Background. It is a fairly common practice for a congregation to set aside a sum of money in a "discretionary fund" and give a minister the sole authority to distribute the money in the fund. In some cases, the minister has no instructions regarding permissible distributions. In other cases, the congregation establishes some guidelines, but these often are oral and ambiguous. Consider the following examples.
Example. A congregation at an annual business meeting authorizes the creation of a "pastor's fund" in the amount of $10,000, with the understanding that Rev. T, the congregation's senior minister, will have the authority to distribute the fund for any purpose. Rev. T is not required to account to the congregation or church board for any distribution, and he is not prohibited from making distributions to himself. During 1994, Rev. T distributes the entire fund to members of the congregation who were in need. He did not distribute any portion of the fund to himself or to any family member.
Example. Same facts as the previous example, except that Rev. T distributed $5,000 to himself in 1994.
Example. The governing board of First Church sets aside $5,000 in a discretionary fund, and authorizes Rev. D, its senior minister, to distribute the funds for "benevolent purposes." Rev. D is required to account to the church board for all distributions and is prohibited from making any distributions to himself or to any family member.
Many church treasurers are unaware of the potential tax consequences of these arrangements. The tax consequences of some of the more common arrangements are summarized in this article.