Q&A: Distributing Church Assets

Can we give a sizable love gift to our pastor and distribute our assets to another ministry?

Our church is dissolving. Can we give the pastor a sizable love gift for his faithfulness, and give the rest of the money and much of our property to another church or ministry?
Yes, the church may pay the pastor a love gift so long as it is treated as taxable compensation to him, and so long as the love gift, together with his other compensation and benefits from the church, are reasonable in total. Reasonableness is a somewhat subjective concept, but the tax law defines it as what similar organizations pay similarly qualified people for performing similar duties. It would not be wise to be too aggressive in making such a gift to the pastor, as there are severe penalty taxes that could apply to both the pastor and those who approve the gift if the amount, together with his other compensation, is determined to be excessive.
As for distributing assets to other churches or ministries recognized by the IRS as exempt and described in Section 501(c)(3) of the Internal Revenue Code, yes, federal tax law allows you to make liquidating and dissolution distributions to such organizations.
You should consult with an attorney about the best way to legally wind up the affairs of the church. If you are a corporation, your attorney may advise you to file articles of dissolution in your state or to take certain other actions (such as leaving the corporation open for a period of years) to reduce the risk of personal or successor liability. You should also address any contractual obligations or liabilities the church may have when talking with your attorney.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

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