Church Related or Not?

[Edsel]

Local church furnishes room for local therapist to use as office. Rent free. Therapist does NOT attend church.

Church occasionally receives large checks ($500 and up) which are earmarked to go to this therapist. The checks are coming from people who are not members, some of them live 200-300 miles away. There is no concrete evidence that these "donations" are for services rendered, but if not it's hard to conjure up another purpose for the transaction.

Treasurer has been asked by church leaders to furnish a letter of appreciation on church stationery for all gifts over $250. Treasurer has been told it is an IRS requirement. Treasurer has refused to do this, and claims that the therapist arrangement is nothing more than an attempt to launder money through the church so the payers can take a tax deduction.

What say ye?? My good friend Bertrans is invited to reply. Mike Malody, hope you're out there somewhere.... Edsel

[Bees Knees]

I smell a dead fish. If I were the treasurer, I'd find a new church.

[FEDUKE404]

VERY strange arrangement here

Absent any other facts, I tend to agree with the church treasurer, especially if any of those "donated" funds end up in the pockets of the therapist who also appears to be getting some rent-free office space.

OTOH, if the church keeps all of the money in its general coffers, then a receipt to the donors could be in order.

The entire thing sounds a bit weird to me..........and if things get squirrelly enough, the church might even lose its tax-free status.

FE

[ChEAr$]

For Edsel

Why am I remembering a certain church treasurer maybe 15 years ago inHuntsville? (grin)

anyway, advice to this church treasurer is to return all such checks to the "contributor" when they
are received.

Actually i can remember when my mother was secretary of local methodist church at home, and
the local big industry would send money to the church saying that it was to go to a certain
employee of theirs. Sham, sham, shame!

[MAMalody]

Local church furnishes room for local therapist to use as office. Rent free. Therapist does NOT attend church.

Church occasionally receives large checks ($500 and up) which are earmarked to go to this therapist. The checks are coming from people who are not members, some of them live 200-300 miles away. There is no concrete evidence that these "donations" are for services rendered, but if not it's hard to conjure up another purpose for the transaction.

Treasurer has been asked by church leaders to furnish a letter of appreciation on church stationery for all gifts over $250. Treasurer has been told it is an IRS requirement. Treasurer has refused to do this, and claims that the therapist arrangement is nothing more than an attempt to launder money through the church so the payers can take a tax deduction.

What say ye?? My good friend Bertrans is invited to reply. Mike Malody, hope you're out there somewhere.... Edsel

On the surface, this does not pass the smell test. Individually directed giving to a church is usually problematic at best. My short answer is they do not appear to be deductible, as described. My long answer is below.
====================

If a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s
exempt purposes.

However, contributions to individuals will, in some cases, be deductible on the ground
that they were for the use of a qualified organization. Contributions to foreign missionaries under the control and supervision of a religious organization often are deductible on this basis. The contribution is not made to the organization, but it is made for the use of the organization.

IRS Letter Ruling 200530016 (2005) addresses charitable contributions that designate specific projects and individuals. The IRS provided an exhaustive analysis of the deductibility of designated contributions and made these clarifications and observations:

(a) An important element for a taxpayer donor of a qualified charitable contribution is the charity’s control over the donated funds. The donor must show that the charity retained
control over the funds. To have control over donated funds is to have discretion as to their use. In instances where a donor designates a gift to benefit a particular individual and
the individual does benefit from the gift, the determination of whether the gift is deductible depends upon whether the charity has full control of the donated funds and discretion
as to their use. Such control and discretion ensures that the funds will be used to carry out the organization’s functions and purposes.

(b) If contributions to a fund are earmarked by the donor for a particular individual and the charity exercises no control or discretion over their use, they are treated as gifts to the
designated individual and are not deductible as charitable contributions.

( c) funds donated to a charitable organization restricted for the benefit of a private individual are not deductible. This is in contrast to funds contributed for a
particular purpose, but the charity maintains control and discretion over actual use of the funds.

(d) The charity must maintain discretion and control over all contributions. Accordingly, the charity may endeavor to honor donors’ wishes that designate the use of donated funds.
However, the charity must maintain control over the ultimate determination of how all donated funds are allocated.

