                               T.C. Memo. 2018-168



                         UNITED STATES TAX COURT



       WAYNE R. FELTON AND DEONDRA J. FELTON, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9644-14.                            Filed October 10, 2018.



      Thomas Edward Brever, for petitioners.

      John Schmittdiel and Blaine C. Holiday, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Holy Christian Church in St. Paul, Minnesota boasts a

diverse and devoted congregation of about 600 families, in no small part

attributable to its founder and pastor--the Reverend Wayne R. Felton. A religious

life often requires financial sacrifice, and Reverend Felton had his fair share of
                                         -2-

[*2] that in the early years of his church. But in both 2008 and 2009 his

congregants gave him over $200,000 in cash and personal checks in addition to

their regular church offerings.

      Reverend Felton says they were nontaxable gifts. The Commissioner wants

them taxed and wants a penalty too.

                                  FINDINGS OF FACT

      Reverend Felton found his vocation at Tuskegee University, where he

assisted the dean of the school’s chapel while still a student. He also first learned

about “shake-hand” money at that chapel--the custom in some evangelical

churches of handing donations to the pastor on the way out of church. Reverend

Felton didn’t like the way the chapel handled these donations and silently resolved

to do things differently if he ever had a church of his own to run.

      That would take a while. After earning his bachelor’s degree Reverend

Felton enrolled at Asbury Theological Seminary. He finished with a master’s

degree, and joined an established Christian denomination as a pastor and “national

evangelist” setting up new churches. But it wasn’t long before Reverend Felton

and his wife, Deondra Felton, moved to “Minnesota independent of that

organization to begin all new.”
                                        -3-

[*3] In 2000 Reverend and Mrs. Felton established Holy Christian Church in

West St. Paul, where it became known as a multiracial nondenominational church

“in which all are welcome.” The soil was good and the increase was more even

than a hundredfold--there are about 600 families in the congregation, and Sunday

services average around 500 people. Reverend and Mrs. Felton are very involved

in the church’s day-to-day operations. Reverend Felton is a charismatic man and,

it would seem to secular eyes, a significant draw to his church. (Though we have

no doubt that Reverend Felton would say that, from his perspective, it is grace and

the call to worship together that draws his congregation in.) Mrs. Felton also

plays an important role. She was too modest to elaborate on this at trial, but

Reverend Felton testified that she’s the pastor of women’s affairs and that she has

long helped with the business of running the church. We find that both Reverend

Felton and Mrs. Felton work hard at their vocations.

      Holy Christian Church is not the only one planted by Reverend Felton. He

is also the presiding bishop (or archbishop) of Holy Christian Church

International. Reverend Felton didn’t describe it exactly this way, but Holy

Christian Church International is a mother church--it established the Holy

Christian Church in St. Paul and also set up churches in Rwanda, Liberia, Jamaica,

Florida, Louisiana, and another one in Minnesota. These seeds also fell on fertile
                                        -4-

[*4] ground: Rwanda has 105 congregations of various sizes; Liberia has 120

congregations of 30 to 300 people; Jamaica’s has about 100 people; Florida’s has

about 100 people and Louisiana’s about 50; and the other church in Minnesota has

approximately 70 in its congregation. Reverend Felton credibly testified that in

this his evangelism is “like any other in church history.”

      We find it likely that Reverend Felton’s personality and moving oratory

make a difference. Reverend Felton also counsels those in need, whether

professional athletes who want to find the narrow path through their fame, or

married couples in trouble with their own vocations to family life. He’s also hired

to speak not only to other meetings of the faithful, but also to more worldly

institutions like the University of Minnesota Carlson School of Management and

Gustavus Adolphus College.

      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-

[*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.

      This sober approach is particularly evident in how the church collects and

records offerings from its members. 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.1

      How does the business administrator know what to enter into Shepherd’s

Staff? For some members she finds the relevant information on their checks, but


      1
        The program produces spreadsheets with breakdowns for contributions to
the “general fund,” “pastor’s gift,” the “pledge fund,” and “tithes”. The statements
report total annual contributions and also show the dates and amounts of each
contribution made throughout the year.
                                        -6-

[*6] for many others the church relies on contribution envelopes. There were

three different envelopes in the years at issue: white, gold, and blue.

      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.

      White envelopes looked like this:
       -7-

[*7]
                                            -8-

[*8] 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. (We have no idea how many church members itemize

or the ratio of those who pick white envelopes compared to those who choose

blue.)

