Diversion of Church Funds
Key point 4-09. Clergy who divert church funds to their personal use face possible criminal and civil liability.
Church income ordinarily consists of designated and undesignated contributions, interest on bank accounts, gain on investments, and rent from church-owned properties. Some churches have income from the rendition of services, such as the operation of child care facilities, private schools, or counseling services. Church income, from whatever source, is held by the church in trust for the church's religious and charitable purposes. Such a trust may be express, as when a donor contributes funds for a specified purpose, or implied, as when funds are contributed without designation regarding their use or constitute rents, interest income, service income, or gains. See generally G. BOGERT, THE LAW OF TRUSTS AND TRUSTEES § 371 (1977 & suppl. 1999).
The principle that church funds and assets are held in trust for the religious and charitable uses of the church is codified in the Internal Revenue Code, which conditions the exemption of churches from federal income taxation on several factors, including the following: (1) none of a church's net earnings inures to the benefit of a private individual, except for the payment of reasonable compensation for services rendered, and (2) a church is organized and operated exclusively for religious purposes. I.R.C. § 501(c)(3).
Ministers who divert church funds to their own benefit in excess of their stated compensation may be personally liable on the basis of several legal theories, including breach of trust, embezzlement, fraud, conversion, securities law violations, and theft. In addition, the tax-exempt status of their church may be jeopardized, and a state investigation could result. Diversion of church funds by a minister can be intentional, but often is inadvertent. For example, diversion of church funds by clergy to compensate themselves for travel or entertainment expenses allegedly incurred on behalf of a church may be considered improper if done without proper authorization.
In summary, ministers ordinarily should not permit church funds or assets to be placed in their names; bank checking and savings accounts should require the signature of two unrelated persons; ministers should not pay for their personal or business expenses out of church funds without written authorization; and they should not accept favorable loans and other financial benefits out of church funds in excess of their stated compensation without the advice of legal counsel. See generally Comment, 73 J. CRIM. L. & CRIMINOL. 1204 (1982); R. Hammar, CHURCH & CLERGY TAX GUIDE (chapter 4, published annually by Christianity Today).