• Federal Taxation of Ministers (income and self-employment, i.e., Social Security)
• Group Federal 501(c)(3) Tax Exemption
• Unrelated Business Taxable Income
• Substantiating and Reporting Charitable Contributions

Throughout this chapter and the entire Legal Manual generally, you will see references to Richard Hammar's Church & Clergy Tax Guide (Hammar's Tax Guide. This is a useful resource we highly recommend. It is written for nonlawyers and lawyers alike. It is updated each year to include the latest changes in the federal law. If you want more detailed information regarding the subjects discussed in this section, we advise you to consult Hammar's Tax Guide. In addition, you may wish to share it with your attorney, accountant, or tax provider. For copies call (800)222-1840 or visit the "Bookstore" at ChurchLawToday.com. Copies are $17.95 each.

• Federal Taxation of Ministers
• Self-Employment Tax
• Federal Income Tax
• Status of Ministers (Employee versus Independent Contractor)
• Housing or Manse Allowance
• The Presbyterian Church ( U.S.A.) Group Federal 501(c)(3) Tax Exemption
• Intermediate Sanctions
  • Intermediate Sanctions Summary
• Disclosure Regulations
• Sample Section 6104(d) Disclosure Statement
• Restrictions on Political Activity and Lobbying
• Unrelated Business Income Tax
• Excise Taxes
• Substantiating and Reporting Charitable Contributions
• Substantiation
• Quid Pro Quo Rules
• State Related Tax Issues
• Sales and Use Taxes
• Property Taxes and Related Matters
• Challenges to Church Property Tax Exemptions
• Taxes vs. Assessments
• Local Taxing Requirements
• Tax Resources
• Sample Manse Allowance Forms
• Housing Allowance Notification by Church to Minister —
• Housing Allowance Insert for Minutes of Meeting —
• Polity Note #24: Tax Status for Commissioned Lay Pastors
• Polity Note #69: Minister Employer
• Private Letter Ruling Regarding Methodist Deacons

• federal tax-exempt status by state revenue departments (in assessing applications for state income and sales tax exemptions)
• U.S. Postal Service (in relating to application for third-class bulk mailing permits)
• grant-making foundations or attorneys for estates (in order to be sure that the grant or bequest is going to a federally tax-exempt entity)
• real estate taxing jurisdictions (to help determine the taxable status of church-owned real property)

The Group Ruling issued by the IRS has two important benefits for the Presbyterian Church (U.S.A.). First, all churches, governing bodies, and included related entities are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code and from federal unemployment tax (FUTA). Second, contributions to such organizations are deductible for federal income, gift, and estate tax. Please note, however, that states may impose an unemployment tax. The Group Ruling does not control excise taxes or state or local income, sales, or property taxes. Additionally, all entities in the Group Ruling must pay taxes under the Federal Insurance Contributions Act (FICA) for each lay employee who is paid $100 or more unless they have obtained an exemption. Also, the Group Ruling exempts churches and middle governing bodies from the Form 990 filing requirement imposed upon other nonprofits (unless unrelated business income on which tax is due has been earned during the year, in which case Form 990T must be filed). Please remember, however, that the Group Ruling does not in and of itself establish exemption from state and local taxes. The relevant state statutes should be reviewed to determine the information and filing requirements at the state (income and sales taxes) and local (sales and real property taxes) levels. See later in this chapter the section titled " State-Related Tax Issues." As stated above, the Legal Office, in conjunction with the Office of the General Assembly, annually submits a report to the IRS listing covered groups. Thus, a covered entity is not required to file any type of report with the IRS concerning its tax-exempt status.

The following is a list of those understood to be automatically included in the Presbyterian Church (U.S.A.) Group Ruling. These groups need not take any additional action to be included within the denomination's Group Ruling:

• The particular churches, congregations, sessions,
• The presbyteries,
• The synods,
• The General Assembly,
• The first or primary corporation of any of the above (e.g., First Presbyterian Church, Inc.), and
• The unincorporated programs or functions of any of the above.

Other incorporated bodies are not automatically included. Examples are:

The second, third, and fourth corporations created by governing bodies. Typically, these are camp/conference center corporations, campus ministry corporations, etc.

These organizations desiring inclusion in the Group Ruling that are separately incorporated but controlled related entities of a synod, presbytery, or local church must apply with the Office of Legal Services and follow certain guidelines as developed by the Office of the General Assembly and the Office of Legal Services. The major criteria for determining if such a corporation is to be included are as follows:

1. The group applying must have an affiliation with a governing body of the Presbyterian Church (U.S.A.).
2. The group must independently meet the qualifications for exemption under Section 501(c)(3) of the Internal Revenue Code.
3. The affiliated governing body must exert control over the group applying. Examples include control by the governing body in the areas of finances, policies, the group's programs, and electing a majority of the board.

