Pastor steals ‘love offerings,’ gets three years in prison

Case reveals how ‘love offerings’ raise many complex questions and issues for churches, church leaders.

Key point 7-21. Embezzlement refers to the wrongful conversion of funds that are lawfully in one’s possession.

A Texas pastor was charged with theft of U.S. currency valued between $2,500 and $30,000 from his church, a third-degree felony. 

The pastor pleaded “not guilty,” and the case proceeded to a jury trial. 

At trial, the evidence showed that the pastor represented to his church members that he had a “calling” to support a South African church and orphanage in need of financial assistance. 

The church and its members directed “love offerings” to the pastor to support the South African church and orphanage. 

Tip: “Love offerings” from a church to its pastor almost always constitute taxable income to the pastor. 

The church’s elders began questioning the legitimacy of the pastor’s representations, which were later revealed to be false. 

The “love offerings” occurred from August 2017 until October 2017. 

Pastor sentenced with theft

The jury found the pastor guilty. Following the jury’s guilty verdict, the trial court gave the pastor a three-year prison sentence. The pastor appealed. 

A state appeals court found no basis for an appeal and affirmed the trial court’s verdict.

Why this case matters to church leaders

There are aspects to this case that merit consideration by church leaders. Consider the following:

1. Control over funds

The court concluded that the church members’ “love gifts” to the pastor were not tax-free, even though he claimed that he would use them exclusively to help a church and orphanage in South Africa. The reason: the donated funds were not sufficiently subject to the church’s control. It was entirely up to the pastor to decide how the funds were spent. The fact that the pastor failed to use the funds for the church and orphanage in South Africa underscores the problem.

2. Discretionary funds and the ‘constructive receipt’ tax rule

It is a 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, ambiguous, and nonaccountable. Many ministers and churches are unaware of the potential tax consequences of these arrangements. 

The IRS could assert that the full value of the discretionary fund constitutes taxable income to the minister, even if the minister does not benefit from the fund. The mere fact that the minister could benefit from the fund may be enough for the fund to constitute taxable income. 

The basis for this result is the “constructive receipt” rule, which is explained in income tax regulation 1.451-2(a):

Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.

For a discretionary fund to constitute taxable income to a minister, it is essential that the minister have the authority to “draw upon it at any time” for his or her personal use. This means the fund was established without any express prohibition against personal distributions.

EXAMPLE: The Tax Court ruled that a pastor was required to report as taxable income $182,000 in deposits to a church bank account over which he exercised complete dominion and control. This case supports the view that church contributions to discretionary funds over which a pastor has complete control represent taxable income to the pastor. The court concluded:

[The minister] had unfettered access to the funds in the church accounts, and there is no evidence that the church congregation had any say over how those funds were used. Indeed, the only member of the church congregation who testified at trial had no knowledge of the church’s finances, suggesting that [the pastor] did not share any information about church finances with the congregation. The facts show that [he] fully controlled the church accounts, used money in those accounts at will, including to pay personal expenses, and were not accountable to anyone in their congregation for their use of the church funds. Accordingly, we conclude that [the pastor] exercised dominion and control over the church bank accounts. Consequently, all deposits into those accounts, except those from nontaxable sources, are properly includable in petitioners’ gross income. 101 T.C.M. 1550 (2011).

3. Love gifts

This case demonstrates once again that “love gifts” to a pastor represent taxable income and should be so reported by the pastor and the church.

4. Charitable contributions

Contributions by church members to a pastor’s discretionary fund will not be tax deductible by donors, assuming that the pastor has sole discretion on distributions from the fund. This is because charitable contributions must be made to, or for the use of, a “qualified charitable organization.” Section 170(c) of the tax code defines qualified organizations to include, among others, any organization that satisfies all the following requirements:

  • created or organized in the United States (or a United States possession);
  • organized and operated exclusively for religious, educational, or other charitable purposes;
  • no part of the net earnings of which inures to the benefit of any private individual; and
  • not disqualified for tax exempt status under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate or intervene in any political campaign on behalf of any candidate for public office.

