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October 25, 2012

The 10 Commandments of Church Management

Key best practices every church should follow.

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.

Practice Tip: The rules are complicated and there is an exception to every 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.

III. Thou shalt carefully design outreach programs to provide for the benefit of a charitable class.

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.

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.

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 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.

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.

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).
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 annual Church & Clergy Tax Guide, the 2012-2013 Compensation Handbook for Church Staff, the Essential Guide eBook series for church boards, and the Does Your Church Owe Taxes on Alternative Revenue? Feature Report from Church Law & Tax Report.

Frank Sommerville is a shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C. in Houston and Dallas, Texas. His law degree is from the University of Houston Law Center. He holds a license as a Certified Public Accountant. He is also Board Certified in Tax Law by the Texas Board of Legal Specialization. He is rated AV (highest possible) by Martindale-Hubbell Legal Directory. He serves as editorial advisor for the Church Law & Tax Group's ManagingYourChurch.com, Church Law & Tax Report, Church Finance Today, and related resources published by Christianity Today.

Elaine L. Sommerville is a CPA and has worked in public accounting for 25 years, primarily focusing on tax compliance aspects of nonprofit organizations. She is currently the sole shareholder of the firm of Sommerville & Associates, P.C. She serves as editorial advisor for the Church Law & Tax Group's ManagingYourChurch.com, Church Law & Tax Report, Church Finance Today, and related resources published by Christianity Today.

Related Tags: attorney, business administrator, church management, compensation, copyright, executive pastor, finance, housing allowance, income, law, pastor, tax

Comments

Is it illegal for a church or church leadership body to designate that it is alright for a pastor to consider his notes, sermons and curriculum his own, or is it just not to be considered acceptable automatically?

Our board recently made this decision in that if and when I leave the church I am free to take my notes etc. and to reuse them. In fact, I think they were more of the opinion that it was ridiculous to think that I would not be able to do so. I also believe the church leadership would have no problem with me using notes from the studies I have done in preparation for preaching/teaching and using those to help me if I were to decide at some point in the future to write a book. It is after all the Bible and our goal should be to see it taught, and not to be concerned about when it was studied. To restrict the use of one's Biblical studies and make them reinvent the wheel (so to speak) just because they have changed ministries is in my opinion ungodly!

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.

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 from their intellectual property.

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?

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.

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.

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!

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 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

What is a disqualified person?

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

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?

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