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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.

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Our top 10 tax developments for churches and clergy 2024 are based on a number of legislative, administrative, and judicial tax developments in 2023, including excess benefit transactions and intermediate sanctions.

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:

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.”

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:

A distinct legal existence
A recognized creed and form of worship
A definite and distinct ecclesiastical government
A formal code of doctrine and discipline
A distinct religious history
A membership not associated with any church or denomination
An organization of ordained ministers
Ordained ministers selected after completing prescribed studies
A literature of its own
Established places of worship
Regular congregations
Regular religious services
Sunday schools for religious instruction of the young
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 8^th 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.

Image: getty/Thomas Barwick

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.

Rick Spruill, Digital Content Manager

Bio

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.

Image: getty/Michael Ochs Archives

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.

Richard R. Hammar, Attorney, CPA

Bio

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.

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Consider These Church Management Conferences in 2024

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

The Editors

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.

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Outsourcing Accounting and Financial Functions

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

The Editors

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.

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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.

Michele M. Wales, Sophie B. Chevalier, and Jessica K. Hebband

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.

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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.

The Editors

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.

Presentation Slides
2024 Church and Clergy Tax Guide | Related Resource
Designating a Housing Allowance for 2024 | Related Article
Sample Housing Allowance for Pastors | Related Article
Mastering Seventeen End-of-Year Tasks | Related Article

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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!

The Editors

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.

The Editors

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.

Richard R. Hammar, Attorney, CPA

Bio

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.

Key Tax Dates December 2023 Download

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.

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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.

The Editors

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 Editors

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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Q&A: Beware Giving Volunteers Cash, Gift Cards, and Gifts

It’s natural to want to bless volunteers with cash, gift cards, and gifts. But how you do it matters to you, them and the IRS.

Frank Sommerville, Attorney, CPA

Bio

Q: Regarding gifts to volunteers, whether it involves gift cards, cash, tangible gifts (such as a guitar) or a trip, must we report the amount for tax purposes? If so, who reports it? The recipient? The church? And if the church must report it, how is it done?

The volunteer reports the taxable income on their tax return, regardless of the amount.

Also, if the total value of the gift(s) is $100 or more, the church is responsible for reporting the recipient’s income and payroll tax withholding for the recipient on a form 941 and a form W-2.

Q: But they are volunteers, not employees. They are not in our payroll system. Does this mean all volunteers [who] receive something of $100 or more are now treated as employees? If so, our small church would potentially have over 100 employees.

That’s true. And it’s a testament to the numerous problems raised by providing volunteers cash, gift cards, gifts and other items of value. These problems include:

The definition of a volunteer is one who works without compensation in any form. Therefore, the volunteer becomes an employee once the church provides anything valuable in recognizing their efforts.
The volunteer [who receives gift cards, cash, or tangible gifts] is a part-time employee, and the church must pay workers’ compensation premiums on the volunteer’s earnings.

For these reasons (and many others), we discourage using cash, gift cards, or tangible items worth more than $100 to recognize the services of volunteers.

Q: Okay, so, can we give volunteers a 1099 at the end of the year for accounting of any gifts we gave to them if the total amount is above $100? Or do we have to enter them into our payroll company as employees? Either way, we would have to get their social security number.

Unfortunately, the correct answer is usually form W-2. Because the analysis is the same as for every worker. Only in rare and unusual circumstances would a volunteer qualify as an independent contractor. In 99.99 percent of the instances, Form W-2 is correct.

Senior Editorial Advisor Frank Sommerville frequently lends Church Law & Tax members his expertise and insights. Find more of his work here.

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

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North Dakota, West Virginia Add Religious Freedom Protections

Legislatures in North Dakota and West Virginia pass religious freedom protections, joining 24 other states with similar laws.

Matthew Branaugh, Business Owner

Bio

Last Reviewed: April 16, 2024

Lawmakers in North Dakota and West Virginia recently passed religious freedom protections, joining 24 other states that have done the same—and with nearly all enacted in the roughly three decades since the US Supreme Court handed down two controversial decisions.

West Virginia’s “Equal Protection for Religion Act” took effect on May 29, 2023, while North Dakota’s law became effective on August 1, 2023.

Both laws are almost identical.

The language follows a “substantial burden/compelling government interest/least restrictive means” standard drawn directly from the federal Religious Freedom Restoration Act (RFRA). Congress unanimously passed RFRA three years after the Supreme Court’s controversial 1990 decision in Employment Division v. Smith.

