Legal Issues

Updates from Church of God Ministries on Legal Issues, January 2011

Late Tax news from December, 2010

Mileage rates for 2011—

Business travel, 51 cents per mile, up from 50 cents per mile in 2010,

For medical expense, 19 cents per mile, up from 16.5 cents per mile in 2010

For charity and volunteer work, remains at 14 cents per mile as in past years

IRA distributions—tax free up to $100,000 if donated to a charity, retroactive to January 1, 2010 and extended to December 31, 2011 if a person is 70 ½ or older

Estate tax—two year exemption of $5 million for individual estates and $10 million for couples with a tax rate of 35% on amounts above those

Hiring issue—World Vision case. World Vision, a religious association, recently prevailed in its case in the U.S. Court of Appeals for the Ninth Circuit. The 2-1 opinion examined the 50 year old religious exemption under the 1964 Civil Rights Act allowing World Vision to hire people of like-minded faith. Spencer, et al v. World Vision. The case involved three employees who were terminated in 2006 because they no longer believed in the Trinity and could no longer comply with World Vision’s statement of faith.

Liability insurance—general liability insurance and employee liability insurance for credential committees. Have you recently examined your liability insurances and are they u p to date to cover your boards, committees, and credential committees? Check with your insurance agent to be sure you are protected.

Closing of churches—how to wind down—have your plan ready while you have members there to convey the property to a nonprofit such as yourself prior to dissolving the corporation

Cities hit nonprofits with fees—with budget gaps and not wanting to impose new taxes, cities, states, and local governments are imposing residents including nonprofits with a variety of fees. For example, in Houston, the city has imposed drainage fees to improve roads and storm-water systems and there are no exemptions to churches, schools, and charities. Other cities are charging religious groups property taxes on buildings no longer used for worship. In Albany, NY, the city passed an ordinance asking schools, churches, hospitals, and other nonprofits to contribute to city services. There are now street light fees in Minneapolis that applies to nonprofits. There are also fees for elevator safety and fire inspections in some locales. Drainage fees apply to nonprofits in Lafayette, IN and Richmond, VA.

Donations—remember for donor receipts that a church will need to give an acknowledgement for gifts of $250 or greater. Out of pocket costs by volunteers for performing services are deductible but the volunteer may not deduct the value of his/her volunteer service. Churches should not appraise non-cash gifts such as stocks, cars (special rules apply.

Red Flag requirements for creditors and financial institutions to fight identity theft

Nonprofits are considered creditors when it defers payment on obligations. The Federal Trade Commission (FTC) has red flag rules that creditors are to follow to protect against identity theft. See http://www.ftc.gov/bcp/edu/pub/businss/alerts/alt050.shtm

Common problems for churches. Employee or independent contractor

Deciding between independent contractors and employees—reemphasize the 20 tests of the IRS as discussed in the 2007 paper on legal issues that I have provided. IRS has a pro employee bias. They found in a case that a person that was working for a church for one hour as a musician was considered an employee rather than an independent contractor. Therefore, be sure to go through the tests to determine. If in doubt, the person probably is an employee as viewed by the IRS.

Reporting requirements for “Love gifts”, Christmas gifts, and retirement gifts. Are these payments taxable or not?

Love gifts—these are gifts for love and affection to the person rather than compensating them for the good job or work that the person has done. If it is for a good job, then it is taxable. If this is considered misclassified by the IRS, then it can lead to penalties and back taxes.

Christmas, birthday, and anniversary gifts. Small amounts of cash would be considered tax free if it is included in a card. If this is a regular practice of the congregation and results in substantial gifts and the donor is given charitable contribution credit, then it is taxable to the pastor. The pastor also would have to pay self employment tax on this as well.

Retirement gifts for years of service or the like. Is this reportable as income or not. If it is connected to the work of the pastor and for the service to the congregation, it generally will be considered taxable and reportable as income for the pastor. It is an area to be wary of in dealing with the IRS.

Social Security paid by the church for the pastor. First, pastors for social security purposes are considered self-employed by the IRS and thus have to pay SECA rather than FICA. Many churches also pay some or the entire entire amount of SECA. This should be reported as income as well as the salary that is paid. So, if you paid your pastor $40,000 in salary for the year and also contributed ½ of his self employment tax in 2010 ($40,000 x .0765 =$3060), the total taxable amount to report to the IRS would be $43,060 in this example. Any amount paid in SECA is reportable as salary to the IRS as part of the pastor’s compensation.

