Transparency In Ministry

How does a Church monitor payments made to various suppliers? How do they know that the purchasing agent or payables clerk isn’t receiving kickbacks? An easy internal control feature for protecting employees and the resources of the Church are:
1.Periodically, confirm selected information with vendors including how much they have paid for selected products or services.

2.Review contracts between consultants and vendors.

3.Send documentation of Church policy to vendors, preventing any additional funds or commissions that will be paid to consultants, external to the contract.

In an article released by Church Report – dated: Aug 09, 2006
Church Consultant Pleads Guilty to Fraud, Tax Charges

NEW YORK – Joseph DeRusso, former consultant to the Roman Catholic Archdiocese of New York, has pleaded guilty to fraud, tax and obstruction of justice charges related to a $2 million kickback and embezzlement scheme. DeRusso, of Florham Park, N.J., admitted in federal court in Manhattan on Friday that he took part in a plot that diverted $1.2 million in kickbacks from vendors doing business with the church. According to prosecutors the hefty kickbacks paid to DeRusso ultimately increased the price of the goods and services he was purchasing for the Archdiocese.DeRusso is the last of four employees or consultants of the archdiocese’s purchasing arm, Institutional Commodity Services Inc., to plead guilty in the case.The three others, Vincent J. Heintz and Nanette B. Melera, of Briarcliff Manor, and Michael J. O’Shaughnessy, of Queens, are scheduled to be sentenced in September.DeRusso sentencing is scheduled for November where, under the terms of a plea agreement, he is likely to spend up to six years in prison.DeRusso also pleaded guilty to tax evasion for failing to report at least $250,000 in cash payments from a vendor and agreed to file amended tax returns, prosecutors said.Authorities said the illegal payments and embezzlement took place between 1996 and 2004. The money diverted from the church’s school food program went to companies the four defendants secretly owned and controlled, prosecutors said.

* The Associated Press contributed to this story.

In accordance with the new IRS requirements, as published by the August 28, 2006 issue of Non-Profit Legal & Tax Letter…

After December 1, 2006, a 501(c)(3) organization applying for tax-exempt status must file a new Form 1023 (revision date June 2006). It is currently available on the IRS website .

The only change is Part XI, User Fee Information. It reflects the new user fees ($750 for organizations with annual gross receipts of greater than $10,000, $300 for less than $10,000) that became effective July 1, 2006.

Applicants may use the earlier version of Form 1023 before December 1, 2006, but they must include the new user fee amount. Older versions cannot be accepted after December 1 because the IRS is initiating a modernized case control system that is programmed to accept only the June 2006 Form 1023.

Filing the Form 1023 can be cumbersome and the IRS may respond with a laundry list of additional information. Be prepared for the filing to be a slow process.

The distinguishing characteristic between for-profit and not-for-profit corporations is not whether each seeks to operate efficiently, generate revenue, and produce earnings, but rather what each entity does with such earnings. Earnings of not-for-profit corporations are used to support the charitable purpose of the corporation or are reinvested into the company to ensure future operations. In contrast, earnings of for-profit corporations are distributed to owners or shareholders.

Healthcare Services of the Ozarks, Inc. v Copeland,---S.W. 3d---(Mo. 2006)- 8/28/06 Non-Profit Legal and Tax Letter

Little Debits are selected information obtained from various sources that provide “user friendly” information for churches and ministries. We are introducing this as a separate blog feature. Enjoy!

Church property is primarily exempt from property taxes, under the IRS code. However...in a recent case reported in a Church Report article dated August 21, 2006,

Texas Church Wins Tussle With Tax-Man, Gets Exempt Status Restored

(AgapePress) - In one Texas city, local government officials have been ordered to restore the tax-exempt status of a church that has been under a heavy tax burden for a number of years. In 1997, the building housing the Full Gospel Church of God in Christ in Wichita Falls burned down. Officials with the local tax assessor's office later presented the congregation with a large tax bill, claiming the church failed to rebuild quickly enough. Since then, Full Gospel COGIC has continued to be taxed annually on its vacant property.These facts prompted the church to seek legal assistance. As a result, the attorney launched a lawsuit against the Wichita County Appraisal District on Full Gospel COGIC's behalf. The result of the lawsuit is that the parties in the case have reached an agreement, one that erases all back taxes and restores the church's tax-exempt status. "...because this church was essentially burned out of existence. And then, right when they had the opportunity to rebuild, the tax man came down and took all their money."