Donations to a pastor earmarked for a discretionary fund over which he or she exercises sole dominion does not satisfy this definition.

5. Excess benefit transaction

The IRS can impose an excise tax against a “disqualified person,” and in some cases against church board members individually, if excessive compensation is paid to the disqualified person. Most senior pastors will meet the definition of a disqualified person. These taxes, known as intermediate sanctions, are substantial (up to 225 percent of the amount of compensation the IRS determines to exceed reasonable compensation). 

As a result, governing boards or other bodies that determine clergy compensation should be prepared to document any amount that may be viewed by the IRS as excessive. This includes salary, fringe benefits, and special-occasion gifts. If in doubt, the opinion of a tax attorney should be obtained.

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.

As a result, the failure of the pastor, or his employing church, to report the offerings as taxable income made them an automatic excess benefit subjecting the pastor, and possibly members of the church board, to substantial excise taxes as noted above.

6. Donations to foreign charities

The pastor’s assertion that he was raising funds for a church and orphanage in South Africa raises the question of the deductibility of contributions made to churches and charities in other countries. The IRS summarizes the rules as follows:

You can’t deduct contributions to . . . foreign organizations other than certain Canadian, Israeli, or Mexican charitable organizations. . . . Also, you can’t deduct a contribution you made to any qualifying organization if the contribution is earmarked to go to a foreign organization. However, certain contributions to a qualified organization for use in a program conducted by a foreign charity may be deductible as long as they aren’t earmarked to go to the foreign charity. For the contribution to be deductible, the qualified organization must approve the program as furthering its own exempt purposes and must keep control over the use of the contributed funds. The contribution is also deductible if the foreign charity is only an administrative arm of the qualified organization. . . .

You may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada. To deduct your contribution to a Canadian charity, you generally must have income from sources in Canada. See IRS Publication 597 (Information on the United States–Canada Income Tax Treaty) for information on how to figure your deduction.

You may be able to deduct contributions to certain Mexican charitable organizations under an income tax treaty with Mexico. The organization must meet tests that are essentially the same as the tests that qualify U.S. organizations to receive deductible contributions. The organization may be able to tell you if it meets these tests. (IRS Publication 526)

7. Internal controls

This case provides a useful lesson in the importance of maintaining good “internal controls” over a church’s financial resources, and the problems that can occur when internal controls are neglected. 

Learn best practices for establishing internal controls with our online course, “Safeguarding Your Church’s Finances.”

8. Criminal consequences 

The case illustrates that church leaders like this pastor who mishandle church funds may be subject to both tax penalties and criminal liability.

Zitha v. State, 2023 WL 3526080 (Tex. App. 2023).

Church Member’s Arrest Justified

Individuals who send threatening communications to a pastor can face criminal liability.

Key point.
An array of civil and criminal remedies are available to clergy who receive communications that threaten harm or death.

A New York federal court ruled that a police officer acted properly in arresting a church member who sent the pastor a series of threatening emails.


A church member (the “plaintiff”) sent a series of text messages to the church’s pastor in which he claimed to have been offended by some of the religious views expressed by the pastor in his sermons. The plaintiff’s messages included the following statements:

While I am learning, what it means to love my enemy, and I am not fully there; I don’t like you, nor the wickedness that you do, from the pulpit. . . . You keep provoking with your attacks from the pulpit, you keep telling your one-sided story from the pulpit, and this can leave two wives without husbands, and children without a father. . . . You better ask God to stop you.

The pastor made a complaint to the local police department concerning the plaintiff’s messages. In response, a police officer called the plaintiff and asked him to come to the precinct to discuss the pastor’s complaint. The plaintiff went to the precinct and met with the officer. After the plaintiff confirmed that he sent the messages to the pastor, the officer arrested him for aggravated harassment in the second degree.

The prosecutor’s office charged the plaintiff with two counts of aggravated harassment in the second degree for sending threatening text messages to the pastor. The criminal charges were dismissed, but the court ordered the plaintiff to refrain from communicating with the pastor.