Clergy income is exempt from withholding on a check by check basis since the IRS considers the pastor as self-employed. However, the pastor is to file a quarterly estimated return for federal tax along with the estimated amount due for SECA. Ministers may have voluntary withholding for federal income tax in his/her paycheck and funds for the minister’s self-employment tax liability. This should be identified as federal income tax withheld but not as social security tax withheld. Remember also that clergy income is exempt from FICA.

Personal use of church owned car or vehicle. The personal use is considered a taxable benefit that is reportable as income to the IRS.

Spousal reimbursement for travel. If you and your spouse attend a convention and the spouse is accompanying you to socialize and is not a delegate or has any official reason to be there, then the IRS does not consider this a legitimate business purpose and it is income to the spouse that should be reported. This would include transportation, meals, lodging, and other expenses incurred. The outcome could be different if the spouse was an official delegate, was on a committee that met at the conference, and this was not merely a social occasion.

Preferential loans to pastors. If a loan is made to pastor, it should be at market rate or it will be considered income.

Refusal to accept full salary—if a church is in a bind and the pastor decides to not accept his/her full salary, the pastor must give a written refusal. Sometimes this is considered by the courts as constructive receipt although s/he did not actually receive and count it as income. My advice is to pay the pastor the full salary and if the pastor wants to donate it to the church, that is okay. The church could also lower the salary of the pastor to comply with a budget reduction to avoid this problem.

Debt forgiveness—if an employee or a pastor leaves the church and the church forgives a debt owed to the pastor or employee, it is taxable income to the employee and the church should issue a W-2 to the person for the additional income.

Holy Land trips—if a church gives an all expense paid trip to the pastor and spouse, the value of the trip is treated as taxable income if the trip is given for service to the church or to enhance ministry.

Severance pay for resignation or retirement—this is taxable income.

Tax holiday for 2011 for part of employee’s share of FICA of 2%. For 2011 only, the employee’s share is down from 6.2 % to 4.2% for FICA. There is still the 1.45% tax for Medicare for a total of 4.2% + 1.45% = 5.65%. The employer still has to pay the total of 7.65%. Self-employed persons like ministers also have this 2% tax holiday and are to pay 2.9% Medicare tax and 10.4 %for SECA for a total of 13.3%. There are also new withholding tables by the IRS in Publication 15. This is to increase the take home pay and stimulate the economy.

There is increasing scrutiny of charities by the government including Senate committees and the IRS. One such committee has been examining six media ministries in the past three years and has a report out. See www.ECFA.org/Content/Commission on Accountability and Policy for Religious Organization and the links on the page

Washington update--Congress and nonprofits.

The ECFA has been selected to lead an independent commission on major accountability and policy issues for churches and other religious organizations. This is independent of Senator Grassley and the IRS. Senator Grassley requested that the ECFA lead this national effort and review and provide input on accountability and policy issues for churches and other religious organizations. This is in response to his committee’s three year investigation into the financial practices of six media-based Christian ministries. Senator Grassley is known for his focus on the financial practices of high profile nonprofit organizations. Laws to correct these challenging tax and law issues are a last resort in his opinion.

The areas to be examined are important to the church and nonprofits. They are:

Clergy housing allowance exclusion—should this be limited in some manner? There is a recent tax court case that permitted more than one residence for exclusion in California. Another issue is the great amount and variety of expense that is being used and claimed by some ministers (see the six media ministries that were questioned by Senator Grassley’s staff). Is there abuse? Is there legislation needed to protect this constitutionally for “excessive entanglement”?
Is legislation needed to remove uncertainty about the taxability of “love offerings” paid by church attendees to ministers through a church? Case law has come to some clearer conclusions than the law. Is legislation needed or education of the churches? There also needs to be uniformity in applying the law.
Should the prohibition against political campaign intervention by churches and other nonprofits be repealed or modified? According to Mr. Batts, this is very hard to enforce and there is an argument of freedom of religion and freedom of speech. This is hard for the IRS to enforce with the amount of resources that it has.
Should churches file the highly detailed annual information return that other nonprofits must file (form 990)? There is a question of “excessive entanglement” between religion and the government. The government is very limited in its resources, and there should be uniform enforcement of this if it is done.
Should the law impose an excise tax (penalty) on nonprofit organizations that engage in excess benefit transactions? The focus will be on enforcement and the uniformity of enforcement. Premise behind the examination is the penalty is not adequate presently and the organization should also have a penalty.
Should the current IRS audit protection for church leaders be repealed? There is a court decision that the current IRS approach does not conform to the law so all activity has been suspended except for fraud cases. Should the IRS have more freedom to audit individuals if those transactions are with leaders of the church? Some impact may be if the church is already part of a denomination or an accountability group such as ECFA.
Should the “rebuttable presumption” of reasonableness for transactions between nonprofit organizations and their leaders be eliminated? There is a doctrine in some churches of leaders should be blessed materially. Should the government be able to investigate and explore doctrinal issues? Currently this is a rebuttable presumption if there is comparative data concerning salary or transactions which shifts the burden to the IRS to prove.
Should the IRS establish an advisory committee for churches and religious organizations? This would be to assist churches and the IRS to diminish the high level of distrust between the two bodies.

