I am told that the word crisis in Chinese is defined as a “dangerous opportunity. ” The Random House Dictionary defines crisis as “a condition of instability, as in social, economic, or political affairs, leading to a decisive change. “1 The Greek word krisis loosely translates as “decision.”

I believe the Christian church is facing a crisis today: the change in attitude of the government as it relates to charitable organizations, religious and otherwise.

Previously, the attitude of the government has been favorable to churches, as indicated in the first paragraph of the Treasury Department’s Publication 561.

Our Federal Government recognizes that gifts to religious, educational, charitable, scientific and literary organizations have contributed significantly to the welfare of our nation; and our tax laws are designed to encourage such giving.2

It must be noted that while the above quote was on the first page of the 1977 publication, it is not on any page of the 1982 edition. Is the IRS trying to tell us something?

In recent years, a real difficulty has arisen when government authorities have attempted to define the place of the church. The First Amendment forbids government entanglement with, or involvement in, the activities of the church. ” A definition of church would be helpful, but on the other hand this is not possible because even a definition could be considered involvement. What a predicament man finds himself in. To define church is a violation, but not to establish criteria or guidelines opens the door to every type of charlatan. When is a church not a church? When is an organization qualified to call itself a church? Sacred institutions can no longer be relied upon to conform to old traditional models. The subject is further complicated by the greed of some self-proclaimed gurus and their elaborate schemes to avoid taxes through religious exemptions.

Tax Reform

As Congress and the Treasury Department look to new tax legislation, we are bound to see tax-exempt organizations become a target for reform. I am sorry to say reform, or demand for it, can be justified by examples of excesses that can be pointed to by the reformers. Pick up an issue of Time, Newsweek, or U.S. News and World Report, and you will find many exposes of these excesses. For example, the November 6, 1978 issue of U.S. News and World Report has a five-page special report entitled “For Many, There Are Big Profits in `Nonprofits. ”’ Much in the article is true and needs to be discussed. The irony of it is the Christian church is lumped right in with the phonies. The word nonprofit strikes a sympathetic chord in the hearts of many. It conjures up images of charities operating on limited budgets with a volunteer staff and bare offices. In many churches and exempt organizations this is true, but we must realize there are some that are not “bare-bones. ”

Today, there are more than 800 thousand recognized tax-exempt organizations, and this number is rapidly increasing. There are over 50 thousand applications for exemption filed each year. And, all too often, the reason for the rush to nonprofit status is profit! From the special report in U.S. News and World Report we read:

About 37 million Americans donate their services each year to charities and other voluntary organizations that spend about 29 billion dollars annually, the bulk of it for worthwhile causes.
But frequently these operations are something else again. Under the label “nonprofit” are organizations that are said to-

* Pay their executives fat salaries and allow them generous fringe benefits . . . .

* Serve as fronts for commercial enterprises

* Enjoy special mailing privileges and property tax breaks that give them a competitive edge against taxpaying establishment.

* Engage in wasteful and sometimes fraudulent fundraising with little accountability to the public

Says former Internal Revenue Commissioner Sheldon Cohen: “Nonprofits are a whole can of worms that Congress has yet to look at in a broad way. I’ve been blowing the trumpet for years to get lawmakers to spell out clearly what should be tax-exempt and what should not.”2

The time has come for Christian leaders and pastors to put their legal and financial houses in order. If they do not, there will be an increase in embarrassing investigations. In most cases, these investigations will be justified. It is time for us to study and learn to avoid the crisis that looms ahead.

I want to discuss two areas where there have already been embarrassing investigations. The church has been disobedient to the law; consequently, its witness to the community has been destroyed.


The first area deals with securities law. It seems that churches are in a constant building program; the need for larger school facilities is never ending. It is impossible to build or expand without money. Church facilities are not, by their nature, a good investment for conventional lending institutions. The cash flow of a church is hard to substantiate. Thus, churches are often in the position of borrowing funds from the public or from the membership in order to continue to grow. The problem is: Most churches that raise funds by means of loans from the public or members, or by the use of a “trust account” or “revocable donation contract” are probably involved in the issuance of securities.

