get a tax deduction for the amounts they gave him—“there were some who said I did not want this to be counted for tax, I wanted it to be a gift.” So Reverend Felton and the rest of the executive board came up with a solution—the blue envelope.
Reverend Felton 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 if they did.
The Case For Exclusion And Against
Unlike other cases, HCC did not have regular appeals to make offerings directly to the minister. Although ushers had blue envelopes available, they were only handed out when asked for. It was something, but really not enough. At the end of the day, I’m thinking that this is an example of Reilly’s Second Law of Tax Planning: Sometimes it’s better to just pay the taxes.
The Tax Court cited some cases where ministers had been allowed an exclusion for gifts, but the typical situation was someone who was retiring or disabled.
The case that Judge Holmes most leaned on, because it was the Eighth Circuit, where the Feltons reside, was Goodwin V US. Although there were differences in fact, the commonality was that “cash payments were gathered by congregation leaders in a routinized, highly structured program,” – like the blue envelopes.
There was also the matter of the amount of blue envelope income relative to the tax-free parsonage allowance of $78,000 and the $40,000 in white envelope donations reported is dwarfed by the blue envelope money over $200,000.
Reverend Goodwin’s “special occasion” gifts were less than the total of his salary and parsonage allowance. Reverend Felton’s purported gifts are around double the total of his deemed salary and parsonage allowance for both of the years at issue. 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.
And The Penalty
There argument that there should not be a penalty, because the law is unclear did not go well.
The Feltons argue that they have reasonable cause because their facts are unique and the cases in this area are anything but clear. We wouldn’t normally penalize taxpayers for making an honest mistake of law in an area that lacks clear guidance. See Van Wyk v. Commissioner, 113 T.C. 440, 449 (1999). But the Feltons have two problems: They cite no precedent favorable to them that arises from gifts to a clergyman who wasn’t retired or about to be, and the record shows that the Feltons filed their returns only after the IRS contacted them. The record shows that Reverend Felton—who didn’t say he has any tax training—prepared the returns himself. We aren’t convinced that he or his wife knew about any of the caselaw in this area when they filed their late returns. And there is no evidence in the record about their efforts to compute their proper tax liability when they filed their returns; that poses a problem because the regulations say that is generally the most important factor for reasonable cause.
More On Bishop Felton
The bishop does not tweet a lot, but when he does, he really makes it count. I really liked this one, although it does require a bit of theology to understand it,
I’m convinced that if the late John Calvin (the Reformer) would’ve lived to hear the late John Wesley (the Methodist) preach, he’d would’ve likely been persuaded to embrace Arminianism. For those of Calvin’s camp it’s not too late to change–not your faith rather, your ‘John.’
— WR Felton (@BishopWRFelton) May 27, 2018
Other Coverage
Lew Taishoff covered the case with – The Envelope, Please – Part Deux. I had to ask for translation to help me with this part.
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.
On the meaning of “nisht azy gefaylach”, he wrote me – “Mr Reilly, Literally, “not so terrible.” In more-or-less modern US slang, “not so shabby.””. Expanding my education in that area was a mitzvah, I’m sure. Mr. Taishoff also included the “Quantity has a quality” attributed, probably wrongly, to a former seminarian. I know you can google as well as I can, but I am not going to hold out on you. The seminarian was Georgian, so you might think SBC like my blogging buddy Reverend William Thornton. Joseph Stalin attended the Orthodox Tbilisi Spiritual Seminary in a Georgia different from the one Tennessee Ernie Ford sang about.
Howard Friedman had a summary in Religion Clause.