Posts Tagged ‘Sean Barnett’

The Grassley staff report: 50/25/25

I realize there are readers who might reasonably think I’m beating this Grassley thing to death, but I think it’s the gift that keeps on giving. One section of the report tries to get a fix on the scale of the money handled by megachurches and/or “media ministries” with no real balance sheet transparency (due to the fact that there are no Form 990 requirements) and no external oversight:

This lack of governmental, independent or denominational oversight is troubling when considering that churches can reach the size of large taxable corporations, control numerous taxable and non-taxable subsidiaries, and bestow Wall Street-size benefits on their ministers. The 2005 megachurch survey found that there were 1,210 megachurches (i.e., Protestant congregations that draw 2,000 or more attendees in a typical weekend) in the United States, nearly double the number that existed five years earlier. The survey also found that average annual expenditure of a megachurch in 2005 was $5.6 million. A follow-up study conducted in 2008 found that average megachurch income in 2008 was $6.5 million. Generally, fifty percent of income went to salaries, a quarter to buildings, and a quarter to missions and programs.  (pages 30-31)

Let’s just note that the “2000 Protestants” is a restriction of convenience; in many ways churches of 1900 or 2100 people are virtually the same, and the term “Protestant” here is a grab-bag term meaning “not Roman Catholic,” mostly because there just aren’t any non-Christian church-like groups drawing 2000 people on a weekly basis with megachurch-like buying power.

I probably should mention here that it is in this part of the document that the Grassley report comes closest to Establishment Clause trouble, because it is suggesting that it is the independence (read: lack of denominational affiliation) that makes these church organizations troublesome. I’d hate to see the final recommendations from this process suggest that of the 1400+ churches on the Hartford Institute list, only those with particular affiliations need to find some ECFA-like body to approve their balance sheets or face losing their 501(c)(3) tax-exempt status.

Anyway, if we roll the megachurch count forward to today’s list and leave the dollar figure at its 2008 level we end up with an aggregate of more than $9 billion tax-free dollars being handled annually by Hartford Institute churches. That’s a substantial amount of money for there to be no external accountability.

Finally, the last figure is of particular interest. Of that $9 billion total half, or $4.5 billion, is spent on salaries, $2.25 billion on facilities, and $2.25 billion on everything else. I might gently suggest that as Christians we’re getting a poor return on our investment if only a quarter of every dollar is actually spent on ministry. No wonder the modern megachurch doesn’t feature foreign ministries as prominently as the small independent churches I attended in the Seventies.

I’m tempted to take this 50/25/25 as sort of a pass-fail line, meaning that churches that spend 50% of their money on salaries are overspending, etc. But it seems kind of outrageous in and of itself. I’m not sure I’d be comfortable (for example) writing two checks to my local church: half to the church and half directly to the pastoral staff.

It also suggests to me that there may be no economy of scale for churches, if small churches and large churches alike are following roughly a 50/25/25 breakdown.

Of course, and this is the point of the Grassley staff report, it’s hard to know if you don’t know how your local church is spending the money it receives.



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.

The Grassley staff report and “love offerings”

March 3, 2011 2 comments

When I first heard that the Grassley investigation was looking into “love offerings” I thought I had misunderstood something. When I was a kid and attending independent Baptist churches we occasionally took up “special offerings” for visiting speakers, missionaries, causes, etc. and these were sometimes called “free-will offerings,” or, in rare circumstances “love offerings.” It was usually made clear to us that this money was leaving the church in the hand of the speaker or being sent to the cause or organization of interest and was separate from our “tithe” which stayed in our local church. Because I was a kid at the time I never thought about the tax implications of these gifts. They were mostly loose cash anyway and wouldn’t have been mentioned on anybody’s Form 1040 Schedule A anyway.

So I was surprised to hear a suggestion that something like this would have merited the attention of a Senator. Needless to say I had it all wrong. The “love offerings” in question are of an entirely different sort; they’re bigger, more organized, and definitely have tax implications for somebody.

Here is the reference to the relevant law from the Grassley staff report [PDF]:

Under section 102(a) [of the tax code], gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. Section 102(c) provides an exception for “employee gifts”: there is no exclusion from gross income for any amount transferred by or for an employer to, or for the benefit of, an employee.

