Church Arrangement with Professional

[Corduroy Frog]

Here goes. I appreciate your help in advance.

Small Church, to best of my knowledge, does not file a 990 - probably not required.

One of the offices is rented to a professional psychologist. Church does not charge rent.
However, there is a handshake agreement that if any of the church members need this kind of help, psychologist works for a reduced rate. For purposes of discussion, let's say his "normal" rate is $75/hr, and this "reduced" rate is $45 per hour. I don't know how extensive his work is with church members, but I suspect it is not overwhelming and, at best, is perhaps sporadic. Bear in mind that payments from an individual to a psychologist is rarely deductible on a Schedule A.

Church wants to set up a special fund for church members who need psychological help. The members are allowed to "earmark" donations so they can go to this special fund.
Earmarking is not unusual -- in fact it is widespread, and allowed as a tax deduction so long as the funds are used for church business (i.e. building fund, missionary support, etc.)

The specific question posed to me was "Can a special fund be set up for psychological support, and earmarked funds be used as a charitable deduction by its members?"

My answer was "no" under the existing arrangement. Too many parties getting less than FMV benefits. And the church already teetering on the brink of unrelated business activities. However, I did want to ask others their opinion, so please respond with your usual candor and disregard my opinion.

If the answer is "no", can the Church restructure the arrangement such that such earmarked deductions are deductible? In other words, what if the psychologist pays
market value rent, and the church disburses for his services at his non-discounted fee?

The minister believes there may have been recent legislation which affects this. I am not aware of anything major except a couple years ago when IRS locked in the market value of a vehicle.

Church is not a client of mine, but DOES have strong ties to my family, so I will appreciate input from as many of you as care to respond.

[George Boutwell]

Tell us more

>>Bear in mind that payments from an individual to a psychologist is rarely deductible on a Schedule A.<<

Really? Or do you mean, "because medical expenses do not exceed 7.5% of income" ?

My first question is whether this provider is licensed by the state. There are many churches with "counselors" who may hold themselves out as psychologists but do not have the training or credentials to qualify. They may be nice people and they may function well as ministers, but they should just use that title. In fact, it would help in this case -- donations to the church earmarked for Rev. Smith would still be deductible.

Finally, it's not clear to me what the scheme is. Does parishioner Jones contribute to the special fund so that parishioner Jones can get so much time with the psychologist, and it counts as charitable instead of medical? Or does parishioner Jones contribute to the special fund so that his kid or his brother-in-law or some other specific individual gets help? Or do all the parishioners contribute to a fund and then there is an independent determination of who gets help? If this last description fits, then I don't see a problem.

[Corduroy Frog]

Clarifications

Boutwell, here is what I know about the situation to add to the information pool...

First, the guy is independent from the church -- professionally whether financially or not.
Church does not profess any connection or credentials with respect to the psychologist. I doubt anyone has asked him if he is registered with the state, but if he is practicing, then registration would be his obligation, and not that of the church, so long as the church is independent.

The psychologist lives in the community but is not a member of the church. Don't have any reason to believe the preacher's wife or any church officer is behind this, but there is no question that members who live in the community know him, and also no question that some in the church have approved the arrangement.

I have made it clear that the church cannot create a separate fund for certain individuals to earmark, so that certain individuals can receive the benefit. The fund would exist for members to donate money, some of it earmarked and some of it funded with general contributions. The benefit of specific individuals could not be part of the arrangement. However, that being said, the likely result would be that much (if not most) of the earmarked money would come from persons who have family members who benefit from the program. Thus, even though prohibited from specific benefits, that may wind up being the end result.

My comment about non-deductibility on Schedule A refers to the 7.5% threshhold, the itemization threshhold, and the nature of services.

Thanks for your reply, George. Tell me more...

[jainen]

there is nothing more to tell

>>Tell me more...<<

Personally, I think there is nothing more to tell. I certainly wouldn't spend any more time discussing it with a client. Apparently this is one of those churches that doesn't have a problem with lying and cheating, at least when it involves taxes. Your answer to them was correct and complete. I don't know of any recent legislation; perhaps he meant litigation.

[Corduroy Frog]

Good Grief Jainen

This is not my client - but people I know very well.

If they weren't interested in doing things the right way, they wouldn't be asking me.

Good Grief...

[erchess]

My two Cents

If the church sets up a fund to pay the psychologist for proving services to members or for that matter anyone else, I don't see why donations earmarked for the fund may not be deductible as charitable contributions.