The plaintiff sues arresting officer

The plaintiff sued the officer who arrested him, claiming that he should not have arrested him for sending the messages, and that the officer had committed false arrest in violation of the Fourth Amendment.

The court noted that “p robable cause is a complete defense to claims for false arrest . . . and that probable cause requires an officer to have knowledge or reasonably trustworthy information sufficient to warrant a person of reasonable caution in the belief that an offense has been committed by the person to be arrested.”

In rejecting the plaintiff’s false arrest claim, the court concluded:

There is no real dispute about what led to the plaintiff’s arrest. The plaintiff, angry about the pastor’s sermons, sent him a series of messages that included one in which he said wives would be left without their husbands and children would be left without their father. The pastor filed a complaint with the police. After the plaintiff admitted sending the messages, the officer arrested him for aggravated harassment based on those messages. The officer reasonably interpreted the messages as threats to the pastor. . . . Therefore, as a matter of law, the officer had probable cause to arrest the plaintiff for aggravated harassment, and the false arrest claim fails.

What this means for churches

As this case illustrates, persons who send threatening communications to a pastor face possible criminal liability for doing so. They also may be compelled by court order to refrain from any contact with the pastor. Abdullah-Sadiq v. Venticinque, 2019 WL 359979 (E.D.N.Y. 2019).

Pastor Sentenced to Prison for Tax Fraud

Learn to properly identify and report taxable income.

Church Law & Tax Report

Pastor Sentenced to Prison for Tax Fraud

Learn to properly identify and report taxable income.

Key Point. Failure to report taxable fringe benefits as taxable income can expose a pastor or lay church employee to significant criminal penalties.

A federal appeals court ruled that a pastor was properly convicted and sentenced to prison for filing a fraudulent tax return as a result of his failure to report several items of taxable income. A pastor (Pastor Phil) served as both senior pastor of his church and superintendent of a school operated by the church. The IRS began investigating Pastor Phil after receiving an anonymous letter. As part of its investigation, the IRS traced payments made by the church and the school to various sources on Pastor Phil’s behalf or for his benefit and determined that he failed to report a substantial amount of taxable income on his tax returns in violation of section 7206 of the tax code which imposes criminal penalties for willfully filing a fraudulent tax return.

At trial, the individuals who prepared Pastor Phil’s tax returns testified that his returns were based solely on the W-2’s and 1099’s he presented to them and that he did not declare any additional income from other sources. Pastor Phil reviewed the returns before they were filed with the IRS and never indicated that they were inaccurate or that they otherwise misstated his tax liability.

At his trial, the prosecution documented $110,000 of unreported taxable income, including the following:

  • The school paid disability insurance premiums on Pastor Phil’s behalf directly to a life insurance company.
  • The school made monthly payments on a loan Pastor Phil had taken out to purchase a car for his daughter.
  • Several persons paid Pastor Phil fees for speaking engagements, “bird-dog” fees for referring customers to a local car dealership, referral fees for sending loans to a mortgage company, and a $6,600 “finder’s fee” for bringing in investors to fund a real estate development project.
  • The church paid Pastor Phil’s life insurance premiums, totaling over $6000.
  • The church paid Pastor Phil a salary of $750 every two weeks ($15,000 per year) for serving as interim manager of a church-operated credit union.
  • The church or school made various other miscellaneous payments on Pastor Phil’s behalf, including a time-share property that he owned; his water bill; and a homeowner’s insurance policy. The water bill and homeowner’s insurance premium payment were treated as unreported income because the church made these payments over and above Pastor Phil’s $36,000 housing allowance.
  • Pastor Phil received $60,000 from the church for his work at a satellite location. This amount was designated by the church for “pastor’s housing expenses” and listed under the heading “salaries.” The church did not give this money directly to Pastor Phil, but deposited it into the church’s savings account at the credit union. Pastor Phil gave a church officer his bills as they became due and the officer paid them until the amounts disbursed totaled $60,000. Out of this $60,000, the church paid off Pastor Phil’s personal credit card debt and the loan on his home, and also wrote checks to cover his cosmetic dentistry and repairs to his home, including repainting and gutter work. The total amount paid out on Pastor Phil’s behalf was less than $60,000, and the remaining money was transferred into his housing allowance account.

