Diversion of Church Funds
By Richard R. Hammar, J.D., LL.M., CPA
© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m18
Church income ordinarily consists of designated and undesignated contributions, interest on bank accounts, gain on investments, and rent from church--owned properties. Some churches have income from the rendition of services, such as the operation of child care facilities, private schools, or counseling services. Church income, from whatever source, is held by the church in trust for the church's religious and charitable purposes. Such a trust may be express, as when a donor contributes funds for a specified purpose, or implied, as when funds are contributed without designation regarding their use or constitute rents, interest income, service income, or gains.1
The principle that church funds and assets are held in trust for the religious and charitable uses of the church is codified in the Internal Revenue Code, which conditions the exemption of churches from federal income taxation on several factors, including the following: (1) none of a church's net earnings inures to the benefit of a private individual, except for the payment of reasonable compensation for services rendered, and (2) a church is organized and operated exclusively for religious purposes.2
Ministers who divert church funds to their own benefit in excess of their stated compensation may be personally liable on the basis of several legal theories, including breach of trust, embezzlement, fraud, conversion, and theft. In addition, the tax--exempt status of their church may be jeopardized, and a state investigation could result. Diversion of church funds by a minister can be intentional, but often is inadvertent. For example, diversion of church funds by clergy to compensate themselves for travel or entertainment expenses allegedly incurred on behalf of a church may be considered improper if done without proper authorization.
There have been many notable cases of ministers being found guilty of diversion of church funds in recent years. In 1979, the attorney general of the State of California ordered a financial accounting of the Worldwide Church of God and further directed that the church be placed in receivership. The attorney general, acting pursuant to the general supervisory authority vested in him over charitable trusts, justified his actions on the basis of the need to prevent diversion of church assets from charitable purposes to the personal benefit of a few church leaders.3
The Founding Church of Scientology lost its exemption from federal income taxation in 1969 because of unexplained payments to its founder in the form of loans and reimbursement of expenses in excess of his salary, even though the amounts of such payments were small. The court observed that Congress, “when conditioning the exemption upon `no part' of the earnings being of benefit to a private individual, specifically intended that the amount or extent of benefit should not be the determining factor.”4
The Reverend Sun Myung Moon was convicted of tax fraud for failure to report interest income on certain bank accounts that were held in his name, despite his allegation that he held the funds as “trustee” for the Unification Church.5 The court concluded: “[T]he government presented evidence . . . that Moon controlled the [bank] accounts, . . . held them in his name, considered [them] his own, used the accounts in a seemingly personal manner, and was regarded by other Church figures as owning the assets personally. . . . Because he owned the assets, he should have reported the interest . . . on his tax return. Since he failed to do so, his returns were false.”6 The court rejected Moon's “messiah defense” that the church was exempt from paying taxes on its income and therefore he was too since he was “potentially the new messiah” who personified the church and was indistinguishable from it.
In another case, a church had three checking accounts. Two of the accounts were in the church's name and required checks to be signed by the minister and two other persons. The third account was in the name of the minister and only his signature was required for withdrawals. Over the course of many years, funds from many sources were deposited in each of the accounts and withdrawn for various purposes. The minister was charged with embezzlement and fraudulent conversion to his own use of certain funds in the checking account that was in his name.7
In summary, ministers ordinarily should not permit church funds or assets to be placed in their names; bank checking and savings accounts should require the signature of two unrelated persons; ministers should not pay for their personal or business expenses out of church funds without written authorization; and they should refrain from accepting favorable loans and other financial benefits out of church funds in excess of their stated compensation.8
For related information on this topic see the following articles: