Immanuel Baptist Church Split Highlights Need for Sound Governing Documents

Immanuel Baptist Church in Little Rock is grappling with a host of complex issues, including how to govern itself in the midst of a split.

A growing conflict within Immanuel Baptist Church, one of Arkansas’s largest and best-known churches, spotlights what happens when a church doesn’t have strong governing documents in place.

The absence of a corporate charter, constitution, or bylaws has complicated the controversy at the Little Rock-based church.

Immanuel Baptists was founded in 1892 and is a part of the Southern Baptist Convention (SBC). 

Without these documents, the church faces an uphill battle regarding the status of Lead Pastor Steven W. Smith.


Does your church lack a charter, or bylaws? We can help – church incorporation and bylaw creation are covered extensively in Richard Hammar’s Church Governance – What Leaders Must Know to Conduct Legally Sound Church Business.


Rooted in child abuse allegations

Smith faces criticism for how he handled a pair of child abuse allegations. A 2015 case involved a former staff member and came to light a year after Smith took the pulpit in 2017. The other, from 2020, involved a former music ministry volunteer.

A seemingly even-split congregation, coupled with its high-profile status, has led to ongoing coverage by the Arkansas Democrat-Gazette, the state’s largest newspaper. Its membership ranks over the years have included former President Bill Clinton. 

About 200 people have recently left the church, which averages 925 in weekly attendance, the paper recently reported.

In January, expenses exceeded receipts by more than $100,000.

The value of governing documents

Governing documents typically include both a corporate charter and a constitution or bylaws.

A corporate charter, born out of an incorporation process with the state’s secretary of state, deals mostly with a church’s physical location, founding members, and doctrinal tenets. 

A constitution or bylaws lay out the rules governing a church’s internal affairs. Those rules guide, among other things: 

  • Membership qualifications
  • Voting rights and privileges
  • Meetings, including notices, timing, and quorum requirements
  • Hiring or terminating staff members, including pastors
  • Formation of committees, such as personnel and finance
  • Selection of individuals and scope of authority for the church’s governing board

Some denominations use a hierarchical structure, meaning bylaws are set by the national organization and followed by its local churches. 

Other denominations and associations of churches, including the SBC, leave governing structures up to their local churches.

When a nonprofit or church lacks formal rules, or remains silent on specific ones, a state’s Model Nonprofit Corporation Act often fills in gaps. It can also be used by courts to determine whether decisions made by an entity were proper. 

However, First Amendment considerations prevent such gap-filling when issues related to doctrine or theology arise. This includes who a church calls to serve as its pastor.

Immanuel Baptist’s challenge

Without governing documents, and with a congregation that is evenly split, what happens next at Immanuel Baptist is uncertain. 

The church’s website describes Immanuel Baptist’s structure as a “congregational polity.” 

“In a congregational structure, the larger decisions are made by the congregation,” it continues. “Larger issues would include the approval of the annual budget, the approval of the quarterly financial statement, the calling of the pastor, and the purchase of property.” 

However, specific rules regarding the processes for formally making those decisions are not stated. This ambiguity has led to turmoil.

Some of the church’s 61 deacons have called for Smith’s resignation. A “no-confidence” vote—first tabled in early February, prompting eight deacons to resign—eventually took place on February 19 and slightly favored Smith. 

Meanwhile, some Immanuel members have filed complaints with the SBC’s Credentials Committee.

The committee is responsible for determining whether churches are in “friendly cooperation” with SBC causes and doctrine, according to the Arkansas Democrat-Gazette.

A possible solution

Since the matter involves Smith’s role as a pastor, the Arkansas Nonprofit Corporation Act cannot be used to create a decision-making process regarding his employment. 

And any ensuing legal action taken by either side to challenge the outcome will almost certainly get dismissed by a court under the ministerial exception doctrine

However, one possible solution exists, said Sarah Merkle, an attorney and senior editorial advisor for Church Law & Tax.

Markle is one of a only a few Certified Professional Parliamentarian-Teachers and Professional Registered Parliamentarians in the country. 

“I would have the congregation get together and adopt a set of rules to govern the process,” Merkle said. “They could do that by giving notice of the rules ahead of the meeting where they are proposed and requiring a super majority for adoption.”


Church Law & Tax partnered with Sarah Merkle in 2023 to bring you “Mastering Meeting Basics,” a five-step guide for planning, scheduling, and managing official church meetings.


A super majority would require approval by two-thirds of the votes cast by voting members present at the meeting.   

“If members can agree on a fair framework for making a decision, they can likely find their way out of this situation,” Merkle added.

Matthew Branaugh is an attorney, and the content editor for Christianity Today's Church Law & Tax.

Advantage Members

Making a Case for Church Trademarks

Making a case for church trademarks is not only about sound legal principles, but marking differences in church doctrine.

Imagine buying a can of Kapow!, cracking it open, tipping it to your mouth and tasting something oddly unfamiliar—dissimilar from every can of Kerpow! that you have ever purchased.  

The cans look alike and promise a similar effect. You did not notice a couple letters’ difference in the name. Confidence shaken, you hesitate to buy another can the next time you are thirsty and instead look for a substitute. This dilemma is what trademarks and service marks are intended to avoid. 

Why churches should consider trademarks

Consumers begin to associate marks with particular kinds and qualities of products and services not only in the for-profit sector, but also the non-profit sector. 

The mark relieves the consumer of the inconvenience of undertaking due diligence on every product and service available. 

Which is to say, the consumer can defer to the mark owner the obligation (i) to ensure its can of Kerpow! will look and taste the same as every other can, and (ii) to police imposters and knock-offs.  

Like it or not, the public comes to associate the names and logos of churches, associations of churches, and denominations with certain doctrinal, liturgical, worship, and other distinctives just as it associates them with secular products and services.  

Some see religious “brands” as commercializing that which is holy, which is sacrilegious. But there are important reasons why churches, associations, and denominations may want to look at word marks and design marks from a different vantage point.  

A word mark is just that, a word or set of words used to identify goods or services, ranging from a product on a store shelf to a particular association, organization or denomination. If a potential parishioner were to see a sign that says “Presbyterian Church,” they should know what to expect when they walk inside.

Design marks are logos or symbols that serve as shorthand brand signals.  Often, logos are designed to catch a potential customer’s (or congregant’s) eye as they pass by.

Doctrinal implication for churches

The most important distinctive and theological apologetic for a word mark may be doctrinal.  

A churchgoer will be as surprised as the consumer purchasing a can of Kapow! if the experience proves unfamiliar. The consequences may be similar to when the visitor considers returning the following week. Just as counterfeit products may have different ingredients, churches with confusingly similar names may adhere to different statements of faith, moral commitments, and worship styles.  

Recognizing this, a federal court ruled that the Episcopal Church in South Carolina is the rightful owner of the names “Diocese of South Carolina,” “The Episcopal Church,” and “The Episcopal Diocese of South Carolina,” as well as the Episcopal shield and the diocesan seal. Ordered to cease using the names, the “Anglican Diocese of South Carolina” has now come to stand for more conservative theology. 

Even small congregations have challenged alleged usurpation of trademarked terms like “Mighty Men” or defended against efforts by commercial brands to cancel their mark and use similar ones.


Explore copyright basics, duration, rights and remedies in Richard Hammar’s Essential Guide to Copyright Basics.


Four elements of trademarking

Churches interested in trademarking must consider four elements.  

1. The mark must be distinctive.  

Marks can be “word marks” in standard character format without regard to the font, style, size, or color, or they can be “design marks” comprising a graphic design or image with or without wording such as a stylized logo. The term “church” is not distinctive and cannot be monopolized as a word mark, but can be disclaimed as part of a phrase with other unique words or when presented as part of a logo to give a “distinct commercial impression.”  

2. A trademark or service mark cannot conflict with any other mark because of confusing similarity.  

Marks do not have to be identical to violate this requirement.  All that is required is for marks to share elements of spelling or style that would lead a reasonable observer to believe the marks such as Kapow! and Kerpow! are related.

3. The mark must be used in commerce. 

“Use in commerce” means bona fide use of a mark in the ordinary course of trade, and not merely to reserve a right in a mark. Churches engage in commerce along with other nonprofits when advertising, buying, selling, and offering products and services as on the church marquee, in the church bookstore, or online. When mark usage is de minimis (or trivial), churches risk challenges to the mark to cancel it.  

4. A mark must be a source identifier for products or services.  

Put another way, the mark must represent the church, such that every time a churchgoer visits a church utilizing the word mark or design mark, the distinctive aspects of that church are present. Some modern church attendees will never have physically attended a church and know it only by its published name, logo, and image. 

Church plants

Viewed as intellectual property, marks are an important tool to ensure churchgoers are not confused. This is especially true with church plants as they establish themselves in their communities.  

The ® symbol indicates that a word, phrase, or logo is a registered trademark for the product or service.  

The ™ symbol is used in connection with an unregistered mark to provide notice to potential infringers that rights in the mark are claimed in connection with specific goods or services.

Because marks can be licensed, a mark licensor such as The Episcopal Church in South Carolina has the legal right to prevent a member church that fails to adhere to the licensor’s standards from continuing to use the mark.  

By analogy, if a franchise operator does not follow a franchisor’s recipes, purchase the franchisor’s ingredients or products, conform with the franchisor’s staffing and management models, or maintain its facility according to the franchisor’s standards, then the franchisor will prevent the franchisee from continuing to use its mark. 

Churches, associations and denominations

Churches, associations, and denominations can utilize the same licensing rights to police sound doctrine and other standards.

Intellectual property rights in connection with a mark can arise by usage under the common law specific to a geographic area. 

Some states also enable organizations to register marks statewide. But the surest way to protect a mark nationally and internationally is to register it with the United States Patent and Trademark Office. Registrants also need to defend and police their registration, meaning that they will need to review or hire counsel or others to make sure new applicants for marks or users of marks do not infringe their own marks.

Imposters, knockoffs, copycats, counterfeits, and fakes are not unique to the commercial sector—churches are also vulnerable to them.  

Trademarks and service marks are intellectual property rights that can confer the same beneficial rights on churches as other organizations. They are an effective means of (i) distinguishing themselves from other religious institutions and commercial enterprises and (ii) deterring fraud, while (iii) preserving their doctrinal and worship distinctives.

Intellectual Property Attorney Thomas W. Brooke contributed to this article. He is a partner in Holland & Knight’s Washington, D.C. office.

Dr. Nathan A. Adams IV is a partner at Holland & Knight. His practice includes representing nonprofit and religious organizations on a variety of matters, including the First Amendment, the ministerial exception, church autonomy, and board and governance issues.

Asked, Answered: Expense Reimbursements for Church Employees

In this two-minute video, Matt Branaugh highlights why expense reimbursements for church employees require special attention and care.

Last Reviewed: March 21, 2024

A recent Legal Development out of federal tax court highlights the importance of properly handling expense reimbursements for church employees.

In it, a pastor and his wife, though acting in good faith, claimed about $37,000 in unreimbursed business expenses for items such as vehicle mileage, travel expense, business meals.

However, after examination their claim, the IRS disallowed the deductions.

The primary reason? The couple failed to properly substantiate their expenses.

Meanwhile, as Matt Branaugh explains in this short video, churches and church employees can avoid wallet—and heart—breaking scenarios like these through the use of accountable reimbursement plans.

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If you’re not up to speed on accountable reimbursement arrangements (which are sometimes also called accountable reimbursement plans), don’t worry, Church Law & Tax members enjoy plenty of access to resources on this topic, including:

For Basic and Advantage Members: Understanding four specific requirements for setting up an accountable reimbursement arrangement.

For Advantage Members: A Q&A with Senior Editorial Advisor, CPA, and attorney Frank Sommerville about how tax reform has affected accountable reimbursement arrangements.

7 Keys to Pastoral Retirement Planning

A wide range of legal, financial, and tax issues come into play in the area of pastoral retirement planning.

Occasionally, a church that has failed to do any pastoral retirement planning will begin making payments directly to the pastor after his or her retirement (and in some cases to the pastor’s spouse if he or she survives the pastor). 

For example, assume Pastor T was employed by a church for 30 years preceding his retirement in 2023, and that the church never established a retirement program for him. 

Embarrassed by the lack of provision for the pastor’s retirement, the church board enacts a resolution to pay him $5,000 per month until he dies. 

However, there are several important legal and tax issues that church leaders should address before finalizing such an arrangement, and the assistance of a tax attorney or CPA is recommended. 

Editor’s note: In this article, “informal retirement agreement” refers to an unenforceable agreement by a church to make a lump sum or monthly payments to a retired minister

Pressed for time? Click these links to jump ahead by topic:

1. Are informal retirement plans legally enforceable?

2. Taxable income or tax-free gift?

3. Nonqualified deferred compensation

4. More on Section 409A

5. Section 403(b) tax-sheltered annuities

6. Excess benefit transactions

7. Housing allowances

1. Are informal retirement plans legally enforceable?

Key point. Financial commitments made by a church to a staff member are legally enforceable only if the church receives something of value (“consideration”) in return. 