The Smith controversy

The majority in Smith contended neutral laws and government actions that generally apply to the public could incidentally burden religious exercise without violating the US Constitution.

Religious freedom advocates immediately decried the ruling; many still highly prioritize legal efforts to overturn it.

Based on First Amendment religious freedom protections, they say, the government should meet a higher standard whenever any law, regulation, or other government-initiated action affects an individual or organization’s religious exercise, incidental or otherwise.

Congress responded with RFRA in 1993, embracing the “substantial burden/compelling government interest/least restrictive means” standard.

When compared to the Smith decision, RFRA’s standard means a claim brought by an individual or organization has a better chance of prevailing—although victory isn’t automatically guaranteed.

Congressional overreach

Four years after RFRA’s passage, though, the Court significantly curtailed the law’s power.

The Court ruled Congress overstepped its constitutional powers when it passed RFRA. Courts have since determined the law applies only to federal laws and federal government actions.

Some states began adopting RFRA-like measures soon after, implementing the “substantial burden/compelling government interest/least-restrictive means” standard for their respective local and state governments.

Fourteen states passed such laws between 1993 and 2005 (with Utah’s religious land use act, passed in 2005, offering RFRA-like protections to churches in property-related matters). Another nine passed RFRAs between 2009 and 2021.

Virginia’s religious freedom protection was included within its constitution codified in 1786.

Become a Church Law & Tax Advantage Member and enjoy 20% off our downloadable 50 State Religious Freedom Laws Report.

Prior to North Dakota and West Virginia, South Dakota and Montana were the most recent to do it. Both passed their respective laws in 2021.

Expanded protections after COVID-19

Like South Dakota, both North Dakota and West Virginia’s new laws also prohibit state and local governments from restricting religious conduct more than secular conduct of “reasonably comparable risk” or “comparable … alleged economic need or benefit.”

The additional provisions address concerns raised by religious liberty advocates throughout the COVID-19 pandemic when government mandates throughout the country affected in-person worship services.

As the pandemic continued, churches and religious organizations began legally challenging mandates prohibiting them from meeting. The challenges often referenced the abilities for similarly situated secular activities to physically gather.

Courts—including the Supreme Court—initially granted state and local governments with greater leeway as they sought measures to slow COVID-19’s spread. Eventually, though, a majority of the Court saw state and local restrictions unevenly applied to churches and determined they were unconstitutional.

Matthew Branaugh is an attorney, and the business owner for Church Law & Tax.

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Asked, Answered: How to Respond to an Unexpected Property Tax Bill

Did your church receive an unexpected property tax bill? Why does this happen? What can be done? This video can help.

The Editors

An unexpected property tax bill can be a confusing, complex and sometimes shocking development for church leaders.

It’s why Church Law & Tax teamed up with Senior Editorial Advisor Midgett Parker in an in-depth Q & A on property taxes, and why we’ve created this brief overview from attorney and Church Law & Tax Editor Matthew Branaugh.

In it, we cover the basics of:

The different exemptions churches usually enjoy
The reality of claiming and maintaining church property tax exemptions at the local level
Why churches sometimes receive an unexpected property tax bill
What to do when it happens

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It’s also important to remember churches are generally exempt from federal and state taxes, but not always at the local level.

In fact, we routinely field questions from church leaders asking why they’ve received a bill from a local municipality.

It can be alarming, it can be frustrating, and it can be difficult to know how to respond. But, it’s always an opportunity to build strong relationships at the local level, bear witness to the Gospel, and find creative solutions in partnership with local government officials.

Meanwhile, are you wondering how to maintain and protect your church’s tax-exempt status?

This downloadable .pdf offers tips on what it means to be tax exempt, and more importantly, how churches sometimes jeopardize that status without even knowing it.

Image: Vasil Nazar

A Closer Look at COVID-19 and the Church

Church Law & Tax’s sister site takes a closer look at COVID-19 and the Church—how the pandemic changed everything.

The Editors

On May 5, 2023, the UN World Health Organization (WHO) ended its “pandemic” designation for COVID-19.

The declaration came slightly more than three years after COVID-19 first took the world by surprise, triggering more than 765 million known cases and nearly 7 million reported deaths during that time span.

