Setting the Record Straight on Group Exemptions

The IRS Advisory Committee on Tax Exempt and Government Entities (“ACT”) issued a report in June that addresses a number of tax compliance issues, including group exemption rulings.

The report caught the attention of many church leaders, since thousands of churches have obtained recognition of tax-exempt status by being included in the group exemption ruling of a parent denomination. Unfortunately, the report has caused needless concern, in part because of the false claims of some seminar leaders that the IRS is going to “revoke the group exemptions of churches by the end of the year.”

The good news is that the IRS is not going to revoke group exemptions. A feature article in the September-October 2011 edition of Church Law & Tax Report explains the recent ACT report, and sets the record straight.

Are Churches an Easy Target for Vandalism and Burglary?

A church business manager told me that two times in the past couple years his church was vandalized. He was grateful the church’s insurance covered most of the cost, but for the most recent case, his church won’t be able to use the sanctuary for more than a month while it’s being repaired.

An Internet search revealed to me that other churches are facing similar problems. The search results showed several news stories of church vandalism, burglary, and robbery throughout the country within the last month. One was a news story of a county in Tennessee investigating at least 23 church burglaries.

One newspaper article in Alabama reported Sherriff Dave Sutton as saying that churches are targets for thieves due to their lack of visibility and their valuable sound systems. The article follows with advice to churches and their communities of how to protect churches:

“(Thieves) are getting a little bit brazen,” Sutton said. “What we ask is people check the churches near you (often), even if you don’t go to church there.”

Sutton said if county residents check on the churches and alert authorities about any suspicious activities, church burglaries could be curbed.

Wayne Russell [a church administrator of a rural church that recently experienced two burglaries] advised staff members at other churches to take even more precautions.

“I recommend talking to security officials and seeing what they recommend,” he said. “You must have deadbolt locks. If you have old keys floating out, definitely remedy that.”

An average of 4,500 churches are the victims of burglary each year, with the median burglary loss estimated at $2,000, according to Securing Your Property, a training resource from ChurchSafety.com.

Unfortunately in some cases, a burglary or robbery can happen during a church service. In one recent case, a gunman came in by an unlocked back door while the offering money was being counted (fortunately no one was hurt). In another case, a man sat in the back pew until the offering. Then he showed his gun and took the money (fortunately no one was hurt in this case, too).

Sometimes it’s possible to recognize people who pose a risk during church services and activities, according to Dealing with Dangerous People, another ChurchSafety.com training resource that lists what to look for and how to respond to a dangerous person.

Has your church been a victim of vandalism or burglary? If so, have you put measures in place that have helped?

For more help on how to protect your church, check out these downloadable resources:

• Protect Your Church from Crime and Violence;
• Securing Your Property.

IRS Increases Mileage Rate

The Internal Revenue Service announced this morning it has increased the optional standard mileage rate that employers can use to reimburse employees who drive personal vehicles for business purposes.

The IRS increased the rate to 55.5 cents per mile for travel occurring between July 1 and December 31.

The rate was 51 cents for January 1 to June 30.

Many pastors and staff members drive their personal vehicles for church-related business, such as visitations or special events. If properly tracked, those miles can be reimbursed by churches (or pastors and staff members may be able to calculate a deduction for their annual tax returns).

Chapter 7 of the 2011 Church & Clergy Tax Guide further explains reimbursements of transportation expenses.

IRS Revokes Tax-exempt Status of Church-run Agency

If your church runs a nonprofit agency, you may want to check this state-by-state list of 275,000 organizations whose tax-exempt status was recently automatically revoked by the IRS. Most organizations on the list no longer exist but some still do.

One organization on the list that still exists is a community development agency run by St. James Chapel Church of God in Christ, according to a newspaper in Reading, PA.

A law in 2006 requires most tax-exempt organizations (excluding churches) bringing in $25,000 or less to start filing yearly IRS returns, specifically form 990-N. Before 2006, they were not required to file. Those that do not file for three consecutive years will find their tax-exempt status automatically revoked by the IRS.

If an organization run by, or affiliated with, your church is on the list of organizations that lost tax-exempt status, an application can be filled out to reinstate it.

For more information on how churches relate to this law and the possibility of a ministry falling under these requirements, a past TheYourChurchBlog.com post covers this in detail.

Group Drops Case Against Pastor Housing Allowances

A constitutional challenge to the tax-free housing allowances and parsonages provided to thousands of American pastors is over after the plaintiffs who filed the original lawsuit voluntarily requested its dismissal Friday in a California district court.

But the battle is far from over. More legal challenges from opponents of the provision are promised, while a federal commission reviewing the benefit has been asked to determine whether it needs additional protections.