Many informal retirement agreements are legally unenforceable for one or both of the following reasons:

Consideration

Consideration is a legal requirement for any contract. Without it, a purported contract is not legally enforceable. 

What, then, is consideration, and why is it important? 

First of all, consideration is a fundamental requirement in any contract. 

It  means that for a contract to be legally enforceable, each party agrees to do something and must receive something of value in exchange. 

That “something of value” is called consideration. There is no enforceable contract without it. 

The issue of consideration often arises in evaluating the enforceability of commitments by churches to make distributions of cash or other benefits to retired ministers or their spouses. 

Consider an actual case: 

Pastor Dave served as senior pastor at a Baptist church in Tennessee (the “church”) from 1981 until he died in 1995. 

In return for his services, the church paid Pastor Dave a salary and various fringe benefits, including cell phone services, lawn services, and vehicle maintenance. 

At Pastor Dave’s request, the church orally agreed to provide most of these benefits directly to his wife, Darla. Before his death, Pastor Dave spoke to several deacons of the church and asked the church to provide for his wife if the church was able to do so. 

The church entered into an agreement with Darla to provide her with $785 on the first and third Sunday of every month until 2010. The church also agreed to provide lawn services for her residence. 

Pursuant to the agreement, these benefits would continue until one of two terminating events occurred: (1) her death; or (2) she remarried. However, if she remarried within five years of the inception of the contract, she would continue to receive these benefits for five years. If she remarried five years or more after the inception of the contract, she would no longer receive any benefits. 

The church discontinued making payments to Darla in 1996.

Darla sued the church and the board of deacons for breach of contract. 

A trial court dismissed all of Darla’s claims on the ground that the church’s obligations under the “contract” were unenforceable because it had not received anything of value (i.e., “consideration”) from Darla for its substantial commitments under the contract. This meant the church was legally justified in terminating its payments to Darla.

A state appeals court affirmed the trial court’s ruling.

This case illustrates an important legal principle. Commitments made by churches to current or former employees, or their spouses, may not be legally enforceable if the church receives nothing of value (consideration) in return for its commitments. There are some exceptions to this rule, such as the doctrine of promissory estoppel, but these will not be available in all cases. 

Cochran v. Robinwood Lane Baptist Church, 2005 WL 3527627 (Tenn. App. 2005).

Statute of frauds

The statute of frauds requires certain contracts to be in writing in order to be enforceable. 

Every state, by statute or court decision, has adopted the statute of frauds, with slight variations. 

Under the statute of frauds, an alleged contract that cannot be fully performed within one year is void if its central terms are not in writing. 

The purpose of the statute of frauds is to prevent fraud in commercial transactions. 

However, there is no exemption for churches. 

Church leaders, therefore, should carefully consider the potential application of the statute of frauds to any legal agreement that is not in writing.

In other words, a church’s agreement to provide a monthly retirement stipend to a pastor, or a pastor’s spouse, generally must be in writing if it cannot be fully performed within one year. An unwritten commitment by a church to pay a retirement stipend is therefore unenforceable. A church can honor its unenforceable commitment, but if it discontinues doing so for any reason, the pastor (or spouse) has no legal recourse.

Authority of signatory to bind the church

In some cases, a church’s written agreement to pay a monthly retirement stipend is signed by a board member or corporate officer having no legal authority to do so. 

Under these circumstances, the “agreement” is unenforceable.

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2. Taxable income or a tax-free gift?

It is common for churches to present a retiring minister with a retirement gift in the form of a substantial lump sum payment, or a series of annual installments to the minister, and in some cases to a surviving spouse. 

Such “informal retirement agreements” often are prompted by the church’s failure to provide adequately for a pastor’s retirement. 

Such gifts can be very generous, which raises the question of their tax status. 

Should the church report them as taxable compensation and include them on the recipient’s Form W-2? Or can the church treat them as nontaxable gifts? 

This question has vexed church boards for many years. 

In a series of cases, four federal appeals courts concluded that certain retirement gifts to ministers were tax-free gifts rather than taxable compensation. 

(1) Schall v. Commissioner, 174 F.2d 893 (5th Cir. 1949)

A federal appeals court ruled that a church’s retirement gift to its pastor represented a tax-free gift rather than taxable compensation. The pastor was forced to retire on the advice of his physician as a result of a long illness. He made no request of the congregation that any amount be paid to him after his resignation, and he had no knowledge that the church would agree to do so. He did not agree to render any services in exchange for the gift and did not do so. 

The court concluded:

We are of opinion the Tax Court clearly erred in holding that the payments to [the pastor] were taxable income. Where, as here, all the facts and circumstances surrounding the adoption of the [gift] clearly prove an intent to make a gift, the mere use of the terms “salary” and “honorarium” do not convert the gift into a payment for services. Moreover, “a gift is none the less a gift because inspired by gratitude for past faithful service of the recipient. . . .” Manifestly, these payments to [the pastor] were non-taxable gifts, within the orbit of the rule defining same, as enunciated by this court in [another case]: “That only is a gift which is purely such, not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection or regard or pity, or from general motives of philanthropy or charity.”

(2) Mutch v. Commissioner, 209 F.2d 390 (3rd Cir. 1954)

A federal appeals court ruled that monthly retirement gifts made by a church to its retired pastor were tax-free gifts rather than taxable compensation. 

The court noted that the church’s action in providing for the monthly honoraria “was motivated solely and sincerely by the congregation’s love and affection for [the pastor].” The court described the church’s action as a “free gift of a friendly, well-to-do group who as long as they were able and because they were, wished their old minister to live in a manner comparable to that which he had enjoyed while actively associated with them.” 

The court also observed: 

[The pastor] had been adequately compensated as far as money could for his services in the past. He was not being tied into any promise of services in the future. The installment gift, while it could be stopped or changed at any time by the trustees, had no conditions attached to its acceptance. The court concluded that no other ruling “justifies the taxing of this bona fide gift given [the pastor] with love and affection by his old congregation.”

(3) Kavanagh v. Hershman, 210 F.2d 654 (6th Cir. 1954)

A federal appeals court, in a one-paragraph opinion, ruled that a distribution of funds to a minister was a tax-free gift rather than taxable compensation. The court based its decision on the Mutch decision (summarized above).

(4) Abernathy v. Commissioner, 211 F.2d 651 (D.C. Cir. 1954)

The Abernathy case was a one-paragraph decision issued by a federal appeals court in 1954. 

The ruling addressed the question of whether a $2,400 retirement gift paid by a church to its pastor “as a token of its gratitude and appreciation” and “in appreciation of his long and faithful service” represented taxable income or a tax-free gift. 

The federal court concluded that the transfer was a tax-free gift. It cited (without explanation) the Schall, Mutch, and Kavanagh decisions (summarized above) along with Bogardus v. Commissioner, 302 U.S. 34 (1936) (discussed below).

The IRS in 1955 endorsed the four cases summarized above because of the following facts in each case: 

  1. “the payments were not made in accordance with any enforceable agreement, established plan, or past practice”; 
  2. the minister “did not undertake to perform any further services for the congregation and was not expected to do so” following his retirement; 
  3. “there was a far closer personal relationship between the [minister] and the congregation than is found in lay employment relationships”; and 
  4. “the available evidence indicated that the amount paid was determined in light of the financial position of the congregation and the needs of the recipient, who had been adequately compensated for his past services.”

(Revenue Ruling 55-422)

Given the age of the  four federal appeals court rulings addressing retirement gifts to ministers, what is their status? 

Note the following:

First, the IRS has never revoked, modified, declared obsolete, or distinguished Revenue Ruling 55-422.

Second, the ruling was quoted with approval as recently as 1995 by the United States Tax Court. Osborne v. Commissioner, 69 T.C.M. 1895 (1995). 

Third, IRS Audit Guidelines for Ministers (2009) contain the following statement: “There are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services. Revenue Ruling 55-422 discusses the fact pattern of those cases which would render the payments as gifts and not compensation.” This appears to be an explicit recognition that Revenue Ruling 55-422 continues to accurately reflect the law.

Fourth, other federal courts have affirmed the tax-free status of retirement gifts made to ministers. 

To illustrate, in Brimm v. Commissioner, 27 T.C.M. 1148 (1968), the United States Tax Court ruled that a severance gift made by a church-affiliated school to a professor was a nontaxable gift rather than taxable compensation. The professor (the “taxpayer”) was employed by a church-related, two-year graduate school supported by the Southern Baptist Convention. It became apparent that, because of low enrollment and the high cost of operations, the school would have to be closed. Before  the school’s dissolution, its board of trustees adopted a resolution authorizing “a gift equivalent to one year’s salary to each faculty member and staff member upon termination of his or her services with the school.” Pursuant to this policy, the taxpayer received a “gift” of $8,600 in two annual installments bearing the notation “severance gift.” The taxpayer did not report the two installments as taxable income on his tax returns because he regarded them to be a tax-free gift rather than taxable compensation for services rendered.

The IRS audited the taxpayer’s tax returns and determined that the severance gifts constituted taxable income. 

On appeal, the Tax Court concluded that the severance payments were, in fact, nontaxable gifts:

It is clear from the evidence that the board of trustees of the school took their action in declaring and making a severance gift to the taxpayer, as well as to other members of the small staff, because they were grateful and appreciative of the past faithful and dedicated service rendered to the school.” The court noted that the presence of affection, respect, admiration, and a deep sense of appreciation in the minds of trustees was demonstrated by the testimony of a member of the board who testified that the severance gifts were not intended to represent additional compensation but were authorized solely as a means of showing appreciation to the faculty and that there was no expectation of additional services being performed in return for the severance gifts.

The court concluded:

There is no doubt that the school’s trustees were motivated by gratitude for the taxpayer’s past faithful services, but, as the Supreme Court said in [the Bogardus case] “a gift is none the less a gift because inspired by gratitude for past faithful service of the recipient.” Indeed, long and faithful service may create the atmosphere of goodwill and kindliness toward the recipient which tends to support a finding that a gift rather than additional compensation was intended. . . . We hold that the school intended to make, and did make, a gift which was made gratuitously and in exchange for nothing.

Key takeaway: Taxpayers generally are not liable for penalties if they rely on a published court decision in support of a tax position. Since the four 1950s cases summarized above have never been overruled, they probably would prevent a minister from being assessed penalties as a result of treating a retirement gift as nontaxable. However, the IRS likely will insist that the entire value of the retirement gift represents taxable income, forcing the minister to still pay taxes on it.

Other cases addressing retirement gifts

(1) Commissioner v. Duberstein, 363 U.S. 278 (1960)

The United States Supreme Court weighed in on a case involving a $20,000 retirement gift made by a church to a retiring lay officer. The church’s board approved the gift, characterizing it as “gratuity” and specifiying it was given “in appreciation for services rendered.” The Supreme Court freely admitted the difficulty of distinguishing between tax-free gifts and taxable compensation. But it noted  “a gift in the statutory sense . . . proceeds from a detached and disinterested generosity . . . out of affection, respect, admiration, charity, or like impulses. . . . The most critical consideration . . . is the transferor’s intention.”

The Court also observed an objective inquiry must be made to decide “whether what is called a gift amounts to it in reality.”

(2) Bogardus v. Commissioner, 302 U.S. 34 (1936)

The Supreme Court noted:

What controls is the intention with which payment, however voluntary, has been made. Has it been made with the intention that services rendered in the past shall be requited more completely, though full acquittance has been given? If so, it bears a tax. Has it been made to show good will, esteem, or kindliness toward persons who happen to have served, but who are paid without thought to make requital for the service? If so, it is exempt.

(3) Perkins v. Commissioner, 34 T.C. 117 (1960)

The Tax Court ruled that pension payments made by the United Methodist Church to retired ministers constituted taxable compensation rather than tax-free gifts. The court concluded that the pension payments could not be characterized as tax-free gifts, since they did not satisfy all of the conditions specified by the IRS in Revenue Ruling 55-422 (discussed above). 

(4) Joyce v. Commissioner, 25 T.C.M. 914 (1966)

The Tax Court ruled that retirement payments made by the General Conference of Seventh-Day Adventists to the widow of a former minister represented taxable income and not tax-free gifts. The General Conference issued the widow Forms 1099-MISC reporting the payments as taxable income. However, in reporting her taxes, the widow treated the payments as nontaxable gifts. The court noted that “the ultimate criterion” in resolving such cases is “the basic or dominant reason that explains the action of the transferor.” How is this “basis or dominant reason” to be determined?

The court listed the following considerations:

  • To constitute a gift the benefits paid must proceed from a “detached and disinterested generosity” or “out of affection, respect, admiration, and charity or like impulses.”
  • “The absence of a legal or moral obligation to make such payments . . . or the fact that payments are voluntary . . . do not [necessarily] establish that a gift was intended. However, payments which do proceed from a legal or moral obligation are not gifts.”
  • “Additional factors, which militate against a determination that gifts were intended, have been findings: (1) that a plan or past practice of payment was in existence; (2) that the needs of the widow were neither the prerequisite for, nor the measure of payment; and (3) that the transferor considered the payment as compensation, including the withholding of income tax.”

