Gifts Designated to Pastors

Designated contributions are those that are made to a church with the stipulation that they be used for a specified purpose. If the purpose is an approved project or program of the church, the designation will not affect the deductibility of the contribution. However, if a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church's exempt purposes. Contributions to a church that designate an individual recipient can arise in several ways. Let’s look at contributions that designate a pastor as the intended recipient.

It is fairly common for individuals to attempt to "supplement" a minister's compensation by making "contributions" to a church that are designated for the benefit of a particular minister. To illustrate, assume that Pastor Ron is the youth pastor at a local church, that his annual compensation from the church is $20,000, and that his parents (who live in another state) want to supplement his income. They send $5,000 to their son's church, earmarked for their son, which is paid by the church to Pastor Ron in addition to his stated salary of $20,000. This contribution is not tax-deductible by the parents, since it clearly was their intent to benefit their son. The church acted simply as an intermediary through which the gift was funneled (in many cases, in an attempt to obtain a charitable contribution deduction).

But what if the church informed the parents that their $5,000 gift would be applied to reducing the church's obligation to pay a $20,000 salary? In other words, if the parents understand that their $5,000 gift will be applied toward the church's commitment to pay a $20,000 salary (leaving the church with an obligation of $15,000), does this make a difference? Does relieving the church of $5,000 of its $20,000 obligation warrant a charitable contribution deduction? This question has been addressed directly by the Tax Court. A couple paid $100 per month toward the housing expenses of their minister son, and they claimed a charitable contribution deduction for all of their payments. They argued that their payments were tax-deductible since they were relieving the church of an obligation to provide housing (or a housing allowance) for their son. In denying any charitable contribution deduction to the parents for their monthly payments, the court observed: "The cases are clear that the criteria for determining whether an amount is a charitable contribution is not whether the payment which is not made directly to the charity might incidentally relieve the charity of some cost but rather whether the payment is such that the contribution is 'for the use of' the charity in a meaning similar to 'in trust for.'"

The court referred to an earlier decision in which it denied a charitable contribution deduction for a payment made by a taxpayer directly to an educational institution for the education and maintenance of a child who lived in a state-operated children's home. In the prior case, the taxpayer had claimed that since the children's home would have had to pay for the education and maintenance of this boy had he not done so, his payments were payments "for the use of" that charity and should be tax-deductible. In holding that the amount paid by the taxpayer to the educational institution was not a charitable contribution, the court observed that these payments were earmarked "not for a group or class of individuals, not to be used in any manner seen fit by the home, but for the use of a single individual" in whom the taxpayer "felt a keen fatherly and personal interest." The court further observed that "charity begins where certainty in beneficiaries ends," quoting from a Supreme Court case which held that the uncertainty of the objects of the donation is an essential element of charity. After reviewing this precedent, the court concluded:

Here, whether the [church] would have chosen to maintain a house for the use of [the taxpayer's] son and his family as living quarters is not shown by this record. It may have been that had the taxpayer paid the [$100 per month] directly to the church, that organization would have chosen to use the funds otherwise. However, even were there something in this record to indicate that the church would have rented a house for the use of the taxpayer's son . . . it would not follow that the deduction would be allowable since by making the payments directly to the landlord the taxpayer took away the option of the church with respect to its use of the funds. As pointed out in several cases, the charity must have full control of the funds donated in order for a taxpayer to be entitled to a charitable deduction, and such is not the situation where the funds are designated by the donor for the use of a particular individual. In the instant case, the evidence as a whole shows that it was the taxpayer's intent to benefit his son by insuring that his son had a place to live with his family. Under these circumstances the payments were for the use or benefit of a particular individual, the taxpayer's son, and therefore are not charitable deductible contributions even though incidentally the payments may have relieved the church of the necessity of paying for a place for the taxpayer's son to live.