THE QUESTION: WHAT HAPPENS WHEN A PASTOR . . .

• Determines his compensation at his own direction with no input from the Board of Directors or approval from the congregation?

• Tries to prevent the finance committee from issuing him a Form 1099?

• Instructs the church finance committee not to include “love offerings” in his compensation?

• Receives such high levels of compensation that the church is forced to deplete its building fund to make payroll?

• Instructs the church finance committee to “doctor” the financial report given to the congregation so that it appears that the church is in the “black” when the church is really in the “red?”

• Uses one of the church’s credit cards to make personal expenditures and for which no receipts of other accounting was provided?

• Has unrestricted use of gas credit cards in the name of the church and cell phones paid for by the church without any requirement to account for personal use of the cards and phones;

• Receives payments from the church to fund a retirement plan?

• Has a travel allowance of almost $25,000.00 in one year and also submits requests for reimbursements for travel expenses?

• Receives payments for his child’s school tuition of more than $30,000.00?

• Has unlimited use of a Mercedes-Benz leased by the church with a value of nearly $83,000.00?

• Fails to report more than $2.3 million in taxable income to the IRS?

THE ANSWER:  A WHOLE LOT OF TROUBLE

Bishop Anthony Jinwright, Pastor at Greater Salem City of God, a church in Charlotte, North Carolina, was recently convicted on federal tax evasion and mail fraud charges.  Both Bishop Jinwright and his wife were convicted of tax evasion and can anticipate spending many years in prison.  The Jinwrights are scheduled for sentencing later this year.

The conviction of Bishop Jinwright provides a picture perfect example of how your church or ministry should not handle compensation issues.

At first glance, you may think that there is no reason why you should be concerned about these issues as they relate to compensation—your salary is set by the church’s board of directors and there is no way you would even consider using the church’s credit card without accounting for it.  However, you need to consider these issues for the simple reason that the Internal Revenue Service is considering whether your compensation is reasonable or whether it is excessive.

In recent years, the IRS has expressed concern with the level of compensation that nonprofit organizations provide to their employees, and it has enacted penalties against organizations that “overly compensate” their employees.  The following two concerns have been specifically identified by the IRS with respect to compensation issues:

(1) Excessive Compensation: For purposes of computing compensation, the IRS considers every benefit an individual receives from the organization as part of that individual’s total compensation.  Therefore, salary is only one component that the IRS will consider when determining if compensation is excessive.  The IRS is clearly concerned about the payment of excessive compensation by exempt organizations.  Tax-exempt organizations must be aware that payments of any kind and for any reason that direct the resources of the organization toward an individual are also considered in the calculation of an individual’s compensation.

(2) Fringe benefits: The IRS has expressed concern over the failure by many exempt organizations to recognize that some fringe benefits constitute taxable income to their employees.  Fringe benefits include enrichments such as the private use of a vehicle that is owned or leased by the organization, payment of an individual’s automobile insurance premiums, payment of a child’s school tuition, and an organization’s payment of an employee’s personal expenses, including some household expenses, country club dues, maid services, and vacations.

For example, the pastor in the above real-life example allegedly received a compensation package that approximately included all of the following benefits:

• $300,000.00 annual salary  +

• $160,000.00 housing allowance +

• $45,000.00 vehicle allowance +

• $52,000.00 annual bonuses +

• $44,000.00 for vacations +

• $130,000.00 in federal income tax liability and social security payments +

• $30,000.00 tuition payments for his daughter +

• And a variety of other “fringe benefits.”

What are the Penalties?

When a pastor receives excessive compensation, as determined by the IRS, he will also face “intermediate sanctions.”  Federal law imposes a series of intermediate sanctions on individuals who are involved in any transaction that results in any disqualified person receiving an excess benefit from a nonprofit organization.  A disqualified person receives an excess benefit if that person directly or indirectly receives an economic benefit from a tax-exempt organization that exceeds the value of the consideration received by the organization.  A “disqualified person” is any person in a position to exercise substantial influence over the affairs of the organization at any time.

For example, if the IRS were to determine that the salary of the pastor in our real-life scenario should only be $100,000.00, then our pastor has received an “excess benefit” of approximately $661,000.00.  Under existing law, the pastor must repay the $661,000.00 excess benefit to his church.  In addition, he must pay an excise tax to the IRS equal to 25% of the excess benefit.  If the pastor does not or cannot repay the excess benefit to his church within the same tax period (defined as the date of the transaction to the date of the assessment or notice of deficiency), then a 200% excise tax on the excess benefit is further imposed on the pastor by the IRS.

It is important to note that in addition to the penalties that will be levied against the pastor who receives the excess compensation, the nonprofit organization’s managers (i.e. the Board of Directors) who were aware of and participated in the excess benefit transaction will also be personally liable for paying an excise tax equal to 10% of the excess benefit, up to a maximum of $10,000.00, to the IRS for each excess benefit transaction that took place.

What should a Church do?

To avoid encountering problems with executive compensation, a nonprofit organization must establish good compensation practices.  Such practices include:

• Having your Board of Directors appoint an independent compensation committee to conduct a compensation study;

• Setting compensation in advance using appropriate comparability data;

• Making sure the Board of Directors has appropriate oversight of compensation; and

• Documenting all decisions on compensation;

If you have specific questions regarding the topic of compensation issues, contact The Church Law Group for more extensive legal advice.

Executive Compensation, Uncategorized conviction, fraud, IRS, love offerings

Every week, your church preaches and teaches about the nature of grace, the need for forgiveness of sin, to treat one another with love, and many other similar biblical concepts. The church positions itself as a place that models those concepts.  However, putting those ideas into real-world practice is often easier said than done.  In particular, many churches struggle with dealing with known criminals, especially registered or convicted sex offenders, who come to church services and intermingle with the church’s congregation, attend classes, and seek to volunteer.

We know of many churches that have been faced with this issue and there have been a range of responses.  Some churches have taken a strict, no-tolerance view and will not allow sexual offenders to come onto church property or become members.  At the other end of the spectrum, many churches appear to have not thought about the issue and do not have any policies or procedures regarding registered or convicted sex offenders or criminals.

Some middle-ground approaches allow sex offenders to come to church, and perhaps even participate in events, so long as the individual has agreed to follow the church’s adopted policies and procedures. Examples of guidelines that have been adopted by churches include one or more of the following:

• Require known registered or convicted sex offenders to submit an updated, comprehensive background investigation to verify the nature and number of any prior convictions;
• Create a special application questionnaire to learn more about the person beyond his or her criminal background, such as personal references, job history and stability, whether the person appears to be in a stable family and work environment, or whether there are any psychological counseling or drug therapies the person may be involved in;
• Create a special committee or appoint a specific church official to review pending membership or visitor applications and determine what restrictions, if any, to place on the person;
• Segregate such person into special worship services, classes, or study groups where they are not interacting with the rest of the congregation;
• Appoint a mentor or sponsor to help the person get acclimated to the church and/or to follow them around;
• Place restrictions on the person’s membership activities, such as not allowing them into areas where children or youth congregate, the use of certain bathrooms only, attendance of certain Sunday School classes only, or allowing them to walk from the parking lot to the sanctuary and back only;
• Put the person on a probationary membership where they are severely restricted in their church activities, but those restrictions are loosened after various milestones are reached over a period of time;
• Not allow the person to volunteer for certain church missions or programs;
• Have the person agree, in writing, that church officials may notify any and all persons that the church deems necessary of the person’s background;
• Require the person to meet with a designated committee of church official on a scheduled basis to assess the person’s state of mind and/or compliance with guidelines as set out by the church; and
• Have the person agree to a Code of Conduct that might include apologizing to prior victims and agreeing to follow certain Christian standards of living.

There is no easy or quick answer to this issue and the church will have to decide where it stands.  When the church adopts its policies and procedures, it will need to make sure that they are closely followed, and the church should review their effectiveness from time to time.  With proper planning, every church should be able to mold a solution that accommodates all concerns and desires, that allows for effective ministry, and that honors God.

The Church Law Group wants to hear from you!  What are your thoughts on allowing registered sex offenders to attend your church?

Children's Ministry, Church Security, Uncategorized child abuse, children, church, Church Law Group, criminals, guidelines, policies, risk management, screening program, sex offenders, threat, volunteer

The Tarrant County Appraisal District (“TAD”) has agreed to abandon its quest to require disclosure of salaries of all employees of Kenneth Copeland Ministries (the “Church”) as part of a recent settlement agreement.  The settlement centers on TAD’s denial of the Church’s application for religious exemption from certain property taxes.  While applying for property tax exemption, the Church refused to disclose salary information for each of its employees. 

TAD—like many other appraisal districts across the state—uses an application for property tax exemption that was generated by the Texas Comptroller.  The form requires the applicant to identify the name, position and salary for each of its employees.  Once submitted, the application is placed in the appraisal district’s file, which is public record.   As a result, the salaries of all church employees may be viewed by any interested person.  For many years, rather than requiring churches to submit actual salary data for each employee, TAD and other appraisal districts allowed churches to provide either a summary of total compensation of employees or a statement from an auditor that the church’s finances were in proper order.  However, after a recent change in TAD personnel, TAD adopted a very stringent approach of interpreting the form—rather than allowing a summary of compensation or auditor statement as previously permitted, TAD began to require applicant churches to provide a complete disclosure of salaries as to each individual employee. 

The Church filed suit over this issue to protect its privacy, the privacy of its employees, and for the general privacy of all churches.   There is a longstanding concept in our country that the government should not intrude into the privacy of its citizens unless it has a compelling reason.  For example, although individuals are required to submit their salaries to the government when they file their tax returns, the returns are not public record.  Churches are typically afforded an even greater sense of deference by virtue of the religious freedoms granted under the First Amendment to the Constitution as well as the Texas constitution.  For instance, churches do not typically file tax returns, thus the salary information of church employees is never reported in any public manner.  The Church believes that the salary information of all employees should not be of public record just as an individual taxpayer’s salary is not of public record. 

