In church-related tax policy report, commission recommends more donor involvement

WASHINGTON (BP) -- A commission examining several church-related tax issues -- such as the limitations of the pastoral housing allowance and the IRS' power to investigate churches -- submitted a 91-page report to U.S. Sen. Chuck Grassley Dec. 4.

"The law on this subject is rather well-settled. Application of the law, however, is often not simple."

-- Tax policy commission

The report by the Commission on Accountability and Policy for Religious Organizations said its 43 recommendations to increase accountability would not impose excessive legislation, giving careful attention to the preservation of religious freedom.

"The vast majority of religious and other nonprofit organizations in America operate with a genuine commitment to financial integrity and appropriate accountability," Michael Batts, a CPA and chairman of the commission, wrote in the report. "Occasionally, we see a few exceptions."

When nonprofits spend money in ways that the public perceives as extravagant, it raises the risk that all nonprofits will face increased scrutiny, Batts noted. Media reports often identify leaders of television ministries with ties to the "health and wealth gospel" as examples of such spending.

In the wake of a mostly unsuccessful investigation of six of those ministries and in an effort to discourage questionable spending, Grassley of Iowa, the ranking GOP member of the Senate Finance Committee, asked the Evangelical Council for Financial Accountability to examine the issues. The ECFA created the commission which submitted the report after nearly two years of work.

Federal policy, Batts wrote, should continue to encourage the public to financially support religious and other nonprofit organizations and should not burden the organizations with harsh or excessive legislation or regulation.

Regarding the pastoral housing allowance, the commission addressed concerns that a small number of ministers live in employer-provided homes with high values or receive allowances to live in high-value homes. They also considered the fact that the clergy housing exclusion is being challenged in federal court by some who claim it violates constitutional provisions.

"Additionally, observations have been made that some religious organizations consider significant portions of their workforce to be ministers," the report stated. "Accordingly, they treat them as ministers for income tax purposes, which may include providing housing or a housing allowance. Observers have expressed concerns that practices in this area by some organizations may be abusive."

The commission encouraged all religious organizations to "help raise the bar of reasonable and ethical conduct" in determining who should participate in the clergy housing allowance.

Congress should not apply a dollar limit to the housing allowance because attempting to do so would create more challenges than it would solve, the commission said. For example, some clergy members are required, due to the location of their houses of worship, to live in high-cost locales.

Also, "an effort by Congress to expand the clergy housing exclusion in an attempt to protect its constitutionality would be counterproductive," the report said. "Legal experts advised the Commission that there is good reason to believe the clergy housing exclusion can withstand a legal challenge to its constitutionality. Further, we are concerned that expanding the exclusion ... could actually enhance the risk to the law's constitutionality."

Regarding the IRS' power to investigate churches, the commission said Congress should never pass legislation requiring churches to file the highly detailed Form 990 that other nonprofits must file because it would place an unnecessary burden on churches and the government.

"The fact that some may take offense over a particular church's practices does not justify eroding the freedom from government interference that is so central and inherent in our country's framework," the report said.

"... As the U.S. Supreme Court has unanimously stated, the First Amendment 'gives special solicitude' to the rights of religious organizations," the report said. "Those rights should be protected, defended, and preserved."

The commission recommended that ultimate accountability for churches in America be placed not with the federal government but with "their God or their faith" and with "their denominations, congregations, members, donors, directors," etc.

"Healthy engagement by those who provide financial support provides a powerful incentive toward self-regulation and is arguably one of the most effective methods of addressing the practices of the few religious leaders who otherwise would have little interest in self-regulation," the report said.

Regarding whether the current IRS audit protection for church leaders should be repealed, the commission recommended that it be preserved.

"An audit of a church leader's transactions with his or her church is essentially an audit of the reasonableness of the church's compensation practices with respect to that leader, and inevitably raises the same kinds of entanglement concerns as an audit of the church itself: close scrutiny of internal procedures for setting compensation, review of minutes and other confidential documents, IRS interviews of key decision-makers, etc.," the report said.

The commission also examined whether legislation is needed to make clear that "love offerings" -- paid by church attendees to ministers -- are taxable.

"Religious organizations should carefully assess their roles in facilitating payments by individuals to or for the benefit of leaders of their organizations and in reporting taxable payments to the leaders of their organizations, to help ensure that their leaders are knowledgeable about, and compliant with, applicable tax law," the report said.

Donors, meanwhile, should carefully evaluate the tax treatment of payments made and should ensure that amounts deducted as charitable contributions on their individual tax returns qualify for such designations, the report said.

"The religious community would benefit greatly from a higher degree of clarity in the guidance surrounding payments commonly referred to as 'love offerings,'" the commission said, recommending that the IRS provide clearer guidance but deciding against added legislation.

"The law on this subject is rather well-settled. Application of the law, however, is often not simple, which is why we are not suggesting a change in the law, but rather clearer guidance in its application," the report said.

As an example of how easily the tax law regarding love offerings is misunderstood, the commission referred to a wedding ceremony after which the father of the bride makes a payment to the minister for officiating.

"The payment is not deductible by the father as a charitable donation, but it represents taxable income to the minister because it is remuneration for services rendered," the report said.

The commission and its panels include leaders from virtually every faith group in America and top attorneys experienced in the areas of exempt organization law and constitutional law with a specific concentration in the arena of religious freedom, Batts, the chairman, said.

In a "highly transparent process" involving multiple meetings, media communications, public input, position papers, presentations at national conferences and a virtual town hall meeting, the commission developed its recommendations "with an extraordinarily high degree of agreement among those participating," Batts said.

"This Commission's work demonstrates that cooperation across faith lines and across different sectors for the public good is a realistic and achievable goal," Batts wrote.

"By working together to improve self-regulation, donor engagement, administration of the law, education about the law, and certain elements of the law itself, we can make real progress toward enhanced financial accountability in the religious and broader nonprofit sector."

The full report is available at religiouspolicycommission.org.

Sometime in 2013, the commission plans to submit to Grassley a second report addressing the increasingly controversial topic of political expression by religious and other nonprofit organizations.


Erin Roach is assistant editor of Baptist Press. Get Baptist Press headlines and breaking news on Twitter (@BaptistPress), Facebook (Facebook.com/BaptistPress ) and in your email ( baptistpress.com/SubscribeBP.asp).

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