The Grassley staff report: self-dealing and disqualified persons

When I was reading the Grassley staff report [PDF] the section I found the most difficult to understand dealt with the concepts of “self-dealing” and “disqualified persons.” Self-dealing is fairly straightforward: it is a kind of conflict of interest, and involves a person with some say in how a tax-exempt organization spends its money uses that position to their own financial benefit.

The definition of “disqualified persons” is a bit more complicated; I will refer interested readers to the IRS definition [link]. It includes board members, their family members, etc. Despite the plain meaning of the term it has more to do with how they can receive compensation from the organization, and more importantly, how it is taxed, rather than whether or not they can receive money from a non-profit they at least partly control.

To be clear (if that’ s possible at this point) the law doesn’t prohibit people with positions of influence at a non-profit from doing business with that same non-profit, or even from profiting from that relationship. It just taxes the transaction and does so in a particular way.

Take for example Ligonier Ministries [link]. It isn’t a church; it’s a doctrinal educational organization; it is officially classified as “Religious Media & Communications.” It promotes Reformed theology, by among other things selling books and other materials written by or featuring R. C. Sproul. Mr Sproul is a trustee, as is his wife Vesta. They are both compensated for being trustees [link, page 7]; he also receives royalties from Ligonier. There’s nothing illegal about this; it just gets taxed a particular way that would e.g. show up on Mr Sproul’s 1040 Form just like anyone else’s. If the transaction were excessive in some way there might be additional taxes, but that’s it.

(Regarding Ligonier Ministries see also [link] and documents linked there).

If Ligonier Ministries were a church, however, it would be possible to hide the size of any transactions between it and Mr Sproul, and it would be relatively straightforward for Mr Sproul to avoid paying any taxes on any excess benefit. And this sort of self-dealing is of interest to the Grassley investigation.

Charitable organizations are frequently criticized for the compensation packages they provide to their officers, directors, trustees and key employees, especially when the package includes luxury vehicles and private jets. Related party transactions and non-arms length transactions are another frequent complaint. The six media-based ministries were also subject to these criticisms and our reviews of each confirm that such criticisms are warranted. See the individual church overviews for more information. (page 37, bolding mine)

The discussion in the Grassley staff report seems fairly arcane; there are some fairly specific recommendations for strengthening current law.

What does this mean for the rest of us who aren’t involved with these giant organizations handling hundreds of millions of dollars? Well, the reforms suggested would raise the standard for board members (elders, deacons, whatever) for churches that have a pastor on their board and one or more family members of that pastor on the payroll. Places like First Family Church in Overland Park, KS [link], where five members of the pastor’s family turned up on the payroll:

According to the bank’s motion, the $915,000 combined salaries of the Johnston family members comprised 76 percent of the church’s total payroll. [link]

I have to admit I can’t see how requiring more transparency and tightening up the law here could be a bad thing.