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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One factor which can contribute to the long-term success of a nonprofit organization is the presence of an able board of directors who can complement the vision and resources of the organization.  However, unlike large for-profit corporations who elect their directors based on the individual’s business and legal savvy, most nonprofit organizations elect their board of directors based upon the individual’s loyalty and dedication to the organization.  As a result, many persons serving on their nonprofit organization’s board may not have a clear understanding of their rights, responsibilities and, most importantly, their potential personal liability.  In an effort to fill this gap, the Church Law Group is focusing this month on training for board members.  Our goal is to to set-out the basic rules which all directors should follow and to discuss a few ways in which nonprofit organizations can limit the potential exposure faced by its board members. 

Let’s start with the traditional duties of individual board members:

The duties of the board of directors of a nonprofit organization can be encapsulated in the three D’s: duty of care, duty of loyalty, and duty of obedience.  Defined by case law, these are legal standards against which all actions taken by directors are held.  They are collective duties adhering to the entire board and require the active participation of all board members.  Accountability can be demonstrated by showing the effective discharge of these duties.

1. Duty of Care.  The duty of care requires that directors of a nonprofit organization be reasonably informed about the organization’s activities, participate in decisions, and do so in good faith and with the care of an ordinarily prudent person in similar circumstances.  The duty of care could be carried out by attendance at meetings of the board and appropriate committees, advance preparation for board meetings, obtaining information before voting to make good decisions, use of independent judgment, periodic examination of the credentials and performance of those who serve the organization, and frequent review of the organization’s finances and financial policies.

2. Duty of Loyalty.  The duty of loyalty requires board members to exercise their power in the interest of the organization and not in their own interest or the interest of another entity, particularly one in which they have a formal relationship.  When acting on behalf of the organization, board members must put the interests of the organization before their personal and professional interests.  In practice, the duty of loyalty is carried out by disclosure of any conflicts of interest, adherence to the organization’s conflict-of-interest policy, avoidance of the use of corporate opportunities for the individual’s personal gain or benefit, and nondisclosure of confidential information about the organization

3. Duty of Obedience.  The duty of obedience requires that directors of a nonprofit organization comply with applicable federal, state, and local laws, adhere to the organization’s bylaws and existing policies, and remain the guardians of the mission.

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There is considerable confusion among church employees and leaders on how to avoid committing copyright infringement.  Churches and other religious organizations can avoid copyright infringement liability by implementing policies that ensure copyright compliance.

One of the simplest ways to avoid copyright infringement is for a church to obtain a “blanket license” for the use of copyrighted materials.  The church will pay an annual fee for a blanket license, and such license will allow a church to use copyrighted materials—such as lyrics, printed music, audio and videos—for the term of the license. 

For example, a church could obtain a licensing agreement from an organization such as Christian Copyright Licensing, Inc. (CCLI).  A church that obtains a Church Copyright License from CCLI enters into a contractual agreement with songwriters and publishers.  By paying CCLI an annual license fee, a church receives legal authorization to copy from over 200,000 songs for congregational use.  Churches can obtain similar blanket licenses from other organizations such as:

• American Society of Composers, Authors, and Publishers (ASCAP)
• Broadcast Music Inc. (BMI)
• Christian Video Licensing International (CVLI)
• Society of European Stage Authors and Composers (SESAC)

Once a license is obtained, churches must act in compliance with the terms of their contract with the licensing authority.  For instance, some licensing organizations require that the church include copyright information on all songs reproduced under the license.  This means that the church would responsible for including the song title, writer credit(s), copyright notice, and your church’s license number on the bulletin, song-sheet, or computer projection.  In order to avoid liability, always remember to abide by the terms of your contract!

Statutory damages in cases of infringement can range from $500 to $20,000 or more per violation–and the recording industry IS watching, as exemplified recently when a woman was charged $1.9 million dollars for illegally downloading music.  (See here for full article.)

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

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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.

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