What is a security? “The word security is defined very broadly in the federal statute: The term security means any note, stock, treasury stock, bond, debenture, evidence of indebtedness . . . . “5 Suffice it to say, a church that has given a promissory note or any other evidence of

indebtedness to anyone has dealt in securities. The problem of securities becomes greater when the church or ministry starts borrowing or accepting funds into a trust from a number of people. It is at this point that the church may be dealing in a public offering, and unless the church had applies for and received permission from the proper authorities, it probably is violating a number of securities and banking laws.

I would like to tell about a true situation that developed into a horror story for a church in Northern California. In the early 1970’s, the rapid growth of this church made a new facility necessary. A construction loan for $1 million was sought, but a reasonable financing package was not available. Then the church staff discovered that seven or eight churches in their denomination were using a “trust fund” to acquire property and finance expansion. It was assumed that the trust fund method was acceptable and within the limits of the law.

The church leadership decided to use the trust fund method for their building project. A brochure was prepared, spelling out the detailed workings of the trust. A document was printed resembling a stock certificate, and an account was opened at a local bank. An announcement was made to the congregation that the church would accept deposits into the trust from members and friends of the church. The interest earned on deposited money was to be more than the current interest rate available from banks or savings and loans. It was stated that a reserve, larger than that required by banks, would be maintained and that money could be withdrawn at any time.

Some five months after the trust fund began, the state corporations commissioner notified the church that he considered the trust fund to be a security and, as such, it was not exempt from registration requirements.

The letter was not shown to the congregation nor to

the investors, and business continued as before. Money was deposited into the fund; interest was paid; banking records were kept; and the funds were used to finance the construction of the new facility. The cost of the new facility by that time had grown to over $5 million, and all the costs were being financed by the trust fund. The congregation and the leadership took great pride in the fact that this church building was one of the largest facilities in the state.

The Department of Corporations of the State of California issued a letter regarding trust agreements (Release No. 3-C) which applied with two exceptions. Release 3-C limited indebtedness to an amount that could be serviced by one-third of weekly receipts and required a separate fund to service principal and interest. The church still had to show financial capability to service the debt. Acquisition of land and construction costs had to be financed primarily through some means other than the trust fund. The church also had to disclose that return of funds depended on the church’s financial condition, and the offering was to be limited to present members of the church. ” Five months later the Department of Corporations sent a new and more stringent draft release. Under the terms of the new release, the trust form could not be used, and the reserve fund had to be administered by a bank or a savings and loan. There were other restrictions included in the draft release.

The church decided that it could not comply with the requirements as spelled out by the commissioner and that the Department of Corporations could not move against it without acting against many other existing church trust funds. Note that the question of right or wrong or the reasons for the requirements were not considered. The primary consideration seemed to be: “Can we do it and not get caught or get into trouble? ”

Despite the obvious violations of the Department of Corporations requirements, the fund continued to function for almost four more years until the Department of Banking ordered the fund to stop accepting deposits.

The local church was not alone in its culpability; the denomination’s district and headquarter offices were both aware of the trust fund and did not disapprove or offer any help or restraint. In fact, the church was encouraging by the district office, inasmuch as the trust fund method of financing had worked well for the other churches in the district.

Let me quote from Legal Guidelines for Christian Organizations:

California has required for sometime that nonprofit organizations register and obtain a permit before offering securities for sale to the public. The California corporations code provides that it is unlawful for any issuer to offer or sell in California any security unless the sale is either qualified or exempt. As with the federal statute, the word “security” is defined broadly in the California corporate securities law and includes, among other things, any note, bond, debenture, or evidence of indebtedness. There is an exemption for any security of an issuer organized exclusively for religious or charitable purposes and not for pecuniary profits, but this exemption specifically excludes the offer and sale of any evidences of indebtedness, whether interest bearing or not.

