Whittington v. Commissioner ( 2000 )

T.C. Memo. 2000-296
UNITED STATES TAX COURT
LARRY WHITTINGTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
RAY WHITTINGTON AND GLYNDA WHITTINGTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5208-96, 11955-96. Filed September 21, 2000.
Richard D. Hall, Jr., and William B. Trevorrow, for
petitioner in docket No. 5208-96.
Ray Whittington and Glynda Whittington, pro sese in
docket No. 11955-96.
Ross A. Rowley and Paul G. Topolka, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notices dated December 22, 1995, and March
12, 1996, respectively, respondent determined the following
deficiencies in and additions to petitioners' Federal income
taxes:
Larry Whittington, docket No. 5208-96
Additions to tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(1)(A) Sec. 6653(a)(2) Sec. 6653(a)(1)(B) Sec. 6661
1
1985 $54,635 $2,732 -- -- $13,659
1
1986 45,307 -- $2,265 -- 11,327
1
1987 48,182 -- 2,409 -- 12,046
1
50 percent of the statutory interest on the deficiency.
Ray and Glynda Whittington, docket No. 11955-96
Additions to tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(1)(A) Sec. 6653(a)(2) Sec. 6653(a)(1)(B) Sec. 6661
1
1985 $30,740 $1,537 -- -- $6,550
1
1986 27,434 -- $1,372 -- 4,663
1
1987 41,243 -- 2,062 -- 9,079
1
50 percent of the statutory interest on the deficiency.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. After concessions, the issues for decision are
whether petitioners are: (1) Entitled to exclude parsonage
allowances from income; (2) subject to tax on certain income;
(3) entitled to deduct certain charitable contributions;
(4) liable for additions to tax for negligence; and (5) liable
for additions to tax for substantial understatements of tax.
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FINDINGS OF FACT
When their respective petitions were filed, Larry
Whittington resided in North Charleston, South Carolina, and Ray
and Glynda Whittington resided in Greensboro, North Carolina.
During the years in issue, Larry and Ray worked for Fountain
of Life, Inc. (FOL), an evangelical organization established by
their brother Jim Whittington. On January 1, 1976 and 1977,
respectively, Ray and Larry were ordained as ministers of the
Gospel by FOL. In addition to their ministerial duties, Ray was
employed as FOL's secretary-treasurer, Larry was employed as
FOL's vice president, and both were members of FOL's board of
directors.
During the years in issue, FOL presented the Gospel through
services, crusades, and publications. Daily services were
conducted by Jim, Larry, and Ray and included sermons, songs, and
the distribution of religious materials (e.g., pamphlets, books,
albums, and cassettes). Jim, Larry, and Ray routinely officiated
at marriages and funerals and provided counseling to FOL members.
FOL had members who were not associated with any other religious
organization or denomination. In addition, FOL conducted several
crusades each month and developed a loyal group of followers.
Some of the crusades were videotaped and later broadcast on "The
Fountain of Life Presents Jim Whittington" television program,
which at its peak was broadcast in 75 television markets.
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The Whittingtons created a production plan for FOL events.
To execute this plan, Larry founded Lovejoy Agency, Inc.
(Lovejoy), a for-profit corporation, and Larry served as its
president and a member of its board of directors. Lovejoy
purchased television, radio, and newspaper advertisements for FOL
events; made travel arrangements and leased facilities for FOL
events; and produced FOL's television shows, albums, and
cassettes.
To fund FOL operations, FOL solicited contributions through
mass mailings. The mailings were also used to inform FOL members
of scheduled FOL events, such as crusades, in their geographic
area. FOL mailed approximately one-half million pieces of mail a
month. To produce these mailings, Ray founded Whittington, Inc.,
a for-profit corporation. Whittington, Inc., bought equipment
and prepared the mass mailings on behalf of FOL in exchange for
fees from FOL.
During the years in issue, FOL paid Larry and Ray salaries,
housing allowances, and other benefits (i.e., travel
reimbursements, football tickets, and scholarship pledges). The
salaries and housing allowances were authorized by FOL's board of
directors before payment. The following chart delineates the
payments from FOL to petitioners.