         Blue envelopes looked like this:
       -9-

[*9]
                                       - 10 -

[*10] 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.2 Blue envelopes weren’t as ubiquitous as white envelopes--ushers

didn’t hand them out at the church’s entrance and, although ushers had them, they

followed the custom that a member had to ask for one if he wished to give in that

way. And, while Reverend Felton regularly preached about tithes and offerings--

made in the white envelopes--he didn’t preach about making personal donations to

him in the blue. Those weren’t the only differences between white and blue

envelopes. The church opened white envelopes and tracked the donations made in

them, but all the blue envelopes were handed over to Reverend Felton unopened.

      We summarize the differences between white and blue envelopes:




      2
         Two of Reverend Felton’s congregants testified about pastoral donations.
They each said that they made donations to Reverend Felton to “bless” him or
“sow unto” his life, and expected no future pastoral services in return. We find
their testimony credible, but we note that both congregants said that they didn’t in
fact use blue envelopes to make their donations--one made hers online and the
other made his by check with no envelope. Nobody who had actually made a
donation in a blue envelope testified, and the parties didn’t stipulate that all the
congregants’ subjective intentions were the same as those of the two who did
testify.
                                          - 11 -

[*11]                                                               Were church
                                         Did ushers distribute    members told these
 Envelope          Were donations          these envelopes         donations were
   color             solicited?              unsolicited?           deductible?

   White                 Yes                       Yes                    Yes
   Blue                  No                        No                      No

We can also summarize the estimated amounts that the church collected in each:3

        Envelope color                    2008                         2009

            White                      $1,000,000                   $1,000,000
            Blue                          258,001                      234,826

        New churches bring forth “first the blade, then the ear, after that the full

grain in the ear.” Mark 4:28. And for the years at issue here, Holy Christian

Church and its affiliates were definitely at the full-grain-in-the-ear stage. But it

was not always so. Eric Jenson, an elder at Holy Christian Church, related about

Reverend Felton’s sacrifices: “[Y]ou hear stories of the early days when, you

know, he was going without * * * any paycheck, and going without a home for

periods of time, but carrying out the work of the ministry because he was called to


        3
       The parties stipulated the collected money that Reverend Felton received
for 2008 and 2009, and Reverend Felton provided estimates at trial for the white
envelopes. He also estimated the gold-envelope donations in each year, which he
said were only about $10,000 in 2008 and $5,000 in 2009.
                                         - 12 -

[*12] do it.” Reverend Felton preached at the church for almost thirteen years

without a salary and, although the executive board authorized a salary for him in

2008 and 2009, he didn’t take it. We find this testimony credible, but it prompts a

question: How did Reverend Felton and his wife support their family?

      The first, and most obvious, answer is the blue-envelope donations, which

exceeded $200,000 in both of the years at issue. Reverend Felton testified that he

also received in-kind donations from “private donors * * * who did not want to

identify themselves.” The church itself didn’t pay Reverend Felton a salary, but it

did track the “pastoral donations” that congregants made in white envelopes and

issued a report to him about those at the end of the year. The report for 2008, for

example, shows that Reverend Felton received just over $40,000 in pastoral

donations in white envelopes. And the church also gave Reverend Felton a

parsonage allowance4 of $6,500 per month, an amount which we find he

      4
         Section 107(2) excludes from the gross income of a “minister of the
gospel” a “rental allowance paid to him as part of his compensation” (i.e., a
parsonage allowance). Some have questioned whether the section conflicts with
the Constitution’s Establishment Clause, see, e.g., Warren v. Commissioner, 282
F.3d 1119 (9th Cir. 2002) (order requesting supplemental briefs), but it wasn’t
until recently that a court actually held the section unconstitutional, see Gaylor v.
Mnuchin, 278 F. Supp. 3d 1081, 1089-92 (W.D. Wis. 2017). That decision is on
appeal to the Seventh Circuit; it’s also not an issue in this case. (All section
references are to the Internal Revenue Code in effect for the years at issue, and all
Rule references are to the Tax Court Rules of Practice and Procedure, unless we
                                                                          (continued...)
                                        - 13 -

[*13] accurately described as “a very, very nice and handsome housing

allowance.” Finally, there are the private counseling and speaking engagements

that Reverend Felton booked through a separate company--Bishop Wayne R.

Felton Ministries, LLC. This company had over $60,000 in gross receipts in both

years, and net profit of $30,000 in 2008 and $40,000 in 2009 that the Feltons

reported on a Schedule C.

      Reverend Felton, however, continued to prepare his own returns even as the

churches grew and the organization of his secular affairs became more complex.