A leader from the Freedom from Religion Foundation, the group that led the latest charge against the decades-old tax benefit for clergy, said her organization will continue its fight to bring an end to these allowances, which it believes violate the First Amendment’s Establishment Clause and endorse religion.

Friday’s request was FFRF’s “only option at this time” after a U.S. Supreme Court ruling in April on a separate Arizona taxpayer case undermined the grounds for its case in California, said Annie Laurie Gaylor, co-president of the Madison, Wisconsin-based organization.

The group is evaluating its next options to challenge the benefit. “We plan to pursue it in a slightly different manner,” Gaylor said. “We’re sorry about (the California case)—we think the Ninth Circuit already indicated that it believed the law was unconstitutional. We believe it’s an unconstitutional law.”

Gaylor said it was too early for her to identify specific next steps or the next legal strategy FFRF will try.

Since 1921, the rental values of church-provided parsonages have been excluded from the gross incomes of ministers. In 1954, Congress enacted a benefit through section 107(2) that allows a pastor to designate part of his or her income as a tax-free allowance for housing not provided by the church. A high-profile challenge to the housing allowance involving Pastor Rick Warren in 2000 led to the passage of the “Clergy Housing Allowance Clarification Act of 2002,” (CHACA) in Congress, which limits an allowance to the fair rental value of the housing provided.

Since it’s a federal statute, the Internal Revenue Service and Franchise Tax Board served as defendants in the California case. Last month, the Pacific Justice Institute successfully appealed to also intervene in the defense on behalf of a Sacramento pastor.

With Friday’s filing, “the bottom line is the housing allowance is safe,” said Kevin Snider, chief counsel for PJI, a nonprofit legal defense group specializing in religious freedom and civil liberty cases. His California-based organization is bracing for “subsequent challenges,” he said.

That the allowance remains safe for now appears to be a victory in and of itself. Until recently, the FFRF’s case in California was considered a legitimate threat, on course for trial after a defense request for dismissal was denied in May 2010.

But momentum quickly shifted this past April, after the Supreme Court ruled a group of Arizona taxpayers lacked standing in a constitutional challenge to tax credits for school tuition organizations. Attorney Richard Hammar, writing shortly after the Arizona decision on Christianity Today International’s ChurchLawAndTax.com and in the Church Law & Tax Report newsletter, considered it a likely “lethal blow” to FFRF’s California case:

… FFRF argued that the taxpayers had standing because the Arizona tax credit was, in essence, a governmental expenditure for religion. The Court disagreed, noting that there is a fundamental difference between granting a tax credit to taxpayers, and using tax dollars to directly benefit religion.

… The Supreme Court's ruling in the Arizona case may well spell the end of the constitutional challenge to the housing allowance, since a housing allowance, like the Arizona tax credit, involves no direct transfer of tax revenue for religious purposes.”

Had the Supreme Court not ruled in Arizona, many observers, including Hammar, weren’t optimistic about the defense’s chances in the FFRF case because the Ninth Circuit isn’t considered sympathetic to religious groups or causes.

Snider said he doesn’t believe the Ninth Circuit had tipped its hand yet in the FFRF’s most recent challenge. Gaylor’s comment about the court’s possible support, he said, more likely was in reference to past activity, specifically the Warren case. A staff report released in January by Sen. Chuck Grassley (R-Iowa) suggests as much; in it, staff members said “The sponsors of CHACA explained that the bill was designed to prevent the Ninth Circuit from considering the constitutionality of section 107(2).”

The Grassley staff report identified housing allowances and several other issues in need of further evaluation, based on a three-year review of six media-based ministries. Grassley asked the Evangelical Council for Financial Accountability to head a special commission addressing those issues (Editor’s Note: Hammar, senior editor of the Church Law & Tax Report and ChurchLawAndTax.com, is a member of the commission).

“The legislative history of the 2002 CHACA evidences particular concern for clergy of modest means ministering to small and rural churches,” the Grassley report noted. “… The parsonage allowances provided by small rural churches … are generally not the ones that attract the attention of the media and the public. The ones provided by churches with denominational or similar oversight also do not attract attention.”

Among the staff’s questions for the special commission to consider: “To withstand further constitutional scrutiny, should section 107 be amended to broaden its applicability?”

Show Me the Money

Church board members are charged with fiscal oversight of the church coffers. But not every board member or finance committee member is a CPA and schooled in finance. Many treasurers and bookkeepers make the mistake of providing too much information and detail to board members. This only muddies the waters and leaves your committee members feeling less equipped to make good decisions. In order to get an accurate picture of the church's financial standing and make good decisions based on this information, your church board and finance committee need the right information presented in the right way.