A copy of these guidelines can be secured by calling Senior Legal Assistant Brenda Smithers at (888) 728-7228 x5377.

The general exemption number listed on the Group Ruling granted to the Presbyterian Church (U.S.A.) is 1617. Every entity that is incorporated has a separate employer identification number (a nine-digit number). Synods, presbyteries, or local congregations that are incorporated or have employees should have separate employer identification numbers. For purposes of the federal Group Ruling, synods, presbyteries, and local churches should use the Presbyterian Church (U.S.A.)'s general exemption number (1617) in conjunction with their own employer identification number. An employer identification number can be obtained by completing IRS Form SS-4/Application for Employer Identification Number. This form can be obtained from the IRS. The telephone number for IRS forms and publications is (800) 829-3676. IRS forms are available at IRS's Forms and Publications page. See the end of this chapter for other easy resources to obtain IRS forms.

1. The IRS can assess excise taxes against any officer or director of a tax-exempt organization who receives an excess benefit and on any participating organization manager.
2. The assessment is in lieu of revocation of the organization's tax-exempt status, but both can be imposed.
3. Generally, an excess benefit transaction is one that provides unreasonable compensation to an officer or director of an exempt organization.
4. Applies to transactions on or after September 14, 1995.
5. Unreasonable compensation is compensation above what would ordinarily be paid for like services by like organizations under like circumstances. Compensation will include cash and noncash compensation, forms of deferred compensation, and benefits whether or not included in income for tax purposes. Revenue-sharing arrangements may be excess benefit transactions if the organization does not receive proportional benefit for the additional compensation to the individual.
6. There is a rebuttable presumption of reasonableness if:
   1. Compensation was approved by a board or committee comprised entirely of persons not having a conflict of interest;
   2. Board or committee relied on objective comparability information such as:
      1. Compensation paid by similar organizations both taxable and tax-exempt for comparable positions
      2. Independent compensation surveys by nationally recognized independent firms
      3. Actual written offers from similar institutions trying to recruit the officer or director
   3. Board or committee adequately documented the basis for the decision
7. A conflict of interest exists if the person:
   1. Is a disqualified person
   2. Is a relative of a disqualified person
   3. Is in an employment relationship subject to direction or control of any disqualified person participating in the transaction
   4. Is receiving compensation subject to approval of disqualified person
   5. Has a material financial interest affected by the compensation transaction
   6. Approves a transaction providing economic benefit to any disqualified person who in turn had approved or will approve such a transaction for this board or committee member
8. Penalties are severe but it is believed they will be assessed only in the extreme case (the case that makes the front page).
   1. Twenty-five percent of the excess benefit, assessed against the disqualified person
   2. Additional penalty of 200 percent of excess benefit if they fail to correct the excess benefit within the taxable period
   3. Additional 10 percent penalty against organization manager who knowingly participates (actively or inactively through silence for example) unless not willful and due to reasonable cause, $10,000 maximum
9. A disqualified person is any person and their family who was in a position to exercise substantial influence over the affairs of the organization at any time during the five-year period ending on the date of the transaction. Persons serving on governing bodies with the right to vote, president, CEO, COO, and treasurer or CFO and highly compensated individuals (earn over $90,000 in 2003) are presumed to exercise substantial influence over the organization. Whether a person is deemed to be disqualified depends on the circumstances. The following are examples of circumstances that would tend to show substantial influence:
   1. Person founded the organization
   2. Person is a substantial contributor
   3. Person receives compensation based on revenues

1. Ensure those approving compensation do not have a conflict of interest as defined by the regulations.
2. Ensure that the Compensation Committee and others in a position to make compensation decisions are made aware of these rules and the related intermediate sanctions.
3. Make any necessary revisions to the organization's Conflict of Interest Policy and review with employees, officers, and directors.
4. Ensure the compensation is reasonable by securing community information and compensation survey information before setting compensation for disqualified persons (president, CEO, COO, CFO, treasurer, or other highly compensated individuals).
5. Ensure contracts benefiting disqualified persons are reasonable by securing competitive bids.
6. Adequately document the basis for the decision.

For more information on this subject, see Hammar's Tax Guide. One helpful resoure is a concise summary of these issues, Taxes On Excess Benefit Transactions (Intermediate Sanctions)

The initial Group Ruling was granted to the Presbyterian Church (U.S.A.) ("PCUSA" on January 31, 1964 and has been reaffirmed by the IRS periodically since that time. The related entities entitled to the use of the Group Ruling include the particular churches, presbyteries, synods, the General Assembly, and their unincorporated affiliates. Additionally, there are subordinate units of the PCUSA that are entitled to the Group Ruling. All of the entities entitled to the Group Ruling are listed in the Statistical Volume of the PCUSA General Assembly Minutes, Volume II ("Statistical Volume"). The Office of Legal Services, in conjunction with the Office of the General Assembly, submits an annual filing to the IRS of covered organizations within the Group Ruling. By virtue of the Group Ruling, PC(USA) and its related entities are tax exempt under 501(c)(3) of the Code and are not required to file a Form 990.