He was also slow in filing, and he and his wife filed both the returns at issue here

well over a year after they were due. The Feltons didn’t report as income on those

returns any of the donations they got in blue envelopes, but they did report about

$40,000 in wages for each year. These reported wages were the amounts made in

white envelopes that donors had designated as “pastoral” donations. The Feltons

excluded the almost $80,000 parsonage allowance from their gross income under

section 107(2) and deducted more than $50,000 in mortgage-interest expense for

each of those years.5 They also claimed about $50,000 in charitable deductions for


      4
       (...continued)
say otherwise.)
      5
          Expenses that are allocable to tax-exempt income are often nondeductible,
                                                                       (continued...)
                                        - 14 -

[*14] both 2008 and 2009--significant figures compared to the approximately

$70,000 to $80,000 of gross income that they reported for each of those years.

The bottom line produced by these exclusions, exemptions, and deductions was

that the Feltons reported no taxable income on either return.

      After the Commissioner audited them, he issued a notice of deficiency in

which he made several adjustments and determined penalties. The Feltons

disagreed and petitioned our Court. They were at the time, and remain, Minnesota

residents. The parties settled many issues before trial, and the main one left for us

to decide is whether the donations that Reverend Felton received in blue envelopes

are income or gifts. We’ll also need to determine whether the Feltons are liable

for additions to tax under section 6651(a)(1) and accuracy-related penalties under

section 6662(a).

                                     OPINION

      The dispute between the Commissioner and the Feltons has roots deep in

Christian history, and both parties can see their positions staked out as far back as

St. Paul. “Who planteth a vineyard, and eateth not of the fruit thereof? Or who

      5
       (...continued)
see sec. 265(a)(1), but that general rule doesn’t apply to mortgage interest or real-
property taxes on the home of a taxpayer who pays those expenses with an
excludable parsonage allowance, sec. 265(a)(6)(B); see also Rev. Rul. 87-32,
1987-1 C.B. 131.
                                        - 15 -

[*15] feedeth a flock, and eateth not of the milk of the flock?” 1 Cor. 9:7. And

“[e]ven so hath the Lord ordained that they which preach the gospel should live of

the gospel.” 1 Cor. 9:14. In our era, the Commissioner might have argued, all this

milk and fruit constitute income upon receipt. See sec. 61 (gross income defined

as income from whatever source deriveth).

      But the relationship between a pastor and his flock is far from entirely

commercial, and the Feltons argue that, at least in part, they are supported by gifts,

not wages justly bargained for and justly earned in the marketplace: “[W]hen I

preach the gospel, I may make the gospel of Christ without charge, that I abuse not

my power in the gospel.” 1 Cor. 9:18. And “[y]e sent once and again unto my

necessity. Not because I desire a gift: but I desire fruit that may abound to your

account. But I have all, and abound: I am full.” Phil. 4:16-18.

      We have already found that the transfers--whether gifts or compensation--

have left the Feltons very full indeed. But our tax system is somewhat more

complicated than the ancients’, and meeting its exactions can only rarely be

extinguished with the draught of a single fish. See Matt. 17:27. To decide this

case, we must therefore descend from the sacred to the profane.
                                       - 16 -

[*16] I.     Basic Principles

      Section 61(a)(1) says that gross income includes “[c]ompensation for

services, including fees, commissions, fringe benefits, and similar items.” See

also Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (broadly

construing gross income as “undeniable accessions to wealth, clearly realized, and

over which the taxpayers have complete dominion”). That’s a big net, but

Congress cut a small hole in it with section 102. Section 102(a) excludes from

gross income “the value of property acquired by gift.” We note, however, that

section 102(a) has its own limitation--the exclusion doesn’t apply to “any amount

transferred by or for an employer to, or for the benefit of, an employee.” Sec.

102(c)(1).6 The Feltons argue that the donations in the blue envelopes are gifts

from individual church members, and are therefore excludable from income under

section 102(a). The Commissioner says they’re not gifts, and are thus income

under section 61(a).




      6
        The Commissioner hasn’t argued that we should apply section 102(c)(1) in
this case, and it’s unclear whether it could apply. See Goodwin v. United States,
67 F.3d 149, 153 n.5 (8th Cir. 1995). We can’t say that the individual church
members are Reverend Felton’s employers, and the Commissioner hasn’t argued
that any of the blue-envelope donations were made “for” the church--his
employer--within the meaning of section 102(c)(1). See id.
                                         - 17 -

[*17] What’s a gift? The Supreme Court has defined it: “A gift in the statutory

sense * * * proceeds from a ‘detached and disinterested generosity,’ * * * ‘out of

affection, respect, admiration, charity or like impulses.’” Commissioner v.

Duberstein, 363 U.S. 278, 285 (1960) (first quoting Commissioner v. LoBue, 351

U.S. 243, 246 (1956); and then quoting Robertson v. United States, 343 U.S. 711,

714 (1952)). The Court also recognized that this definition might not be easy for a

trial court to apply, because it “does not lend itself to a[] * * * definitive statement

that would produce a talisman for the solution of concrete cases.” Id. at 284-85.