The prosecution noted that Pastor Phil’s annual salary was $115,000, but that he had acquired numerous “luxury items” that seemed excessive in light of his salary, including two time-shares, a 2.73-carat diamond ring, a projection television, a camcorder, a DVD player, and custom-made clothes. According to the prosecution, the excessiveness of his lifestyle relative to his reported income was indicative of fraud. Pastor Phil presented several witnesses who testified that the $60,000 payment from the church was a “gift” and not compensation for services rendered. These witnesses conceded, however, that there was no written evidence that the $60,000 payment was intended as a gift. The jury convicted Pastor Phil on all counts, and sentenced him to 21 months in prison.

Pastor Phil appealed his conviction on the ground that he had not acted willfully, as required under section 7206. The court disagreed: “His argument is without merit. The government presented ample evidence that he knew his income exceeded the amounts he reported on his tax returns and that he had the opportunity to review and correct his returns before fi ling them with the IRS. We have no difficulty finding that it was sufficient for a reasonable jury to conclude beyond a reasonable doubt that he willfully filed tax returns in which he knowingly and significantly under-reported his income and that he was aware of their falsity when he signed and subscribed them under penalties of perjury.”

The appeals court also rejected Pastor Phil’s claim that the trial court erred in “enhancing” his prison sentence based on his use of “sophisticated means.” Federal sentencing guidelines permit a prison sentence to be increased (“enhanced”) if an offense involved “sophisticated means.” The concluded that the following evidence warranted an increase in Pastor Phil’s sentence based on sophistical means: (1) depositing his salary from the church and the credit union into accounts that were not registered in his own name; (2) instructing the church to make payments out of these accounts directly to his personal creditors; and (3) having the school and the church pay his life and disability insurance premiums directly to the insurance carriers. The court concluded that Pastor Phil’s schemes to conceal income through the use of third-party accounts over a three-year period required intricate planning and therefore involved the use of sophisticated means.

Application. This case illustrates the importance of being familiar with the definition of taxable income. Pastor Phil failed to report various items of taxable income on his tax return, and these items totaled $110,000. It is not always easy to know whether various benefits are taxable or not. Chapter 4 of Richard Hammar’s 2009 Church & Clergy Tax Guide lists 22 categories of taxable income that are often made available to clergy and church staff. This information is designed to assist church leaders in properly identifying and reporting taxable income. 2009 WL 723206 (C.A.11 2009).

This Recent Development first appeared in Church Law & Tax Report, July/August 2009.

Clergy-Penitent Privilege in Court Cases

The clergy-penitent privilege may be lost if a counselee seeks out a minister for spiritual counsel in the presence of one or more third persons.

Church Law & Tax Report

Clergy-Penitent Privilege in Court Cases

The clergy-penitent privilege may be lost if a counselee seeks out a minister for spiritual counsel in the presence of one or more third persons.

Key point 3-07.2. In order for the clergy-penitent privilege to apply there must be a communication that is made in confidence. This generally means that there are no other persons present besides the minister and counselee who can overhear the communication, and that there is an expectation that the conversation will be kept secret.

* A North Carolina appeals court rejected a youth pastor’s argument that his conviction for murdering his wife should be overturned because the trial court erred in allowing his senior pastor to testify about statements he made to him that were protected by the clergy-penitent privilege. A youth pastor (the defendant) began informing people that his wife had disappeared. He went with his senior pastor to search for her. The following morning, several members of the church joined the search. Several searchers noticed that the defendant had several scratch marks on the side of his face, which he claimed to have sustained during the search. The search proved fruitless, and the defendant’s wife was considered missing.

A few months after the wife’s disappearance, and following the defendant’s return from a church-related trip to another state, the senior pastor and other pastors of nearby churches met with the defendant to discuss some improper credit card charges which he had made on the church credit card. At that meeting, the defendant disclosed that his relationship with his wife had become strained. He later resigned from the church and moved.