The discussion goes on to list examples of how this section is being interpreted by various ministries:

  • Randy and Paula White were taking “love offerings” in addition to a base salary
  • Eddie Long was taking “love offerings” instead of a salary
  • Gregory Clarke was convicted of tax fraud in 2007; he admitted to taking a $60,000 “love offering” and other gifts instead of a salary

There is also an unquantified note from Larry McSwain, professor at Mercer [link]:

one of the practices of many churches, especially non-denominational and African-American ones, is to provide a love offering from the members to their pastor in place of salary. This technique is, for some, a way of avoiding the reporting of income. (page 45)

There’s also several pages of language parsing what constitutes a “gift,” the difference between an “offering” and a “gift,” and pointing out that language in Section 102 regarding gifts to employees may not apply to ministers, who are considered self-employed in some contexts, employed by a church in others.

Of the issues considered by the investigation this is the thinnest, in the sense that there’s just not much data. It does appear that in some churches and under some circumstances “envelopes stuffed with cash” pass from hand to hand, and the “love offering” language is just a smoke screen to sanctify a practice that may have been appropriate at one time but now is just a tax dodge. It’s hard to quantify, though, when churches aren’t required to file any forms (e.g. the IRS Form 990) detailing how much money they handle and what they do with it.

This is a tough issue; see e.g. some of the clear distinctions and some of the gray areas in McSwain’s 2007 article from Ethics Daily [link]:

It is altogether fair for Sen. Grassley to determine whether such monies were indeed gifts or were checks from churches given by members who were eligible for a charitable deduction on their taxes. If they were, it was not a gift!

There’s a point at which small “special offerings” become salary-sized tax dodges; I’m not sure I know where. I have to admit that I think this is a shady practice at best, but I get the impression from the Grassley staff report that it is not likely to change any time soon under current law. From what I understand this particular issue is not front and center among the issues of interest to the Evangelical Council for Financial Accountability (ECFA); issues such as self-dealing and integrated auxiliaries (of which more later) being better-defined and more important. I guess we will see if and when the ECFA-related independent commission reports [link].

The Grassley staff report and the pastoral housing allowance

The Grassley staff report written by Pattara and Barnett [PDF] also cites some of the history of the way the pastoral housing allowance has run afoul of the IRS in the past. The pastoral housing allowance, for those just joining us, is a provision in the tax code that allows “ministers of the gospel” to receive money from their churches tax-free as a housing allowance; it is meant to parallel the tax-free benefit received by pastors who have use of a parsonage paid for by their church.

The examples cited by the staff report are meant to summarize the case law, and are not intended to be representative either of typical use of the allowance or of extreme uses of the allowance. Here’s a quick rundown:

  • 1987: PTL was paying not less than $2000 a month to Jim Bakker as a housing allowance, plus picking up his utility bill, which ran $1000-2000 a month. That’s a really soft number, but it works out to at least $36000 a year for a $1.3 million house.
  • 1993: Leroy Jenkins was using a parsonage in Ohio and taking the allowance for a second house in Florida where he was spending most of his time conducting crusades. The IRS denied the allowance for the Florida house. No amounts are given.
  • 1995: Walter V. Grant was taking $175,000 a year as a housing allowance before he was imprisoned for tax evasion.
  • 1993-5: Rick Warren takes allowances ranging from $76,300 to $84,278 as a housing allowance each year for a house purchased in 1992 for $360,000.

The court case surrounding the Warren allowance mushroomed (pages 13-15) and ended up in front of the Ninth Circuit Court of Appeals [link] where Establishment Clause issues were raised and not entirely resolved; one of the results was the Clergy Housing Allowance Clarification Act of 2002 (CHACA) [link] which limited future allowances

such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities

and exempted anyone who exceeded the new guideline in previous years

no person shall be subject to the limitations added to section 107 of such Code by this Act for any taxable year beginning before January 1, 2002

Section 2(b)(3) effectively settled Warren’s case in his favor and had the side effect of making the examples above, all pre-2002, legal.