The Court held that the most critical consideration is the transferor’s intention

when the payment was made. Id. at 285-86 (citing Bogardus v. Commissioner,

302 U.S. 34, 43 (1937); id. at 45 (Brandeis, Stone, Cardozo, Black, JJ.,

dissenting)). But the transferor’s characterization of his intention “is not

determinative,” the Court warned; “there must be an objective inquiry as to

whether what is called a gift amounts to it in reality.” Id. at 286 (citing Bogardus,

302 U.S. at 40). With all that said, there is no bright-line test, and decisions “in

these cases must be based ultimately on the application of the fact-finding

tribunal’s experience with the mainsprings of human conduct to the totality of the

facts of each case.” Id. at 289.
                                        - 18 -

[*18] II.    Donations to Clergy

      We do not think that this call for reliance on experience with the

mainsprings of human conduct means reliance on any single judge’s experience,

but is rather a call for trial courts to make an objective inquiry by comparing the

facts of the cases before them to other cases decided over many decades. This is

especially true when we have to gauge the intent of a great many transferors

whose identities are unknown to us, and who couldn’t all be reasonably asked to

testify. Our goal is to make a reasonable finding about the intent of the many

members of Reverend Felton’s congregation who gave him money in blue

envelopes. It’s a factual determination, but one where the higher courts know that

“[d]oubtless diversity of result will tend to be lessened somewhat since federal

income tax decisions, even those in tribunals of first instance turning on issues of

fact, tend to be reported, and since there may be a natural tendency of professional

triers of fact to follow one another’s determinations, even as to factual matters.”

Id. at 290. We will therefore look at the Feltons’ situation back in 2008 and 2009

and compare it to similar situations in which courts have had to distinguish gifts

from income.

      We begin by acknowledging the long tradition among the faithful of most

religions to give to their spiritual leaders. This means that we have many cases
                                        - 19 -

[*19] about the taxability of transfers from the faithful to clergy. Some are so

egregious that they cross over into criminal-tax territory--cases like United States

v. Terrell, 754 F.2d 1139 (5th Cir. 1985), where a jury convicted an evangelist of

criminal tax evasion. Terrell preached at churches and tent revivals where he

collected donations for his church and for himself that he called “love offerings.”

Id. at 1143. Terrell made appeals for the offerings--one congregant testified that

Terrell said he was a prophet and that those who gave to him would receive a

prophet’s reward. Id. at 1150. Church members put money in a bucket and

Terrell’s apron pockets during services, or mailed their offerings in contribution

envelopes to his post office box in Texas. Id. at 1143. The criminal investigation

showed that Terrell’s church didn’t pay him a salary, and the government had to

reconstruct his income. Id. at 1142. This showed that “[t]he likely source of * * *

[Terrell’s] income was money earned through his ministry.” Id. at 1143. He had

exclusive control over his church’s recordkeeping, and he understated the amount

of the weekly “love offerings” he received by about 80% in the records that he

gave his accountant. Id.

      On these facts, the Fifth Circuit held that the following jury instruction was

an accurate statement of the law:
                                        - 20 -

[*20]          The federal income tax is levied on income received by
        ministers. When an individual provides ministerial services as his
        trade or business, controls the money he receives in that business, and
        receives no separate salary, the income of that business is taxable to
        the minister. Voluntary contributions, when received by the minister,
        are income to him. Payments made to a minister as compensation for
        his services also constitute income to him. If money is given to a
        minister for religious purposes, any money used instead for the
        personal benefit of the minister becomes taxable income to him.

Id. at 1148-49.

        There are also cases where the donations were labeled “honoraria” or

“salary”, but ultimately found to be gifts--cases like Mutch v. Commissioner, 209

F.2d 390 (3d Cir. 1954), and Schall v. Commissioner, 174 F.2d 893 (5th Cir.

1949), rev’g 11 T.C. 111 (1948).7 Mutch, 209 F.2d at 391, was about a beloved

minister who served his church for 24 years before he had to retire when his health

went bad. Before then, the church had paid his salary and contributed to his

pension. Id. But after he fell ill, the church elders feared that he wouldn’t have

enough income in retirement to live “‘as * * * [they] would like * * * [their] old

minister to live.’” Id. The church’s trustees passed a resolution to give him a

modest monthly honorarium contingent only upon the church’s future prosperity.