At a 1976 conference of the Christian Legal Society, a representative of the California securities division stated:

The offering of promissory note, or other evidences of indebtedness (by nonprofit corporations), is a potential problem and requires regulation for a number of reasons. First, the church might over-extend itself and issue more notes than it is able to service as to interest and principal, in addition to any other debt that it may have. Second, it may not have made satisfactory arrangements for interest and principal as it becomes due. Third, the purchaser may not be given adequate disclosure of the financial condition of the church, the use of the proceeds, his rights as a note holder, and the nature of the note.7

It can readily be seen that the state of California has taken a hard line regarding the church and trust funds. All churches would be well-advised to seek proper counsel prior to borrowing from the congregation or setting up a trust fund, regardless of the state in which the church is located.

A minister faces a potential legal problem when he or his church enters into the sale of church securities. The minister must first become a registered representative (salesman or agent) and, if it is found that there were fraudulent or deceptive practices used in the sale of the church securities, the minister may find himself liable to the people buying the securities. (Loaning the church money?)

One last comment must be made regarding the Northern California church and its trust fund problem, After the cease order, it was found that the fund was virtually out of money. Because of strife within the congregation, an amicable agreement for repayment could not be reached. When the problem reached its peak, the church was forced into bankruptcy. The witness to the community is destroyed, and the congregation has split. The damage is done; the credibility of a great many church leaders is now destroyed. In the end, the plans for buildings, which just a few years ago were designed to “glorify God, ” became a nightmare. The church building is now used for other purposes and is no longer a place of worship. How Satan must enjoy all that has happened.

Let me tell you about some other events, lest you think I am singling out just one church. In Colorado a church raised funds through an issue of bonds to build a nursing home. Six years later when the nursing home was still not completed, it was discovered that the money had been spent instead for television and other media costs. The financial condition of the church had not been disclosed to investors, and eventually bankruptcy proceedings took place.

In Ohio a religious organization that included a church raised over $12 million through the use of notes which it could not repay. This organization was charged with scheming to defraud the noteholders because it did not disclose its financial condition to investors.

A minister in Oregon sold investment certificates throughout the United States. At maturity the certificates could not be redeemed because of a lack of funds, and the minister was charged with failure to comply with securities law, misrepresentation, and illegally diverting over $3 million to corporations which he owned. Over seven thousand investors faced the potential loss of their investments.

The list goes on and on, and, in almost every case, the problems stem in part from the desire of leadership to be bigger and more grand than the other guy. This success syndrome has caused Christian leadership to lose sight of the purpose of the church. Nowhere in God’s Word do we find that success is measured by bigger buildings, bigger programs, or self-promotion of people. It is not considered success when a ministry goes bankrupt or damages the cause of the Great Commission by either breaking the law knowingly or by being naive.

Inurement and Self-Promotion

This brings me to the next area of disobedience of the law that will result in poor witness as well as embarrassment: inurement and its companion, self-promotion.

Inurement is an action that becomes beneficial or advantageous to the one who is involved in the activity. Self-promotion is defined as advancement in rank, dignity, or position using one’s own approval as the standard of performance.

Revenue Ruling 55-231, CB 1955-1, 72 makes it very clear that “promoting the work of an author who was one of the organization’s founders is a form of inurement. ” An essential requisite for tax-exemption is that no part of the organization’s net earnings inure to the benefit of any private individual. In recent months I have seen a flood of books and tapes being promoted in church publications, most of which have been mailed nonprofit bulk rate. If these books and/or tapes have been written or made by a staff member, and if the proceeds of the sale of these books or tapes are given to the staff member, that staff member and the exempt organization have been involved in inurement. Inurement can be a cause for revocation of tax-exempt status.

Let me give you an example of some types of inurement that I have seen of late. I am sure that in these examples the people involved were not aware of the potential problem they were creating; however, not being aware is not a very good excuse when the IRS shows up.