The single-most important report you can bring into a finance meeting is the cash availability report.

Cash availability = cash - current payables - temporarily restricted funds

Available cash represents the real money on hand now for the church to work with. Many churches today find that senior management (pastoral staff) and the governing board want to know how much cash the church has. The most important question is not "how much money do we have?" It's "how much can we spend?" Typically, these two are very different answers.

A cash availability report factors in the immediate (i.e. less than 10 days) requirements related to cash to tell others what money is available to spend. It is a simple report that you can generate on a spreadsheet and provide on a monthly basis with other reports that you prepare. Here's an example:

While temporarily restricted net assets are not a legal liability or obligation of the church, the funds are not to be expended for general operations purposes and are excluded from the cash balance for that reason. Some churches have in essence "borrowed" from temporarily restricted because they overspent from operations. This report will help you avoid these types of issues.

You will notice in this example that the cash balance was $750,000. However, the available cash was only $190,000. Significantly different decisions will be made based on the two numbers. Providing this information to the decision-makers in your church is crucial.

Churches can utilize a variety of ratios and reports to get an accurate picture of its financial health. The Essential Guide to Church Finances provides a chapter on Performance Measurements and highlights some of these tools.

Vonna Laue is a CPA and partner with the non-profit accounting firm Capin Crouse, and co-author of Essential Guide to Church Finances (Christianity Today, 2009).

The Top Three Reasons Fraud Happens at Church

Embezzlement in churches is on the rise. Regardless of a church's size, three factors can make it more vulnerable to fraud.

1. Lack of segregation of duties. Churches often fall victim to embezzlement when they rely on one person to handle too many tasks related to handling the cash. For instance, even if Jane, the church bookkeeper, is able to sign checks, if she also has access to the check stock and the general ledger, she is in a prime position to steal money from the church. Her duties are not sufficiently segregated. A better practice would be to have Bill, the treasurer, sign the checks. By dividing the duties, there's a greater degree of accountability and oversight.

2. Trust. Churches need to trust their employees, but trust itself can't stand in the way of making good decisions regarding internal controls. Almost every church I have worked with that has experienced fraud said, "We trusted her." Trust is not a sufficient strategy for protecting the church's assets. Churches owe it to their congregation—and to their employees—to implement financial safeguards that help prevent fraud from occurring.

3. Change. Churches that experience fast growth are especially vulnerable to fraud. New personnel may not be trained properly or understand the importance of the procedures that are in place. If the church is growing quickly, leaders may not provide enough oversight of new employees to immediately recognize when certain practices are not being followed as assumed. Slow-growing churches are at risk too. Like a frog in a pot of simmering water, if your church is growing gradually, you may continue doing things the way you've always done them without recognizing that some of your internal controls have fallen by the wayside or are no longer effective given your new, larger size. You may also be at risk because of changes such as new technology. If people aren't properly trained on the necessary controls in software, there can be breakdowns there as well.

Is lack of segregation of duties, trust, or change putting your church at risk for embezzlement? What steps are you taking to prevent it? Please comment below so we can learn from each other.

Vonna Laue is a CPA and partner with Capin Crouse, a national accounting firm for non-profits and churches. She co-authored the book Essential Guide to Church Finances (Christianity Today, 2009), which includes a comprehensive list of internal controls for churches. Vonna will be leading a basic and advanced accounting forum at the National Association of Church Business Administration's (NACBA) annual conference in Washington, D.C., July 1-5, 2011.

More Analysis on the Pastor Housing Allowance Challenge

Last month, Richard Hammar wrote an article detailing new developments in the constitutional challenge to pastoral housing allowances under way in California.

In a separate case in Arizona, the Supreme Court ruled the plaintiffs there lacked standing for their case to proceed. The logic applied in that situation likely will apply to the plaintiffs challenging the pastoral housing allowance in California, Hammar says (Hammar further explains the ruling's meaning and how it may prevent the Freedom From Religion Foundation from successfully advancing its case to trial).

The defendants in the housing allowance case likely will file a motion for its dismissal. If the motion succeeds, it will thwart what had otherwise become a growing concern for religious communities, churches, and pastors across the country.

In the latest issue of Christianity Today, a new article also examines the development in the Arizona case, quoting Hammar as well as several other religious and First Amendment experts, including Notre Dame law professor Rick Garnett and University of Virginia law professor Douglas Laycock. Garnett reinforces Hammar's analysis; Laycock says the decision, though helpful for the defendants in Arizona (and likely California), may create a "squelching" affect for any future cases arguing violations of the Establishment Clause, according to the article.