        7
        These cases predate Duberstein, but they came after, and relied in part on,
Bogardus, 302 U.S. 34 (1937)--an opinion the Supreme Court looked to at length
when it formulated the factbound Duberstein test. We’ve also cited these cases
since Duberstein when parsing the gift-or-income question. See Brimm v.
Commissioner, T.C. Memo. 1968-231, 27 T.C.M. (CCH) 1148, 1151 (1968).
                                          - 21 -

[*21] Id. at 391-92. The Third Circuit focused on the objective evidence of the

congregation’s intent to find that the honorarium was a gift. Id. at 392. It said that

the action “was motivated solely and sincerely by the congregation’s love and

affection for Dr. Mutch”--that “Dr. Mutch had been adequately compensated as far

as money could for his services in the past,” and “[h]e was not being tied into any

promise of services in the future.” Id.

      Schall is similar. Dr. Schall was pastor at a church in Pennsylvania for

almost two decades when health problems also forced him to retire. Schall, 174

F.2d at 893. His doctor told him he needed to move to Florida to escape the harsh

Pennsylvania winters. Id. The church paid Dr. Schall a salary of $6,000 per year

when he was pastor, but his congregation knew that he would be financially

unable to move to Florida. Id. It unanimously adopted the following resolution:

      Whereas the pastor of this Church, Rev. Dr. Charles Schall, has
      become incapacitated for the further service as pastor * * * ; and

      Whereas the Congregation moved by affectionate regard for him and
      gratitude for his long and valued ministry among them, desire that he
      should continue to be associated with them in an honorary relation;

      Now, Therefore, Be It Resolved that, effective upon formal
      dissolution by Presbytery, Rev. Charles Schall be constituted Pastor
      Emeritus of this church with salary or honorarium amounting to Two
      Thousand Dollars ($2,000) annually, payable in monthly installments,
      with no pastoral authority or duty * * *
                                        - 22 -

[*22] Id. at 893-94. Much as did the Mutch court, the Fifth Circuit focused on the

congregation’s objective intent as seen in the fact that Dr. Schall never agreed to

provide future services for the payments and never did. See id. at 894. “That only

is a gift which is purely such,” according to the Fifth Circuit, “not intended as a

return of value or made because of any intent to repay another what is his due, but

bestowed only because of personal affection or regard or pity, or from general

motives of philanthropy or charity.” Id. (quoting Bass v. Hawley, 62 F.2d 721,

723 (5th Cir. 1933)). It held that Dr. Schall’s honorarium was a gift. Id.

      Then, of course, there are the cases where it’s harder to draw a line between

gifts and income. In Banks v. Commissioner, T.C. Memo. 1991-641, 62 T.C.M.

(CCH) 1611, 1612 (1991), a minister formed a church that the IRS recognized as

tax exempt under section 501(c)(3). Banks drew a salary from the church in each

of the years at issue, but church members also gave her cash on four “special” days

in each year: her birthday, Mother’s Day, the church’s anniversary, and Christmas.

Id. at 1612. Banks preached that church members were required to tithe, and the

members got together to decide how much to transfer to her on each of the

“special” days. Id. Members also made contributions directly to the church. Id. at

1613. Here’s a summary:
                                        - 23 -

[*23] Transfer type                1982               1983               1984

 Banks’ salary                   $10,985            $17,223            $41,945
 “Special” donations              41,919              43,175            46,900
 Church donations                 25,694            109,807            113,785

Id. at 1612-13. Members of Banks’ congregation testified that they made the

“special” donations to show their “‘appreciation’ of * * * [Banks] and her

ministry, because she had done a lot of things for them and was there to help them

with their problems, and to say thank you.” Id. at 1614. One congregant said that

the “special” donations were made because Banks “was a good pastor and the

congregation wanted to keep her.” Id.

      We found that the “special” donations were compensation for Banks’

services and thus income. Id. We found that church members didn’t make the

transfers primarily out of detached and disinterested generosity, but instead out of

their desire to reward Banks for her services and their hope that she would

continue as their pastor. Id. This was evident from the congregants’ testimony,

but there was also “strong, objective evidence that the amounts transferred to * * *

[Banks] were part of a highly structured program for transferring money to [her]

on a regular basis.” Id. Church members had a program to transfer money to

Banks on four “special” days, and there was a regularity to the amounts transferred
                                        - 24 -

[*24] by individual members on each of the four days. Id. “The existence of such

a program,” we reasoned, “suggests that the transfers did not emanate from a

detached and disinterested generosity but, instead, were designed to compensate

* * * [Banks] for her service as a minister.” Id.

      But the Feltons are Minnesotans, and Minnesota is in the Eighth Circuit,

which brings us to perhaps the most important precedent for them, Goodwin v.

