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Editor's Note:Frank and Elaine Sommerville, editorial advisors for
ManagingYourChurch.com, presented some of this material on Monday at
The Ultimate Financial and Legal Conference in Arlington, Texas.
I. Thou shalt not allow the church's intellectual property to be used
for personal purposes.
Rule: Under the work for hire doctrine, any property developed within the
scope of the job duties of an employee is the property of the employer.
Practice Tip: An intellectual property policy should be carefully crafted and
adopted. It should address all areas of concern, such as curriculum,
sermons, and music.
II. Thou shalt not have a substantial amount of revenue derived
from unrelated business income.
Rule: An organization may have some unrelated business income, but too
much can endanger the exempt status of the church.
Unrelated business income is generated from activities that are:
1. Regularly carried on.
2. Not substantially related to exempt purposes.
3. Trade or business.
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exception. Each activity must be separately analyzed. The commercial
manner in which an activity is conducted can create unrelated business
income even if the activity seems to be related.
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III. Thou shalt carefully design outreach programs to provide for the
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benefit of a charitable class.
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Rule: The church's programs cannot create unacceptable private benefit to
individuals and organizations. Therefore, all programs have to be able to
pass a test that any benefit to an individual is permissible private benefit
and will not endanger the exempt purposes of the church. Such programs
include the benevolence program and scholarship programs.
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Practice Tip: The church should construct policies and guidelines to be
followed for these programs that comply with the applicable rules.
IV. Thou shalt not allow any transactions with another party to be
conducted at more than or less than fair market value.
Rule: Any transaction may benefit the church, but the transaction may not
provide a greater benefit to the other party (with the exception of another
nonprofit organization). Transactions with disqualified persons may be
subject to intermediate sanctions of 25 percent to 200 percent under IRC
Section 4958.
Practice Tip: Fair market value should always be established for a
transaction. Where a control party is involved, this should be determined
and documented in writing. For example, competitive bids should be
obtained for transactions involving outside services, purchases, or sales.
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V. Thou shalt not endorse any candidate for any public office, nor
dedicate a substantial amount of your assets to legislative activities.
Rule: No support or opposition may be given to a political candidate and
only limited support can be dedicated to legislative activities.
VI. Thou shalt fully document every aspect of a control party's
(disqualified person's) compensation package within the
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requirements of IRC Section 4958.
Rule: The compensation paid to a disqualified person must meet the
following criteria:
1. It must be decided by the independent persons.
2. It must be based on outside, comparable data.
3. It must be documented in writing along with the basis for the amount of
compensation determined.
Practice Tip: Each year, analyze every benefit provided to a disqualified
person and re-document these in writing prior to the start of the next year.
This includes cash compensation, noncash compensation, and fringe
benefits.
VII. Thou shalt document all expenditures as to the exempt purpose
of the expenditure and maintain documentation as required by law
for those special expenses involving meals, entertainment, and
travel.
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Rule: Every expenditure of a church must be documented as to the exempt
purpose of the expense. For meals, entertainment, and travel, the "who,
what, when, where, and why" must be documented.
Practice Tip: The following should be adopted and maintained by the
church:
1. An accountable plan for all business expenses.
2. A credit card acceptance policy that requires employees to submit
receipts for all charges.
3. A formal policy should be adopted to require immediate repayment of any
expense that is determined to be a personal expense.
VIII. Thou shalt conduct all designated fundraising programs with
the greatest of care and caution and don't mess up the contribution
receipts.
Rule: Designated contributions must be used as designated unless the
restriction is released by the donor or by the appropriate state office or
court.
Practice Tips:
1. Attempt to build in a provision that allows excess funds to be redirected
to another ministry of the church or to the general fund.
2. Make sure everyone is familiar with the rules regarding events that
include a contribution where benefits may be exchanged.
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IX. Thou shalt adhere to all payroll/labor rules—even the ones you
don't like.
Rule: Churches are subject to many of the same payroll tax rules as other
organizations, with the complication of special rules for ministers.
Additionally, the majority of labor law rules apply to churches and religious
ministries.
Practice Tip: Pay special attention to the following areas:
1. Classification of ministers.
2. Classification of employees vs. independent contractors.
3. Deposit rules for payroll taxes and filing requirements for Forms 941,
944, W-2, and 1099-Misc.
4. Taxation of fringe benefits.
5. Designation of housing allowance.
X. Thou shalt endeavor to determine good governance procedures
and adhere to them consistently.
Rule: Good governance equals good organization. Follow the basics:
1. Knowledge of what the organization's exempt purposes are.
2. Good governing documents.
3. Well-documented actions of the governing body(ies).
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4. Good policies.
5. Good people.
6. Keep the corporate status up to date and in good standing.
Practice Tip: Review governing documents, policies, and procedures and
make sure that they are actually being followed.
Adapted from "The Ten Commandments of Religious Organizations," by
Frank and Elaine Sommerville. Used with permission.
