This article grew from a Twitter exchange regarding a Greenville News report about the $1.8 million house bought as a parsonage by Relentless Church in Greenville. The parsonage provides shelter for the church pastor and his wife who were in the news recently regarding their anniversary gifts to each other. The news reported that the wife received a Lamborghini and the pastor received a Rolex.
At the very beginning I want to strongly emphasize that I fully support the current tax exempt status that churches and other religious organizations enjoy. I only wish to remind the public that Americans regard churches and other religious organizations as “unique” (the word used by the IRS) in our society because of the good works that their ministers and members contribute to our community and of their protected First Amendment rights. Due to their unique status, Congress and the General Assembly have passed laws granting them broad exemptions from income and property taxation.
However there are limits. The IRS specifically states:
Inurement to Insiders
Churches and religious organizations, like all exempt organizations under IRC Section 501(c)(3), are prohibited from engaging in activities that result in inurement of the church’s or organization’s income or assets to insiders (such as persons having a personal and private interest in the activities of the organization). Insiders could include the minister, church board members, officers, and in certain circum- stances, employees. Examples of prohibited inurement include the payment of dividends, the payment of unreasonable compensation to insiders and transferring property to insiders for less than fair market value. The prohibition against inurement to insiders is absolute; therefore, any amount of inurement is, poten- tially, grounds for loss of tax-exempt status. In addition, the insider involved may be subject to excise tax. See the following section on Excess benefit transactions. Note that prohibited inurement doesn’t include reasonable payments for services rendered, payments that further tax-exempt purposes or payments made for the fair market value of real or personal property.
Excess Benefit Transactions
In cases where an IRC Section 501(c)(3) organization provides an excess economic benefit to an insider, both the organization and the insider have engaged in an excess benefit transaction. The IRS may impose an excise tax on any insider who improperly benefits from an excess benefit transaction, as well as on organization managers who participate in the transaction knowing that it is improper. An insider who benefits from an excess benefit transaction must return the excess benefits to the organization. Detailed rules on excess benefit transactions are contained in the Code of Federal Regulations, Title 26, sections 53.4958-0 through 53.4958-8.
An IRC Section 501(c)(3) organization’s activities must be directed exclusively toward charitable, educational, religious or other exempt purposes. The organiza- tion’s activities may not serve the private interests of any individual or organization. Rather, beneficiaries of an organization’s activities must be recognized objects of charity (such as the poor or the distressed) or the community at large (for example, through the conduct of religious services or the promotion of religion). Private benefit is different from inurement to insiders. Private benefit may occur even if the persons benefited are not insiders. Also, private benefit must be substantial to jeopardize tax-exempt status.
The above applies to federal income taxation. South Carolina’s tax code follows the federal code with the only addition being that the state grants property tax exemptions to churches and religious organizations. Income tax exemptions impact South Carolina’s general fund. Property tax exemptions impact county revenue.
Just from reading the Greenville News reports on the Relentless Church situation, my first thought is that each church and charitable organization should define “Inurement” in their corporate by-laws to reduce the risk of being perceived as overpaying a minister or providing church leaders with excessive benefits from church assets.
Growing up in the Blue Ridge community back in the late 1960’s, I remember the parsonage beside the Baptist church that my family attended. It was a well constructed bricked house that had an above average property value for our rural community. It was appropriate for the pastor and the ministry of that church. Only Relentless Church can justify if a $1.8 million parsonage is appropriate for their membership demographics.
In more traditional times, pastors were not “celebrities”. The current crop of ministers who enjoy exhibiting some celebrity flash should pause to remember that celebrities are not “unique” in our society. They twitter for a few moments until the next celebrity appears. Ministers who give their time and talents for the good of others are unique. Thankfully we have many such ministers here in Greenville.
Our state and federal governments, with a few exceptions, have granted churches and other religious organizations broad exemptions from taxation. The exemptions were granted with the understanding that the funds not paid in taxes by these organizations would be used for charitable purposes. When the public witnesses religious leaders flashing wealth like the latest social media celebrity, the public has a right to question the negative impact on the less privileged in our community before the IRS questions the validity of the tax exemptions.