Moreover, the Church believes that it was not within TAD’s governmental authority to request salary information.  Currently, the Internal Revenue Service is the only governmental agency that has jurisdiction to investigate churches and more specifically, the compensation of church employees.  When the IRS investigates a church’s employee’s compensation, they take the actual compensation number and then have qualified executive compensation experts analyze it based upon access to comparable data.  This evaluation of whether the compensation is “reasonable”—as required by the Internal Revenue Code—is not based upon common sense, rather it is determined only after a highly developed fact based investigation. 

During the course of the lawsuit, TAD came to realize that it not only lacked the authority to evaluate compensation, but TAD also realized that it lacks the resources to analyze the salaries of every church employee for each church that applies for property tax exemption.  TAD officials acknowledged that they were requiring disclosure of salaries for which they had no actual use and that they did nothing with the information other than put it in the applicant’s file. 

TAD’s settlement—and concession not to require disclosure of private salary information—is a victory for church freedom, the preservation of religious constitutional protections, and the privacy rights for church employees throughout all of Texas.   We are hopeful that going forward, this suit can be the basis for TAD and all appraisal districts, as well as the Texas Comptroller, to remove the salary disclosure requirement from its forms and to develop a process that allows churches and employee privacy to be protected while simultaneously obtaining appropriate documentation of the exempt purposes of the organization. 

We here at the Church Law Group applaud TAD for taking this matter to heart and allowing church freedoms to be preserved while still doing its job to make sure that exemptions are being properly administered.

Click here to read a recent article from the Fort Worth Star-Telegram.

Uncategorized appraisal district, church, Church Law Group, compensation, First Amendment, lawsuit, privacy, property taxes, religious freedom, settlement, Tax-exemption

At the beginning of December each year we usually receive a multitude of questions concerning housing allowances.  One of the most frequent questions is whether a traveling evangelist is entitled to such a benefit.  The answer is yes if the following criteria is met:

(1) The traveling evangelists maintains a permanent home;

(2) Have local churches in which they conduct religious meetings; and

(3) Declare in advance a portion of their compensation as a housing allowance.

The requirement that each church designate a portion of an evangelist’s compensation as a housing allowance is certainly an inconvenience, but it is well worth it.

Some evangelists have created nonprofit corporations to avoid such an inconvenience.  One of the justifications sometimes given for this procedure is to enable the evangelist to avoid the inconvenience of having each church designate a portion of his or her compensation has a housing or rental allowance—the idea being that the corporation can designate a portion of the evangelist’s annual income as a housing allowance in a single action.

To ensure accountability, analysts recommend that churches issue evangelists and other guest speakers a Form 1099 if the church pays them compensation of $600 or more.  The church should include a housing allowance designation when computing the compensation, but also provide the evangelist or guest speaker with a written housing allowance designation on the church’s stationary to confirm the housing allowance amount.

Uncategorized housing allowance, local church, traveling evangelist

This week, the state of New Hampshire become the sixth state in the U.S. to permit homosexual marriage.  However, unlike in previous states, New Hampshire’s revised bill added a sentence specifying that all religious organizations shall have exclusive control over their religious doctrines, policies, teachings, and beliefs on marraige.  It also clarified that church-related organizations that serve charitable or educational purposes are exempt from having to provide insurance and other benefits to same-sex spouses of employees.  Churches will be able to decide whether to conduct religious marriages for same-sex couples.

Whether or not homosexuality is a comfortable topic of discussion for the leaders of your church, your church is now, or soon will be, forced to confront the issue in the context of employment, performing weddings and funerals, the use of church property, and church membership standards.

The significance of homsexuality as a social issue in recent years has caused significant challenges for churches holding to a traditional definition of marriage.  Some churches have made headlines for denying the use of their facilities to homosexuals who would use their facilities to promote an openly gay lifestyle, and faced the scorn of national media.  Churches in every state will soon be confronted with whether or not to allow a gay couple legally married in another state the opportunity to become church members.  If your church adheres to a traditional definition of marriage, you had better think about the challenges to your beliefs that you may face, and how to handle them without public embarrassment and legal trouble.  There are some groups in this country that would prey upon the unpreparedness of your church to prove a point, or score a political or legal victory.

Regardless of what they may be, if your church wants to effectively stand by its beliefs and teaching then your church MUST document its religious beliefs and principles in its corporate governance documents.  An effectively managed religious organization will have well thought out and documented bylaws, employment policies, contracts, standards of conduct, protocols for use of church property, employee handbooks, and dispute resolution procedures.  Having the appropriate language in these various documents can help protect your church and your pastor from public ridicule, save your church litigation costs and help protect it from legal assaults, help your church properly steward resources, and present an accurate witness to the public about its beliefs.

Please contact an attorney at the Church Law Group if you have any questions regarding the adequacy of your governance documents or any other policies or procedures of the your church.

Uncategorized church, Church Law Group, dispute resolution, doctrine, employment, Governance, homosexuality, marriage, New Hampshire, religious organization