United States, 67 F.3d 149 (8th Cir. 1995). Reverend Goodwin was pastor at his

church for more than twenty years, and his church also flourished under his

stewardship. See id. at 150. From 1987 through 1989 the church paid his salary

and gave him a parsonage allowance. Id. Early in his ministry, the congregation

also began making gifts to him; by 1987 it “had developed a regular procedure for

making special occasion gifts” on the same three days each year. Id. About two

weeks before each “special occasion,” the associate pastor announced that those

who wished to do so could make gifts by putting cash (to preserve anonymity) in

envelopes. Id. The associate pastor then gave the cash to Reverend Goodwin, and

the church kept no record of amounts given or who contributed. Id. These were

the numbers:
                                         - 25 -

[*25] Type of receipt               1987               1988                1989

 Salary                            $7,800             $14,566            $16,835
 Parsonage allowance                6,000               6,000               6,000
 “Special occasion” gifts          12,750              14,500              15,000

Id. Reverend Goodwin argued that the “special occasion” gifts were nontaxable

gifts “as a matter of law,” because the parties stipulated that church members made

them “out of love, admiration, and respect, not out of a sense of obligation or fear

that Goodwin might otherwise leave.” Id. at 152.

      The Eighth Circuit disagreed. It made an objective inquiry and reasoned

that the “critical fact * * * is that the special occasion gifts were made by the

congregation as a whole.” Id. The “cash payments were gathered by congregation

leaders in a routinized, highly structured program,” individual church members

contributed anonymously, and the payments were made to Reverend Goodwin on

behalf of the whole congregation. Id. The court highlighted these points:

      !      the congregation funds the church, and that includes Reverend
             Goodwin’s salary;

      !      the “special occasion” gifts were substantial compared to his salary;

      !      the congregation knew that, without the gifts, it wouldn’t be able to
             keep its “popular and successful minister at the relatively low salary it
             was paying;” and
                                         - 26 -

[*26] !        “[r]egular, sizable payments made by persons to whom the taxpayer
               provides services are customarily regarded as a form of compensation
               and may therefore be treated as taxable income.”

Id. at 152-53 (citing a Ninth Circuit case, Olk v. United States, 536 F.2d 876, 879

(9th Cir. 1976), about tips to casino dealers for the last proposition). The Eighth

Circuit held that the “special occasion” gifts were income. Id. at 153.

         As all courts have done since Duberstein, we’ll focus here on objective

evidence of the transferors’ intent to determine whether the blue-envelope

donations were gifts or income. The caselaw on donations to clergy shows that

the following things are important in distinguishing between taxable payments and

gifts:

         !     whether the donations are objectively provided in exchange for
               services;

         !     whether the cleric (or other church authorities) requested the personal
               donations;

         !     whether the donations were part of a routinized, highly structured
               program, and given by individual church members or the
               congregation as a whole; and

         !     whether the cleric receives a separate salary from the church and the
               amount of that salary in comparison to the personal donations.

         Donations in Exchange for Services. Two of Reverend Felton’s

congregants testified that they expected no future pastoral services in exchange for
                                       - 27 -

[*27] the donations they made to him. We’ve noted, however, that neither of

those congregants made donations in blue envelopes, see supra note 2; even if they

had, we wouldn’t find their testimony decisive on this factor. The cases tell us to

look at objective rather than subjective expressions of intent,8 and we cannot find

objective signs that the blue-envelope donations were unrelated to future services.

This case isn’t anything like those with retiring ministers, for example, where the

congregations quite clearly understood that the additional retirement payments had

nothing to do with services. See Mutch, 209 F.2d at 392; Schall, 174 F.2d at 893-

94. Reverend Felton founded Holy Christian Church, and he’s a devoted pastor.

Although he didn’t explicitly agree to provide future services only in exchange for

blue-envelope donations, we don’t think that that proof of his subjective intent is

required either.

      Since 1993 Congress has required a “contemporaneous written

acknowledgment” for all but the smallest gifts to a church or other charity.

      8
        The Feltons also failed to show that the congregants who actually made
blue-envelope donations would have said the same thing about their intent as the
two who did testify. In Banks v. Commissioner, T.C. Memo. 1991-641, 62 T.C.M.
(CCH) 1611, 1614 n.5 (1991), on the other hand, the Commissioner agreed that all
church members would say the same thing as the ones who actually testified, and
in Goodwin, 67 F.3d at 150, the parties stipulated that “[a]ll members of the
Church deposed or interviewed maintain that * * * gifts * * * are not given out of
any sense of obligation or any sense of fear that [Reverend Goodwin] will leave
their parish if he is not compensated beyond his yearly salary.”
                                       - 28 -

[*28] See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, sec.

13172, 107 Stat. at 455 (adding section 170(f)(8) to the Code). Part of the more-

or-less standard form language the Commissioner suggests is that “no goods or

services were provided by the organization in return for the contribution.” IRS

Pub. 1771 (2016) (referencing the substantiation requirements of section

170(f)(8)(B)(ii) and section 1.170A-13(f)(2)(ii), Income Tax Regs.). And the

Commissioner’s informal guidance goes on to state carefully that the recipient

“must also provide a good faith estimate of the value of the goods or services

because a donor must generally reduce the amount of the contribution deduction

by the fair market value of the goods and services provided by the organization.”