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Larry Whittington
Housing Allowance Travel ECU
Scholarship
Year Salary Authorized Paid Expended1 Reimbursement Tickets2 Pledges3
1985 $88,400 $52,000 $61,600 $57,108 $20,421 -- --
1986 91,000 45,000 40,500 25,903 23,169 $522 $2,000
1987 88,000 45,000 55,500 25,608 20,825 -- 2,000
Ray Whittington
Housing Allowance Travel ECU
Scholarship
Year Salary Authorized Paid Expended1 Reimbursement Tickets2 Pledges3
1985 $88,400 $52,000 $48,100 $35,738 $2,606 -- --
1986 91,000 45,000 40,500 48,247 1,902 $522 $2,000
1987 88,000 45,000 58,000 25,733 4,300 -- 2,000
1
The portion of the allowance expended for housing-related expenses.
2
FOL purchased East Carolina University (ECU) football tickets for
petitioners.
3
FOL made scholarship pledges to ECU on behalf of petitioners.
In 1985, Whittington, Inc., issued three checks payable to
Ray for $1,750 each, and Lovejoy issued six checks payable to
Larry for $1,750 each. In April of 1987, Whittington, Inc.,
issued four checks payable to Ray or his creditors totaling
$21,172.
On their respective Federal income tax returns, Larry
claimed charitable deductions of $6,500, $15,751, and $26,500,
and Ray claimed charitable deductions of $11,500, $28,362, and
$18,300, relating to contributions to FOL in 1985, 1986, and
1987, respectively.
OPINION
I. Parsonage Allowances
Respondent determined that petitioners are not, pursuant to
section 107, entitled to exclude from income parsonage allowances
received from FOL. Section 107 provides that a minister of the
Gospel may exclude from gross income a rental allowance paid to
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him as part of his compensation, to the extent used by him to
rent or provide a home. The accompanying regulations provide
that the rental allowance must be provided as remuneration for
ministerial services. See sec. 1.107-1(a), Income Tax Regs.
Such services include the ministration of sacerdotal functions;
the conduct of religious worship; and the control, conduct, and
maintenance of religious organizations, under the authority of a
religious body constituting a church. See sec. 1.1402(c)-
5(b)(2), Income Tax Regs.
Respondent's only contention regarding section 107 is that
FOL is not a "church" and, therefore, Ray and Larry were not
ministers performing services under the authority of a church.
We disagree. The term "church" is not defined in section 107 or
the regulations thereunder. Nevertheless, we have previously
stated:
To classify a religious organization as a church under
the Internal Revenue Code, we should look to its
religious purposes and, particularly, the means by
which its religious purposes are accomplished. * * *
At a minimum, a church includes a body of believers or
communicants that assembles regularly in order to
worship. When bringing people together for worship is
only an incidental part of the activities of a
religious organization, those limited activities are
insufficient to label the entire organization a church.
[Foundation of Human Understanding v. Commissioner, 88
T.C. 1341, 1357 (1987) (Court reviewed); citations and
internal quotation marks omitted.]
FOL had a far-ranging ministry that reached its members through
television and radio broadcasts, written publications, and
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crusades. FOL had loyal followers, some who attended worship
services held regularly in Greenville, and others who attended
crusades held regularly in various cities. Many of FOL's members
were not associated with any other religious organization or
denomination. In essence, FOL had the requisite body of
believers, and, therefore, Ray and Larry performed services under
the authority of a church. In addition, Larry and Ray were
"authorized to administer the sacraments, preach, and conduct
services of worship" and were ordained ministers of the Gospel.
Salkov v. Commissioner, 46 T.C. 190, 194 (1966).
The housing allowances are excludable only to the extent
such allowances were authorized, paid, and expended for housing.
See sec. 107(2). Accordingly, Larry is allowed to exclude
$52,000, $25,903, and $25,608, and Ray is allowed to exclude
$35,738, $40,500, and $25,733, relating to 1985, 1986, and 1987,
respectively.
II. Unreported Income
A. Payments From FOL
Respondent determined that Larry's and Ray's travel
reimbursements were taxable income. Generally, an employee is
not required to report reimbursements received from an employer
for travel expenses incurred by the employee, for the benefit of
the employer, if the employee makes an "adequate accounting" to
his employer. Sec. 1.274-5(e)(2)(i), Income Tax Regs. (requiring
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the taxpayer to provide the amount of the expense and the time,
place, and business purpose of such travel). An employee who
does not make an "adequate accounting" must report as income any
travel reimbursements and will be entitled to deductions only to
the extent that the employee can substantiate the expenditure.