Dan Busby, head of the ECFA will be on the committee along with Michael Batts, a CPA with extensive experience and former chair of the ECFA board. For more information on this topic, go to www.ECFA.org and check out other releases concerning this commission and background information on why the commission was set up.

In addition, the Debt Reduction Commission is seeking to replace the charitable contribution tax deduction. The National Commission on Fiscal Responsibility and Reform (deficit-reduction commission) has released a report (The Moment of Truth) on December 1, 2010 that has a proposal recommending the elimination of itemized deductions and implementing a series of non-refundable tax credits, including charitable contributions. This would replace the deductibility of charitable contributions in its current form and provide a non-refundable tax credit of 12% which is above 2% of a taxpayer’s adjusted Gross Income. This is 2.1.3 to simplify the key provisions to promote work, homes, health, charity, and savings. See www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf this indicates that nonprofits and charitable deductions are under discussion in Congress and in the marketplace for possible change. Stay tuned to current events for further information.

Resources--A good resource for your tax questions are two books by Dan Busby and John Van Drunen: Church and Nonprofit Tax and Financial Guide for 2010 Tax Returns, Zondervan $15.99 and Minister’s Tax and Financial Guide for 2010 Tax Returns, Zondervan, $15.99 Another resource along the same line is Richard Hammar’s 2011 Church & Clergy Tax Guide, Christianity Today, $39.95.

Acknowledgement--I would like to thank the ECFA for two outstanding workshops recently and their newsletters for much of the material. Other information providers were from government websites and news releases.

The material provided above is for educational and informational use only and is not considered legal advice. Please consult with your own professional legal and accounting advisors for your particular situation to comply with your state laws.

Essential Elements for Functional Structure

1. Preamble: A statement of purpose for the bylaws.

2. Identification: The legal name of the congregation.

3. Affiliation: A statement of affiliation with the denominational organization. Both the regional and national judicatories.

4. Membership: A definition of membership in the corporation.

5. Meetings: It is required that an annual meeting be stipulated and provision be made for special called meetings. Instruction for

absentee balloting should be provided.

6. Corporation Officers: Michigan law requires at least three officers: President, Secretary and Treasurer.

7. Governing Board: The proper name for the governing board is: Board of Directors. However, the bylaws may use a variety of designations (Trustees, elders, leadership team, etc.).

8. Governing Board Powers: This board should have broad powers to act on behalf of the congregation.

9. Limitations: The membership should define those decisions that they will not delegate to any board or officer.

10. Committee Structure: It is not necessary to delineate complex committee structures. The governing board may appoint such committees, as it deems appropriate and necessary. A pattern consistent with the 1980-1999 decade set is to appoint temporary task forces to serve until their task is completed.

11. Pastoral Relations: The matters of selection, call, discipline and termination of pastoral staff need to be clearly stipulated.

12. Member Relations: Procedures for disciplining and removing members, as well as officers, should be clearly defined.

13. Other Items: Additional items to delineate are:

14. Terms of office: The length of term for each officer and how many times they can be re-elected.

15. Quorum: What constitutes a legal meeting. ½ or 2/3 of voting members, or those who attend a duly called meeting.

16. Dissolution procedures: This is a statement of what organization receives the assets of the non-profit should it cease to exist. This is required by Michigan law. The assets must go to another non-profit.

17. Amendment requirements. This is the percent of vote of the members of the organization needed to amend the bylaws.

TEN FUNDAMENTAL RESPONSIBILITIES OF A BOARD by Alfred H. Ells

“What is a board supposed to do?” a pastor friend asked. “What authority are they supposed to have, and how do I keep them from taking over my responsibility to lead the church?”

Many church leaders have board member horror stores, and many board members are frustrated with church leadership and their own confusing role. It is a distinct honor to be elected to serve as a member of a church or para-church ministry’s board of elders or board of directors. With the privilege of board membership also comes a weighty responsibility. Those who govern make decisions that affect the lives of many people now and many more who will benefit in the future.