The first example came to me by way of a very high class monthly magazine. The back cover was a full-page advertisement for a book written by the pastor of the ministry putting out the magazine. The ad indicated that the book was available at local Christian bookstores or by mail through the ministry. Of course, the magazine was mailed to a large mailing list on a bulk mailing and at a “nonprofit” rate. Further investigation revealed that the book was owned and published by the pastor. All royalties and profits were paid directly to the pastor. This is, of course, not the intent of “nonprofit” mail. Nor is the use of a nonprofit corporation for the benefit of a particular individual the proper or legal reason for tax exemption. Consider how you would react if you were a for-profit corporation attempting to sell your product by direct mail and you were required to pay for an advertisement in a magazine of this type, and, of course, had to pay regular bulk mail rates to get the magazine to a mailing list. Of course the nonprofit, tax-exempt organization has the financial advantage, and the staff member or organization leader has much to gain when the nonprofit corporation promotes his work under these advantageous conditions. This, however, is not the purpose for which exemption is given and is certainly inurement.

Let me quote from an internal revenue manual called Exempt Organizations Handbook:

The problem at which the tax on unrelated business income is directed is primarily that of unfair competition. The tax-free status of Section (501) organizations enables them to use their profits tax free to expand operations while their competitors can expand only with the profits remaining after taxes. ”

The same situation exists regarding inurement, for we in ministry must not unfairly profit from the use of exempt status. When, as individuals, we do profit through the use of (501) status, we are guilty of inurement.

Another example of unfair competition arises in the publishing field. While inurement is not the problem, the nonprofit, tax-exempt publisher in many cases can be said to be guilty of “unfair competition.” Mailing costs for the publisher in today’s marketplace constitute a major expense. In my opinion, non-profit mail was not, nor is it now, designed to allow an organization an advantage in marketing a product. Note, however, as you look at the stack of nonprofit mail you receive, just how many advertisements from publishers come “nonprofit.”

Inurement can also take the form of promoting an extraneous purpose. As an example, in one case it was held that an organization dominated by one individual was not exempt as a religious organization.

The court found that its purpose was to carry on the founder’s personal feud with a local newspaper. The court did not examine the validity or sincerity of the beliefs held. Rather, it found that the actual activities had little relation to the observance of these beliefs. Puritan Church of America, 10 CCH Tax Ct. Mem. 485 [1951], affd. per curiam 209 F.2d 306 [D.C. Cir. 1953], cert. den., 350 U.S. 810 [1955].”

For a more blatant example of these problems, I offer you this situation which developed in California where a large church is headquartered. The state has contended that church officials were siphoning off church funds for their personal use. The state alleged that the pastor-general was spending money far too lavishly and his chief adviser was unduly benefiting from his own position; the latter had a contract for $200 thousand annually, with unlimited expenses. The adviser kept homes in Beverly Hills, Pasadena, and Tucson, all of which were financed initially by the church. The state cited other alleged extravagances, including credit card excesses; there was one charge for $22, 571 at a Paris hotel. Purchases of antiques, paintings, and other lavish gifts were made from church funds. The state attempted to correct alleged fraudulent diversion of assets by the church; the state attorney general had charged that since 1975 leaders of the church being investigated had diverted at least $1 million annually.

In the June 3, 1980 issue of the Los Angeles Times it was reported that an “evangelist . . . who last September 24 said his television ministry was $3.2 million in debt, has purchased with his two sons, a home and condominiums near Palm Beach, Fla. , for $650, 000 with a $177, 500 cash down payment. ” True or not, the damage has been done. Again, from the Los Angeles times May 4, 1980 issue came this news item, “Gifts of equity in home to church official questioned, financial arrangements for retiring Methodist Bishop . . . disputed among church members. ” This article describes a Methodist Church that wanted to give the $44, 000 equity in a home to its retiring bishop and to raise an additional $85, 000 to pay off the mortgage. Before the almost full-page article is finished, the bishop, who has spent over forty years in the ministry, is made to appear as the bad guy.

Again, the problem is lack of knowledge and naivete in a situation which never should have arisen. Ignorance of the law is no defense!

It is not my intent to throw stones at any individual of organization. It is, however, my desire that those who call themselves part of the body know the law and become aware that when they violate the law they might have to face the consequences. Pleading first amendment rights after the fact is not good witness. If the law is wrong, work to change it; otherwise, present a good witness to the world and obey it.