Two years later the skeletal remains of the defendant’s wife were found. A nylon cord was knotted and looped around the top of the rib cage near the neck area. In the opinion of the medical examiner, she died as a result of violent injury or trauma, most likely asphyxiation. The defendant was charged with first degree murder. The state produced considerable evidence of guilt. A pathologist testified that the scratch marks on the defendant’s face appeared more like fingernail marks than briar marks. He further testified that the defendant had bruising on his right upper arm that was consistent with a “grab mark.” The state also called a prison inmate as a witness who had been incarcerated with the defendant while the defendant was awaiting trial. The inmate testified that the defendant informed him that his wife discovered that he had been having an extramarital affair, and had followed him to a meeting with the other woman and confronted him. The inmate further testified that the defendant admitted to him that he had strangled his wife and had driven around for a period of time trying to dispose of her body. The state also produced two witnesses who had seen the defendant near the place where the skeletal remains were found, on the same day as the wife’s disappearance.

The defendant produced evidence at trial of his innocence. In particular, he testified that he and his wife were both involved in the music ministry of the church, and though his wife was not paid, she contributed her efforts to that ministry and to youth and outreach activities. The defendant insisted that they were a very happy and loving couple and participated in a number of mission trips together. Because of the defendant’s meager salary, the couple struggled financially, which caused strains upon their marriage, as did other factors. Defendant admitted that he had spent money making phone-sex calls, and had become involved in a romantic, though not sexual, relationship with another woman with whom his wife was acquainted. He claimed that he confessed the affair to his wife and she forgave him, though he acknowledged that for a time there were issues of trust. In addition, defendant had occasional sexual dysfunction which strained their relationship.

The defendant testified that he had “relationship problems” with his senior pastor which came to a head when the senior pastor asked him to reduce his workload at the church. In addition, the defendant wanted to go on a mission trip to Romania, but the senior pastor would not permit him to go at church expense. Though defendant was angered at the denial of his request, he and his wife went at their own expense.

A jury convicted the defendant of first degree murder, and sentenced him to life in prison without the possibility of parole. The defendant appealed on several grounds, two of which are summarized below.

Use of church credit cards

The defendant claimed that the trial court erred in allowing the jury to hear evidence regarding his unauthorized use of church credit cards. The appeals court disagreed, noting that this evidence “was relevant in showing the financial status of the defendant and his wife before and immediately after the wife’s disappearance. From this evidence, the jury could infer that the marriage relationship between defendant and his wife was not as good as shown by defendant’s evidence. In addition, defendant’s improper use of the credit cards was linked in time and circumstances with the crime. Finally, the evidence was not offered to show, nor does it suggest, a propensity or disposition on the part of the defendant to commit murder.”

Clergy-penitent privilege

The defendant also claimed that the trial court erred in allowing his senior pastor to testify about statements he made to him. This testimony, the defendant asserted, was in direct violation of the clergy-penitent privilege. The North Carolina privilege states:

No priest, rabbi, accredited Christian Science practitioner, or a clergyman or ordained minister of an established church shall be competent to testify in any action, suit or proceeding concerning any information which was communicated to him and entrusted to him in his professional capacity, and necessary to enable him to discharge the functions of his office according to the usual course of his practice or discipline, wherein such person so communicating such information about himself or another is seeking spiritual counsel and advice relative to and growing out of the information so imparted, provided, however, that this section shall not apply where communicant in open court waives the privilege conferred.

The court stressed that “to fall within the protection of the privilege, the defendant must be seeking the counsel and advice of his minister and the information must be entrusted to the minister through a confidential communication.” The court concluded that the defendant’s statements to his senior pastor were not privileged, since a church elder was present during the conversation. The court concluded: “The clergy-communicant privilege is not applicable in this case [since] a person to whom the privilege did not extend was present at the meeting between defendant [and senior pastor]. This person was a church elder rather than an ordained minister or clergyman …. The conversation of the defendant and the clergy, held in the presence of an elder who was not an ordained minister, is one in which the defendant no longer entrusts his admissions solely to the clergy …. As a result, the clergy-communicant privilege does not apply in this case.”