CHACA continues to be interpreted fairly generously, at least in some quarters. Fred Southard, the recently retired Chief Financial Officer from Crystal Cathedral, was taking almost all of his compensation as a housing allowance:

According to court documents, Southard received $132,019 out of his total $144,261 compensation in the form of a housing allowance in 2009. Southard has been with the Crystal Cathedral since 1978. He owns a home in Newport Beach assessed at $2.3 million, property records show. [link]

In other words, Mr Southard’s tax attorney would have you believe that the fair rental price plus utilities for a $2.3 million house in Newport Beach was $11,000 a month.

This brings up two more issues: 1) apparently anyone can be a “minister of the gospel” for tax purposes provided they have a church to pay them; the Grassley staff point out that Paul Crouch of TBN fame ordains various station managers and department heads to this end, and 2) the allowance is not capped.

This certainly seems like a lot of money, especially when compared to the national average:

Note that the U.S. Bureau of Labor Statistics reports that the average housing expenditure for all households in the United States in 2007 was $16,920. (page 14)

Remember that the Rick Warren we’re talking about here, who is taking a $6000-7000 a month housing allowance isn’t the best-selling author we know today. That didn’t happen until 2002 [link]. In 1994 he was just a megachurch pastor from California.

I have a hard time making sense of these numbers; if I had to estimate my own housing costs they’d come out somewhere near the 2007 average. I’ve been to a couple of pastors’ houses here in the Santa Fe area, and while they were nicer than mine, etc. it’s hard to imagine that their expenditures were twice mine (say $32,000 a year). I have a hard time believing that any pastor needs a million-dollar house, and an even harder time believing that if he needs a million-dollar house that he should be able to pay for it and maintain it tax-free.

Even allowing for that it’s hard to comprehend a preacher taking 90% or more of his compensation in the form of a housing allowance. That seems dishonest both to the letter and the spirit of the law. I think if I were attending a church where the pastor were taking even a $50,000 tax-free housing allowance it would give me pause.

Anyway, in conclusion, I hesitate to mention this now, but we will need to think about what this means later when we come back to the case of Joyce Meyer; it’s important to remember that she’s the star pupil of the Grassley investigation for having made some changes and joined the ECFA, so it may be helpful to look at how she treats the housing allowance.


The Grassley staff report and the pastoral housing allowance

February 25, 2011 Leave a comment

The staff report to Senator Charles Grassley written by Pattara and Barnett [PDF] deals primarily with tax status of four items:

  1. Pastoral housing allowances
  2. Love offerings
  3. For-profit integrated auxiliaries
  4. Politicking

Today I want to deal with the history of pastoral housing allowances; in a later post I’ll deal with some of the problematic uses of the pastoral housing allowance.

Congress first excluded from gross income the rental value of parsonages furnished to ministers of the gospel in the Revenue Act of 1921. (page 11)

The authors go on to say that this was intended to treat pastors who received a housing allowance the same as those who got use of a church property (a parsonage) instead. I might gently suggest that in the current climate if we were facing the same inequity the recommendation might go the other way, and the recommendation would be to tax the pastor for his use of the parsonage. I say this on the basis of current discussion of e.g. tax-free insurance premiums [link]. Also, I would note the use of the language “minister of the gospel” here; in this document and elsewhere it serves as the point of entry for discussing revoking this exemption on the basis of Establishment Clause issues. On which more later.

In 1954, Congress adopted section 107(2) [of the Tax Code], thereby allowing a minister of the gospel to designate a portion of compensation as a housing allowance and exclude that amount from income. (page 11)

The authors cite the language used by Congressman Peter Mack [link] to justify the extension:

Certainly, in these times when we are being threatened by a godless and antireligious world movement, we should correct this discrimination against certain ministers of the gospel who are carrying on such a courageous fight against this foe. Certainly, this is not too much to do for these people who are caring for our spiritual welfare. (page 12)

Mack also claimed that preachers made less money than average workers:

Of our clergymen, 55 percent are receiving less than $2,500 per year. This is some $256 less than the $2,668 annual median income for our labor force. (page 12)

So the justification the Grassley staffers cite in Mack’s comments is basically this: preachers are poor and they’re our allies against godless Communism. Remember, this was 1954, early in the Eisenhower Administration. I would be inclined to cite this as an example of a step in the process of the American conservative Church being co-opted into, well, a certain segment of the American political Right, let’s say. In retrospect it’s hard not to see Congressman Mack’s comments as a quid pro quo.