1. Random House Dictionary of the English Language, Unabridged Edition, s.v. “crisis. ”

2. U. S. , Department of the Treasury, Valuation of Donated Property, IRS Publication 561, 1977, p. 1.

3. U. S. Constitution, First Amendment, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition Government for a redress of grievances.”

4. Lawrence Maloney, “For Many, There Are Big Profits in ‘Nonprofits,”‘ U.S. News and World Report (November 6, 1978), p. 45.

5. Wllliam H. Ellis and Joel H. Paget, Legal Guideness for Christian Organizations (Oak Park, IL: Christian Legal Society, 1977), p. 21.

6. State of California, Department of Corporations, Release No. 3-C, October 3, 1974.

7. Legal Guidelines, pp. 22-23.

8. Exempt Organizations Handbook (IRS), p. 7751-326.

9. Ibid, p. 7751-327-

The Internal Revenue Service intends to, and is, taking a hard stand on the growing number of persons who form their own churches because they want to render less unto Caesar. We have only to look at the full-page ads that show up in publications sold in supermarket checkout areas to see the problem. A recent ad states, “How to Profit from Little Known Tax Loopholes.” The text of the ad tells people that they too may take advantage of the tax code. An interesting quote states, “Did you know that you (within 24 hours) could easily establish a legal operating `nonprofit’ organization with you in total control based on any moral reason? Then open a bank account, and legally donate up to 50% of your income to it, and simply take a corresponding tax deduction. ” The ad goes on to tell you that the ULC Research Department will send you the information you will need to start taking advantage of this loophole. They will send you this book, etc. , for a “donation” of $24.95.

It isn’t hard to appreciate the difficult position of the IRS. They see abuses of church status in abundance. Because it is not possible to clearly define church without entanglement, the IRS is in the predicament of not being able to define church. But to not establish guidelines opens the door to every type of charlatan out to promote self gain.

A hue and cry is developing throughout the country to “stop the crooks. ” The problem is: How? Should the courts decide what a church is? Do we let the courts determine what constitutes religion and what is religious ? What if they decide that Christianity is not a religion or that only churches over fifty years of age should qualify for exemption?

The most sought-after reform would require that all churches file annual financial reports with the IRS. Ironically the cults and crooks would probably retain advisers to find a way to go on cheating, while the traditional church, in honest naivete, could find itself in trouble and possibly lose its exempt status. Another suggestion that has been made is to do away with the tax-free status of all churches. This appears to be the direction the trend is taking us.

I point out these concerns to you here to acquaint you with the problem that the auditor faces. Remember, the auditor is not just examining churches as we know them. He is auditing every type of 501(c)(3) organization. When you are asked to produce certain items, you must understand that the auditor does not know you and he is not aware yet that you are an honest organization.

The IRS will want to know if your organization is engaged in the activities for which it received tax-exempt status. This intent is expressed in IRS Publication 857.

The Internal Revenue Service recognizes the exempt status of organizations on the basis of their purposes and activities. It is the Service’s duty to insure that exempt organizations continue to operate within the applicable provisions of law. For this reason, we examine returns of these organizations. ‘

Okay! Your organization receives a notice that the IRS wants to visit you. Now what? The first thought most of us would have is -why? May I assure you that you need not feel you are being singled out for persecution. The IRS examines more than twenty thousand except organizations annually. This number is increasing as fast as the IRS can train people. Remember that there are in excess of 800 thousand recognized exempt organizations in existence, and over fifty thousand applications for exemptions are accepted or rejected by the IRS each year.2 Start adding the numbers, and you will have a feel for the size of job the IRS has.

The exempt organization auditor is, for the most part, a considerate, well-trained person who is not out to “get” honest organizations. However, he is making sure that those who have claimed an exemption are truly staying within the framework of the exempt purpose.

Programmatic , Not Financial

The IRS auditor who examines your personal income tax return is looking at it from a financial point of view. The one who audits your exempt organization will be doing a programmatic audit. Programmatic means that the exempt functions or activities of your organization will be reviewed. His chief concern will be to see that your orga-

nization is staying within the boundaries of its tax-exempt purpose; however, he also will be interested in the financial aspects. The place of audit will almost always be your office, not the auditor’s. He will want to make a visual inspection of your facilities for obvious reasons.