The appeals court rejected all of the defendant’s remaining arguments, and affirmed his conviction and sentence.

Application. This case demonstrates that the clergy-penitent privilege may be lost if a counselee seeks out a minister for spiritual counsel in the presence of one or more third persons. The North Carolina clergy privilege does not specifically negate the privilege under these circumstances, but the court construed the statute to apply only to confidential communications made to one or more ministers, and without the presence of a third person.

The court suggested that the clergy privilege would apply to statements made by a counselee to two or more ministers. This is a helpful clarification of an issue that arises frequently. To illustrate, assume that a teenage boy informs his youth pastor that he has committed a crime. The youth pastor takes the boy directly to the senior pastor and has him repeat his confession in the presence of both pastors. This case suggests that this confession remains privileged despite the presence of a third person, since that person was a minister. Of course, courts in other jurisdictions may or may not agree with this conclusion, but the case represents one of the few times that a court has addressed this issue and so it may be given special consideration by other courts. State v. Anonymous, 636 S.E.2d 231 (N.C. App. 2006).

Chaplains and Miranda Warnings

It is important for police chaplains to clearly understand when they are required to provide Miranda warnings.

Church Law & Tax Report

Chaplains and Miranda Warnings

It is important for police chaplains to clearly understand when they are required to provide ‘Miranda’ warnings.

Key point. In some cases, police chaplains may be required to provide criminal suspects with the Miranda warnings before speaking with them.

* An Indiana court ruled that a police chaplain was not required to provide a murder suspect with the Miranda warnings before speaking with him since police officers had done so a few days before. A seven-month-old infant died suddenly. An autopsy determined that the infant died of Sudden Infant Death Syndrome (SIDS). Shortly after the child’s funeral, however, his father admitted to his wife that he had killed the child by wrapping his head in plastic wrap and suffocating him. The father then went to the local police station and told several detectives that he had killed his son, explaining that he did so as an act of revenge against his wife for refusing to return from a vacation to attend his father’s funeral. He also gave two taped statements to the police admitting that he had killed his son. He was taken into custody, and spoke with a police chaplain. Prior to their conversation, the chaplain informed the father that any statements made to him would not be confidential and that he would reveal their conversation to the detectives. Despite this warning, the father admitted that he had killed his son by suffocating him. The father was later convicted of murder. He appealed his conviction on several grounds, including the fact that the police chaplain had failed to give him the “Miranda warnings” before speaking with him.

The United States Supreme Court ruled in the Miranda case (1966) that a defendant’s statements stemming from custodial interrogation may not be used against him at trial unless the state demonstrates that, prior to any questioning, the defendant was warned “that he has a right to remain silent, that any statement he does make may be used as evidence against him, and that he has a right to the presence of an attorney, either retained or appointed.” A repetition of the Miranda warnings is only necessary when an interruption “deprived the suspect of an opportunity to make an informed and intelligent assessment of his interests.”

The court observed that the police chaplain spoke with the father shortly after he had been informed of his Miranda rights by police officers. Following the Miranda warnings, the father confessed to killing his son on several occasions to police officers and detectives, and signed two statements of confession. Thereafter he confessed to the chaplain after the chaplain informed him that anything he communicated would be disclosed to the detectives. The court concluded: “Given these circumstances … it was not necessary for [the chaplain] to repeat the Miranda warnings. It is apparent that the chaplain spoke to the father just after he had received two separate Miranda warnings. He waived his rights on both occasions and rendered two confessions admitting that he had killed his son. As a result, he failed to show that any interruption before speaking with the chaplain deprived him of the opportunity to assess his interests before that meeting took place.”