The court acknowledged that “in determining that certain payments constituted gifts, courts have seized upon the following: that payments were made directly to the widow rather than to the estate; that the widow performed no services for the transferor; that full compensation had been paid for the services of the deceased husband; and that the transferor derived no benefit from the payment.”

The court concluded that the payments made to the widow in this case represented taxable income. 

  • The benefits paid were fixed according to a computation based on length of service–a formal plan. 
  • There was no inquiry into her financial condition. 
  • The payments were “based on a computation which ignores financial condition” without considering the widow’s financial status. 
  • The General Conference itself treated the payments as taxable income by issuing the widow Forms 1099-MISC. 
  • And, the church “recognized a moral obligation to make such payments to those employees, and their widows, who have loyally rendered service to the church. This fact alone has been held sufficient to prevent payments from constituting gifts.”

The court also acknowledged that the payments were made directly to the widow and that she did not perform any services for the church. It rejected the widow’s argument that this factor required the payments to be treated as gifts to her, since she had otherwise failed to overcome all of the other factors supporting the court’s decision that the payments were taxable.

Caution:Church leaders should not treat retirement gifts to clergy as nontaxable distributions on the basis of the precedent cited above without first obtaining the assistance of a tax professional.

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3. Nonqualified deferred compensation

Section 409A of the tax code imposes strict requirements on most “nonqualified deferred compensation plans” (NQDCs). 

The IRS’s final regulations interpreting 409A include any plan that provides for the deferral of compensation, with some exceptions. 

This definition is broad enough to include rabbi trusts and many other kinds of church compensation arrangements. 

Any church or other organization that is considering a rabbi trust (or any other arrangement that defers compensation to a future year) should ask a tax attorney or CPA to review the arrangement for compliance with both section 409A and the final regulations. 

Doing this will protect against the substantial penalties the IRS can assess for noncompliance. 

It also will help clarify whether a deferred compensation arrangement is a viable option in light of the limitations imposed by section 409A and the final regulations.

NQDC plans are rarely used by churches because so few ministers are able to contribute the maximum amount each year to a 403(b) or other qualified plan. 

For example, in 2024, ministers who are 50 years old or older can contribute up to $30,500 to a 403(b) plan. 

This amount, and any gains realized, are tax-deferred. 

Only for those few ministers who are able to contribute more than this amount does an NQDC plan make sense.

Key point: The “limit on annual additions” (the combination of all employer contributions and employee elective salary deferrals to all 403(b) accounts) generally is the lesser of: (1) $69,000 in 2024, or (2) 100-percent of includible compensation for the employee’s most recent year of service. Generally, includible compensation is the amount of taxable wages and benefits the employee received in the employee’s most recent full year of service. 

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4. More on Section 409A

Section 409A of the tax code governs NQDC arrangements. 

More specifically, section 409A provides that all amounts deferred under an NQDC plan for all taxable years are currently includible in gross income (to the extent the amounts are not subject to a substantial risk of forfeiture and were not previously included in gross income) unless certain requirements are satisfied. 

All plans must be in compliance with 409A regulations, both in form and operation. 

If section 409A requires an amount to be included in taxable income, the tax code imposes a substantial additional tax assessed against the employee, and not the employer recipient. 

Employers must withhold income tax on any amount includible in gross income under section 409A, with the possible exception of NQDC plans established for ministers, since ministers’ church compensation is exempt from withholding.

Section 409A also provides that “failed deferrals” under an NQDC plan (deferrals that become includible in the employee’s income due to a violation of section 409A) must be reported separately on Form W-2 (box 12, code Z).

So, what requirements does section 409A of the tax code impose on NQDC plans? 

There are several, and they are highly complex. 

Church leaders contemplating the deferral of compensation that an employee earns in the current year to a future year should address the following four points:

  1. If your church is considering the deferral of compensation for an employee beyond the current year, such as in a severance agreement, rabbi trust, or informal retirement plan, you need to understand that complex rules now apply to such arrangements (nonqualified deferred compensation plans), and the employee may be subject to significant penalties (including back taxes plus a 20-percent tax) if the requirements spelled out in section 409A are not met.
  2. Penalties may be avoided if a deferral arrangement meets the requirements of section 409A.
  3. Any church contemplating the deferral of an employee’s compensation to a future year should first consult with a tax professional for assistance in complying with the section 409A requirements.
  4. Section 409A contains some exemptions that may apply, depending on the facts and circumstances. A tax professional can assist in evaluating the possible application of these exemptions.

Key point: Any church or other organization that has entered into a rabbi trust or any other informal retirement arrangement that defers compensation to a future year should contact an attorney to have the trust or other arrangement reviewed. Doing this will protect against substantial penalties. It also will help clarify whether a rabbi trust or other deferred compensation arrangement remains a viable option in light of section 409A and the IRS regulations.

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5.  Section 403(b) tax-sheltered annuities

One of the most popular retirement plans for church employees is the 403(b) plan (sometimes called a tax-sheltered annuity). 

Such plans permit employees of churches and other public charities to make nontaxable contributions to their 403(b) retirement account up to the allowable limits prescribed by law. In addition, earnings and gains on 403(b) accounts are tax-deferred, meaning that they are not taxed until distributed.

A 403(b) plan has several tax advantages:

  • You do not pay tax on contributions to your 403(b) plan in the year they are made. 
  • Earnings and gains on your 403(b) plan are not taxed until you withdraw them, usually after you retire. Earnings and gains on amounts in a Roth 403(b) contribution program are not taxed if your withdrawals are qualified distributions.
  • You may be eligible to claim a “qualified retirement savings” tax credit (the “saver’s credit”) for contributions to your 403(b) plan made by salary reduction.
  • Churches and church pension boards that offer 403(b) plans can designate a portion of a retired minister’s distributions as a housing allowance.

Key point: The amount that can be invested in a 403(b) account is so generous that there is little justification for utilizing alternatives that may expose a church to liability if conditions are not met. Such alternatives, some of which are addressed in this article, should not be considered if a church’s contributions to an informal retirement plan are less than the 403(b) plan limits.

As noted above, NQDC plans are rarely used by churches because so few ministers are able to contribute the maximum amount each year to a 403(b) or other qualified plan. To illustrate, for 2024, ministers who are 50 years of age or older can contribute up to $30,500 to a 403(b) plan. This amount, and any gains realized, are tax-deferred. Only for those few ministers who are able to contribute more than this amount does an NQDC plan make sense.

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6. Excess benefit transactions

Section 4958 of the tax code authorizes the IRS to impose an excise tax against a “disqualified person” (an officer or director of a tax-exempt charity or a relative of such a person) if the church pays excessive compensation to them. 

(Excise taxes can also be imposed against individual board members, in some cases.)

These taxes are substantial—up to 225 percent of the amount of compensation the IRS determines to be in excess of reasonable compensation.

As it pertains to churches, most senior pastors are disqualified persons. . 

Therefore, governing boards or other bodies responsible for setting clergy compensation should be prepared to document any amount that may be viewed by the IRS as excessive. This includes salary, fringe benefits, and special-occasion gifts. 

When in doubt, consult a tax attorney.

For example, a church board establishes an informal plan calling for the payment of $25,000 per year to the pastor upon his retirement. 

The church treasurer assumes that these payments are non-taxable and doesnot report them as taxable compensation. However, if the IRS determines that these payments are taxable, they constitute automatic excess  benefits. And this exposes the pastor, and possibly members of the church board, to substantial excise taxes.

Important note: The IRS deems any taxable fringe benefit provided to a disqualified person, such as no additional discounts for the pastor’s kids to attend church camp or church bookstore discounts, to be an “automatic excess benefit” that may trigger the excise tax on excess benefit transactions, regardless of the amount of the benefit, unless the benefit was timely reported as taxable income by either the recipient or the employer.

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7. Housing allowances

Can a church that adopts an informal retirement plan for a retired pastor designate some or all of the payments made under the plan as a housing allowance? 

This question is addressed in Revenue Ruling 72-249. The IRS concluded that payments made to a retired minister under an informal retirement agreement are nontaxable. 

However, payments made by the church to the pastor’s widow following his death, were taxable.

The background:

Shortly before a pastor retired, the governing body of the church he pastored authorized a monthly payment upon his retirement. These payments were to continue until his death, with survivor benefits for his wife. The authorization designated a portion of the payment as a rental allowance. 

The wife was not a minister of the gospel, and she did not perform any services for the church.

The IRS concluded:

Until his death, and to the extent used to provide a home, the rental allowance paid to the retired minister was excludable from his gross income since it was paid as part of his compensation for past services and it was paid pursuant to official action of his church. 

However, the rental allowance exclusion does not apply to amounts paid to his widow since it does not represent compensation for services performed by her as a minister of the gospel.

This ruling suggests that local churches can designate housing allowances out of retirement distributions paid to a retired minister under a church-sponsored plan. 

But a church cannot designate a housing allowance out of funds distributed to a deceased pastor’s widow unless he or she is a minister and the distributions constitute payment for ministerial services.


Housing allowances are always a hot topic for those visiting Church Law & Tax! Give this Recommended Reading list a scan for more on housing allowance basics.


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Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Dept. of Labor Rolls Back Independent Contractor Test Rules

The new rules undo the Trump-era independent contractor test, and focus on economic independence as the “ultimate inquiry.”

The US Department of Labor (DOL) recently adopted new regulations that again change the independent contractor test under the Fair Labor Standards Act. 

The new regulations essentially undo Trump administration regulations enacted in 2021.


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New rule stresses economic independence

The DOL test is effective March 11, 2024. 

In many respects, it reverts the test to its pre-2021 status. 

The 2024 rule stresses that economic dependence is the “ultimate inquiry.” 

This means that a worker is an independent contractor if the worker “is, as a matter of economic reality, in business for themself.” 

This determination is made by looking at the totality of the circumstances to determine whether the worker is economically dependent on the company, and no one factor is controlling. 

The factors include:

  1. the degree of the hiring entity’s right to control how the work is to be performed;
  2. the worker’s opportunity for profit or loss depending upon their managerial skill;
  3. the worker’s investment in equipment or materials required for their task or their employment of others to assist with the work;
  4. whether the service rendered requires a special skill;
  5. the degree of permanence of the working relationship; and
  6. the extent to which the service is rendered is an integral part of the hiring entity’s business.

Most employers do not realize that federal and state employment laws offer differing definitions for separating employees from independent contractors

And the IRS still has a different test. 

ABC test

The practical problem is that most employers will classify workers as independent contractors without considering the differing tests. 

If the worker is an independent contractor for tax purposes, it will issue a Form 1099-NEC and ignore the other tests. 


Fun Fact: The Internal Revenue Code contains 16 different definitions of employee for differing purposes. 


Since the DOL and IRS tests are challenging to apply, most states have adopted the ABC test. 

The ABC test is designed to make most workers employees. 

This test looks at (A) the degree of control the company exerts over the details of the work being performed, (B) whether the service performed is integral to the company’s business, and (C) whether the worker regularly performs a similar service for other companies.   

Churches and ministries will be best served using the ABC test. 

Is a worker considered an employee under the ABC test? If so, it’s likely they’ll be classified that way under all employment and tax laws.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

Key Tax Developments for 2024

A number of key tax developments in 2023 will affect church and clergy taxes in 2024.

A number of key tax developments in 2023 will affect church and clergy taxes for 2024.

As always, the Church Law & Tax team is at the forefront of identifying, and explaining, what these important developments mean to pastors and church leaders.

Ten developments, in particular, caught our collective eye. They are:

  1. No new legal challenges to the housing allowance
  2. No changes to social security exemption revocation rules
  3. Income limits for those working after retirement in 2024
  4. Inflation adjustment for 2023 tax returns
  5. Maximum earned income credit for three or more qualifying children
  6. Simplified definition of a highly compensated employee
  7. IRS strips nonprofit of its tax-exempt status
  8. IRS calls off unannounced taxpayer visits
  9. IRS addresses inurement, intermediate sanctions, and the definition of a church
  10. IRS revokes tax-exempt status of a religious charity

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Video: Seven Common Tax Errors

In this exclusive video, Matt Branaugh and Rich Hammar discuss the seven common tax errors many churches and pastors make.

Attorneys Matt Branaugh and Rich Hammar hopped on camera to tackle seven common tax errors churches and church leaders make.

In this 20-minute companion to “Top 10 Tax Developments for Churches and Clergy in 2024,” Branaugh and Hammar call on case law, IRS guidance, and practical experience as they discuss why these errors are so common. They also touch on why they carry such large implications for church boards, pastors, and lay leaders. And they share a few helpful hints on correcting, if not avoiding, these errors in the future.