For more help, check out the annualChurch & Clergy Tax Guide, the 20122013 Compensation Handbook for Church Staff, the Essential GuideeBook
series for church boards, and the Does Your Church Owe Taxes on
Alternative Revenue? Feature Report from Church Law & Tax Report.
This content is designed to provide accurate and authoritative information in regard to the
subject matter covered. It is published with the understanding that the publisher is not
engaged in rendering legal, accounting, or other professional service. If legal advice or other
expert assistance is required, the services of a competent professional person should be
sought. "From a Declaration of Principles jointly adopted by a C ommittee of the American Bar
Association and a C ommittee of Publishers and Associations."
RELATED TOPICS:
Administration; Attorney; C hurch Finances; C ompensation; C opyright; Housing Allowance;
Pastors; Tax
POSTED:
October 25, 2012 at 09:01 am
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Phil Stone
November 07, 2012
Our small church is sponsoring our Pastor's daughter who is serving as a missionary house
parent with children in Colombia, South America. She is associated with YWAM organization.
Our church has a budget item for "Colombian Missions" to which people may designate money
plus 1% of all regular offerings is designated for this "Colombian Missions" ministry, but all of
the money goes to support this person. Since the church has a designated item for this
ministry and has voted to give a percentage of offerings to this ministry does this make it a
legal, tax deductable donation? I know that one may not give a donation to the church and
designate it to be given to a specific person. This is money laundering! But does it make it
legal to designate to a specific budget item even though all of the money goes to a specific
person's support?
Matt
November 01, 2012
Friends, Here is Frank Sommerville's answer to the question, "What is a disqualified person?":
"'Disqualified person' is defined over 4 pages of the Treasury Regulations. While not repeating
all the detailed analysis from the regulation, a disqualified person is an officer, director,
department head, committee member or substantial donor. Stated another way, anyone with
significant influence over the operation of the church or a substantial segment of the church
is a disqualified person. We typically glibly define it in seminars and training as 'movers,
shakers and decision makers.'" I pray this helps. Best, Matt
Kurt Snyder
October 31, 2012
What is a disqualified person?
Matt
October 31, 2012
Friends, Great questions and dialogue on this post. I posed Mark's question directly to Frank
Sommerville, and he kindly provided this response: "The federal copyright act vests
ownership with the employer for works created within the scope of an employee's duties,
absent a written contract to the contrary. Stated another way, a work is made at the hiring
party's instance and expense when the employer induces the creation of the work and has
the right to direct and supervise the manner in which the work is carried out. The right to
direct and supervise the manner in which work is created need never be exercised. The issue
is whether the sermons were created as works for hire, vesting ownership with the
employer. If the church and pastor execute a written contract that vests sermon ownership
with the pastor, then tax laws will dictate the terms of that agreement. All church resources
must be used exclusively for exempt purposes. It is not an exempt purpose to fund the
pastor's other jobs, such as preaching at another church or serving as pastor of another
church. Under federal tax laws, the pastor may not use any church resources or facilities in
creating his sermons or he must compensate the church for the use of the church's
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creating his sermons or he must compensate the church for the use of the church's
resources in creating those sermons. Further, he cannot create the sermons as the church's
employee; he must create them during his time off from the church. In the alternative, the
pastor may purchase the sermons from the church at the higher of fair market value or the
amount the church spent creating the sermons, including a portion of the pastor's
compensation as a church cost of creation." I pray this helps. Best, Matt
Sally
October 31, 2012
Regarding V., I attended a seminar put on by one of the Liberty Institute attorneys last
week. They are currently in the process of TRYING to get the IRS to withhold tax-exempt
status from any church which supports a particular candidate. From what he told us, our
First Amendment rights allow us to support who we choose and, if the IRS or ACLU takes a
church to court for doing so, Liberty Institute would LOVE to take it to the Supreme Court, if
necessary. I thought it was a very interesting take on a 'rule' that might not be one. Thanks
for the article!
Lou
October 31, 2012
The idea is to spread the gospel. So it would make sense that both the church and the
pastor should be able to use his work for this purpose. For legal reasons, that should be
made clear by the church governing body which would have the say in the matter.
Lou
October 31, 2012
The idea is to spread the gospel. So it would make sense that both the church and the
pastor should be able to use his work for this purpose. For legal reasons, that should be
made clear by the church governing body which would have the say in the matter.
Mark
October 30, 2012
Thanks for the feedback. Our church is a small independent church so there is no
denominational governing body. With that being the case, if the board states (and it is
recorded in the minutes)that I am the owner of said intellectual property then there should
be no problem with me using it elsewhere. Is that correct?
jarrod
October 30, 2012
I think the law is more about a pastor taking the sermons he preached at your church and
publishing them as a book. Who owns the copyright? To whom does the money belong?
According to the law, the church holds the copyright and the rights to any revenue derived
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According to the law, the church holds the copyright and the rights to any revenue derived
from their intellectual property.
Deb27
October 30, 2012
Mark, Under the ELCA (Evangelical Lutheran Church of America) it remains the intellectual
property of the minister. Your denomination's governing body probably has rules addressing
that same thing too.
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