With the honor and responsibility of governance comes the mandate to persevere at acquiring the understanding and skills required of a board member. Board members come to the job with the best intentions. But good intentions are not enough. Productive board members develop the knowledge and abilities required for their spiritual service over time — they are not born with this type of maturity. Additionally, few first-time board members understand the crucial role and responsibilities they must fulfill. Most board members usually assume a role based on their past experience and/or the ministry leader’s expectations. This leads to unhealthy board behavior. Board members who do not understand their spiritual, legal and governance responsibilities tend to assume passive “yes man” roles or become overly involved in managing and controlling the ministry. This is frustrating for both the ministry leader and the board member.

However, when all board members understand and practice the “Ten Fundamental Responsibilities” of a governing board, unity, cooperation and maximum effectiveness result.

Consider the following fundamental responsibilities of a governing board of elders, trustees or directors. Discussion of each suggested responsibility and how it is carried out by the board and senior ministry staff will help create the environment and teamwork needed to accomplish God’s purposes.

Tips To Consider

1. Review and approve the ministry’s mission and purpose.

One of the board’s fundamental responsibilities is to review and approve the ministry’s stated mission. The board should ask the senior ministry leader for a written mission or purpose statement for the ministry that describes what God has called the ministry to accomplish. The statement of purpose should be reviewed periodically and revised when necessary. It should be clear and concise, and each member of the board should understand and support it.

2. Select and support the senior ministry leader and review his/her performance periodically.

Perhaps the most significant decision a ministry board makes is the selection of a senior minister (or executive director). An effective board will draft a clear job description that outlines the duties of the position and will undertake a carefully planned search process whenever the position is vacant. The board will also support its chosen leader by providing that individual with frequent supportive and constructive feedback and by periodically conducting an evaluation to help strengthen his performance. A word of caution: feedback should not be random or offered by individual board members, but rather graciously given as a summary report by the Board that also hi lights accomplishments and strengths.

3. Approve and monitor the ministry’s programs and services.

A ministry carries out its mission by offering specific programs and services that meet the needs of a targeted group of people. The board is not responsible for managing, developing or administering these programs. However, the board is responsible for ensuring that the programs and services of the ministry are consistent with its statement of purpose. Additionally, the board is responsible for monitoring the programs and services to ensure that their quality is as high as possible. Such monitoring can be done, for example, be reviewing performance data, seeing the programs firsthand or conducting a survey of participants or asking the senior ministry leader for a report.

4. Ensure effective organizational planning and participate as appropriate.

One of the major contributions that a board can make to a ministry is to prayerfully consider how the ministry needs to evolve and change. At least every two to three years, the board should engage in a planning process with the ministry leader(s) to better understand the changing environment in which it is operating and further embrace what the Holy Spirit is doing and wanting to do to meet people’s needs. The senior ministry leader should initiate the planning process and assure board participation, as appropriate.

5. Ensure adequate resources and participate in the fund-raising efforts of the ministry.

The board must ensure the availability of adequate funding to meet the ministry’s stated mission, programs and services. Board members should make regular on-going personal contributions to the ministry as well as contribute to special fund-raising projects. Additionally, the board should work closely with the ministry leader in exploring different venues for supporting the ministry’s mission, programs and services. If a board member does not support the ministry with tithes and offerings, the individual’s commitment to the ministry should be graciously challenged by the board moderator or chairman.

6. Ensure effective fiscal management.

Ensuring that income is managed wisely is especially important for a tax-exempt nonprofit church or organization that operates in the public trust. The board should approve an annual operating budget and then routinely monitor the ministry’s ability to adhere to the budget. If the ministry is large enough, the board should require an annual audit to verify to itself and to the congregation and public that the ministry is reporting accurately the sources and uses of funds.

7. Carefully select and mentor new board members.

An effective board is made up of individuals who can contribute critically needed spiritual maturity, skills, experience, perspective, wisdom and time to the ministry. Because no one person possesses all these qualities, and because a ministry’s needs continually change, a board should institute a well-conceived plan to identify and recruit additional members whose gifting and talents match its current needs. Once new members are selected, a board should orient them to the organization through a mentoring process. Additionally, to encourage a continual flow of fresh ideas and prevent power cliques from forming, members whose terms have expired should regularly rotate off the board.

