IRS: No Sympathy for Clergy!

Giving new meaning to the term “hard hearted,” the Revenooers and the Tax Court, itself, recently taught a pastor and his spouse a thing or two.

Seems that in 1997, taxpayer Cortes helped found the Christian Fellowship of Seventh Day Adventists, and was appointed pastor, while the Mrs. became the secretary.  And a few years later, Pastor Cortes formed a corporation in Nevada named, “The Office of Presiding Head Elder, Salomon Haroldo Cortes, After the Order of Jesus Christ, The High Priest and King, and His Successors, A Corporation Sole.”

Now there’s a mouthful.

Then Cortes became an ordained minister and signed a vow of poverty.

So far, so good.  But the trouble started when Cortes deposited the regular checks he received from the Seventh Day Sabbath Church into the bank accounts of his corporation, Living Waters Ministries.  From those funds, of course, Cortes paid his mortgage and other personal living expenses, which is what raised the IRS’ hackles, particularly upon receipt of tax returns from the Pastor and the Mrs. describing Mr. Cortes as unemployed!

If this scenario sounds like the classic “assignment of income” to you (a “no, no” in the Revenooers’ eyes – he who earns the dough has to pay the tax) you’re right.  Even though Cortes pleaded to the Court that because he received the money after he signed a vow of poverty, it was not taxable.

Nice try.

The Court noted, “Mr. Cortes individually provided his services as a pastor to Seventh Day Sabbath Church, and he received compensation for those services in the form of payments the church made to Living Waters Ministries…..the money received for his services…..is Mr. Cortes’ unreported income.”

And to add insult to injury, the happy Cortes couple also got dinged for the 20% accuracy-related penalty.  Even though they had engaged a tax return preparer, they acknowledged that they did not discuss any of the Living Waters Ministries activity with the bloke, and therefore could not claim the “reasonable cause” excuse from penalty coverage.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a stockholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentaries at http://blog.nolo.com/taxes.

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