Sec. 1.274-5(e)(2), Income Tax Regs. If, however, the taxpayer
establishes that the failure to produce adequate records is due
to the loss of such records through circumstances beyond the
taxpayer's control, the taxpayer shall have the right to
substantiate a deduction by reasonable reconstruction of the
expenses. See sec. 1.274-5(c)(5), Income Tax Regs.
We hold that to the extent petitioners did not make an
adequate accounting they substantiated the related deductions.
Petitioners presented credible testimony relating to this issue
and adequately substantiated and reconstructed their travel
expenses. Respondent took possession of, and limited
petitioners' access to, their records. Consequently,
petitioners' failure to produce more adequate records is due to
circumstances beyond their control.
FOL, in 1986, purchased ECU football season tickets for Jim,
Ray, and Larry, and, in 1986 and 1987, made scholarship pledges
to ECU on behalf of Ray and Larry. A third party's payment of a
taxpayer's personal expenses is income to the taxpayer. See sec.
61; Coors v. Commissioner, 60 T.C. 368, 407-409 (1973), affd. 519
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F.2d 1280 (10th Cir. 1975). These payments were for petitioners'
personal benefit, and, accordingly, are income.
B. Payments From Whittington, Inc., and Lovejoy
In 1985, Ray received three $1,750 checks from Whittington,
Inc., and Larry received six $1,750 checks from Lovejoy. On the
memo line of each of these checks, notations were made indicating
a $2,500 salary payment and purported withholdings of $750. In
1987, Whittington, Inc., issued four checks payable to Ray or his
creditors totaling $21,172. Respondent determined that, in 1985,
Ray and Larry received income of $2,500 relating to each check
with the aforementioned notation, and that, in 1987, Ray was
subject to tax on the payments from Whittington, Inc.
Conversely, petitioners contend that these checks related to
repayment of loans Ray made to Whittington, Inc., and Larry made
to Lovejoy. We reject respondent's and petitioners' positions
relating to the $2,500 payments and hold that petitioners are
subject to tax on $1,750 relating to each check. In addition, we
sustain respondent's determination relating to the 1987 payments.
III. Charitable Contribution Deductions
Respondent determined that petitioners may not deduct
charitable contributions to FOL. Section 170(a)(1) allows as a
deduction any charitable contribution as defined in subsection
(c). Section 170(c) defines a charitable contribution as a gift
to a corporation "no part of the net earnings of which inures to
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the benefit of any private shareholder or individual". Sec.
170(c)(2)(C); McGahen v. Commissioner, 76 T.C. 468, 481 (1981)
(stating that the taxpayer "must prove that the recipient
qualified under section 170(c)(2)"). We have found that, during
the years in issue, Larry and Ray received certain payments from
FOL (i.e., unauthorized payments, football tickets, and
scholarship pledges). These payments inured to the benefit of
petitioners. In addition, petitioners failed to establish that
these payments were compensation or were from a source other than
FOL's net earnings. Accordingly, petitioners are not allowed the
claimed charitable deductions.
IV. Additions to Tax for Negligence
Respondent determined that petitioners were liable for
additions to tax for negligence under section 6653(a)(1) and (2)
relating to 1985 and section 6653(a)(1)(A) and (B) relating to
1986 and 1987. Petitioners did not exercise due care in
reporting their tax liabilities. Accordingly, they are liable
for the additions to tax for negligence.
V. Additions to Tax for Substantial Understatement
Respondent determined that, pursuant to section 6661,
petitioners were liable for additions to tax for substantial
understatements during the years in issue. An understatement is
substantial if it exceeds the greater of $5,000 or 10 percent of
the amount of tax required to be shown on the return. See sec.
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6661(b). Petitioners' understatements were not based on
substantial authority or adequately disclosed. Accordingly, if
the recomputed deficiencies satisfy the statutory percentage or
amount, petitioners will be liable for those additions to tax.
See, e.g., Cluck v. Commissioner, 105 T.C. 324, 340 (1995).
All other contentions raised by the parties are either moot,
meritless, or irrelevant.
To reflect the foregoing,
Decisions will be entered
under Rule 155.