How to Manage Risk at Church

David Middlebrook, editorial advisor for ChurchLawAndTax.com and ChurchSafety.com’s “Ask the Expert,” has developed an easy way to understand and develop a risk management plan. Each letter of the word “risk” stands for a step in the process:

R – Rate Your Risk

Do you intentionally try to understand your church’s risk profile? Which of the following is most like your church?

• A risk-friendly church engages in risky conduct to preach the gospel. Intercity ministry, working with homeless and hungry people, is a good example of this.
• A risk-neutral church stays away from many risky activities but has not done any planning to understand its risk profile. This church would need to understand each of its activities to start risk management planning.
• A merely risk-conscious church knows that it is engaging in risky activities yet has no policies or procedures to deal with these risks.

I – Insuring Your Church

Write a list of everything your church is doing and share this with your insurance provider to make sure your church has proper insurance coverage and policies in place to reduce risk to your ministry.

S – Strategy

Check if your church has the proper strategies in place to deal with risks at your church. If not, start writing policies and procedures.

K – Know How to Communicate Your Church’s Risk to Your Church

Develop a plan to communicate these risks and any policies and procedures to manage these risks.

After you’ve developed a risk management plan for your church, keep these steps on hand for the next time your church discusses and starts a new activity. Assessing your R.I.S.K. will give you a quick way to determine what additional measures you should take to protect your church.

For comprehensive risk management information, see the Risk Management Handbook for Churches and Schools (Christianity Today International).

Fire Prep for Your Church

During the past week, the states of Texas and Arizona faced rapidly spreading wildfires. In Arizona, firefighters now battle the state’s third-largest wildfire ever after attempts to contain it this past weekend failed, according to the Associated Press.

The unpredictability of a fire is what makes it so threatening, but there are ways to keep your church safe by creating procedures for both preventing and responding to a fire.

When preparing for wild, electrical, mechanical, or arson-related fires, start with this free checklist from Brotherhood Mutual.com—Annual Fire Safety Checklist. The checklist includes taking a building inventory once or twice a year for insurance purposes. One of your first priorities should be creating an evacuation plan.

Here are a few additional tips from, “Creating Your Plan,” a ChurchSafety.com article to help you get started:

Creating Your Plan

1. Ask the pros. Invite firefighters or paramedics to tour your building so that they can offer tips and suggestions on your plan and become familiar with your facility.

2. Think it through. Identify all the possible ways people can get out of your building, noting which routes may be inaccessible to the elderly or disabled. Consider buying wagons or sturdy cribs on wheels to help evacuate the nursery.

3. Assign responsibilities. Clearly define who’s responsible for carrying out each part of the evacuation. For example, certain people should be assigned to notify emergency responders and ensure that the pre-designated assembly area is safe.

4. Conduct ongoing training. After you’ve developed your plan, train all staff and volunteers on the proper procedures to follow.

5. Hold fire drills. Conduct drills at your busiest times to identify preventable problems in your evacuation plan and prepare people for the real thing.

6. Evaluate the plan. After conducting a drill, determine whether the plan effectively worked.

7. Provide information. Make sure every member of your congregation knows about your emergency procedures through announcements, specific discussions, church bulletins, visitor packets, and handouts for parents.

If your church decides to work with the local fire department, consider asking them to train your staff on some basic fire-safety skills. Finally, stay informed about local fire news and safety. Consider following your state or local fire department on Twitter for continual tips and reminders.

Churches Forced to Stop Building Use Over Zoning Issue

At least five churches in a business park in Georgia are being prevented from holding services there after a fire marshal’s routine inspection found that each church did not have a certificate of occupancy, according to a local newspaper and channel. Further troubling for the congregations, the complex where the churches are located is not zoned for churches; therefore, the county will not issue the needed certificates.

The churches hope to convince the county to allow them back in, which may include asking the county to rezone the area. Until then, they will not be able to meet in these buildings.

Zoning cases like this are among the top five reasons churches go to court, according to Richard Hammar, who is an attorney and the senior editor of Church Law & Tax Report.

Hammar writes in detail about a similar case and the court’s ruling, as well as what churches should know about the Religious Land Use and Institutionalized Persons Act (RLUIPA), which may help churches who face similar zoning issues.

Earlier this year a church started to battle a zoning law passed soon after they signed a contract to build a new sanctuary out of a restaurant, according to Christianity Today, which quoted Richard Baker, an attorney who is representing the church, as saying, “The objections to churches obtaining zoning do seem to be heating up under the [economy]."

An article co-written by Hammar describes how launching a business at church can impact a church’s zoning.