Under the public disclosure requirements of section 6104(d), organizations exempt under section 501(c)(3) are required to permit inspection and provide copies of their exempt status application material (Form 1023 or Form 1024) and Form 990s. Organizations, however, whose applications were filed before July 15, 1987 and did not possess a copy of the application on that date are exempt from providing a copy of the application. The PC(USA) does have a copy of its application. You may secure a copy of it by calling April Davenport, Staff Attorney, at (888) 728-7228 x5350. As stated above, PC(USA) and its related entities are not required to file a form 990. Therefore, this portion of the regulation does not apply to the PC(USA) or its related entities.

With the above in mind, PC(USA) and its related entities covered under the PC(USA) Group Ruling are required to provide for inspection or copying only the page of the current Statistical Volume on which it appears as well as a copy of its exempt status application. If an organization does not have a copy of these materials, it has two weeks in which to obtain a copy of the appropriate page and application in order to comply with the provisions of section 6104(d). The most recent Statistical Volume should be available at your presbytery or synod office. It is also available by calling Kris Valerius, Manager for Records in the Office of the General Assembly at (888) 728-7228 x5427. The following is a sample disclosure statement for your reference. The following should be revised as needed.

First Presbyterian Church is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code by virtue of its inclusion in the group tax exemption (GEN #1617) of the Presbyterian Church (U.S.A.) ("PC(USA)"). Because of its inclusion in the PC(USA) Group Ruling, First Presbyterian Church did not file an application for exemption, Form 1023. A copy of the PC(USA) Group Ruling letter and its application for exempt status can be obtained by calling Senior Legal Assistant Brenda Smithers at (888) 728-7228 x5377.

As provided in section 301.6104(d)-3(f) of the Regulations, First Presbyterian Church will provide for public inspection and copying the pages of the current edition of the Statistical Volume of the PC(USA) General Assembly Minutes, Volume II ("Statistical Volume") on which it appears.

Under the provisions of section 6033(a)(2)(A)(I) of the Code, First Presbyterian Church is not required to file an annual information return, Form 990. Accordingly, there is no Form 990 subject to public inspection under section 6104(d).

Compliance with section 6104(d) is required independently by each organization that is a separate legal entity under civil law. Thus, for example, if a church has a day care center that is separately incorporated and not listed separately in the Statistical Volume, then the day care center is under a different set of compliance rules if it is not under the PC(USA)'s Group Ruling. Private legal counsel should be consulted in those situations. Additionally, the above disclosure would not apply in these situations.

If an organization does not have a copy of the Statistical Volume, it can be obtained by calling Kris Valerius of the Office of the General Assembly at (888) 728-7228 x5427, or a copy of the pertinent page of the Statistical Volume can be obtained by contacting Brenda Smithers of the Office of Legal Services at (888) 728-7228 x5377.

IRS Publication 1828, Tax Guide for Churches and Religous Organizations — , which you can secure by calling the Internal Revenue Service at (800) 829-3676 or by downloading it from the Web site, states:

All IRC section 501 (c)(3) organizations, including churches and religious organizations, are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made by or on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise tax.

It is important to distinguish between political activity and witnessing/lobbying. Political activity typically involves a candidate for office or political party. Witnessing/lobbying involves a public issue or legislation. Political activity is strictly prohibited. Lobbying is merely limited. What constitutes a "political activity" versus "lobbying"? Political activity includes endorsements and statements of opposition of particular candidates, parties, or political action committees; provisions of financial and other support; provisions of mailing lists; sponsoring of political action committees; and distributions of partisan campaign materials. The political activity prohibition does not prevent candidate forums being held in or sponsored by a church. As long as such activities are evenhanded, nonpartisan, and demonstrate no favoritism for a particular candidate (or opposition to a particular candidate), they are allowed.

Witnessing/lobbying, on the other hand, includes contacting or urging the public to contact members of the legislature or the executive for the purpose of proposing, supporting, or opposing legislation or advocating the adoption or rejection of legislation. Witnessing/lobbying may be engaged in as long as it does not constitute a substantial part of the organization's total activities. While neither the Code nor the Regulations define what is substantial, a few cases suggest that the line between what is insubstantial and substantial lies somewhere between 5 percent and 15 percent of an organization's total activities as measured by time, effort, expenditure, and other relevant factors. The Legal Office advises your governing body or church to keep such expenditures at the lower end of the spectrum.

For more information concerning these issues, the following websites provide very helpful additional information:

1. The Pew Forum's article titled Politics and the Pulpit 2008
2. the Internal Revenue Service's letter, IRS Issues Letter on Exempt Organizations, dated June 10, 2004
3. The Internal Revenue Service's publication 1828, Tax Guide for Churches and Religious Organizations —