Id.; see also 15 West 17th Street LLC v. Commissioner, 147 T.C. 557, 562 (2016)

(“Generally, the amount of the [charitable contribution] deduction is the value of

the property contributed reduced by the value of any consideration that the

taxpayer receives in exchange for the gift.” (citing Addis v. Commissioner, 118

T.C. 528, 536 (2002), aff’d, 374 F.3d 881 (9th Cir. 2004))). This is

understandable from a secular point of view, but one might think a faithful person

would be stunned at the implicit assumption about the value of a good minister to

his life--isn’t the provision of sacraments or the transmission of the Almighty’s

word a service of great value, indeed of eternal and immeasurable value?
                                        - 29 -

[*29] In tax law, though, such returns on a faithful person’s donative investment

are called “intangible religious benefits.” See sec. 170(f)(8)(B)(iii). They don’t

count as items of value received by a donor in exchange for his donations. See id.

And we think the same logic applies from the perspective of the recipient: The

vocation of a minister is very often a calling quite unmotivated by hope or

expectation of material gain. But even though the tax system labels some of the

benefits given by a minister to his faithful as intangible and religious, Duberstein

reminds us that a payment can be for services rendered even if the payor receives

no economic benefit from it. Duberstein, 363 U.S. at 285. From personal

observation at trial we think it highly likely that Reverend Felton would follow his

vocation whether he and his church got envelopes of any color. But we also think

that the exhortation by the Supreme Court in Duberstein to focus on objective

evidence of a donor’s intent means we have to ask whether the donations are of

the magnitude and type that would make us doubt that what is called a gift

amounts to one in reality. See id. at 286.

      We do therefore find that by this measure the contributions made in blue

envelopes were not gifts as that term has developed in tax law, but are rather--

from an objective perspective--meant to keep Reverend Felton preaching where he

is. He provides those “intangible religious benefits,” and the blue envelopes are in
                                        - 30 -

[*30] exchange for them and would to any reasonable person look like an

incentive for him to keep providing them. This factor tilts towards income.

      Donation Requests. Reverend Felton introduced the blue envelopes at the

church’s annual business meeting, where he explained that members could use

them to make personal donations to him but that there would be no tax deduction

if they did. It seems that that was the last time anyone from the church talked

about the blue envelopes with the congregation. Congregants had to specifically

ask an usher for a blue envelope and ushers didn’t hawk them. Reverend Felton

also preached about tithes and offerings in white envelopes, but he never preached

about personal donations in blue envelopes.

      This is different from Goodwin and Banks. In both of those cases, personal

donations were openly and regularly discussed in the church. In Goodwin, 67

F.3d at 150, two weeks before “special occasion” days “the associate pastor

announced--before Church services, when the Goodwins were not present--that

those who wish to contribute to the special occasion gift may do so.” In Banks, 62

T.C.M. (CCH) at 1614, a congregant testified that “members made pledges of cash

* * * on the four ‘special’ days of the year and that the amount ‘pledged’ by the

individual church members was determined at open meetings at the Church.” The

fact that the church didn’t solicit blue-envelope donations is an objective sign that
                                         - 31 -

[*31] the transferors proceeded “from a ‘detached and disinterested generosity,’

* * * ‘out of affection, respect, admiration, charity or like impulses.’” See

Duberstein, 363 U.S. at 285 (quoting LoBue, 351 U.S. at 246, and Robertson, 343

U.S. at 714). This factor tilts towards gift.

      Routinized, Highly Structured Program. The third factor we’ve gleaned

from the caselaw is whether the donations were part of a routinized, highly

structured program, and given by individual members or the congregation as a

whole. This case differs in some respects from Goodwin and Banks on this factor,

but we think it has great similarities in the most important respects. The

blue-envelope donations were made by individual church members, which is

different from the anonymous cash donations that the Goodwin court found the

congregation made as a whole. See Goodwin, 67 F.3d at 152. And in contrast to

both Goodwin and Banks, we are dealing here with donations that congregants

made throughout the year as opposed to only a few “special” days in each year.

See Goodwin, 67 F.3d at 150; Banks, 62 T.C.M. (CCH) at 1612.