But beyond the numbers, COVID-19 changed everything.

Economies, social structures, educational institutions, governments, and health care systems all shifted to meet changes—and challenges—throughout the pandemic.

So did American churches.

COVID-19 and the church from a pastor’s perspective

But just how much?

A nationwide study by ChurchSalary, a sister site of Church Law & Tax, aimed to find out.

ChurchSalary partnered with Arbor Research Group to do a yearlong study of more than 1,000 pastors and leaders. The study used a wide range of tools including a nationwide survey, focus groups, in-person interviews, and community case studies.

Church Salary’s Aaron Hill shares why this study can be of service to pastors, church leaders, and church members, alike:

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Insights on giving trends, layoffs, PPP loans and more

Several angles will be of special interest to pastors and church leaders who keep tabs on the legal, financial, tax, and risk management matters of their churches and ministries.

Among them:

Why some churches experienced increased attendance and giving, while others did not;
What happened to people who lost their church jobs;
How many churches obtained Paycheck Protection Program loans, and what federal data shows regarding how much aid was received;
How the pandemic accelerated technological adoption and innovation; and,
How government restrictions on in-person gatherings—a highly controversial and litigated issue throughout the pandemic—affected the health and vitality of congregations.

This resources site also includes a free, downloadable PDF report, a pastor- and researcher-fueled podcast, and several related articles and opinion pieces.

All are created to help leaders better understand their strengths, weaknesses, and opportunities to improve so that they are better prepared to respond when the next crisis—whether local or global—arises.

The full findings are here:

Image: Vasil Nazar

Key Tax Updates November 2023

Key tax dates for November 2023 include a quarterly Form 941 requirement for nonminister employees.

Richard R. Hammar, Attorney, CPA

Bio

Monthly requirements

Key tax updates for November 2023 relate to depositing withheld payroll taxes. 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.

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

Withheld taxes include:

Federal income taxes withheld from employee wages
The employee’s share of Social Security and Medicare taxes
The employer’s share of Social Security and Medicare taxes

Key Tax Dates November 2023 Download

Semiweekly requirements

If your church or organization reported withheld taxes of more than $50,000 during the most recent lookback period noted above, then the withheld payroll taxes are deposited semiweekly.

What this means:

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

Note: 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.

Key Date: November 13, 2023

Other key tax updates for November 2023 relate to churches having nonminister employees (or one or more ministers who report their federal income taxes as employees and who have elected voluntary withholding).

These churches can file their employer’s quarterly federal tax return (Form 941) on November 13 instead of October 31. But only if they deposited taxes for the third calendar quarter in full and on time.

For complete information, consult the 2023 Church & Clergy Tax Guide by Richard R. Hammar, JD, LLM, CPA. Visit ChurchLawAndTax.com for the expert insights you need to manage tax issues with confidence

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

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Boy Scouts’ Bankruptcy Informs Church Insurance Decisions

The Boy Scouts’ bankruptcy offers many insights and lessons for leaders in the area of church insurance coverage.

Richard R. Hammar, Attorney, CPA

Bio

The Boy Scouts of America (BSA) bankruptcy offers insights that can help inform church insurance decisions.

Several BSA insurers balked at the idea of defending or indemnifying BSA. Among the various reasons is the fact that the statute of limitations barred most of the victims’ claims. Because of this, the court’s decision in the Boy Scouts bankruptcy contemplated several key church insurance issues.

Our analysis reveals three key points for church leaders:

Permanently retain all insurance policies

May sex abuse claims involve incidents that occurred long ago. Therefore, it is entirely understandable that many churches cannot produce them.

However, church leaders should still work to ensure all insurance policies are retained permanently by the church.

Without a policy documenting coverage, an insurer is much less likely to pay for a legal defense. It is also less likely an insurer will pay toward an adverse judgment or settlement awarded to a plaintiff.

Richard Hammar found several other key takeaways for church leaders in the BSA bankruptcy ruling.

Find them all right here.

Church leaders do not want their church to bear sole responsibility of paying substantial legal fees incurred defending such claims.

Work with an insurance archeologist

Consider hiring an insurance archeologist if your church cannot find an insurance policy potentially applicable to an incident occurring long ago. An insurance archeologist has legal and forensic training and can find key elements of old (or discarded) insurance policies.

Understand coverages

Be familiar with the exclusions in a policy before purchasing it.