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By the way, the seven common tax errors are:

  • Failing to Set a Housing Allowance
  • Not Having an Accountable Reimbursement Plan
  • Not Treating Clergy as “Self-Employed” for Social Security
  • Trying to Avoid Paying FICA
  • Treating Non-Ministers as Ministers for Tax Purposes
  • Ignoring the Tax Implications of “Love Gifts”
  • Ignoring the Tax Implications of “Loans”
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And if you’re wondering about how costly tax errors can truly be, review this 2023 legal development from Rich Hammar. It details the case of how a clerical error cost an Oregon church its tax exemption.

Five Key Tax Developments for Churches and Clergy in 2024

These tax five developments for churches and clergy included inflation adjustments and redefining highly compensated employees.

Church Law & Tax identified five key tax developments in 2023 that will affect church and clergy taxes for 2024

They are:

No change to the housing allowance

In March 2019, a federal appeals court rejected an atheist group’s challenge to the constitutionality of the housing allowance. The atheist group did not appeal this ruling, and there have been no further legal challenges. 

Revoking an exemption from Social Security

Congress has created three limited windows of time since 1977 to allow ministers who exempted themselves from self-employment taxes by filing a timely form 4361 with the IRS to revoke their exemption. The latest was in 1999. Congress did not pass any bills in 2023 that would have authorized ministers to revoke an exemption from Social Security. 


Save 25% when you order both a print and downloadable .pdf versions of our 2024 Church & Clergy Tax Guide. For 35 years, this easy-to-understand guide has helped church leaders and pastors navigate US tax laws.


Working after retirement in 2024

Many churches employ retirees who are receiving Social Security benefits. People younger than full retirement age may have their Social Security retirement benefits cut if they earn more than a specified amount. 

Full retirement age (the age at which you are entitled to full retirement benefits) for people born between 1943 and 1954 is 66 years. 

IRS to stop unannounced taxpayer visits

The IRS announced a major policy change in July 2023. The change ends most unannounced visits to taxpayers by revenue officers (ROs). This was done to reduce public confusion and enhance overall safety measures for taxpayers and employees.

ROs will no longer make unannounced or unscheduled field visits. Instead, they will send an appointment letter to schedule an initial or follow-up meeting with the taxpayer. 

IRS addresses inurement, intermediate sanctions, and the definition of a church (PLR 202317022)

A private letter ruling (PLR) issued by the IRS in 2023 to a tax-exempt entity claiming to be a church while providing behavioral health services addresses three important topics:

  • Inurement
  • Excess benefit transactions
  • What is a church?

Upgrade to an Advantage membership today to unlock all ten key tax developments with expanded information for each, along with an interview with Church Law & Tax Senior Editor and Co-Found Rich Hammar. In it, he covers the most common tax mistakes he sees pastors and churches make.

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Top 10 Tax Developments for Churches and Clergy in 2024

These ten tax developments for churches and clergy included inflation adjustments and the IRS definition of a church.

Our top 10 tax developments for churches and clergy 2024 are based on a a number of legislative, administrative, and judicial tax developments in 2023.

Here they are:

1. No change to the housing allowance

In March 2019, a federal appeals court rejected an atheist group’s challenge to the constitutionality of the housing allowance. The atheist group did not appeal this ruling, and there have been no further legal challenges. 

2. Revoking an exemption from Social Security

Congress has created three limited windows of time since 1977 to allow ministers who exempted themselves from self-employment taxes by filing a timely form 4361 with the IRS to revoke their exemption. The latest was in 1999. Congress did not pass any bills in 2023 that would have authorized ministers to revoke an exemption from Social Security. 

However, the Internal Revenue Service (IRS) in 1970 allowed an exempt minister to revoke his exemption on the ground of a mistake (Revenue Ruling 70-197).

In addition, section 4.19.6.4.11.3 (02-13-2020) of the IRS’s Internal Revenue Manual explicitly recognizes that, under some conditions, ministers who have exempted themselves from self-employment taxes solely for economic reasons can revoke their exemption. 

3. Working after retirement in 2024

Many churches employ retirees who are receiving Social Security benefits. People younger than full retirement age may have their Social Security retirement benefits cut if they earn more than a specified amount. 

Full retirement age (the age at which you are entitled to full retirement benefits) for people born between 1943 and 1954 is 66 years. 

If you are under full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn above the annual limit. For 2024, that limit is $22,320.

In the year you reach full retirement age, your monthly benefit payments are reduced by $1 for every $3 you earn above a different limit. For 2024, that limit is $59,520, but only earnings before the month you reach full retirement age are counted.

4. Inflation adjustments for 2023 tax returns

Some tax benefits are adjusted for inflation for 2023 tax returns (filed in 2024). Key changes affecting 2023 tax returns include the following:

  • The Alternative Minimum Tax exemption amount for tax year 2023 increases to $81,300 for single taxpayers and $120,000 for married persons filing jointly. The exemption amount for single persons (and heads of household and married persons filing separately) begins to phase out at $578,150, and the exemption amount for married couples filing jointly begins to phase out at $1,156,300.
  • For estates of any decedent passing away in calendar year 2023, the basic exclusion amount was $12,920,000.
  • For 2023, the foreign earned income exclusion will be $120,000.
  • The maximum earned income credit amount will be $7,430 for taxpayers with three or more qualifying children for 2023.
  • The IRS’s recommended mileage rate for miles driven for church-related business increased to 67 cents per mile on January 1, 2024.
  • The mileage rate for miles driven for medical purposes, and for moving expenses for members of the armed forces, decreases to 21 cents per mile for 2024.
  • The charitable mileage remains at 14 cents for all of 2024.

5. The maximum earned income credit amount will be $7,430 for taxpayers with three or more qualifying children for 2023.

You may be able to claim the earned income credit for 2023 (taxes filed in 2024) if:

  • you do not have a qualifying child and you earned less than $17,640 ($24,210 if married);
  • a qualifying child lived with you and you earned less than $46,560 ($53,120 if married filing jointly);
  • two qualifying children lived with you and you earned less than $52,918 ($59,478 if married filing jointly); or
  • three or more qualifying children lived with you and you earned less than $56,838 ($63,698 if married filing jointly).

The maximum earned income credit for 2023 is:

  • $600 with no qualifying child;
  • $3,995 with one qualifying child;
  • $6,604 with two qualifying children; and
  • $7,430 with three or more qualifying children.

Advantage Member exclusive: The Seven Most Common Tax Mistakes Churches and Pastors Make

In this 20-minute companion video, Rich Hammar covers the seven most common tax mistakes churches make. Errors include failing to set a housing allowance, misclassifying love gifts, or trying to avoid paying FICA. And all have repercussions for pastors and churches.


6. Simplified definition of a highly compensated employee

A number of tax-favored provisions in the tax code do not apply if there is discrimination in favor of highly compensated employees. These provisions include:

  • simplified employee pensions (SEPs),
  • 403(b) tax-sheltered annuities (churches and qualified church-controlled organizations are exempt from this nondiscrimination rule),
  • qualified employee discounts,
  • cafeteria plans,
  • flexible spending arrangements,
  • qualified tuition reductions,
  • employer-provided educational assistance, and
  • dependent-care assistance.

For 2023, a highly compensated employee was one who (1) was a 5-percent owner of the employer at any time during the current or prior year (this definition will not apply to churches), or (2) had compensation for the previous year in excess of $150,000 and, if an employer elects, was in the top 20 percent of employees by compensation.

7. Nonprofit organization that operated a coffee shop and restaurant stripped of its tax-exempt status by the IRS

A charity that operated a restaurant and coffee shop was granted tax-exempt status by the IRS.

The exemption was granted on the basis that it would be operated to assist formerly incarcerated persons reenter society. However, the IRS found it operated largely for commercial purposes in a manner similar to for-profit entities. The IRS, therefore, revoked the charity’s tax-exempt status.

The IRS also noted that the internal controls of the organization were not adequate. That is because the founder and executive director was in charge of opening the organization’s mail and making deposits. That person was also in charge of writing and signing checks.

 PLR 202321005.

8. IRS to stop unannounced taxpayer visits

The IRS announced it is ending most unannounced visits to taxpayers by revenue officers (ROs). This was done to reduce public confusion and enhance overall safety measures for taxpayers and employees.

ROs will now send an appointment letter to schedule an initial or follow-up meeting with the taxpayer. 

Unannounced RO visits will only be done in a few unique circumstances.

The rest of the IRS collection process will remain the same, and will depend on the facts and circumstances of the case.

Information on the IRS collection process is available under “Topic No. 201, The Collection Process” at IRS.gov.

ROs are unarmed civil agency employees whose duties include visiting households and businesses to help taxpayers resolve their account balances.

Their job is to collect taxes that are delinquent and have not been paid to the IRS. They also secure tax returns that are overdue from taxpayers.

The IRS has about 2,300 ROs.

ROs carry two forms of official credentials with a serial number and their photo. 

Taxpayers have the right to see each of these credentials. They can also request an additional method to verify their identification. Taxpayers should know they have a tax issue before these visits occur, since multiple mailings occur.

IRS Criminal Investigation special agents are the only armed IRS personnel. They always present their law enforcement credentials when conducting investigations. 

FS-2023-17.

9. IRS addresses inurement, intermediate sanctions, and the definition of a church (PLR 202317022)

A private letter ruling (PLR) issued by the IRS in 2023 to a tax-exempt entity claiming to be a church while providing behavioral health services addresses three important topics:

  • Inurement
  • Excess benefit transactions
  • What is a church?

The IRS analysis of these three topics is summarized below.

Inurement

Churches must satisfy several conditions to enjoy the benefits of exemption from federal income taxation. One of these conditions is that none of the net earnings  of a church can “inure” to the benefit of an officer or director (or a relative of an officer or director) other than reasonable compensation. The IRS explained this “inurement” requirement in the PLR:

Churches and religious organizations, like all tax-exempt organizations, are prohibited from engaging in activities that result in inurement of the church’s or organization’s income or assets to insiders (i.e., persons having a personal and private interest in the activities of the organization). 

Insiders could include the minister, church board members, officers, and in certain circumstances, employees. 

Examples of prohibited inurement include the payment of dividends, the payment of unreasonable compensation to insiders, and transferring property to insiders for less than fair market value. 

The prohibition against inurement to insiders is absolute; therefore, any amount of inurement is, potentially, grounds for loss of tax-exempt status. In addition . . . the insider involved may be subject to excise taxes. See the discussion of excess benefit transactions below. Note that prohibited inurement does not include reasonable payments for services rendered, or payments that further tax-exempt purposes, or payments made for the fair market value of real or personal property.

Excess benefit transactions

Excess benefit transactions are common among churches and expose ministers and possibly church officers and board members to significant penalties under section 4958 of the tax code. Note that these penalties are assessed against the recipient of the excess benefit, not the church. 

The PLR shows how much church leaders have ignored this issue, needlessly exposing “disqualified persons” (defined below) to significant penalties.

Let’s review the basics.

Section 4958 of the tax code imposes an excise tax on a “disqualified person” who engages in an “excess benefit transaction” with a tax-exempt charity. Section 4958(c)(1)(A) defines an excess benefit transaction to mean:

Any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit.

An applicable tax-exempt organization is defined to include an organization described in tax code section 501(c)(3), including churches and other religious organizations.

Section 4958(a)(1) imposes on each excess benefit transaction an excise tax “equal to 25 percent of the excess benefit” and provides that this tax “shall be paid by any disqualified person . . . with respect to such transaction.”

If the excess benefit transaction is not corrected in a timely fashion, the disqualified person is liable for a second-tier tax equal to 200 percent of the excess benefit.

One court has noted that Congress enacted section 4958 not to collect revenue, but rather, to “deter insiders of an organization from using their positions of influence to receive unreasonable compensation.” 

Before the enactment of section 4958, “if an organization . . . did not comply with the rules regarding tax exemption, the [government’s] only recourse was to revoke the organization’s exemption.”

Because revocation falls on the organization, rather than the benefited individuals, Congress recognized the need for intermediate sanctions including the 25-percent and 200-percent penalties described above. Intermediate sanctions are intended to “deter malfeasance and incentivize insiders to restore the charity to the status quo” prior to an excess benefit transaction.

Intermediate sanctions only apply to “disqualified persons,” which include:

  1. Voting members of the governing body, presidents, chief executive officers, chief operating officers, treasurers, and chief financial officers. The category of “treasurers and chief financial officers” includes “any person who, regardless of title, has ultimate responsibility for managing the finances of the organization.” A person who serves as treasurer “has this ultimate responsibility unless the person demonstrates otherwise.”
  1. Family members of disqualified persons, down to the level of great-grandchildren, with respect to a charity.

In the PLR, the IRS concluded that the petitioner was a disqualified person based on both categories. She served as a director and executive officer of the charity and was the spouse of a disqualified person (the president).

The “contemporaneous substantiation” requirement can be satisfied in two ways—by timely reporting or by “other written contemporaneous evidence.” Timely reporting occurs if the organization reports a payment to the disqualified person as compensation on a Form W-2 or a Form 990 filed before the IRS commences its examination. 

Timely reporting also occurs if the disqualified person reports the payment as income on an original or amended Form 1040 filed before the earlier of the date on which the IRS commences its examination or supplies written documentation of a potential excess benefit transaction. 