For more information on how zoning laws apply to churches, Hammar’s book Church Property & Administration: Volume 2 of Pastor, Church & Law covers zoning in detail.

Bill Maher: Should Churches be Taxed?

A little more than a year ago, Bill Maher hosted actor Ashton Kutcher, author and editor Jon Meacham, and Florida Congresswoman Ileana Ros-Lehtinen on his HBO program, Real Time. A YouTube clip from the program circulated recently throughout social media circles.

Church leaders might find the clip particularly interesting—and not just because of Maher's well-documented skepticism of religious beliefs (for instance, in 2008, he released Religulous, a feature film with a title combining the words "religious" and "ridiculous.")

Rather, it's a question he raises to his guests.

At one point, Maher asks Meacham, Kutcher, and Ros-Lehtinen whether churches should be taxed. Without hesitation Meacham says yes, offering his own church—one located on valuable New York City property—as an example to support his position. After Maher quips about the "invisible" product churches "sell," Meacham adds they're only open one hour per week anyway.

Kutcher suggests churches should be judged based on their philanthropic worth before determining their tax status, a "luxury tax" of sorts. The congresswoman remains silent on the subject throughout the clip.

Conversations like this only underscore the growing chorus of opposition to the tax-exempt status of churches. One need only read the YouTube comments below Maher's clip to see how hostile that chorus has become.

It's time churches responded, joining the conversation in an active, productive way. Lest Maher or any of his guests think otherwise, churches already pay many types of taxes, despite their exempt status, whether it's payroll taxes for employees, fees for local services, or taxes on substantial amounts of unrelated business income.

As we've previously covered, local cities and municipalities continue to eye more taxes and fees for churches. As these efforts intensify, it's increasingly important for churches to share their stories with their local communities.

Why?

Because if local municipalities and talking heads have their way, taxes and fees will arrive on an unprecedented scale. And they need reminding of the frequent aid churches provide to their local communities.

Churches big and small frequently are on the frontlines to help homeless and transient people through food pantries, soup kitchens, and benevolence funds (the 2011 State of the Plate survey showed many churches increased budgets for benevolence last year, despite financial struggles within some of those congregations). Numerous churches host free vision and dental clinics, and scores conduct food and clothing drives, often after disasters strike at home and abroad (witness recent efforts from Japan to Joplin, and word this week of church volunteers continuing to pay their own way to rebuild New Orleans nearly six years after Hurricane Katrina). Many more provide tutoring and volunteer services to nearby schools, an increasingly valuable effort as school districts with ever-shrinking resources scramble to meet the needs of students.

Even large churches, often subject to the most heated criticism because of their visibility, offer significant philanthropic contributions (for instance, Willow Creek Community Church's untold success battling poverty and AIDS in Africa or Saddleback Church's PEACE Plan initiative).

And these activities happen not just one hour a week, but seven days a week, every week of the year.

The effects of increased taxes and fees on churches will be significant to every community. With higher tax bills to pay, churches will have fewer resources to deploy to meet tangible and intangible needs.

One such example of this consequence emerged this week. A church administrator wrote this letter to the editor of the Bangor Daily News in Maine:

Unfair assessment

The viability of Aldersgate Methodist Church is threatened by tax assessments by the city of Rockland representing a 166 percent increase in valuation of our property since 2003.

The assessor asserted the property outside the footprint of the church is now subject to tax. The city values this land at $625,000 – a twenty-fold increase since we purchased it in 1994. Taxes on that scale threaten our existence, curtailing our ministry to 120 members and services and donations to the local food pantry, soup kitchen, and other local, national and global missions.

The church filed two abatement requests: the high assessment on its parsonage, and seeking exemption on the church’s driveway and parking lot, but did not prevail in either hearing. The assessor has broad authority to combine or reconfigure parcels and the board of appeals is predisposed to deny petitions, rarely challenging the assessor. The city determined that Aldersgate is not a charitable and benevolent organization (a designation that would have ensured exemption of the entire parcel), and offered no explanation for the high annual increases in assessments on the church’s parsonage property.

We don’t understand how our property (rocky, densely wooded, steep hillside and protected wetlands) became the focus of massive tax hikes, or why our church was singled out for canceling the exemption on surrounding property outside the footprint of the church. If this can happen to us, what protections do other churches and private homeowners have in the face of unfair assessments?

Kathy Lane

Chairwoman, Administrative Council

Will communities really benefit by assessing additional taxes on churches? The answer is no. Whatever gains municipalities make in their coffers will likely go right back out the door as the stresses of human need redirect to already-overburdened government programs.

Somehow, though, I'm certain churches would still find ways to provide, just not to the level they have.

But let's not even go there.

It's time to speak up.