All policies exclude intentional or criminal acts. Therefore, a question often arises whether such an exclusion applies to sex abuse claims, which are both intentional and criminal.

Some insurance companies say that they do.

Sex abuse claims represent the most significant risk to churches. Therefore, it is imperative churches adequately insure themselves against potential claims. It is also wise to determine whether a church policy offers “claims-made” or “occurrence-based” coverage. Use this checklist to guide that process.

Review state mandatory reporting requirements

Another key step: Becoming aware of and familiar with state-specific mandatory reporting laws. These laws define how, when, and to which agency an incident of abuse must be reported. This downloadable .pdf offers state-by-state guidance along with important facts to help you understand abuse reporting laws.

Boy Scouts bankruptcy provides BSA’s insurance footprint

The bankruptcy court analyzed BSA’s insurance coverage dating back to the mid-1900s.

This is what the court found:

“BSA carried some form of primary and/or excess comprehensive general liability insurance in place covering abuse claims since at least 1935.

The terms of BSA’s policies vary over time and include policies that have a per occurrence limit, an aggregate limit or both.

For the years 1935 through most of 1971, and 1979 through approximately 1996, Insurance Company of North America (Century) issued primary insurance policies to BSA that also contained per occurrence limits, but no aggregate limits for abuse claims.

Beginning in 1969 and through 1982, in addition to primary coverage, BSA began to purchase excess insurance policies.

The vast majority of the excess policies provided per occurrence limits, but no aggregate limit.

Accordingly, once the underlying primary insurance is exhausted, the excess policies may need to pay the per occurrence limits numerous times without exhausting. Certain of the excess policies in these years have settled, but others are available to provide coverage.

Beginning in 1983, BSA insurance policies generally provide for aggregate limits applicable to abuse claims. BSA also began procuring significantly more excess insurance with higher aggregate limits.

From 1986 through 2018, BSA purchased primary and first-layer excess matching deductible policies that require BSA to pay or reimburse deductibles before excess coverage attaches over and above either a primary policy or a first-layer excess policy.

Also, from 1986 through 2018, BSA purchased multiple layers of excess insurance that, in most years, provide over $140 million in excess insurance coverage.

From 1983 forward, certain policies are exhausted, and certain insurers are insolvent, but there is $3.6 billion worth of available aggregated coverage, the actual value of which will not be known until all claims have hit the policies and been paid.”

Local Councils lacked coverage before 1971

Prior to 1971, Local Councils were not covered under BSA insurance policies.

“Beginning in 1971 through 1974, BSA gave Local Councils the ability to pay a premium to become an additional insured under BSA’s general commercial liability policies… . From 1975 through the end of 1977, all Local Councils were additional insureds under insurance policies issued to BSA.

Beginning in 1978 through the present, BSA implemented a General Liability Insurance Program by which all Local Councils were added as named insureds under insurance policies issued to BSA.”

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

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Takeaways for Church Leaders From the Boy Scouts’ Bankruptcy

Behind the Boy Scouts’ bankruptcy are victim-plaintiffs whose enormous pain, suffering, and loss hold valuable warnings for church leaders.

Richard R. Hammar, Attorney, CPA

Bio

Many helpful takeaways are in the 200-page ruling issued by the judge overseeing the Boy Scouts of America’s bankruptcy proceeding.

We’ve summarized a few of them here:

Takeaway 1: Boy Scouts of America (BSA) is a debtor with tens of thousands of non-debtor entities. The Boy Scouts bankruptcy proceeding is a mass tort case that involves sexual abuse claims. The Boy Scouts bankruptcy case also underscores BSA’s violation of trust as a national nonprofit organization with a household-recognized name and more than 100 years of history. The victims and their families suffered abuse. They now seek compensation. The also want to ensure that, to the extent BSA survives, it does so in an environment where abuse is both exposed and dealt with.

Takeaway 2: More than 82,000 claimants filed proofs of claim asserting sexual abuse. More than 1,000 claimants sent letters to the court, many telling their stories for the first time. Meanwhile, BSA continues its mission by offering more than 1 million boys and girls opportunities to learn self-sufficiency and leadership.

Takeaway 3: Both the national BSA office and its local councils and chartered organizations are defendants in hundreds of lawsuits alleging sexual abuse. These cases contain horrific details into specific abuse cases as well as grooming activities that extend back more than a century. Moreover, the cases suggest BSA maintained secret records of volunteers accused of molesting scouts. These are the “ineligible volunteers files,” or “perversion files.”

Some plaintiffs allege BSA enjoyed “top-down” control over the local councils and chartered organizations. Others allege local councils and chartered organizations acted as BSA agents. Still others allege adult volunteers acted as BSA agents with BSA’s blessing.

Takeaway 4: Many legal theories are in play as plaintiffs look to hold some—or all—defendants liable for their acts. These theories include:

Negligence
Gross negligence
Negligent retention
Negligent supervision
Fraudulent concealment
Willful and wanton misconduct
Constructive fraud
Breach of fiduciary duty

Meanwhile, some complaints separate the allegations by defendant. Others lump all defendants together as a single, harmful group.

The plaintiffs seek economic and non-economic damages and punitive damages. They also want names of known abusers made public and letters of apology. They want a toll-free number established so others may report abuse.

It is important to also understand that BSA settled some very large claims before seeking bankruptcy protection. One case involved 16 victims of a notorious abuser from the 1970s named Thomas Hacker. BSA filed and lost statute of limitation motions and later settled with the victims for almost $90 million.

Takeaway 5: At least 16 plaintiffs law firms or entities ran almost 11,000 ads in 90 days (from radio spots to half-hour infomercials) targeting potential claimants in 2020.

Takeaway 6: Many victims want the BSA to adopt new or expanded youth protection procedures as part of any settlement to their claims.

These include:

Mandatory routine criminal background checks
Registering all adults staying overnight while leading scouting activities
Creating a single, accessible youth protection manual
Creating trauma-informed, clinical- and evidence-based training materials
Teaching scouts how to recognize and report inappropriate behavior
Creating better incident reporting procedures to include mandatory reporting anytime an adult offender is placed in the volunteer screening database
Creating a place of remembrance for all child abuse survivors in prominent places at all BSA High Adventure bases, along with a survivor-focused path to Eagle Scout
Improved volunteer screening through a public-facing volunteer screening database that is also shared with other youth service organizations.
Creating better incident reporting procedures to include mandatory reporting anytime an adult offender is placed in the volunteer screening database
Creating a place of remembrance for all child abuse survivors in prominent places at all BSA High Adventure bases, along with a survivor-focused path to Eagle Scout
Improved volunteer screening through a public-facing volunteer screening database that is also shared with other youth service organizations.

Richard Hammar also found several insurance takeaways for church leaders within the BSA bankruptcy ruling.

Find them right here.

Key revelations in the Boy Scouts bankruptcy

The damages are substantial.

Sexual molestation of minors can come with a heavy financial penalty. Again, the court noted BSA’s almost $90 million settlement with 16 victims. Remember, there are more than 82,000 claims currently pending against BSA.

Churches are not automatically liable for the sexual abuse of minors.

There must be a legal basis for liability in cases of sexual abuse of minors that happens on a church premises or in the course of church activities.

The court mentioned nine of them:

Negligence
Gross negligence
Negligent retention
Negligent supervision
Fraudulent concealment
Willful and wanton misconduct
Gross negligence
Constructive fraud
Breach of fiduciary duty

Victims of child sexual abuse in a church generally cite one or more of these theories of liability in an attempt to hold the church liable for the abuse.

What is “negligence?”

Negligence refers to conduct that creates an unreasonable risk of foreseeable harm to others. It connotes carelessness, heedlessness, inattention, or inadvertence.

But church leaders should understand that churches are not “guarantors” of the safety and well-being of children. They are not liable for every injury that occurs on their premises in the course of their activities. Generally, they are responsible only for those injuries that result from their negligence or some other malfeasance.

One common form of negligence is negligent selection. Negligent selection is when an organization fails to responsibly, and with due care, choose volunteers and paid workers whose duties involve the supervision or custody of minors.

Abuse victims suing churches often allege negligent selection.

What is “negligent retention and supervision?”

Negligent retention means that a church knows an employee or volunteer who interacts with minors may pose a risk of harm to minors, but retains that person anyway.

Negligent supervision means that a church is careless with how it supervises children on the church premises and during off-campus church activities.

Gross negligence and willful and wanton misconduct all can lead to punitive damages not covered by insurance.