The original intent, that the tax break would benefits “ministers of the gospel” is problematic nowadays, too, since many religious figures would not self-identify this way. I have a hard time believing that this language would pass Constitutional muster today. See discussion here and elsewhere. The alignment between preachers and “godless Communism” is not a going concern in quite the same way it was during the Eisenhower Administration; in fact it might be argued that the alignment between some preachers and some politicians makes the housing allowance more of a political football than it was then.

That brings us to the issue of whether preachers are poor and in need of a tax break. The staff report deals mostly with cases where preachers clearly are not poor and are not using the tax break for its intended purpose.

They don’t attempt to project Mack’s numbers forward; they do mention how many churches there are in the States:

the Yearbook of American and Canadian Churches reports that there are 331,000 church congregations in the United States (page 59)

But they don’t break this down into the useful number: how many people take the housing allowance exemption? How many of these have annual incomes below the median?

I think this is mostly because the Grassley staffers are mostly interested with six particular ministries, none of which are anywhere near the median income line. Or at least wouldn’t be by any reasonable measure of income, we suspect, if we knew what they actually made.

Regardless, the Grassley staffers cite a paper by Kamron Keele [link, link] that calls for “scrapping the exclusion entirely:”

Parts IV and V conclude that, as the parsonage allowance exclusion is not required for genuine clergy to exclude legitimate rental values of furnished parsonages as part of their compensation under section 119, Congress should scrap the exclusion entirely.

So it is important to keep in mind what’s at stake here: that the behavior of what we hope are a few outliers could be used as justification for revoking the exemption altogether.


The Grassley staff report and the First Amendment

February 24, 2011 Leave a comment

One of the things that really jumped out at me when I was reading the Grassley staff memo [PDF] was the way in which it deals with Constitutional questions, particularly First Amendment [link] questions, before focusing on narrow tax-related questions. The pertinent language is familiar to most Americans:

Congress shall make no law respecting the establishment of religion, or prohibiting the free exercise thereof;

The first clause, before the comma, is referred to as the Establishment Clause; the second as the Free Exercise Clause. “Establishment” traditionally meant there was a state church, but has come to mean something broader today. I think we as conservative Christians tend to focus more on the Free Exercise Clause; our traditional legal adversaries tend to focus more on the Establishment Clause, so we mean different things when we say “separation of Church and State.” We sort of take our interpretation for granted, as if somehow the Free Exercise Clause came down off a mountain with Moses, or as if it were a magic formula that guarantees freedoms we’ve grown accustomed to.

In particular I think we’ve assumed that the tax-exempt status churches enjoy (and the rather liberal reporting requirements mentioned in the Grassley staff report) were guaranteed by the Free Exercise Clause, not least because donations to churches are tax-deductible. Without tax-deductible donations many churches would receive smaller donations, fewer large one-time donations, etc., their churches would fail to function financially, and the freedom to practice their religion would be moot.

Unfortunately Pattara and Barnett, the report authors, don’t see it that way. While they note on a couple of occasions that they lacked a Constitutional scholar, so they felt ill-equipped to judge the Constitutional issues involved, but they deal with the Constitutional issues anyway. Here are some quotes:

Unlike the tax law, the U.S. Constitution does not distinguish churches from other religious organizations. The word “church” does not appear in the Constitution; the First Amendment refers to “religion,” not “church.”
The Constitution does not require the government to exempt churches from federal income taxation or from filing tax and information returns. Although tax exemption for religious institutions has been incorporated into American income tax statutes since the inception of the modern income tax in 1894, such exemption is a privilege, not a constitutional right. (page 17-18)

Also, in the context of whether the government can require religious organizations to file the IRS Form 990, they cite an older case that deals with the Establishment Clause but not the Free Exercise Clause:

The only constitutional problem we would foresee … would be if a statute differentiated between religious denominations in filing requirement in a manner that favored one denomination over another. (page 20)

It is popular in some circles today to ask why churches should be tax-exempt at all [link], and it is troubling for some accustomed to seeing these issues examined from a Free Exercise perspective to see them instead examined from an Establishment perspective, given that it is also popular today to consider any tax break a government subsidy, e.g.