While I realize the shortcomings with PLR, this does give clear IRS thinking on this issue. There are some related court cases (not directly on point) that also seem to support the conclusion of nondeductibility.

I hope this helps.

Mike

[Zee]

Ubit

I agree with the other responses. In addition, the church might be subjecting itself to UBIT taxes with this activity and/or jeopardizing their tax-exempt status. The billings for the counseling are simply being routed to the church as a contribution in an attempt to avoid taxation by the provider and to provide a deduction for the recipient.

[Edsel]

Thanks to All

[QUOTE= If I were the treasurer, I'd find a new church.[/QUOTE]

Thanks to everyone who has responded. Bee's advice is probably the exact course of action I would take, but I know the Treasurer well. He is one of the people responsible for starting the congregation, and he won't leave without first trying to put a stop to this.

Some of the supporters are using the IRS $250 receipt guideline as an excuse to write these acknowledgement letters. Others have raised questions but have been assured that the arrangement is perfectly acceptable. The church, for example, has issued 1099s to all recipients over $600, including the therapist.

As I will ultimately be asked, my advice would be to institute end-of-year statements. If any money was earmarked, this would also be disclosed on the statements, along with a caviat that earmarked money is not necessarily sanctioned as an IRS charitable contribution. Neither the church nor the contributors are going to put up with this. In fact, the contributors would be better off without a letter at all.

Thanks for everyone who has posted. I'd rather do anyone's accounting/taxes than a church.

[Snaggletooth]

Don't Do It

I would imagine IRS consequences of ruling this to be a sham would go beyond a civil offense and may go into criminal.

[Bonnie]

Issue the letter of appreciation and keep the funds for the church and use as the church board sees fit for church purposes. When questioned as to why the money wasn't passed on to the therapist, explain this is impossible when the contribution statement is issued. If the therapist does not receive the funds, it will stop quickly.

[MAMalody]

Issue the letter of appreciation and keep the funds for the church and use as the church board sees fit for church purposes. When questioned as to why the money wasn't passed on to the therapist, explain this is impossible when the contribution statement is issued. If the therapist does not receive the funds, it will stop quickly.

There may be some legal problems with this unless there is a clause in the constition and by-laws indicating that all funds received are expended at the discretion of the church, regardless and/or in spite of any designation.

There are actually two reasons for the clause. The first reason is to protect the church leadership from violating the law regarding implied trusts (this is a common law issue, not an IRS issue). Whenever a person makes a contribution that is designated for a particular purpose, the acceptance of that contribution imposes an implied trust on the recipient organization (unless it is clearly stated to the contrary). The organization must disburse the funds for that particular purpose only. It may not borrow from the fund account, even temporarily, to meet emergencies. Therefore, the article in the bylaws and the statement on the envelopes is to allow for flexibility if circumstances change. Most often the need for flexibility is only important when the designated funds are for a long-term project—like a building fund.

It has been my experience that churches do not violate the law on implied trusts intentionally. The normal situation is that an emergency of the first magnitude "cries out" for relief and the compassion of the church overrides the letter of the law. A repeated example is when a missionary needs immediate passage home from a foreign field and the missionary's home church does not have enough money in the missionary fund or the general fund to meet the need. The church, however, does have the money in the building fund. The building fund, often, has been drawing interest and there are no current plans to build anything. The church votes to "borrow" the money from the building fund to meet the need and thereby violates the law. The church's motive is pure and the result is legitimate but the law has been broken. Even if the money is returned to the building fund the next day, the law has been broken. The clause in the constitution and by-laws is intended to remove the illegality of the church's beneficent action.

The second reason for the clause is to protect the deductibility of the contributions given to the church whenever the need focuses on a particular individual. Years ago the IRS stated in Revenue Ruling 62-113:

"The test [of deductibility] is whether the organization has full control of the donated funds and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes. [The contributor's] right to suggest distributees [must] be advisory in nature and [may not] be binding on the organization. Moreover, the fund [must] be used in the furtherance of the organization's stated purposes."