Recent Developments

Issues that affect ministers and churches
When a Church Dissolves
Distribution of assets requires legal counsel.

Key point 6-07.04. Church board members have a fiduciary duty of loyalty to their church, and they may be personally liable for breaching this duty by participating in board decisions that place the interests of one or more board members above the interests of the church itself.

Key point 6-15. The procedure for dissolving an incorporated church is specified by state nonprofit corporation law.

A Pennsylvania court addressed the issue of whether a church acted properly when it dissolved due to declining attendance, sold its assets, and transferred most of the sales proceeds to the pastor as compensation for wages that it was previously unable to pay. A church was established in 1902. In 1999, the church hired a new pastor with a starting weekly salary of $150, out of which $90 was treated as a non-taxable housing allowance. The pastor subsequently received periodic salary increases and, eventually, his entire salary was treated as a housing allowance. He was also paid separately for his maintenance work. As of 2008, his annual salary was $17,930. In 2007, thirteen members of the church's congregation unanimously approved the revision to the church's constitution to provide that "in the event of the dissolution of this corporation, all of its debts shall be fully satisfied, including any compensation and benefits due to its Pastor."

At an annual congregational meeting in 2008, eight voting members of the church, including the pastor and his wife and two children, voted to dissolve the church and sell the church's property. They also adopted a motion by the pastor's son to compensate the pastor for his past service after the sale of the church's property. A committee formed to determine the amount of compensation for the pastor proposed to pay him up to $635,000. Between 1999 and 2008, the church's annual income ranged from $26,474 to less than $35,000.

    Churches and religious organizations, like all exempt organizations under IRC section 501(c) (3), 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 tax. See the following section on excess benefit transactions. Note that prohibited inurement does not include reasonable payments for services rendered, payments that further tax-exempt purposes, or payments made for the fair market value of real or personal property. IRS Publication 1828.

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