Both tax exemptions and tax-deductibility are a form of subsidy that is administered through the tax system. A tax exemption has much the same effect as a cash grant to the organization of the amount of tax it would have to pay on its income. (page 50)

If we think of tax breaks this way it’s hard to avoid the impression that the Grassley staffers, at least, would be inclined to think in terms of questions like “what does the Government get for its money when it gives a church a tax break?” rather than in terms of Constitutionally guaranteed freedoms and the legal structures required to preserve them.

I think the takeaway for me from this report on this particular question is that when we see a document like this, generally disposed to distinguishing between well-run, well-monitored religious organizations and a few bad actors, but still viewing tax-exempt status this way, we should take it as read that at some point in the future the tax-exempt status we’re accustomed to is at the very least up for reconsideration.

The Grassley Investigation: an overview

February 23, 2011 Leave a comment

I’ve cached a copy of the staff memo to Senator Grassley (R-IA), written by Theresa Pattara and Sean Barnett, locally [PDF] and I would encourage all interested parties to have a look at it. Here’s my quick overview:

The inquiry dealt directly with some narrow questions pertaining to tax law and “media-based ministries,” namely

  1. Benny Hinn Ministries
  2. Joyce Meyer Ministries
  3. Creflo and Taffi Dollar/World Changers Church International
  4. Randy and Paula White/Without Walls International Church
  5. Kenneth Copeland Ministries
  6. Eddie Long/New Birth Missionary Baptist Church

And questions regarding their tax status and the appropriateness of tax-free compensation, including but not limited to

  • Housing allowances; these are under current law explicitly tax-exempt compensation for pastors, and have been subject to interpretations that seem very much at variance with the original intent of the governing law
  • “Love offerings;” this is a term that is used differently by different people, but in the Grassley staff report always refers to an untaxed transfer of money to ministers. It is also apparently treated as a tax loophole under some circumstances.
  • Companies owned by ministries that would be taxable if they were not church-owned

There are also some broader issues, including but not limited to

  • Whether churches should file the IRS Form 990
  • How donors can make well-informed giving decisions
  • Conflict of interest in churches
  • The legal definition of a church for tax purposes

It’s important to keep these distinctions clear; the staff report goes back and forth between broad issues and narrow issues, but it becomes clear that no sweeping changes were seriously being considered, so only the narrow issues are really of interest.

Two of the six ministries responded to Senator Grassley’s inquiries: Benny Hinn Ministries and Joyce Meyer Ministries. The histories of two of the other ministries (Eddie Long and the Whites) have become complicated due to unrelated scandals and business issues. Also, the relationship between Benny Hinn and Paula White merits mention and not much else [link].

The inquiry ended with more a whimper than with a bang. Senator Grassley asked the Evangelical Council for Financial Accountability (ECFA) to form an independent commission to make recommendations to him. He made it clear that he wants the community to correct various practices itself under threat of legislation [link]. The reaction to this request etc. has mostly been greeted with disdain [link, link, link] and only occasionally seen as a shot across the bow, wake-up call, whatever [link]. Of these only the Nonprofit Quarterly article notes the important political reality that Grassley is not currently as powerful a Senator as he was in say 2006 and so may be biding his time.

Meyer joined the ECFA and got a top rating from them [link], making her the big winner in this story (about which more later). It isn’t clear to me at present what Hinn did apart from cooperating with the inquiry.

For the record and up front let me say that I think churches currently benefit from advantages they had at say mid-century that they will not have fifty years from now, among them the housing allowance, that if they were new law today would not pass Constitutional tests they would face in the current political climate. I really do think because there’s so much money in the hands of so many large ministries, and because of the questionable things they’ve done with that money, they will eventually forfeit at least some of the current tax-exempt status churches have today. And finally: I think churches should have to file the IRS Form 990, primarily because of the disclosure it requires about executive compensation, conflict of interest, and politicking.  But more on all those things later.