I can't comment on whether this guy can legally call himself a psychologist in that state, but I think the church needs to make sure he can before he sets up shop in their building and before they recommend his services. They also need to be aware of all regulations under which he operates and take reasonable care to make sure that he follows them all.

If he is providing discounted services to members of the church in exchange for use of space, the church is receiving taxable rent. I disagree with Jainen's assumption that the leaders of the church know that they are violating the law. I also disagree with the assumption of several of you that people know that calling an expenditure a donation to their church helps them taxwise more than if they called it a medical expense. Until recently, I did not know that there were any limits on how a 501 (c) (3) entity may raise tax free money. I once belonged to a Church that rented out houses that had been inherited from deceased members. I was not aware at that time of any legal distinction between these rents and the donations made by members or the proceeds from various fund raisers in which goods were sold to members and or the general public. I can assure everyone, however that all was handled in a legal manner.

My current church, to which I am NOT tax adviser, lets various groups use the facility. This ranges from the Civic Choral Society practicing in the sanctuary every Monday night to a free legal clinic making use of several otherwise empty rooms during business hours nearly every weekday. Of course we don't charge them rent because we would be taxed on rent, but the agreements under which they use the facilities specify the love offerings they will make. I have my doubts about the legality of this arrangement but if push comes to shove we are a Connectional Church and it will be the denomination and not us that will have to pay. Meanwhile there are very sharp lawyers and an EA who does nothing but representation who oversee these matters for my congregation and I am comfortable with my personal lack of liability.

[jainen]

I'm sorry

>>Good Grief...<<

Okay, I'm sorry. I'm just a bit off because of something that's happening with the "other" board. But after all, you DID request our "usual candor."

[George Boutwell]

Was the last time you saw stained glass . . .

Apparently this is one of those churches that doesn't have a problem with lying and cheating, at least when it involves taxes.

....When you forgot to rinse your shot glass?

If it were food for the hungry, rather than psychological services for the troubled, that the church was helping to distribute, would your answer still be go straight to Hades, do not pass the collection plate?

[jainen]

a different interpretation

>>you forgot to rinse your shot glass<<

I don't know how personal insults add to your credibility, George. You yourself called this a "scheme," and cast aspersions on the minister's wife besides.

It is my opinion, based on the same limited information that you have, that this organization is trying to abuse their tax exempt status to obtain personal benefits, coupled with a quid pro quo commercial arrangement. You may have a different interpretation.

I am not comfortable with tax evasion structured this way. I stated my position strongly but it is little different from Corduroy Frog's own answer. You may have a different interpretation.

[MAMalody]

I come down on the side that it would be a charitable contribution as long as it was not an individual specific contribution. As long as the church had the ability to determine who recieved the benefit, I don't see a problem.

As to the "rent," I would have to do research, however, if this type of support is specified in the church's organizing documents (the constitution and by-laws) it may not actually be rent or if rent, still tax free. Was this discount available to all church goers or only those of this specific church? I have found that it is not unusual for medical professionals to have sliding scales for income levels and group associations. I'm not sure what impact this really has.

Mike

[George Boutwell]

Casting As Persians

So I take it your answer is that they can't operate a food bank either.

[ChEAr$]

We're two of a kind

>>Tell me more...<<

Personally, I think there is nothing more to tell. I certainly wouldn't spend any more time discussing it with a client. Apparently this is one of those churches that doesn't have a problem with lying and cheating, at least when it involves taxes. Your answer to them was correct and complete. I don't know of any recent legislation; perhaps he meant litigation.

who do not do clergy tax returns. Am I right?

[jainen]

a muffin syndicate

>>I take it your answer is ...<<

My answer is based on the facts and circumstances. I would not object to them providing a low-cost mental health clinic according to their religious or charitable purposes.

I haven't seen any facts or circumstances about a food bank proposal, but it sounds like a good idea. However, if they give a grocery store free rent in exchange for discount cards that they sell to their own congregation with a tax subsidy, I might suspect the minister's wife was running a muffin syndicate.

[Corduroy Frog]

Anyone Else?

I'm hoping to give an answer to the minister and other church members before Sunday morning. I will give them what I know, but I would like to know more than I do.

Some of our brightest people have responded, and I would have hoped from their combined intellect to know much more than when I started. Can we get back on topic?

[OldJack]

>>coupled with a quid pro quo commercial arrangement.<<

Maybe this church would give me office space to do tax work and pay me out of a special fund from members. LOL

This is so obvious, intended or not, it is an end-run around the itemized deduction limitation for a full individual tax deduction. The church officials in their tax ignorance probably think this is acceptable since it has to do with helping members, but in truth it is not even close to being allowed.