Religious discrimination...see the following post...

In a recent post from the Church Report, a Texas church received a huge victory in the lawsuit against a county assessor's office. The problem...after the church facility burned, the church was unable to rebuild quick enough before the tax man assessed property taxes and penalities. HUGE tax bill. The churched hired an attorney and the church ultimately won. No taxes were paid.

The congregation's attorney believes religious discrimination may have been a factor in the case initially. "Certain churches face harassment by government officials," he says. "Many times it's churches that are on land the government would rather see a shopping mall on, so they'll harass the church there, or they might get in the way of development."

Interesting thought...Assets are protected by church leadership and the exempt status of the property was maintained. Tax Man cometh...NOT!

According to the Non-Profit Legal and Tax Letter, August 28, 2006 edition, Mr. Hugh Webster notes that Non-Compete Agreements are enforceable against former employees of a non-profit.

What is a non-compete agreement? For simplification purposes, let’s say that a church hired a minister to perform selected duties for the church. In conjunction with his services and as a condition of employment, the minister was required to sign a non-compete agreement. The agreement provided that for 1 year following termination of his employment with the church, the employee would not perform the same service for a church across the street. Subsequently, the minister resigned his employment and soon violated the agreement by working for the “church across the street,” performing the prohibited services under the agreement. The church files a suit against the minister and won under the state court.

Some employees may not perceive the driving principle behind not-for-profit status. The simple fact that a corporation is organized for benevolent purposes does not indicate that such corporation does not have protectable business interests. Not-for-profit (Churches are classified under this IRS code) corporations are entitled to protect themselves from unfair competition just as for-profit corporations can. The not-for-profit status has no effect on its ability to protect itself from unfair competition by way of non-compete agreements.

We believe that non-compete agreements should be reviewed by an attorney prior to finalization between the parties to the agreement. If in question…ask!

With the advancements with technology, cell phones, pagers and other “listed property” are being used by churches and ministry personnel. These costs are typically paid by the ministry…however…(can you hear me now???) certain calls received/made by the employee are personal. How should the ministry record the cost of these personal calls?

IRC Section 280F(d)(4) specifies that cellular phones are considered "listed property", and therefore special rules of substantiation apply to them, such as keeping logs as to use. With the cellular phone billing, however, each call is automatically logged, and therefore the billing records can provide substantiation as to use, if the calls are identified as “personal”. The personal use then should be attributed to the employee as compensation and recorded in the general ledger as follows:
DR Salaries $xx
CR Telephone expense $xx

If the personal calls are minimal, however, the de minimis rules may apply to them. Reg 1.132-6(e) states that gross income does not include the value of a de minimis fringe provided to an employee. The term “de minimis fringe" means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make the accounting for it unreasonable or administratively impracticable.

So…(can you hear me now??) Using this rule as a base, the answer really depends on the actual facts and circumstances of the particular situation. (simple huh?)

If an employee uses a ministry provided cell phone to call home to a spouse while on a ministry trip, the same rules previously discussed apply. It depends on the actual level of use. For instance, one short call home a night probably would fall into the de minimis fringe category, but lengthy and numerous calls probably should be attributed to the employee as compensation.

(Can you hear us now??)

TAX Basis for donor/donee:
The IRS, in Rev. Rule 2002-67 (addressing the fair market value of a donated auto for charitable deduction purposes) states:

One method of determining fair market value of a single donated car is by reference to an established used car pricing guide. However, a used car pricing guide establishes fair market value only if the guide lists the sales price for a car that is in the same make, model, and year, sold in the same area, and in the same condition, as the donated car.