Application. Several pastors serve as police chaplains, and in this capacity they often communicate with criminal suspects. It is important to note that in some cases a police chaplain may need to read the Miranda warnings to a suspect before speaking with him or her to avoid jeopardizing a criminal prosecution. It is important for police chaplains to clearly understand when they are required to provide Miranda warnings. This should be part of the training they receive from the police department. Police chaplains who have any doubts about this important responsibility should obtain clarification from the police. Shanabarger v. State, 846 N.E.2d 702 (Ind. App. 2006).

Employee Relations

Church Law and Tax 1990-01-01 Recent Developments Employee Relations Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1990-01-01 Recent Developments

Employee Relations

Can church employees who are fired for refusing to “backdate” or otherwise falsify records sue the church? A recent Illinois appeals court ruling suggests that they can. Occasionally, a church with poor recordkeeping procedures will ask a bookkeeper or other church employee to backdate a document. Examples include a contribution receipts (to assure a deduction in a prior year), or a housing allowance designation (which must be declared in advance to be effective). If an employee refuses to backdate such a document, the church should recognize that it may be legally liable for firing the employee. The Illinois case involved an employee of a pension consulting firm who allegedly was fired when he refused to backdate certain documents in order to provide clients with tax advantages that otherwise would not have been available. The court observed that the fired employee could sue his former employer for “retaliatory discharge” if he could prove “(1) that he was discharged; (2) in retaliation for his activities; and (3) the discharge violates a clear mandate of public policy.” There was no doubt, the court observed, that the fired employee had properly alleged the first two requirements. The court also found that discharging an employee for failure to violate federal tax law (by backdating documents) violated a “clear mandate of public policy.” The court noted that federal law imposes criminal liability on any person who “aids or abets” in the preparation of a knowingly false or fraudulent tax return or related document, and that “the backdating of documents for the fraudulent purpose of obtaining a deduction constitutes an offense.” Accordingly, a church employee who complies with a request to backdate a contribution receipt or housing allowance designation may be criminally liable. Clearly, requests to “backdate” documents are not only unethical, but they may result in civil or criminal liability. Russ v. Pension Consultants Company, Inc., 538 N.E.2d 693 (Ill. App. 1989).

Related Topics:

Child Abuse – Part 1

Church Law and Tax 1990-01-01 Recent Developments Child Abuse Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1990-01-01 Recent Developments

Child Abuse

A question that undoubtedly will be of increasing concern to church staff members is their potential civil liability for failing to report known or reasonably suspected cases of child abuse. In many states church staff members are required to report known or reasonably suspected cases of abuse to the authorities. In some states, they have the option to report or not to report. Whether reporting is required or not, a church staff member who is aware (or reasonably should be aware) of an incident of abuse and who elects not to report it may later be sued by the victim. Will such lawsuits be successful, and if so, what will be the basis of liability? A Florida appeals court recently issued a ruling that addresses these issues in the context of a psychiatrist’s failure to report a patient’s physical and emotional abuse of his daughters. The minor daughters sued their father’s psychiatrist, alleging that he knew that his patient had abused his daughters, that he failed to report the abuse to state authorities as required by law, and that his failure to report caused the children to suffer continued abuse and injury. The court acknowledged that state law requires many categories of professionals (including psychiatrists) to report “known or suspected child abuse or neglect,” and imposes criminal penalties for failure to do so. However, the court observed that the reporting law said nothing about victims being able to sue persons who fail to report, and it refused to create a new theory of liability. In fact, it stated that the “increasing complexity” of legislation and the “much higher volume of litigation” required the courts to refrain from creating new theories of liability unless a statute specifically provides for them. It observed that the Florida legislature “has had ample opportunity to broaden the penalty for failure to report” child abuse by allowing children to sue persons who fail to report. As a result, the court rejected the daughters’ attempt to sue the psychiatrist for injuries they allegedly suffered because of his failure to report. A dissenting judge argued that the daughters should have been permitted to sue the psychiatrist. He maintained that “our jurisprudence rests on the principle that for every wrong there is a remedy,” and that the purpose of the child abuse reporting law was sufficiently broad and important that private lawsuits should be encouraged rather than discouraged. This case provides some indication that civil lawsuits against clergy and other church staff members who fail to report incidents of child abuse may not be allowed by the courts, despite the fact that the victims continue to suffer abuse or molestation because of the failure to report. Certainly it is too early to make such a prediction at this time, but the Florida case at least indicates that the civil courts will not automatically recognize such lawsuits. Future developments of course will be fully addressed in this newsletter. Fischer v. Metcalf, 543 So.2d 785 (Fla. App. 1989).