8. Understand the relationship between board and staff.

Of vital importance is the definition and understanding of the relationship between board and leadership staff. An effective board should have a clear understanding of the differences between its governance role and the spiritual leadership role of the staff. Boards are not created to lead or manage a ministry; the staff is responsible for those functions. Oftentimes, because roles are easily blurred and issues are important, board and staff must maintain the highest possible quality within their working relationship.

9. Assess its own performance and organize itself to operate efficiently.

Boards carry out much of their work in meetings and board members need to be team players that understand their roles, responsibilities and authority. Board members should never operate independently. The Board only has authority when acting as a group. To make board and committee meetings most productive, board members must understand the bylaws under which they operate and should have the opportunity to review written material related to the agenda several days prior to a meeting. Furthermore, each committee needs a statement of purpose, strong leadership and the ability to develop consensus among it members and present its recommendations to the full board. Lastly, the board should undergo an annual self-review process (often performed by an external consultant) that assesses board performance and makes recommendations for change.

10. Pray for the ministry, its mission and personnel.

One of the major contributions a Christian leader can make to a ministry is to diligently pray for its mission and personnel. John Wesley is often quoted as saying; “God does everything through prayer and nothing without it.” Prayer is possibly the most essential ingredient for ensuring God’s favor and direction for the ministry. Board members should routinely pray for the right resolution to agenda items and come together for strategic prayer initiatives regarding key projects and problems. Remember, fervent prayer can go a long ways to reducing dissension and criticalness among board members and staff.

* Material adapted from National Center from Nonprofit Boards, Thunderbird Consulting Group and ClergyCare.

Issues Unique to Pastors and Ministry Leaders by Al Ells

Alfred H. Ells is an ordained minister and founder-director of Leaders that Last Ministries™. He is a gifted consultant, marriage and family counselor and author of several best-selling books and devotionals including One-Way Relationships: When you Love Them More Than They Love You and Leaders that Last: How Covenant Friendships can Help Pastors Thrive. Al has founded or assisted in establishing numerous Christ-centered treatment programs for individuals, families, and youth including LifeGate residential treatment center for adolescents and Remuda Ranch treatment center for women suffering from anorexia and bulimia.

Al has four children and resides in Mesa, Arizona, with his wife, Susan.

Leaders that Last is a not-for-profit organization that provides relationships and resources that strengthen and restore ministers and ministries. We offer specialized services that meet the personal, relational and organizational needs of church and para-church Leaders. Our services include:

Individual, marital and family counseling for those in ministry.
Personal leadership coaching.
Training and consultation for board of elders and boards of directors.
Staff and leadership crisis resolution.
Strategic planning for church or ministry growth.
Meeting planning and facilitation.
Overcoming ministry burnout and depression.
Team building and conflict resolution.

Leaders that Last also partners with Pastors in Covenant to provide a safe setting for local church and ministry leaders to develop mutually supportive friendships that provide nurture, protection and cooperation.

10 WAYS CHURCH BOARD MEMBERS CAN BE PERSONALLY LIABLE FOR CORPORATE ACTIONS *

1. Tort Liability Examples - Directors may be personally liable if they
a) Knowingly permit an unsafe condition to exist on church property that results in death or injury;
b) Negligently fail to adequately supervise church activities resulting in death or injury.

2. Contract Liability – Personal liability may be incurred if done with out proper authority or if signed personally with out reference to their official capacity.

3. Breach of the Duty of Care – Some Examples –
a) Failure to attend board and/or committee meetings.
b) Thoroughly reviewing and following the by-laws.
c) Thoroughly reviewing financial reports and rectifying any irregularities.

4. Breach of the duty of Loyalty – Some Examples –
a) Failure to disclose a personal interest in a transaction involving a board members firm.
b) Failure to abstain from voting on that transaction. The interest of the Corporation must always be placed before personal interests.

5. Violation of Trust Terms – Some Examples -
a) Spending designated funds for a different item or purpose.
b) Selling church assets contrary to restrictions specified in the church charter.

6. Violating Securities law - Example –
Selling church notes or bonds without complying with all registration and sale requirements of State and Federal regulators.

7. Wrongful discharge of an Employee –
Before discharging any employee it is imperative that competent legal counsel be obtained. “This is a legal mine field.”

8. Failure to Withhold and Remit Payroll Taxes –
Church Directors and Officers can be personally liable for the amount of payroll taxes not withheld or paid to the IRS.

9. Exceeding the Authority of the Board – Example –
Bylaws are changed without formal approval of the membership.

10. Loans to Directors –
Church boards are prohibited from making loans out of corporate funds to directors or officers. Loans to pastors may also be impermissible.

* Information from “Church Law & Tax Report” article by Richard Hammer.