Unincorporated Churches--A "Loophole"?

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Question:

I am a member of a local church that has opted to notincorporate with our State nor to file for the 501(c)(3) tax exemption with thefederal government. I have heard of churches giving occasional"gifts" to individuals within the church from money that was given tothe church by donors who write these contributions off as tax-deductible andthe recipients of these gifts were never given Form 1099s from the church, nor dothey claim them as income on their personal tax returns.  How do donations to individual missionaries qualifyfor tax deduction? What is the responsibility of the church to account for suchdistributions to individuals?  
Answer:“A church is a cohesive group of individuals who jointogether to accomplish the religious purposes of mutually held beliefs. Inother words, a church's principal means of accomplishing its religious purposemust be to assemble regularly a group of individuals related by common worshipand faith” (Tax Court Memorandum 1990-41). Whether the church has eitherformally incorporated or filed for IRS recognition as a 501(c)(3) organization isirrelevant to its classification as a church and to its responsibility tocomply with tax law.

According to IRS Publication 526 charitable contributionsmade to individuals are not tax deductible nor are they reported as income.Donations must be given to a qualified organization (e.g. achurch) in order to be tax deductible by the donor. The church can use suchdonations to support missionaries without affecting the tax deductibility ofthe gift for the donor. 

In the case of a church giving a “gift” to an individualwithin a church, it depends on the relationship between the church and theindividual. Because a missionary is providing services on behalf of the church,money received from the church is considered taxable income . If the gift isdispensed by the church for non-compensatory, benevolent purposes, then it isnot taxable to the recipient.If the a church is simply a supporting church and themissionary is sent funds through a missions’ agency, the “gift” is treated as atransfer to funds between two tax-exempt organizations—a church and a missions’agency. The missions’ agency is responsible to correctly report thedisbursement of taxable compensation to the missionary.

If the church is acting as the missions’ agency then taxtreatment must be determined by the church—typically Form W-2 or Form 1099-MISCdepending on the missionary’s employment status (i.e., employee or independentcontractor). I recommend that readers of this blog explore other postings for areview 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.