Felton v. Commissioner of Internal Revenue, 101018 FEDTAX, 9644-14

Docket Nº:9644-14
Opinion Judge:HOLMES, JUDGE.
Party Name:WAYNE R. FELTON AND DEONDRA J. FELTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Envelope color Were donations solicited? Did ushers distribute these envelopes unsolicited? Were church members told these donations were deductible? Envelope color 2008 2009 Transfer type 1982 1983 1984 Type of receipt 1987 1988 1989 Type of...
Attorney:Thomas Edward Brever, for petitioners. John Schmittdiel and Blaine C. Holiday, for respondent.
Case Date:October 10, 2018
Court:United States Tax Court

T.C. Memo. 2018-168




No. 9644-14

United States Tax Court

October 10, 2018

Thomas Edward Brever, for petitioners.

John Schmittdiel and Blaine C. Holiday, for respondent.



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 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.


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."

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 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 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 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:

(Image Omitted)

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:

(Image Omitted)

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.


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