The “contemporaneous substantiation” requirement can also be satisfied by “other written contemporaneous evidence” showing that “the appropriate decision-making body or an officer authorized to approve compensation approved a transfer as compensation for services in accordance with established procedures.” 

Such evidence includes “an approved written employment contract executed on or before the date of the transfer,” other documentation showing that “an authorized body contemporaneously approved the transfer as compensation for services,” and contemporaneous written evidence establishing “a reasonable belief by the . . . organization that a benefit was a nontaxable benefit.”

In reviewing the case about the tax-exempt entity claiming to be a church while providing behavioral health services, the IRS noted in the PLR:

The organization has been involved in multiple excess benefit transactions with major officers. There have been several incidents where organization funds have been used to purchase property for officers of the organization. The organization has failed to establish that cash and expenses were not used for the benefit of the organization’s officers. There are additional incidences of benefits that also flow to the officers’ family members.

Penalties (intermediate sanctions). Tax code section 4958(a) imposes a first-tier tax equal to 25 percent of the excess benefit, payable by the disqualified person. Section 4958(b) provides that, if a first-tier tax is imposed “and the excess benefit involved in such transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 200 percent of the excess benefit involved.” This second-tier tax, like the first-tier tax, is imposed on the disqualified person. The second-tier tax is not discretionary with the IRS but is statutorily mandated.

Such cases are important because they demonstrate the continuing relevance of intermediate sanctions and excess benefit transactions in the life of virtually every church, and the need to take them seriously. They also underscore the need for careful compensation planning and practices.

Further, note that the IRS deems any taxable fringe benefit provided to an officer or director of a tax-exempt charity (including a church), or a relative of such a person, to be an automatic excess benefit that may trigger intermediate sanctions, regardless of the amount of the benefit, unless the benefit was timely reported as taxable income by either the recipient or the employer. 

This makes it essential for churches to correctly report taxable income paid to staff, since a failure to report taxable benefits as taxable income can lead to the assessment of “automatic” intermediate sanctions against the recipient.

What is a “church”?

In the PLR, the IRS concluded that the charity was not a church. The tax code uses the term church in many contexts, including the following:  

  • charitable giving limitations,
  • various retirement plan rules,
  • unrelated business income tax,
  • exemption from applying for exemption from federal income taxation,
  • unemployment tax exemption,
  • exemption from filing annual information returns (Form 990), and
  • restrictions on IRS examinations.

Despite numerous references to the term “church,  the tax code provides no definition. This is understandable; a definition that is too narrow may interfere with the constitutional guaranty of religious freedom. Meanwhile a definition that is too broad may encourage abuses in the name of religion. 

The United States Supreme Court has noted that “the great diversity in church structure and organization among religious groups in this country . . . ​makes it impossible, as Congress perceived, to lay down a single rule to govern all church-related organizations.” St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772 (1981).

In the absence of any meaningful guidance in the tax code and regulations, the courts have developed various approaches to determine whether an organization qualifies as a church. 

Several courts have applied a fourteen-criteria standard introduced in 1977 by Jerome Kurtz, then commissioner of the IRS, to determine whether an organization is a church. The Tax Court has applied the fourteen criteria in several cases. They are:

  1. A distinct legal existence
  2. A recognized creed and form of worship
  3. A definite and distinct ecclesiastical government
  4. A formal code of doctrine and discipline
  5. A distinct religious history
  6. A membership not associated with any church or denomination
  7. An organization of ordained ministers
  8. Ordained ministers selected after completing prescribed studies
  9. A literature of its own
  10. Established places of worship
  11. Regular congregations
  12. Regular religious services
  13. Sunday schools for religious instruction of the young
  14. Schools for the preparation of its ministers.

One court noted:

Due partly to concerns over a mechanical application of rigid criteria to a diverse set of religious organizations, some courts have deemed a few of the criteria within the fourteen-factor IRS test to be of special, or “central” importance. The leading case is American Guidance, in which the United States District Court for the District of Columbia articulated the following standard: “While some of the [fourteen criteria applied by the IRS] are relatively minor, others, e.g., the existence of an established congregation served by an organized ministry, the provision of regular religious services and religious education for the young, and the dissemination of a doctrinal code, are of central importance.”

A federal appeals court made the following observation regarding the fourteen criteria: 

We are mindful of [the plaintiff’s] claim that the criteria discriminate unfairly against rural, newly formed churches which lack the monetary resources held by other churches. [The plaintiff] is not alone in this position. In large part it is for this reason we have emphasized what we view as the core requirements of the fourteen criteria.” Spiritual Outreach Society v. Commissioner, 927 F.2d 335 8th Cir. 1991.

The IRS has acknowledged that “no single factor is controlling, although all [fourteen] may not be relevant to a given determination.” These criteria have been recognized by a number of courts.

Because of the ambiguity of several of the fourteen factors, any clarifications provided by the IRS or the courts are helpful. The IRS recently did just that. Note that the IRS addressed all but one of the fourteen criteria: 

(1) A distinct legal existence.

The IRS concluded that the organization was incorporated and has a legal existence as noted in its articles of incorporation and bylaws. However, “as illustrated by the undocumented cash withdrawals, real estate transactions for personal use, and other benefits flowing to [the president] and her family members, the organization is operated as a private business of a few individuals. The distinct legal existence of the organization exists in paper only, but not in operation.’’

(2) A recognized creed and form of worship.

The IRS noted that the organization did not provide a written creed or formal code of doctrine. Further, “in response to a question regarding its form of worship, the organization provided minimal information, which showed that its worship services are secondary or incidental to its overall operations.”

(3) A definite and distinct ecclesiastical government.

The organization provided the following statement to show this attribute: 

The Board of Directors with the Chairman as the head; The Pastor is the Spiritual Director; Assistant Pastors in charge of the following ministries: Welfare, Healing, Counseling, and Director for Administration. . . . 

The organization also provided its minutes of a recent meeting, noting that the meeting began with prayers. The minutes discuss various activities, staff and volunteers, financials, projects and business reports, and the associated expenses. The IRS concluded: “While the organization appears to be governed by a government a closer look shows the ‘government’ of the church was merely incidental to its overall secular operations.”

As stated above, the organization failed to document the mentioned activities, financials, projects, and financial reports as it claims all documentation perished in a rain.

The IRS continued: “Furthermore, as proved [sic] the fact that [a substantial percentage] of the organization’s income is from [sic] and the substantial expenses on activities and staff, the government is merely or incidental to its overall operations.”

The IRS concluded that the factor “a definite and distinct ecclesiastical government” was not satisfied since the “government” of the church was merely incidental to its overall secular operations.

(4) Formal code of doctrine and discipline.

The organization failed to provide a specific code of doctrine and discipline in the everyday behavior of the congregants.

(5) A distinct religious history.

The organization claimed that it is an established, interdenominational ministry that provided welfare services. The organization described aspects of the ministry to elaborate upon its religious history. According to information the organization gave to the IRS, the pastor conducted services with the assistance of workers present during the services, including the choir, ushers, and instrumentalists. The organization also indicated that it did not have “permanent attendees” and did not track attendance. “Welfare” was provided between certain designated hours, and the “planning and operations of the welfare committee is supervised” by a church council.

In response, the IRS noted, “The organization failed to provide any other records or forms of communications show[ing] such worship was recurring outside of the one event that occurred. . . .  Based on the facts of this case [religious] services appear to be secondary or incidental to its overall operations.”

(6) Membership that is “not associated with any other. . . denomination.” 

The IRS observed:

The organization’s initial response claimed that it had members. The organization’s response was later changed. . . .  The organization failed to provide records or information to establish [where] to [where] the claimed number of members comes from. The organization failed to provide records or information to establish who its members were, how to contact them, what was their attendance . . . whether members were unassociated with others, how often they met, or document any other purely religious services.

(7) Organization of ordained ministers.

The organization stated that it has an ordained minister with a license to conduct marriages. Certificates of minister ordination and authority to solemnize marriage were provided to support this statement. However, except for flyers and bulletins, the organization failed to provide any income, expenses, or other records to substantiate that any weddings, baptisms, or other religious ceremonies had ever been conducted by a minister of the organization. On the other hand, the organization’s registered records show the minister has . . .  received compensation for his services.

(8) Ordained ministers selected after completing prescribed studies.

The organization stated that it “does not license ministers.” 

(9) Established places of worship

The IRS noted:

The organization claimed that it leased an established place of worship. An image shows that the place is a clinic-like building with only one entrance. The place allows only one person to get in or out at a time. Such a place does not appear to allow for large gatherings of people at the same time. The organization’s place of worship was at the same location where the organization provided services. . . . The claimed worship, prayer services, and other activities did not appear to take place when an [IRS agent] conducted a drive-by for observation.

(10) Regular congregations

The IRS noted:

The organization claimed that it had a regular congregation with groups of administrative personnel and volunteers/workers in the programs. The organization claims that the size of its membership is [the IRS did not disclose this information]. The organization provided no records to substantiate these numbers. No explanation was given on how this group of people share the same place with clients and workers. . . . The organization has not established that its meeting location could accommodate people meeting at the same time. Bank records show only individuals or entities issued checks to the organization as contributions, besides the family. Analysis of available information shows that the organization’s workforce, time, and space are used in full or beyond its capacity for operation. The organization failed to establish that its congregation, as claimed by the organization, did not consist of mostly clients receiving behavioral services. Gathering of such congregation did not appear when the [IRS agent] conducted [a] drive-by during its scheduled service.

(11) Regular religious services. 

The IRS noted:

The organization claimed [it conducted]  “Bible studies and special prayers; and [a] welfare program . . .  open to all.” The IRS noted that the organization “has not provided records to establish these activities. As shown by its full range of health services being used for operation, the organization’s religious services are incidental. The observation of [an IRS agent] during her drive-by shows that the organization’s religious services are not regular.”

(12) Sunday schools for the religious instruction of the young

The IRS noted:

The organization stated that it has no school for the religious instruction of the young. But it . . . conducted a Day Treatment program for young children that need help in learning and social activities.

(13) Schools for the preparation of its ministers. 

The IRS noted: 

The organization claimed that it [operated]  an educational and religious program . . . Compared with the organization’s expenses for services, the organization’s training expenses are secondary or incidental to its overall operations. 

Based on its determination that the organization was not a church, the IRS revoked its tax-exempt status.

Concerns with the fourteen criteria

As this PLR shows, the fourteen criteria are so restrictive that many, if not most, bona fide churches fail to satisfy several of them. 

The problem stems in part from the use of criteria that apply to both local churches and conventions or associations of churches. 

To illustrate, few local churches would meet criteria #7, #9, and #14, since these ordinarily would pertain only to conventions or associations of churches. 

In addition, many newer, independent churches fail criteria #1 and #5, and may also fail #2, #3, #4, #6, and #8. 

It is therefore possible for a bona fide church to fail as many as ten of the fourteen criteria. 

Indeed, the original Christian churches described in the New Testament book of Acts would have failed most of the fourteen criteria.

The criteria clearly are vague and inadequate. 

Some apply exclusively to local churches, while others do not. And the IRS does not indicate how many criteria an organization must meet in order to be classified as a church, or if some criteria are more important than others. 

This vagueness means that their application in any particular case will depend on the discretion of a government agent. 

This is the very kind of conduct that the courts repeatedly have condemned in other contexts as unconstitutional.

10. The IRS revoked the tax-exempt status of a religious charity

There are several points in IRS PLR 202243013 that provide useful information to church leaders. 

Organizational test. 

The IRS observed:

Our adverse determination as to your exempt status was made for the following reasons: Organizations described in Section 501(c)(3) of the Internal Revenue Code and exempt from tax . . . must be both organized and operated exclusively for exempt purposes. You have failed to produce documents or otherwise establish that you are operated exclusively for exempt purposes and that no part of your net earnings inures to the benefit of private shareholders or individuals. Furthermore, you fail the organizational test for exemption because your articles of incorporation do not limit your activities to one or more exempt purposes and your dissolution clause does not ensure that assets will be dedicated exclusively to Section 501(c)(3) purposes.

“Quid pro quo” contributions. 

Several members made donations to the organization but received various services and items in exchange. The IRS noted in the PLR that these were quid pro quo contributions. The IRS pointed out that section 6115 of the tax code specifies that substantiation of a quid pro quo contribution requires a written disclosure that must:

inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the value of goods or services provided by the charity and provide the donor with a good faith estimate of the value of the goods or services that the donor received.

The IRS concluded there was no documentation to show the organization provided disclosure statements to donors.

Purpose clause. 

The IRS then examined the organization’s purpose, power, and dissolution clauses in its governing documents and concluded that the organization failed to meet the organizational test for tax-exempt status.

The organization’s purpose clause was set forth in its corporate articles of incorporation. Its general purpose was “to have and exercise all rights and powers conferred on nonprofit corporation[s] under the laws of [this state] including the power of contract; rent, buy or sell personal or real property; provided, however, that this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the primary purpose of this corporation.”

