Expert: Harvey Mechanic - 6/26/2009

Question
QUESTION: Is it ok to borrow money from your local church, as a loan to be paid back to the church, not from other peoples tithes or offering but maybe from offerings that yourself have made in the past, when what you are asking the church is much less than what you have offered or tithe into that church.

ANSWER: The past donations are not relevant as to loans.  However, the church is permitted to refund past donations. If, instead, it gives a loan it will need to be secured and would need to call for market rate interest. If the loan is inadequately secured and that is given to an
insider then the IRS treats the proceeds as compensation to the
insider which may result in a total of excessive compensation to
that person which is a  violation of IRS regulations.
www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4749

If you then read two sections down you would see that such
violations may result in excise taxes for "intermediate
sanctions"

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

---------- FOLLOW-UP ----------

QUESTION: Thank you for your response. Where do I find that is ok for the church to refund a past donation?. Please advise.
Thank You.

Answer
In the United States acts are legal unless there is a specific prohibition for the act.  Merriam-Webster's Dictionary of Law cites to the legal "principle
that an act is not a crime unless there is a law prohibiting it."
http://pages.citebite.com/m1q4d7q3j4yse

That phrase comes from the Latin "nullum crimen sine lege" and a
similar phrase is "Nulla poena sine lege" (Latin: "no penalty
without a law").
http://en.wikipedia.org/wiki/Nulla_poena_sine_lege

For refunds of donations where a deduction was taken in a
previous year, put that amount on line 21 of your form 1040 as
stated in IRS publication 17 on page 84 of
www.irs.gov/pub/irs-pdf/p17.pdf -- "Recoveries
A recovery is a return of an amount you deducted or took a credit
for in an earlier year. The most common recoveries are refunds,
reimbursements, and rebates of deductions itemized on Schedule A
(Form 1040)."

The organization must send to the IRS a 1099-Misc indicating the
amounts of the refunds given to persons if the amount is $600 or
more.
See the top of page 6 of
www.irs.gov/pub/irs-pdf/i1099msc.pdf
which is the IRS instructions for form 1099-Misc
--start of excerpt  ---
When to report. If the following four conditions are met, you
must generally report a payment as nonemployee
compensation.
• You made payments to the payee of at least $600 during the
year.
--end of excerpt  ---


Details about recovery rules are on page 22 of of
www.irs.gov/pub/irs-pdf/p525.pdf
"Taxable and Nontaxable Income" (it may take about 15 seconds to
load from IRS site)

The statutory authority is 26 U.S.C § 111 "Recovery of Tax
Benefit Items" which you may review at:
http://bit.ly/15omZa

  Please see http://bit.ly/3lPY5 which is an article "The
Importance of Respecting Donor Wishes" from Guidestar.org, which
"is the leading source of information about U.S. nonprofits"
http://en.wikipedia.org/wiki/GuideStar

    In that story about its February of 2005 "Question of the
Month", Guidestar asked nonprofit leaders, "Should charities be
able to use earmarked donations (those given for a specific
purpose or program) for other things?" The answer was a
resounding "No" ( 65%). For example, Mary Ferrell of the
Fairmount Park Conservancy ...spoke for many in the "No" camp
when she asserted, "Ack! This is fundamental to the trust people
have in our sector! We do what the donor tells us with their
money, or we send it back to them. Period."

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com