The IRS, in Publication 17, (addressing the determination of value of an auto for casualty loss deduction purposes) says (paraphrased): Books (referred to blue books) issued by various automobile organizations are useful in figuring the value of an automobile. Taxpayers can use the retail value listed in the book for a car and modify that value by such factors as mileage and the condition of the car. The prices aren't official but suggest relative prices for comparison with current sales and offerings in the taxpayer's area.
And finally, Regulation 1.61-21(d)(5)(ii)(A) (addressing the determination of value of an automobile for personal use compensation purposes) says: A lease automobile being valued pursuant to....this section may be determined by reference to the retail value of such automobile as reported by a nationally recognized pricing source that regularly reports new and used automobile retail values, whichever is applicable. That retail value must be reasonable with respect to the auto being valued. Pricing sources consist of publications and electronic data bases.
It is clear from the above that the IRS does recognize and even encourages using a source such as the Kelly Blue Book value for purposes of determining the fair market value of an automobile as long as appropriate adjustments are made because of, for instance, options and miles on the car.

GAAP Reporting: Donated assets are recorded based on the estimated fair value of the property. Retaining documentation of the values obtained from sources, as indicated above, will maintain the “audit trail”.

A well respected pastor is retiring from his local congregation. Other local community congregations and ministries would like to honor his service by donating to the retiring pastor’s congregation for a retirement gift (cash). Is this an allowable donation from the local pastors, congregations and ministries?

Several points are critical in understanding the IRS’ intent for allowing donations…

1. If a “donor” ministry wants to support a “donee” minister in performing his ministry, it can do so as long as it contributes importantly to the donor-ministry's tax-exempt purpose. However, it will be taxable income to the recipient minister, and a 1099 should be issued.
2. If a “donor” ministry wants to support a “donee” minister or ministry in their exempt purpose and the funds are not restricted as a gift to the minister, the donation will not be taxable income to the recipient minister.

However…the practice of exchanging “gifts” among friendly pastors using ministry funds would be personal inurnment to the recipient pastor and is taxable income, reported by a 1099.
Ministries giving to ministries…when it isn’t a “donation”…coming next. Blogging again soon.

When a pastor performs services for a recipient congregation and the recipient congregation would like to “pay” the guest pastor for those services. The guest pastor has performed “services” consistent with the receipient congregation’s exempt purpose – those services are considered “professional services” and not a donation or contribution or mission expense. The funds received by the guest pastor represents taxable income, reported by a 1099.

The IRS is very particular about “services rendered” and when “services” are performed by individuals in the “line of duty” or in the ordinary course of employment – these “gifts, donations or reimbursements” represent taxable income. No if, ands or buts….

Ministries giving to ministries…can it affect excessive compensation? You betcha! See post #3 coming soon!

In our two previous posts…we’ve discussed the requirements for “donating” to other ministers and ministries. In this third posting, we will address “gifts” affecting excessive compensation…

Donations or gifts received by “visiting or guest pastors” from a recipient congregation must be included in the estimated salary for a pastor. These special speaking events can accumulate, $10,000 here, $10,000 there. These “gifts” are considered taxable income to the pastor and should be included in the annual compensation analysis of the pastor.

If a pastor receives more than $120,000 - $150,000 a year as compensation, then the board of the church of ministry is responsible for determining if the compensation is reasonable and not excessive as defined by IRS.

Concerned with excessive compensation or taxable “gifts”…e-mail us.

FACTS: Ministers are self-employed for social security purposes, that is, they pay their own social security taxes. Churches are not supposed to withhold social security taxes for ordained ministers.

OPTION: Ministers have the option as to whether or not to have federal tax withheld from their check.

Some ministers have extra AMOUNTS withheld from their checks in federal withholding to cover the social security taxes they are to personally pay FOR THE YEAR.

Also, some ministers are exempt from even paying social security taxes, IF THEY HAVE ELECTED THE EXEMPTION DURING the first two years of ministry. See IRS Form 4361.

Despite increases in gasoline prices and other necessities, Americans found a way to give 2.7 percent more to charitable causes last year than in 2004, according to a report by the American Association of Fundraising Counsel. Experts say the increase was propelled by a series of significant natural disasters including Hurricane Katrina and the tsunami in Southeast Asia, The New York Times reported in June

How are these types of contributions to be recorded, in accordance with generally accepted accounting principles?

When contributions are soliciated for designated projects or events, FAS #116 requires that these contributions be reported as either:

1.Restricted contributions and then “released to unrestricted” with the donor restriction has been satisfied or

2.Unrestricted contribution if the restriction was satisifed in the same period as receipt and if the account policy disclosed this fact.

For additional information, see FAS116.