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.

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The IRS wants to know if your organization is practicing “good governance,” so it recently released its new Governance Check Sheet that its agents will use to gather information about the governance practices of nonprofit organizations, including churches and ministries.   The release of the Governance Check Sheet is helpful to public charities because it gives nonprofit organizations a better idea of what the IRS is thinking and what the IRS considers “good governance.”  This, in turn, will help your organization make important governance decisions and implement important policies and procedures.  Specifically, in the Governance Check Sheet the IRS examines the following issues:

1)  Governing Body and Management: 

• Does the organization have a written mission statement that articulates its exempt purpose?
• Do the bylaws of the organization include information about who has the right to vote, qualifications, etc?

2)  Compensation:

• Does an authorized independent body establish compensation procedures, in advance, for all high level employees?
• Is comparability data used to determine compensation?

3)  Organizational Control:

• Are related family members serving on the Board of Directors?
• Do any directors have business relationships with other directors, officers, or key employees?

4)  Conflicts of Interest:

• Does the organization have a written conflict-of-interest policy?
• Is the policy followed?

5)  Financial Oversight:

• What type of policies and procedures are in place to ensure assets are properly used for exempt purposes?
• How often are financial reports provided to the organization’s Board of Directors?
• Is the Form 990 (if applicable) reviewed by the entire Board of Directors prior to submission?

6)  Document Retention:

• Does the organization have (and follow) a policy for document retention and destruction?
• Does the Board of Directors contemporaneously document its meetings (i.e. minutes) and retain such documentation?

Some have wondered why the IRS is becoming involved in corporate governance issues when its role is really to ensure tax compliance.  However, it appears as though the IRS is reviewing the governance practices of charities to determine the connection between a charity’s tax compliance and corporate governance practices.  The thought is that the better governance procedures that an organization has in place, the more likely that the organization is also going to comply with all applicable tax rules and standards for exempt organizations.

Here at the Church Law Group, we strongly recommend making sure that your organization’s governance documents–including articles of incorporation, bylaws, and other basic policies and procedures–are compliant with state and federal laws, as well as with the current standards for tax-exempt organizations.  Determining the effectiveness of your organization’s governance practices will help ensure the long term success and viability of your organization.  Remember, as Benjamin Franklin stated so long ago, “an ounce of prevention is worth a pound of cure.”  Contact us today at 972-444-8777 to learn more about how the Church Law Group can help you evaluate the effectiveness of your organization’s governance procedures.

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Entitlement to a clergy housing allowance is not as straightforward as is often imagined.  Right now, religious nonprofit organizations are under heavy assault by the IRS, so a conservative approach is warranted.

The Internal Revenue Code allows a tax-free housing benefit for a “minister of the gospel” in two situations.  First, the employer can allow the minister to live rent-free in a home (parsonage) owned by the church.  The minister can exclude this benefit from gross income up to the home’s fair rental value.  The value of the parsonage must be clearly distinguished from other compensation, and includes items such as furniture, insurance, utilities, and taxes.  Second, if a parsonage is not provided to the minister, a nontaxable housing allowance can be provided so that the minister can rent or buy a home.  This is the option used most frequently.  It provides ministers with the freedom to choose their preferred type of housing.  The allowance covers items such as mortgage payments (principal and interest), insurance, repairs, utilities, and other expenses to keep the home in working order.

Although the term “minister” is not defined in the Internal Revenue Code, the IRS and courts have specified five factors that should be used to identify a minister.  The factors include:

• Performing sacerdotal functions (i.e. weddings and funerals, etc.);
• Conducting worship services;
• Controlling or maintaining the organization;
• Considered a spirtual leader; and
• Ordained, licensed, or commissioned.

Only the last factor is required in all cases: the individual must be ordained, licensed, or commissioned.  Although it is clear from existing caselaw that the remaining four factors need not all be present for a person to be considered a minister for tax reporting, it is unclear how many of the remaining four factors must be met.

It is not uncommon for an employee’s job duties to include both ministerial and nonministerial functions.  However, if more than 50% of an employee’s time is devoted to nonministry (i.e. secular) duties, the church will be put in a tenuous position if it grants a housing allowance to the employee.  Many churches think it seems unfair to exclude employees from the benefits of a housing allowance if part of their job involves performing the typical duties of a minister.  However, the church cannot ignore the fact that if most of the employee’s duties are secular, in the eyes of a court they will fail to meet the definition of a minister. 

The Church Law Group has released a Guide to Executive Compensation (with forms) that is now available for purchase. Email churchlawgroup@amlawteam.com or call 972-444-8777 if you have any questions about clergy housing allowances or are interested in the Church Law Group Guide to Executive Compensation.

You can also visit us on You Tube to hear David Middlebrook speak about some important  information on housing allowances!!!

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This month, the Church Law Group is focusing on church governance.  For example, in this month’s “Ask Dave,” we discuss the differences between the articles of incorporation, constitution, and bylaws of a church.

 

Traditionally, the law as to governance of a nonprofit organization has been largely confined to state rules.  Recently, this has begun to change.  Over the past several years, the IRS has begun to take an active interest in the topic of nonprofit governance.  To date, the IRS has concentrated on the composition and independence of the boards of directors of nonprofit organizations, as well as on the compensation of the board members and conflicts of interest. 

 

The essence of the emerging corporate governance principles is that a nonprofit organization must be managed by its board of directors.  It is becoming unacceptable for a board of directors to meet infrequently and merely be recipients of reports from the organization’s officers and staff.  Rather, the developing law is requiring the board of the organization to become directly involved, to be knowledgeable about the organization’s programs and finances, to understand the climate in which the entity operates, to avoid conflicts of interest, to place the objectives of the organization above personal desires, and to actually govern the nonprofit.

 

Does your church have a board of directors?  Is the board a strong influence in the church or is it just a group of people that sometimes meet once a year?

 

 

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