Unincorporated Churches--A "Loophole"?

Question:

I am a member of a local church that has opted to not incorporate with our State nor to file for the 501(c)(3) tax exemption with the federal government. I have heard of churches giving occasional "gifts" to individuals within the church from money that was given to the church by donors who write these contributions off as tax-deductible and the recipients of these gifts were never given Form 1099s from the church, nor do they claim them as income on their personal tax returns.  How do donations to individual missionaries qualify for tax deduction? What is the responsibility of the church to account for such distributions to individuals?  

Answer:

“A church is a cohesive group of individuals who join together to accomplish the religious purposes of mutually held beliefs. In other words, a church's principal means of accomplishing its religious purpose must be to assemble regularly a group of individuals related by common worship and faith” (Tax Court Memorandum 1990-41). Whether the church has either formally incorporated or filed for IRS recognition as a 501(c)(3) organization is irrelevant to its classification as a church and to its responsibility to comply with tax law.

According to IRS Publication 526 charitable contributions made to individuals are not tax deductible nor are they reported as income.

Donations must be given to a qualified organization (e.g. a church) in order to be tax deductible by the donor. The church can use such donations to support missionaries without affecting the tax deductibility of the gift for the donor. 

In the case of a church giving a “gift” to an individual within a church, it depends on the relationship between the church and the individual. Because a missionary is providing services on behalf of the church, money received from the church is considered taxable income . If the gift is dispensed by the church for non-compensatory, benevolent purposes, then it is not taxable to the recipient.

If the a church is simply a supporting church and the missionary is sent funds through a missions’ agency, the “gift” is treated as a transfer to funds between two tax-exempt organizations—a church and a missions’ agency. The missions’ agency is responsible to correctly report the disbursement of taxable compensation to the missionary.

If the church is acting as the missions’ agency then tax treatment must be determined by the church—typically Form W-2 or Form 1099-MISC depending on the missionary’s employment status (i.e., employee or independent contractor). I recommend that readers of this blog explore other postings for a review of rules to determine this status.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer the posted question. Andrew Domsic of Mattawan, Michigan gets credit for this one.