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Tax Law (Questions About Taxes)/Taxes On Royalties for Gifted Land to Church


Good Afternoon,

Thank you for answering my question from yesterday.

I have one additional question not pertaining to the previous question that we have been trying to find an answer for.  

The church was gifted or inherited some property from a church member that passed away some time ago.  More recently with the oil boom in the area, we were approached by an oil & gas company to drill on said land.  We signed papers with this oil & gas company allowing them to drill and we receive monthly royalty interest on this property.  As a church, are we required to report earnings from these royalties to the IRS?  If so, how do we go about this.  We are at a loss regarding how to proceed with this situation.  We did receive a letter from the oil & gas company stating that we can request information regarding production that has been reported to the Railroad Commission.  Please, if you are able, let us know how we should proceed.

Thank you.



Thanks for your question.

First things first, the royalties are NOT taxable income.

A not-for-profit organization is subject to tax on it unrelated business income.  In order to be subject to that tax, three requirements must be met:
1. It is a trade or business,
2. It is regularly carried on, and
3. It is not substantially related to furthering the exempt purpose of the organization.

Exceptions include that it is for the convenience of members.  This would include sales of Wednesday night dinners, for example.  Another exception would be if the activity were carried on substantially by volunteers.  An example of this would the the sale of donated items in a thrift store that was manned by unpaid volunteers.

The first requirement is key in your case, as you are not carrying on a business.  Royalties are specifically excluded as being a business activity for this purpose.

For your information, if you did need to file, you would do so on Form 990-T.

Hope this helps.

John Stancil, CPA  

Tax Law (Questions About Taxes)

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John Stancil, CPA


I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at I also offer seminars and consultations to churches and clergy on their tax issues at Also visit my blog, I am listed on Tax Connections at Prepare and file your own taxes at


I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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