Gross negligence, by definition, is more serious than negligence because it indicates a party showed a lack of care that demonstrated reckless disregard for the safety of others. Willful misconduct suggests an intent to injure, while wanton misconduct suggests indifference about whether an act would harm others.

BSA victims alleged gross negligence and willful and wanton misconduct, opening the door for a court to award punitive damages.

Punitive damages go beyond just compensating victims for whatever loss they sustained.

They are designed to punish a wrongdoer for particularly reprehensible or outrageous conduct.

They also represent a potentially uninsured risk.

To illustrate, in one case, a punitive damage award was based on the fact that church officials repeatedly and knowingly placed a priest in situations where he could sexually abuse boys and then failed to supervise him and disclose his sexual problem. Clearly, church officials did not intend for the priest to molest anyone. But, under the circumstances, the jury concluded that the church’s actions were sufficiently reckless to justify an award of punitive damages.

For church leaders, reckless inattention to risks can lead to punitive damages. The problem then becomes one of insurance, as many church insurance policies exclude punitive damages.

One example of gross negligence or willful and wanton misconduct that can potentially lead to punitive damages is a failure by church leaders to implement effective procedures for the selection and supervision of youth workers.

Gross negligence and willful and wanton misconduct also can lead to the loss of limited liability under state law for uncompensated officers and directors of churches.

State and federal laws provide limited immunity from legal liability to the uncompensated officers and directors of nonprofit corporations (including churches) for their ordinary negligence. This is an important protection.

However, most of these laws do not protect officers and directors from liability for their gross negligence or willful and wanton misconduct.

Gross negligence and willful or wanton misconduct also can bring personal liability.

Church leaders are more likely to be personally sued if they’re found guilty of gross negligence.

Church leaders that show indifference to information that clearly demonstrates improper behavior by a staff member or volunteer worker can be viewed by a court as being grossly negligent. This makes it more likely such leaders will be personally sued.

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

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IRS Unveils Voluntary Withdrawal Program for Pending ERC Claims

IRS says erroneous ERC claims—many spurred by aggressive third parties—prompted voluntary withdrawal program.

Matthew Branaugh, Business Owner

Bio

Last Reviewed: January 22, 2024

The Internal Revenue Service (IRS) launched its promised voluntary withdrawal program for pending Employee Retention Credit (ERC) claims.

The agency unveiled the process just weeks after suspending new applications for the pandemic-related relief.

In late December, the agency announced additional details, including a March 22, 2024, deadline to participate, and a provision allowing parties who voluntarily participate to only have to repay 80 percent of the credit they received.

Meanwhile, the agency continues warning small businesses, nonprofits, and churches of unscrupulous third parties who aggressively push filings without fully vetting the employer’s eligibility.

Have you considered a Church Law & Tax membership for your church or ministry? Give us a try today!

ERC claims can be withdrawn, amended

Under the voluntary process, employers that filed for the ERC—but have not yet received a refund and believe the claim is likely ineligible—can “withdraw their submission and avoid future repayment, interest, and penalties,” the IRS announced.

Employers who received a refund check, “but haven’t yet cashed or deposited it, can still withdraw their claim,” the agency added.

Employers who received and deposited refund checks, and now believe all or part of their claim may not be eligible, can file an amended return.

The agency posted a Q&A series further explaining ERC eligibility, the withdrawal process, and amending a return to correct a previously processed refund.

Keep up with the latest Church, Law & Tax developments through our weekly newsletter service

Mistaken claims and rampant fraud

The ERC was created in 2020 as part of the congressional response to the unfolding COVID-19 pandemic. The credit aimed to help employers retain employees while government-mandated shutdowns hampered operations.

Many small employers, including churches, are potentially eligible. However, the process for determining eligibility and properly claiming the credit is complex. Depending on the employer’s size, and the demonstrated impact, refunds can amount to tens or hundreds of thousands of dollars—or even larger in very limited situations.

Numerous third parties—many formed specifically for ERC claims—have aggressively marketed their consulting services. They’ve promised large refunds in exchange for sizable contingency fees.

These organizations push employers to submit claims without fully determining their eligibility.

As a result, fears of mistaken claims and rampant fraud have followed. The agency said it has already denied more than 20,000 claims and sent letters to more than 20,000 recipients indicating likely problems with credits received. The IRS also said it has already received withdrawals totaling more than $100 million.

Matthew Branaugh is an attorney, and the business owner for Church Law & Tax.