What are some of the obvious reasons? His first consideration might be to see if you or some staff member is using the church for personal living quarters. Or is the facility really just a home called a church? Another consideration might be the use of the facility for purposes of self gain, i. e. , a business reason. The agent will want to look at which books and tapes your organization is selling. Who profits from the sale of the books and tapes? Is there an investment or trust department, and if so, is the organization dealing in securities? Remember, he doesn’t assume you are honest. He must look for violations if he is to do his job.

Defining the Word Religion

In the November 1979 issue of Reader’s Digest, there is an article entitled “How Cults Bilk All of Us.” The subtitle capsulizes the thrust of the article: “Because they don’t have to file annual financial reports with the IRS, unscrupulous sects can-and do-ignore the law with impunity. Let’s close this tax loophole. ” The article, which is just one of many found in such publications, hits its mark.

They are able to violate the tax Law by funnelling tax-exempt money into profit-making businesses, and into the pockets of their leaders, many of whom live like potentates at public expense. ”

The writer makes a good point. We are all familiar with phony religions, rip-off charities, and welfare fraud. The

problem is that the term religion cannot be defined with precision. It has been interpreted broadly by the courts. The Supreme Court has suggested that serious constitutional difficulties would be presented if the exempt section of the Internal Revenue Code were interpreted to exclude those beliefs that do not encompass a Supreme Being in the conventional sense, such as Taoism, Buddhism, and Secular Humanism. It is obvious that organizations such as the Church of Scientology, ISKCON (better known as Hare Krishnas), and the Unification Church (Moonies) know how far they are able to bend the exempt organization code.

Audit Items

The first items the agent will want to see are your articles of incorporation, bylaws, and exemption letter. If these items are in order, the agent will review various activity items such as changes in articles and bylaws, minutes, any newsletters or brochures your organization produces, your correspondence files, and other narrative reports.

The agent will have certain considerations in mind. These considerations generally fall into five areas:

1. Inurement

2. Private benefits

3. Illegal activities

4. Legislative and political activities

5. Unrelated business income.

While the auditor of a tax-exempt organization is primarily performing a programmatic audit, he also will ask to see some, if not all, of your financial records (for example: your year-end report to members; your employment tax forms; and, in some cases, specific income and expense items). ” If your organization uses an outside accountant rather than an in-house bookkeeper, the IRS seems to be

more favorably impressed. There are other specific items the agent will request.

1. If your organization is a school, he will look for complete information as to your racial non-discrimination policy.

2. If your organization is an exempt church, he will want evidence to support your claim that a church does in fact exist.

3. He also will want to look at your control of funds and contributions to other exempt organizations.

Since the audit is generally programmatic rather than financial, what is the IRS trying to accomplish? In my opinion, the issue of revocation will be the key goal-if not now, certainly in the near future.


1. U.S., Department of the Treasury, Why Your Return Is Being Audited: Exempt Organizations, IRS Publication 857, December 1974.

2. Lawrence Maloney, “For Many, There Are Big Profits in `Nonprofits, ‘” U. S. News and World Report (November 6, 1978), pp. 45,52.

3. C. Williams, “How Cults Milk All of Us, ” Reader’s Digest (November 1979), PP- 237-238.

4. Mention must be made regarding the restrictions against IRS agents conducting examinations of churches. Section 7605(c) of the Internal Revenue Code states that IRS agents must go through a preexamination process before making an audit of churches. The purposes of the restrictions, as spelled out in the code, are to protect churches or associations of churches from undue interference in their internal affairs through unnecessary examinations. Protection afforded the church through this section of the code is primarily that of protection related to the financial aspects of the organization. Church business managers, clerks, and pastors would be well advised to obtain a copy of this code section, read it, and be aware of this safeguard to the church. So that you can better understand section 7605(c) and its ramifications it is printed below:

No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to [the tax on unrelated business income] unless the Secretary (such officer being no lower than a principal internal revenue officer for an internal revenue region) [1] believes that such organization may be so engaged and [2] so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.