The IRS concluded that “your purpose clause is too broad as it does not limit the organization’s purpose to one or more purposes specified in section 501(c)(3). To promote personal interest and educational development in the activities and to promote incentive through financial aids are too broad because they are not necessary within the status of section 501(c)(3).

Power clause. 

The IRS noted that:

you do not have a power clause that will not allow your organization to carry on any activities not permitted by an organization exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Since the primary purpose of this corporation is too broad and not within the status of section 501(c)(3) of the Code, hence your . . . power clause does not meet the organization test.

Dissolution clause. 

The organization’s bylaws state that:

in the event of dissolution, disbandment, inactivation, or other termination of this [organization] the funds and properties . . . in excess of its liabilities shall be disposed of in accordance with the decision of the existing active membership, consistent with integrity and good judgment, by a majority vote of the members present at a duly called general membership meeting.

The IRS concluded that “there is no provision in the [bylaws] that requires that the [organization] shall distribute its net assets for one or more exempt purposes within the meaning of section 501(c)(3) of the tax code. Hence, your dissolution clause does not meet the organization test.”

Inurement. 

Organizations seeking exemption under tax code section 501(c)(3) are subject to the inurement provision:

Inurement of income is strictly forbidden under section 501(c)(3) without regard to the amount involved. Because the financing arrangements of the club have the effect of permitting the earnings of the organization to inure to the benefit of specific insiders (the controlled parents’ members and their children), your organization cannot qualify for exemption. . . .

Hence, persons who earned benefits from participating from fundraising programs are subject to tax. . . . We do not see any exclusion to exempt earned income from the Family Shared Benefits. Hence, the income is taxable to the participants. Your organization operates in such a manner to defeat recognition of exemption by crossing the line of these inurement/private interest prohibitions. 

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Q&A: Make Sure Your Super Bowl Watch Party Splits the Uprights

Make sure the Super Bowl watch party you’re planning for your church follows NFL guidelines for copyright, trademark and acceptable use.

The Super Bowl is a slice of Americana, an opportunity for fellowship and community that many churches still embrace in the form of the popular Super Bowl watch party.

But National Football League (NFL) guidelines are very specific when it comes to hosting non-residential watch parties, and church leaders should know what they are.

Attorney and pastor Dustin Gaines of MyChurch law firm in Dallas, Texas, shares valuable insights into the ways churches can bring everyone together while complying with the rules.


Have you picked up a copy of Richard R. Hammar’s Essential Guide to Copyright Law for Churches?

Act now–it’s on sale and, with your Advantage Member discount, you can snatch it up for less than $20, while supplies last.


The NFL has said churches cannot charge admission for Super Bowl watch parties. Why is that?

What the NFL is saying is that it has intellectual property as it pertains to its trademarks. That’s its branding, the identity-type items, such as team names and logos. And copyright law is also in play. That is the right to transmit or broadcast the game.

Intellectual property is not something you may hold in your hands, but it is just the same as other property. 

So when it comes to the Super Bowl, the NFL is saying, “This is our intellectual property, and we’re going to provide some allowances for religious organizations to show the game to congregation members.”

The general rule the NFL abides by is, if you’re in a non-residential setting and you’re broadcasting the game on a screen that is larger than 55-inches, you’re going to need to pay a licensing fee.

But the allowance given to churches is that they can have viewing parties for congregants at their place of worship but they can’t charge money.

However, a church can accept donations to help defray costs, or use it as an event as a charity drive, so long as it is not a profit-making endeavor for the church.

What if a church rents a space for a Super Bowl watch party? Can they charge admission then?

No. If you are going to have a viewing party for the Super Bowl, it has to be at your church, using your own audio-visual equipment. (By the way, it’s okay if the screen is larger than 55-inches if it is being used in your church, and it is your equipment.)

Is the NFL really paying attention to what churches are doing?

It’s kind of like an IRS agent. You don’t know when they’re going to look in and see something. 

But irrespective of whether the NFL is looking, churches should commit to doing this the right way, maintaining a good testimony. 

What if you would like to purchase a license from the NFL for the Super Bowl? How does that process work?

It’s a fairly simple process. The NFL is going to be able to issue the license directly, or, perhaps a church can use the copyright services it already uses. 

You pay the fee, describe what you’re going to do, and receive the license to do it.

What other key recommendations would you offer churches when it comes to Super Bowl parties?

First, do not record and broadcast the game at a later date. The NFL has said you can temporarily record and replay the game the way you would use a DVR. But do not record it and say, “Come back on Monday, we’ve got a recording of the game.”

Second, churches can also get in hot water with how they advertise the watch party, particularly with branding and trademarks. And with those trademarks, the NFL has said you cannot use their visual logos, such as the NFL shield, or the Super Bowl trophy. However, you can use words like “Super Bowl,””NFL,” or the team names.

Non-compliance can be expense

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Worship music and web sites can be a challenge, too

The Super Bowl and other types of watch parties are not the only way churches can expose themselves to copyright and trademark infringement claims.

Worship music, and church websites, can pose a problem, too. Take this quiz to determine whether your church is playing by the rules.

Rick Spruill is an award-winning journalist, editor, and multimedia storyteller with a passion for empowering others to lead their churches and religious non-profits with confidence.

Lessons From Aretha Franklin’s Holographic Will

The Queen of Soul left a holographic will under a couch cushion. What happened next is a valuable lesson for church leaders.

Aretha Franklin left two wills. 

One, drafted in 2010, specified how she wanted her $6 million estate distributed.

But another, handwritten and dated 2014, laid out different terms. This handwritten will, discovered in Franklin’s home under a seat cushion after she died in 2018, was filled with cross-outs and insertions and was generally unintelligible.

Franklin’s heirs challenged the handwritten will—also known as a holographic will—and yet, a jury in July 2023 found it was valid, overriding conflicting provisions contained in Franklin’s 2010 will.

A court now must decide whether the holographic will completely nullify the 2010 will.

The lessons from the late musician’s situation are important for many reasons, including what church leaders should know about how holographic wills may affect gifts involving their churches. 

What is a holographic will?

So, what is a holographic will? It is one written entirely in someone’s handwriting (the “testator”) and includes the testator’s signature.

Holographic wills are recognized in the majority of states (consult a local estate attorney to determine whether they’re recognized in yours), and are often considered valid even though no one witnessed the testator’s signature. As a result, the provisions of such wills take precedence over provisions in prior wills that are executed in compliance with state law.

And, as seen in the Franklin case, because holographic wills are so easy to create, they have led to many disputes by family members, churches, and other charitable organizations regarding their legal validity 

Earlier cases

There have been many cases involving the validity of handwritten wills leaving gifts to churches and other charities. 

Here are several examples:

CASE 1: What a difference a day made 

The day after executing her will, the deceased met with her pastor and his wife and executed a handwritten document containing the testator’s signature and the following text: 

“I want to donate $150,000 to God in order to build a church.” 

The church insisted that the handwritten document signed by the deceased represented a legally valid holographic will that should be probated. The heirs argued that the document merely expressed a present intent to give money and was not a testamentary instrument. A Michigan appellate court sided with the church, and ordered the holographic will to be probated. 

In re Estate of Smith, 651 N.W.2d 153 (Mich. App. 2002).

CASE 2: Only the lawyers prospered 

Church Law & Tax Co-Founder and Senior Editor Rich Hammar was involved in the case of a 93-year-old single man from Kentucky with no living relatives and an estate valued at more than $1 million.

When the man died at home, someone found a holographic will entirely in his handwriting that contained the following sentence:

“I leave my estate, in its entirety, to a nursing home that has a chapel for Pentecostal worship.”

More than 25 nursing homes from around the country filed claims with the probate court seeking distribution of the entire estate to themselves. Many of these homes had some affiliation with a church or religious denomination, although many of these would not be considered “Pentecostal.” 

A few were operated by a government agency, rather than a church or denomination, and were creative in describing to the court their status as a Pentecostal institution.

After 10 years of litigation the probate court ordered the entire proceeds of the estate to be distributed to a nursing home in another state having no ties to a Pentecostal denomination. 

By this time, the $1 million estate had been reduced to a mere $40,000. 

The remainder was spent on legal fees, hardly a result the testator could have imagined.

CASE 3: The Church got half … eventually

A woman drafted a holographic will that left half of her estate to her church. Upon her death, some of her heirs challenged the legality of the holographic will and took the case to court. 

A probate court concluded that the holographic will was invalid, and the church appealed. 

A Texas appeals court ruled that the will was valid, and so the gift to the church was enforceable. Unfortunately, the estate was significantly diminished through legal fees.

Estate of Abshhire, 2011 WL 3671998 (Tex. App. 2011).

CASE 4: Jane Doe, Esq. 

A woman (Jane Doe) died, leaving a holographic will that provided:

I, Jane Doe, do hereby make and declare this to be my last will.

1st. I direct my executors, the deacons of First Baptist Church, to pay all of my debts.

2nd.  I want a trust fund put in the First Federal Bank of $2,500.00 for Greenvale Cemetery to help care for it and help keep the road to the cemetery fixed. Interest to be used each year.

3rd.  If there is anything left, I want it put in First Federal Bank for my church to use the interest each year for mission work. That lost souls may hear about and know my dear Savior.

Jane Doe

Several heirs of Jane Doe filed a will contest with a probate court, claiming that the holographic will was invalid, and therefore the entire estate should be distributed to them with nothing going to the church. The heirs argued that the will was invalid because it did not identify the trustees, executors, or the “church.” 

The court concluded:

From a fair and unstrained reading of the will of Jane Doe it is clear that she intended to create two trusts, one for the benefit of the cemetery and one for the use of First Baptist Church in its mission program; and it is equally clear that she intended that her entire estate be so used. For a person untrained in the law we find that Jane Doe has been more than legally adequate in the drafting of her will … .      

Lewis v. Darnell, 580 S.W.2d 572 (Tenn. App. 1978).

CASE 5: Old MacDonald left a will 

John Doe lived alone on a farm in South Dakota. He executed a document entirely in his own handwriting purporting to dispose of his property upon his death. He died a few months later. 

The decedent’s sister searched his home and bank boxes thoroughly after his death but could find no will. She, the sheriff, and others went through the papers of the deceased in his home. Some were destroyed. Others were piled into boxes and stored in a rented barn near the home of a niece. 

The niece found a holographic will entirely in the testator’s handwriting that left his entire estate to his church. 

This will was submitted to the local probate court. All of the witnesses testified that the decedent’s home was a mess with important documents as well as worthless scraps of paper piled around the house without any system or order.  

In the light of these facts the court ruled that the holographic will would not be probated.

The church appealed, challenging the order of the probate court. The court reversed the ruling of the probate court and ordered the will to be probated.

In re Estate of May, 220 N.W.2D 388 (S.D. App. 1974). 

CASE 6: Church sues daughter 

A woman (Jane Doe) had been a teacher for many years and had amassed an estate of several million dollars. 

She was a long time member of a Baptist church in her community. 

However, she eventually joined a Presbyterian church, and attended services regularly until a broken hip reduced her mobility. She executed an estate plan in 1995 that left $1.5 million to her church. However, shortly before her death, Jane Doe gave one of her two daughters a holographic will that left everything to this daughter and nothing to the church. 


As this legal development from 2007 explains, “undue influence” is sometimes used to challenge the validity of a will.


The church appealed, claiming that the holographic will and its $1.5 million distribution to the daughter were invalid. The appeals court denied the church’s’s petition to invalidate the holographic will.

The church appealed, challenging the order of the probate court. The court reversed the ruling of the probate court and ordered the will to be probated.

Burson v. Presbyterian Church, 2002 WL 498054 (Cal App. 2002). 

CASE 7: Everything to the Church

A woman’s holographic will stated that she “wanted to give my money to the Mother Church in Boston Massachusetts as it has been a great help to me.” 

The church submitted the will to the probate court, but this was opposed by the decedent’s heirs, who claimed that the will was not in proper form and that the decedent’s entire estate should be distributed to them. 

The court concluded:

“It is considered by the Clerk that the said will has been duly and fully proved and the same is ordered admitted to probate and recorded as the true last will and testament of [the decedent] in due form.” 

First Church of Christ, Scientist v. Hutchings, 163 S.E.2d 178 (Va. 1968).

Why many states recognize holographic wills

Holographic wills are recognized in the majority of states, with some variations, meaning they are widely recognized in the United States.

According to one court, holographic wills allows people who are unable or unwilling to hire an attorney to make a valid will in their own handwriting. (In re Estate of Teubert, 298 S.E.2d 456 (W. Va. 1982).) 

In many, if not most, cases, the person drafting a holographic will is attempting to avoid legal fees. But legal fees are a small price to pay to ensure that a will is drafted properly and will withstand legal challenge. Holographic wills often lead to ambiguities since the testator has no legal training or experience in drafting such documents.

Don’t google it

The plethora of legal forms available online makes it tempting to create one’s own will.