Church Law and Tax 1989-09-01 Recent Developments Immigration Richard R. Hammar, J.D., LL.M., CPA •

Church Law and Tax 1989-09-01 Recent Developments


A federal district court in Arizona ruled that the Immigration and Naturalization Service (INS) acted properly in seizing a van owned by the Tucson Ecumenical Council. At the time the van was seized, it was being used by a local clergyman to transport three Guatemalan citizens in violation of federal law. Vehicles so used are subject to seizure and forfeiture so long as the person operating the vehicle knows that the alien or aliens being transported are in the United States in violation of immigration law. The court rejected the Council’s contention that the aliens were lawfully in the United States. The court concluded: “The fact that [the clergyman] acted as a matter of conscience and moral conviction and with no intent to do specific harm to any person, group or society is abundantly clear … but that does not mean he did not know he was violating the law. It only means that in following the dictates of his conscience he was willing to violate secular law in order to obey moral law. With the freedom to make that choice, as I believe he did, comes the consequences of the act demanded by that secular law. In this case it is forfeiture.” Tucson Ecumenical Council v. Ezell, 704 F. Supp. 980 (D. Ariz. 1989).

Officers, Directors, and Trustees

Church Law and Tax 1989-01-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Church Law and Tax 1989-01-01 Recent Developments

Officers, Directors, and Trustees

A Texas appeals court decision addressed the issue of a church trustee’s alleged criminal liability for misapplication of church funds. Here are the facts. In 1973, a donor conveyed a tract of land to a church by delivering to three church trustees a deed to the property. A sanctuary was constructed on the property. By 1978, church attendance had declined significantly and weekly services had been cancelled. The three trustees discussed selling the property, and agreed that the property and building were “not theirs personally” but rather “were the Lord’s and they should be the work of the Lord’s.” However, no action was taken. In 1981, one of the trustees sold the property for $100,000 to a third party by signing his own name and forging one of the other trustee’s signatures on a deed. The trustee placed the sales proceeds in a church account, and within two months spent almost the entire balance on personal purchases. He was prosecuted for violating a Texas law prohibiting trustees from knowingly “misapplying” property held in a “fiduciary” capacity. A jury convicted the trustee of misapplication of funds and felony theft, but the appeals court overturned the convictions. The court reasoned that the trustee could not be guilty of either misapplication of funds or theft since “at the time of the misapplication the church had ceased all of its regular functions of work and worship for approximately three years … and was not in existence as a matter of law.” Since the church did not exist, the trustee could not be convicted for misapplication or theft of its assets. A dissenting judge denounced the court’s handling of the case, noting that under Texas law (1) a trustee has “a solid duty of loyalty and fidelity,” and “must make a strict accounting of the properties of the trust”; (2) a trustee cannot by himself sell any property held in trust for his own benefit; and (3) the attorney general must be notified if trust property is distributed contrary to the purposes of a trust. The dissenter also challenged the court’s conclusion that the church had ceased to exist, since the trustee’s own actions “prove the contrary.” Specifically, the trustee executed the forged deed in the name of the church, deposited the proceeds in a church account, and paid for all of his personal purchases with church checks. Another important consideration missed by both the majority and the dissenter is the fact that section 501(c)(3) of the Internal Revenue Code requires that the assets of churches and other exempt organizations be distributed upon dissolution (i.e., termination) to another organization exempt from federal income taxation under section 501(c)(3) of the Code. Section 501(c)(3) specifies that a church’s charter must contain a dissolution clause that satisfies this requirement. Had the church in the Texas case complied with this requirement, the unfortunate and unjust result may well have been avoided. Martinez v. State, 753 S.W.2d 165 (Tex. App. 1988).

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