A church staff member recently passed away. His wife remains a current employee. If a memorial fund is established for the family of the deceased employee, can the church (her employer) make a non-taxable contribution to the memorial fund, even though it benefits a current employee and her family?
Multiple factors must be taken into consideration to determine the taxability of a disbursement of this nature.
First, the "gift" cannot be disguised compensation, (e.g. previously undisbursed vacation pay for the deceased employee). Even if it is designated by the church as a gift, the disbursement may be taxable as compensation if the IRS deems it to be pay that he was owed for previous services. Additionally, the contribution cannot be made in anticipation of future services by the wife; if this is judged to be simply advanced compensation, it will be taxable.
Also, the church should consider whether contributions of this nature have been a common practice in the past for non-employees. Have gifts been made to memorial funds for non-employee members of the church, or are employees the sole recipients of the contributions? If employees are the typical beneficiaries of gifts of this nature to the exclusion of other church members, this contribution will likely be viewed by the IRS as taxable compensation.
While these considerations seem to suggest a restriction on gifts of this nature, there are instances when memorial fund contributions for employees will not be taxable. As noted above, there are multiple factors influencing taxability which must be applied to the facts and circumstances of each particular case. While we certainly do not want to discourage gifts of this nature, churches should be aware of these guidelines and make financial decisions accordingly. Memorial fund contributions made in good faith will generally be non-taxable.
It is interesting to note that in the case of the Hokie Fund, established at Virginia Tech University, memorial fund contributions to victims and their families were specifically excluded from tax, regardless of the employment status of the recipients (Public Law 110-141, §1).