But doing so can create unforeseen problems:

  • The will may not be properly executed according to state law, making the purported will invalid and unenforceable. Of course, an attorney will be familiar with the requirements and will ensure that the document is properly executed.
  • Using forms copied from an online source can be dangerous.
  • To illustrate, in one case, a Florida church used an internet-generated contract but failed to notice that it contained a “venue” clause requiring all disputes to be litigated in California. A court confirmed the legality of the venue clause, meaning that the church’s pastor and attorney had to travel to California for depositions, conferences, hearings, and trial, all at considerable expense to the church. 

As the cases summarized above illustrate, holographic wills often prompt immediate legal challenge, embroiling the parties in costly and protracted litigation with no certain result. 

Another problem with holographic wills is that they often are discovered months or even years following the death of a testator, making it difficult to determine inevitable questions of priority involving multiple wills.

For all of these reasons, church leaders should discourage members from using holographic wills, even if legally valid under state law.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Consider These Church Management Conferences in 2024

Why church leaders won’t want to miss these six management conferences in 2024.

Last Reviewed: March 22, 2024

2024 promises to be as busy as ever, but these church management conferences are worth considering. After all, leading a church does not mean one can’t carve out time for ongoing education and training.

A commitment to learning is the hallmark of effective leadership, and this list is geared for church pastors, board members, and volunteers.

Choose your church management conference with care

But choose wisely. Not all church management conferences are created equal. Many demand significant investments of both time and money. Others involve unscrupulous individuals who sometimes target churches with erroneous, inaccurate, or misleading information.

Let us help take some of the guesswork out of it by recommending these six conferences and seminars (organized in chronological order).

All involve individuals and organizations connected with Church Law & Tax. Church Law & Tax editors and staff have attended these events over the years, and can vouch for the accuracy and ministry-minded focus that each offer.

CapinCrouse 2024 National Nonprofit Virtual Seminar

CapinCrouse, the well-known nonprofit CPA firm, will again host its virtual event for nonprofit leaders. The program will include sessions specific to churches. Ted Batson, an advisor-at-large for Church Law & Tax, is a CPA and tax attorney who serves as a partner and Professional Practice Leader-Tax for CapinCrouse.

Note: Participants can earn up to 5 CPE credit hours.

Date: February 7, 2024

Location: Virtual

Registration: $40

2024 XP-Seminar

This two-day conference, founded 20 years ago by XPastor.org founder David Fletcher, is a perennial sell-out. It educates, connects, and encourages about 200 select executive pastors, senior pastors, and other church leaders. The workshops and general sessions will cover key leadership and management issues facing medium, large, and multisite churches.

Dates: February 27-29, 2024

Location: Dallas, Texas

In-person event: $799

Online seminar: $99 (through Jan. 31)

The Church Network National Conference

The Church Network (TCN) hosts the longest-running national conference serving church business administrators. The 2024 event again will offer multiple days with general keynote speakers, a wide range of workshops, and an exhibit hall with vendors that serve the church market.

Dates: July 9-12, 2024

Location: Lexington, Kentucky

Registration is now live.

Can’t make it? TCN also has more than 80 local chapters that meet monthly. These chapters offer guest speakers who cover various topics related to church administration.

BMWL National Nonprofit Conference

CPA firm Batts Morrison Wales & Lee covers recent developments and trends on tax, financial, and regulatory topics affecting nonprofit organizations and churches this annual event. CPA Michael Batts, managing partner of the firm, is a senior editorial advisor for Church Law & Tax, and CPA Kaylyn Varnum, a partner at the firm, is an advisor-at-large for Church Law & Tax.

Date: August 27, 2024

Location: Virtual

Registration cost: TBD by July

Learn more details through the conference website.

Church Compliance Conference

Attorney Erika Cole, a senior editorial advisor for Church Law & Tax, will host this one-day conference for pastors and church leaders, including executive pastors, trustees, church administrators, and finance officers.

Date: September 19, 2024

Location: Virtual. In-person component is TBD.

Registration cost: TBD

Christian Legal Society National Conference

The Christian Legal Society (CLS) is the largest national organization serving attorneys and law students who are Christians. The CLS conference provides training and encouragement to legal professionals, including those who serve churches, ministries, and nonprofits. 

Dates: Oct. 31 – Nov. 4, 2024

Location: Washington, D.C.

Registration cost: Varies based on the individual’s membership status with the organization.

Outsourcing Accounting and Financial Functions

Churches are always thinking about outsourcing accounting and financial functions. These articles from trusted experts can guide you.

Outsourcing accounting and financial functions remains a hot topic for churches.

And we understand why.

As churches confront tighter budgets in the face of complex IRS guidelines governing religious not-for-profits, the need for outsourcing accounting and financial functions for bookkeeping support, compliance, and basic tax literacy is paramount.


Upgrade to an Advantage Membership and start receiving Church Law & Tax Store discounts, unlimited access to all content, cohort visibility, and our weekly insiders newsletter with the latest information on the issues and trends affecting churches today.


Whether it’s understanding the ever-changing dynamics of the church treasurer role, to making a wise choice in third-party software, the below resources will go a long way in asking—and answering—questions you may not have known to ask.

Third-party financial and accounting tips

As XPastor founder and longtime Church Law & Tax Advisor-At-Large David Fletcher suggests, cost, banking data security, and savings all come into play when considering whether to send accounting and financial services to a third-party.

Controlling for costs

Senior Editorial Advisor Mike Batts explains that outsourcing can be an effective way of bringing costs in line with reality.

This is especially true when coupled with a zero-based budgeting approach. Batts outlines how in in chapter 1 of Church Finance: The Church Leader’s Guide to Financial Operations.

Meanwhile, outsourcing your church’s specific accounting work begins with a sound understanding of the accounting role within your church.

Choosing the right accounting software

Choosing the right accounting software can be—and probably is—every bit as important as answering whether to outsource your accounting function.

Though there are no perfect solutions, there are many important considerations, as Glenn Wood at SeaCoast Church in Charleston, South Carolina, explains.

Hiring a CPA

Sometimes churches need to quickly hire a CPA, either because of unforeseen circumstances or a shift in roles. These six, timeless tips will help inform that crucial hiring decision.

What Pastors Need to Know about Tax Preparation Software

Tax preparation software remains a cost-effective solution for many, including pastors. But beware the shortcomings.

Tax preparation software packages, such as TurboTax, TaxAct, H&R Block, and TaxSlayer, are popular ways for individuals to prepare their own income tax returns.

The upside of using tax preparation software packages

Most of the leading income tax preparation software are popular because they are:

Accessible. They come in boxed, downloadable, or online versions.

Affordable. Most are in the $50 to $150 range for the federal self-employed version. There may be an additional cost to prepare a state return. However, some versions are free for lower-income individuals.

Convenient. These packages allow users to e-file federal (and sometimes state) returns. This helps speed along the refund process. A higher-end package usually offers optional (for an additional fee) add-ons such as:

  • the ability to import tax data from other sources (e.g., from investment accounts or from Quicken/QuickBooks);
  • the ability to track real-time information during the year (such as TurboTax’s ItsDeductible feature for tracking charitable donations);
  • an interview interface to guide you through the preparation process;
  • error-checking of the return after it has been prepared;
  • a deduction finder to alert you to income tax deductions that may be applicable;
  • easy access to IRS publications and tax practitioner explanations;
  • tax planning assistance;
  • audit defense (for example, in the case of an IRS audit, the manufacturer will defend the income tax filer if there is an error resulting from the use of the manufacturer’s product), and
  • financial or retirement planning assistance.

Caveat Emptor

Tax preparation software packages often do not address three tax rules applicable to duly ordained, licensed, or commissioned ministers who are paid for services performed in the exercise of their ministry.

These rules do not apply to income or wages earned by a minister outside of the ministerial context (such as in secular employment).

1. Social Security and Medicare taxes

Under federal tax law, ministers employed by a church have a “dual tax status.”

They are considered employees for federal income tax purposes but are considered self-employed for federal employment tax purposes. 

Therefore, a minister will generally receive a Form W-2 from his employing church for wages earned, but those wages are not subject to employee- and employer-paid FICA taxes (the 7.65 percent each respective side pays into the Social Security and Medicare systems).

Instead, ministers are responsible for paying the full 15.3 percent due into Social Security and Medicare through the payment of self-employment taxes (also known as SECA), which are computed on Schedule SE of their personal income tax returns.

Ministers who are conscientiously opposed to, or because of their religious principles are opposed to, the acceptance of any public insurance (such as Social Security or Medicare) with respect to their ministerial earnings may elect out of the Social Security and Medicare system by filing Form 4361 with the IRS.

Form 4361 generally must be filed within two years of the first year that a minister has earnings from ministerial work. Ministers who have made this election would not complete Schedule SE but would enter “Exempt-Form 4361” on the dotted line next to Form 1040, Schedule 2, line 4, and/or Form 1040, line 23 (other taxes, including self-employment tax).


Tip: Learn more about the dual tax status of ministers and six questions to address before pursuing exemption from the Social Security and Medicare system.


Ministers using tax preparation software should check to make sure that the software accepts their Form W-2, since a properly prepared Form W-2 will not show their wages as subject to Social Security or Medicare taxes.

The minister also should make sure that their wages are being treated by the software package as self-employment income, for purposes of computing the self-employment tax, if applicable to the minister. 

For ministers opting out of the Social Security and Medicare system, check to make sure that the tax software package makes the notational entry on Schedule 2, line 4, and/or line 23 of the Form 1040.

2. Parsonage or housing allowance exclusion

Ministers may exclude from their taxable income the annual fair rental value of a parsonage provided rent-free by their church as part of their compensation package.

Ministers living in their own homes may exclude from their taxable income cash payments that have been properly designated by their employing church as a ministerial housing allowance, up to the lesser of (1) the amount used to pay for housing-related expenses (such as mortgage payments or rent, utilities, repairs, furnishings, insurance, property taxes, improvements, maintenance, and homeowners’ association dues), or (2) the fair rental value of the home, including furnishings and utilities.

The excess of the amount designated over the excludable amount should be included in taxable income (and the words “Excess Allowance” should be added on the dotted line next to the appropriate Form 1040, Line 1h).

The allowance is excludable for income tax purposes only. For ministers who have not opted out of the Social Security and Medicare system, their parsonage/housing allowance must generally be included in determining their self-employment tax.

Therefore, ministers using tax preparation software should check to make sure the package is properly limiting the housing allowance exclusion based on the limitations noted above, including the ”Excess Allowance” notation, and that the package is properly including the parsonage/housing allowance amount in the calculation of self-employment income.

3. Limitation on—or disallowance of—business expense deductions

Many ministers may incur unreimbursed expenses in connection with their church employment. For tax years 2018 through 2025, such unreimbursed employee business expenses are not deductible for federal income tax purposes. (However, such expenses are still deductible for self-employment tax purposes.)

Ministers may also incur expenses, such as travel expenses, in connection with ministerial income earned outside of their employment (such as honorarium payments received for speaking engagements, weddings, or funerals). Business expenses related to ministerial income earned outside of a minister’s employment (reportable on Form 1040, Schedule C) incurred in connection with ministerial earnings are not deductible for federal income tax purposes to the extent that they are allocable to tax-exempt parsonage or housing allowances.

To compute the nondeductible portion, the minister should first determine his total ministerial income, including the parsonage/housing allowance. The minister should then divide the parsonage/housing allowance by the total ministerial income to determine the nontaxable percentage. This percentage should then be applied to any business expenses incurred to determine the nondeductible portion. Only the deductible portion should then be reported on Schedule C.


For detailed tax guidance: Additional information is in Richard Hammar’s annual Church & Clergy Tax Guide. Chapter 13 of Hammar’s guide contains a sample minister’s tax return (prepared by Batts Morrison Wales & Lee, CPAs) illustrating the concepts described in this article. Ministers should also consider seeking the advice of a tax professional with experience in preparing ministers’ tax returns.


Many tax software packages do not automatically calculate the nondeductible portion of business expenses allocable to the tax-free portion of a minister’s income. Ministers will therefore need to manually adjust these expenses and input the reduced figure into the software for purposes of computing the income tax deduction. However, since the parsonage/housing allowance is included in the computation of the amount subject to the self-employment tax, the full amount of the business expenses should be used to compute the net earnings from self-employment reportable on Schedule SE.

Consider a professional tax preparer review

Because these unique rules are so critical to filing accurate and mistake-free returns, ministers who opt to use tax preparation software may wish to have returns reviewed by a tax professional with experience in preparing ministers’ returns.

Michele Wales is a partner and the national director of tax services for BMWL. She has oversight responsibility for the firm’s tax practice, with expertise in federal, state, and local tax issues affecting nonprofit organizations and their affiliates.  Michele has more than 25 years of experience in public accounting, and has also served as chief financial officer for a large nonprofit social services agency and controller for an airplane manufacturing company. She has been a conference speaker on nonprofit taxation issues at both the local and national levels. Michele is based in our national headquarters office in Orlando. 

