Church Loans to Directors, Officers and other Insiders

Dear Clients and Friends,

Have you ever attended a board meeting to consider loaning money to a church leader? Maybe he or she has a legitimate financial need. I understand you would think a ministry should be able to give a lending hand to a leader in need. But please step back and think again.

This legal issue touches on both state and federal law. What are the issues? First, would such a loan violate Florida law? Second, would the transaction jeopardize the churches 501(c) (3) status with the IRS?

I will answer both questions starting with state law.

Florida non-profit statute 617.0833 addresses this issue directly:

617.0833 Loans to directors or officers.- Loans, other than through the purchase of bonds, debentures, or similar obligations of the type customarily sold in public offerings, or through ordinary deposit of funds in a bank, may not be made by a corporation to its directors or officers, or to any other corporation, firm, association, or other entity in which one or more of its directors or officers is a director or officer or holds a substantial financial interest, except a loan by one corporation which is exempt from federal income taxation under s. 501(c)(3) of the Internal Revenue Code of 1986, as amended, to another corporation which is exempt from federal income taxation under s. 501(c)(3) of the Internal Revenue Code of 1986, as amended. A loan made in violation of this section is a violation of the duty to the corporation of the directors or officers authorizing it or participating in it, but the obligation of the borrower with respect to the loan is not affected.

Florida law aside, the Internal Revenue Services (IRS) may also prohibit this transaction because the loan may be considered a violation of the IRS “No Private Inurement” policy for nonprofit corporations. In general, private inurement is when a 501(c)(3) nonprofit’s money is devoted to private uses instead of charitable purposes. Per the IRS,

” 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 circumstances, 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, potentially, grounds for loss of tax-exempt status.”

So the next time you are in a Board meeting and there is discussion about financially benefiting an insider raise these issues and give me a call.

Remember, churches receive tax free income to assist the communities they serve. Society does not want churches to receive tax favored donations to benefit insiders.

In Him,

Rev. John P. Joseph, Esq. CCA