      But there are also things about the donations here that show a routinized,

highly structured program. The blue-envelope system in and of itself is evidence

of a structured program: The envelopes say “pastoral gift” on them, and they list

all the necessary information about Holy Christian Church and how to make
                                       - 32 -

[*32] checks out to Reverend Felton personally. Donations made in these

envelopes are objectively different from the occasional “twenty dollar gift

spontaneously given by a church member after an inspiring sermon.” Goodwin,

67 F.3d at 152. We also can’t ignore the sheer size of blue-envelope donations in

2008 and 2009, or the fact that they are very similar in amount in both years--

within 10% of each other. We find it more likely than not that this means there

was a “regularity of the payments from member to member and year to year,”

which “indicates that they were the result of a highly organized program to

transfer cash from church members” to Reverend Felton. Banks, 62 T.C.M.

(CCH) at 1614. These are regular, sizable payments made by people that

Reverend Felton provides a service for, and they are therefore hard to distinguish

from compensation. See Goodwin, 67 F.3d at 152-53. This factor tilts towards

income.

      Ratio of Church Salary to Personal Donations. And that brings us to the

final factor. Though the executive board approved a salary for Reverend Felton in

2008 and 2009, the church didn’t actually pay it out to him in either of those years.

Reverend Felton testified that he had in fact preached at the church for almost

thirteen years without a salary. He did receive personal donations from some

members of the congregation in white envelopes, and he did report them as wages
                                       - 33 -

[*33] in 2008 and 2009. See supra pp. 13-14. The church also gave him a

parsonage allowance of almost $80,000 per year. But look at how this stacks up

against the blue-envelope donations:

      Type of receipt                   2008                        2009

 White-envelope donations              $40,000                    $40,000
 Parsonage allowance                    78,000                      78,000
 Blue-envelope donations               258,001                    234,826

      This all makes the blue-envelope donations seem more like income than

gifts. The only other case we’ve cited where the church paid no salary was

Terrell, which was a criminal tax-evasion case. And even if we treat the

white-envelope donations as Reverend Felton’s salary--as he seems to have done

on his returns--the ratio of that income and the parsonage allowance to

blue-envelope donations gives the distinct impression that the transferors knew

that, without the donations, they wouldn’t be able to keep their “popular and

successful minister.” See Goodwin, 67 F.3d at 152. Reverend Goodwin’s

“special occasion” gifts were less than the total of his salary and parsonage

allowance. Id. at 150. Reverend Felton’s purported gifts are around double the

total of his deemed salary and parsonage allowance for both of the years at issue.
                                        - 34 -

[*34] 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.

III.   Penalties

       Only additions to tax and penalties are left. The Commissioner determined

one of each for both years--failure-to-timely-file additions to tax under section

6651(a)(1) and accuracy-related penalties under section 6662(a)--but only the

accuracy-related penalties need analysis.9

       Section 6662(a) imposes a 20% penalty when there is “[a]ny substantial

understatement of income tax,” sec. 6662(b)(2), which exists if the tax

understatement exceeds the greater of $5,000 or “10 percent of the tax required to

be shown on the return,” sec. 6662(d)(1). The Commissioner meets his burden of


       9
         The Commissioner has met his burden of production on the
failure-to-timely-file additions to tax--the copies of the Feltons’ 2008 and 2009
returns that are in the record show that the Commissioner received each of them
more than one year past their respective due dates. See sec. 7491(c). The Feltons
also didn’t address these additions to tax in their briefs, so we deem this issue
conceded. See Rule 151(e); Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989);
Tufft v. Commissioner, T.C. Memo. 2009-59, 97 T.C.M. (CCH) 1305, 1309
(2009).
                                        - 35 -

[*35] production for these penalties with math, because the Feltons’

understatements for 2008 and 2009 well surpass both $5,000 and 10% of the

required tax.10

      The burden then shifts to the Feltons to try to avoid the penalties by

showing that they acted with reasonable cause and in good faith. See sec.

6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.11 The reasonable-cause exception

to penalties is applied “on a case-by-case basis, taking into account all pertinent

facts and circumstances.” Sec. 1.6664-4(b)(1), Income Tax Regs. “Circumstances

that may indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of all of the facts and

circumstances, including the experience, knowledge, and education of the

taxpayer.” Id. But “[g]enerally, the most important factor is the extent of the

taxpayer’s effort to assess the taxpayer’s proper tax liability.” Id.




      10
         The Commissioner meets the supervisory-approval portion of his burden
of production by stipulation. See sec. 6751(b)(1); Graev v. Commissioner, 149
T.C.    ,    (slip op. at 14 n.14) (Dec. 20, 2017) (citing Chai v. Commissioner,
851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-
42), supplementing and overruling in part 147 T.C. 460 (2016).
      11
        The Feltons did not assert in their petition or argue in their briefs that they
had substantial authority for their position.
                                        - 36 -

[*36] 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. See sec. 1.6664-4(b)(1). We therefore

find for the Commissioner on this issue as well.

      The Commissioner made some concessions, so


                                                      Decision will be entered under

                                                 Rule 155.