Sophie Chevalier is a manager for BMWL. She received her bachelor’s degree in accounting from Burnett Honors College at the University of Central Florida, where she graduated with highest honors. As a manager, Sophie’s responsibilities include communicating directly with clients; performing research and analysis related to technical tax issues at the federal, state, and local levels; providing tax advisory services related to exempt organization corporate structure planning; obtaining and maintaining federal, state, and local tax exemptions; evaluating exempt organizations’ tax compliance; contributing to OnPoint feature articles and special alerts; supervising tax team members; and other related matters. She has been a conference speaker on nonprofit taxation issues at both the local and national levels. Sophie is based in our national headquarters office in Orlando.

Jessica Hebb is a senior team leader for BMWL. She received her master’s and bachelor’s degrees in accounting from the University of Central Florida, where she graduated with highest honors. As a senior team leader, Jessica’s responsibilities include communicating directly with clients; performing research and analysis related to technical tax issues at the federal, state, and local levels; providing tax advisory services related to exempt organization corporate structure planning; obtaining and maintaining federal, state, and local tax exemptions; evaluating exempt organizations’ tax compliance; and other related matters. Jessica participates in appropriate continuing professional education in nonprofit accounting and taxation. Jessica is based in our national headquarters office in Orlando. 

Advantage Members

Exclusive Webinar—Thrive as 2023 Comes to a Close

Thrive as 2023 comes to a close with Rich Hammar, who offers key insights and tips into finishing the year with a flourish.

Our perennially popular event with attorney and senior editor Richard R. Hammar returns as we focus on helping you thrive as 2023 comes to a close.

Pour some coffee or tea, grab a sandwich, and spend time learning from one America’s most trusted voices on legal, tax, and accounting issues for churches.


Not yet an Advantage Member? Join today to gain access to Church Law & Tax’s treasure-trove of content and resources.


  • How to correctly handle business expenses for pastors and staff;
  • How to properly set minister housing allowances;
  • How to document and process charitable contributions; and,
  • How to identify and prepare the records and paperwork that ministers, staff members, and the church will need for the upcoming tax-filing season.

Speaker:
Richard R. Hammar | CPA & Attorney

Reading & Resources:
Download the resources and templates mentioned in this webinar below. Or read one of the articles for more information that will help you finish thrive as 2023 comes to a close.

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Merry Christmas from Church Law & Tax!

As 2023 draws to a close, Merry Christmas from Church Law & Tax and a very blessed New Year. We are grateful for your support!

On behalf of the Church Law & Tax team, we wish you a very, very Merry Christmas!

You work hard serving the Church, and serving your church. And we work just as hard to give you the trusted resources you need to lead with confidence.

As 2023 draws to a close, we wanted to say thank you—thank you for the work you do and for supporting the work we do as members, newsletter subscribers, trusted advisors, and readers.

May the Lord’s peace be with you this Christmas season, and many blessings in the coming year.

If you’ve not yet joined Church Law & Tax, we hope you’ll consider kicking off 2024 on a strong note with a basic or advantage membership!

If you’re not quite ready to join as a member, perhaps receiving one of our weekly newsletters is a great way to start.

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The Best of Church Law & Tax—2023

From mastering key end-of-year financial tasks to the Employee Retention Credit, and AG investigations to Supreme Court rulings, this is the best of Church Law & Tax for 2023.

With 2023 in the homestretch, Church Law & Tax counts down the most read, listened to, and downloaded content.

You may be among the tens of thousands who checked in on articles tackling some of the most complex issues facing the church today. Or maybe you’re among the thousands who attended a series of live webinars and cohorts throughout the year. Or perhaps you downloaded or streamed the Church Law podcast. Regardless of the way (or ways) you accessed our content, know how grateful and thankful we are for your trust and support.

Blessings in the New Year!

-The Editors

Top 10 Church Law & Tax articles (by page views)

10. Mastering Seventeen End-of-Year Tasks
Make sure these various, critical end-of-year financial tasks are covered as you and your church move in to the new year.
By the Editors

9. IRS Again Alerts Employers to Improper ERC Claims
Third parties are using aggressive tactics and lucrative promises related to ERC claims.
By the Editors

8. Designating a Housing Allowance for 2024
Designating a housing allowance is a critical part of every church’s pastoral compensation package and a key tax benefit for pastors.
By Richard R. Hammar


Ever wonder about the minds behind all this wonderful content? Church Law & Tax’s team of advisors-at-large and senior editorial advisors speak into virtually every piece of content we deliver.


7. A Pair of Noteworthy Supreme Court Decisions for Church Leaders
A pair of Supreme Court decisions are noteworthy for church leaders and bivocational pastors.
By Richard R. Hammar and the Editors

6. Q&A: Amending a Housing Allowance
Can we increase our pastor’s housing allowance during the year?
By Richard R. Hammar

5. Q&A: Tackling Big-Ticket Repairs on a Housing Allowance
So, you’ve done the hard work of setting a housing allowance and, SURPRISE!, the septic tank fails.
By Ted Batson

4. Housing Allowance Basics
Learn and understand more about the most important tax advantage available to ministers—the housing allowance.
By Richard R. Hammar

3. AG Investigations into Churches and Nonprofits Are On The Rise
AG investigations can lead to both civil and criminal penalties. What triggers such investigations, and how can your church be prepared?
By Dustin Gaines

2. Why that ‘Gift” to Your Pastor Requires Caution
Churches often bless their ministers with gifts—here are the tax- and compensation-related issues to note.
By Matt Branaugh

1. Fed Rolls Out New I-9, Sunsets Key COVID-19 Deferment
The new Form I-9 is for churches, too, and remote examination is an option. 
By the Editors

Top five Church Law & Tax podcasts (by downloads)

5. Healthy Leaders, Healthy Churches, Reduced Legal Liability
From pastoral burnout to budgeting decisions and counseling ministries, churches that prioritize the right things minimize the rise of the unwanted things.
Featuring Erika E. Cole

4. Using a Legal Audit to Position Your Church For the Long Haul
New laws, regulations, and court decisions create new complexities and legal liabilities. Here’s how regular check-ups can minimize challenges for church leaders.
Featuring Erika E. Cole

3. Building a Healthy Leadership Culture in Your Church
Avoiding the toxic dynamics among and between a church’s pastors, boards, and senior staff leaders that can hamper fulfilling the church’s God-given vision and mission—and can create legal troubles.
Featuring Nicholas Pearce


Check out all of Church Law & Tax’s Church Law podcasts with host Erika Cole.


2. Building a Culture of Safety And Security in Churches
How church leaders can proactively assess their church’s vulnerabilities and needs and respond—while also fulfilling their missions. Featuring Simon Osamoh

1. Listener Mailbag: Addressing Your Questions on Love Gifts, Political Activities, Copyright, and More
Unpacking several topics church leaders routinely ask about.
Featuring Erika E. Cole and Matt Branaugh

Key Tax Updates December 2023

Housing allowance designations, year-end transactions, 2023 donations, and more.

Monthly requirements

If your church or organization reported withheld taxes of $50,000 or less during the most recent lookback period (for 2023, the lookback period is July 1, 2021, through June 30, 2022), then withheld payroll taxes are deposited monthly. Monthly deposits are due by the 15th day of the following month.

Note, however, that if withheld taxes are less than $2,500 at the end of any calendar quarter (March 31, June 30, September 30, or December 31), the church need not deposit the taxes. Instead, it can pay the total withheld taxes directly to the IRS with its quarterly Form 941. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.


Lead your church with confidence! Become a Church Law & Tax member today!


Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period (for 2023, the lookback period is July 1, 2021, through June 30, 2022), then the withheld payroll taxes are deposited semi-weekly.

This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Note further that large employers having withheld taxes of $100,000 or more at the end of any day must deposit the taxes by the next banking day. The deposit days are based on the timing of the employer’s payroll. Withheld taxes include federal income taxes withheld from employee wages, the employee’s share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes.

December 15, 2023

  • Complete all year-end transactions to be sure that they are reportable on your income tax return.
  • A church must make quarterly estimated tax payments if it expects an unrelated business income tax (UBIT) liability for the year to be $500 or more. Use IRS Form 990-W to figure your estimated taxes.
  • For 2023, quarterly estimated tax payments of one-fourth of the total tax liability are due by April 15, June 15, September 15, and December 15, 2023, for churches on a calendar-year basis. Deposit quarterly tax payments using Electronic Federal Tax Payment System (EFTPS).

December 31, 2023

  • Churches must designate a portion of each minister’s compensation as a housing allowance by this date in order for ministers who own or rent their homes to receive the full benefit of a housing allowance exclusion for calendar year 2024.

The designation should be adopted during a regular or special meeting of the church board and should be contained in the written minutes of the meeting.

  • Churches should designate a parsonage allowance for any minister who lives in a parsonage and who is expected to pay some of the expenses of maintaining the parsonage (e.g., utilities, furnishings, repairs, improvements, yard care, insurance).
  • Donors must deliver checks on or by this date to claim a charitable contribution deduction for 2023. Checks that are placed in the church offering during the first worship service in 2024 will not qualify for a charitable contribution deduction in 2023, even if the check is predated to 2023 or was written in 2023. However, checks that are written, mailed, and postmarked in 2023 will be deductible in 2023 even though they are not received by a church until 2024.
  • An employee’s marital status on this date determines his or her filing status for the year.
  • If you have a minister or lay worker who is treated as self-employed for federal income tax reporting purposes, but who you would like to reclassify as an employee, the ideal time to make the change is on January 1, 2024.

Note: If a date listed for filing a return or making a tax payment falls on a Saturday, Sunday, or legal holiday (either national or statewide in a state where the return is required to be filed), the return or tax payment is due on the following business day.

Note: You must use electronic funds transfer to make all federal employment tax deposits. This is generally done using the Electronic Federal Tax Payment System, a free service provided by the U.S. Department of Treasury. If you don’t wish to use EFTPS, you can arrange for your tax professional, financial institution, or payroll service to make deposits on your behalf. Failure to make a timely deposit may subject you to a 10-percent penalty.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Asked, Answered: Are Gift Cards Really Just Gifts?

Gift cards are a simple yet powerful way of blessing others. But there are some very real tax strings attached.

It’s a common question we field here at Church Law & Tax—are the gift cards we’re giving to our pastor, or lay minister, or volunteer, really just gifts?

Gift cards are a natural expression of the sort of love Christ commands we show to one another. They are a simple way of saying “thank you” for serving.


Upgrade to an Advantage Membership today for unlimited access to Church Law & Tax’s storehouse of curated content on how to manage church finances, address HR issues, understand taxes, stay legal, and keep safe.


We’ve tackled this topic here, here, and here.

So has Elaine Sommerville, starting on page 165 of Church Compensation—From Strategic Plan to Compliance. Pick up a copy today.

Meanwhile, as Matt Branaugh explains, a gift card does carry weight with the Internal Revenue Service. And there’s a good chance they’re taxable income for employees:

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DOJ Unveils ‘Place to Worship’ Initiative

The Department of Justice’s ‘Place to Worship’ initiative highlights the protections afforded under the Religious Land Use and Institutionalized Persons Act of 2000.

The US Department of Justice (DOJ) has unveiled the “Place to Worship” initiative, which highlights a landmark, decades-old federal law protecting individuals, churches, and religious organizations.  

The initiative explains the protections afforded under the Religious Land Use and Institutionalized Persons Act of 2000 (RLUIPA), and lays out the steps religious leaders can take when they encounter resistance or challenges to their property-related activities by local, state, and federal government agencies and officials.


For Members:

This five-part virtual roundtable, featuring a group of attorneys and RLUIPA experts, shares RLUIPA’s origins, and key provisions, along with insights into how RLUIPA might help your church if the need ever arises.


RLUIPA violations

Examples of RLUIPA violations by government actors, the DOJ says, can include:

  • A city or county denies a church a building permit to add Sunday school classes. But, the city cannot provide a compelling reason for the denial.
  • A mosque leases a storefront space, but the city denies an occupancy permit because zoning restrictions disallow houses of worship. Meanwhile, those restrictions allow fraternal organizations, meeting halls, and banquet facilities.
  • A building official denies a permit to build a Jewish temple that meets all requirements. The building official is later heard making anti-semitic remarks.

“Over the last 23 years, the Religious Land Use and Institutionalized Persons Act has helped to combat religious discrimination by protecting the civil rights of faith communities across the country,” said Assistant Attorney General Kristen Clarke of the Justice Department’s Civil Rights Division. “In light of continued anti-Semitism, Islamophobia and other forms of religious discrimination, the Justice Department stands ready to use federal civil rights law to ensure that communities can use their property for worship and to freely engage in religious exercise. The anniversary of RLUIPA provides an opportunity to underscore our commitment to protecting religious rights and ensuring that people are able to freely use land to worship and practice their faith.”

Click here to report a suspected RLUIPA violation.

It is important to remember local municipalities are sometimes subject to penalties for RLUIPA violations. A good example? A case out of Florida, where a city faces fees and damages for violating RLUIPA.

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