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Nonprofit Law/sevrance pay for minister

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QUESTION: Is there an approved formula for appropriate determining severance pay for a church minister.  The IRS tells me they are pretty lenient on the subject but I should expect the State and County views to be stricter on this subject.  We are just trying to avoid any red flags that might trigger an audit.  Are there any specific publications on the subject.  Thank you for the use of this forum.

ANSWER:  It is against IRS regulations for a 501(c)3 organization to give
"severance pay" or any substantial gift to an outgoing employee
unless it is required by a long-standing employment contract. Such
payments would be a prohibited use of funds as the funds would not
be used for the benefit of the organization or pursuant to the
exempt purposes of the organization and, even worse, may be
considered by the IRS to be a distribution similar to a profit
distribution to an insider.  Of course, 501(c)(3) organizations,
right in Internal Revenue Code 501(c)(3) are prohibited from
giving private inurement. That code section is at:
http://snipurl.com/7s89j
and it has, in part, that the 501(c)(3) organization must be
"operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes ...
no part of the net earnings of which inures to the benefit of any
private shareholder or individual". That is the main issue that
needs to be addressed, as a 501(c)(3) organization is supposed
to use its assets for charitable, educational or religious
purposes.

In fact, the IRS defines a severance payment in the instructions to
the new Form 990 (which is the annual form used by exempt
organizations to report their activities to the IRS) as "payment
made if the right to the payment is contingent solely upon the
person's severance from service in specified circumstance, such as
upon an involuntary separation of service.... Treat as a severance
payment any payment to a listed person in satisfaction or
settlement of a claim for wrongful termination or demotion."
www.irs.gov/pub/irs-tege/990_instructions_schj_040708.pdf
on the right column of page 2

A severance  payment is allowed to be given to someone going out
the door if there was something of equal value given to the
employer by the employee, such as the agreement to terminate an
existing employment contract.

The Internal Revenue Code at section 102(a) provides that generally
gifts are not income. "Gross income does not include the value of
property acquired by gift..."
http://bit.ly/QEZhX

However, further in that code section is "(c)  Employee gifts
(1) In general--Subsection (a) shall not exclude from gross income
any amount transferred by or for an employer to, or for the benefit
of, an employee."

Therefore, if there is no legal right to receive such payments,
then any payment would be considered by the IRS as compensation
given to the employee.

Then the IRS would be able to apply the excess benefit transaction
rules. The IRS could state that compensation additions for no
additional work in return mean that the 501(c)(3) organization is
operating illegally and that organization may face the excess
benefit transaction rules. The IRS could then assess Intermediate
Sanctions which are usually in the form of Excise Taxes on Excess
Benefit Transactions.
An IRS article explaining the Excess Benefit Transaction rules  is
at:
www.irs.gov/pub/irs-tege/eotopice04.pdf
and note, from page 13 that the IRS managment has there advised its
agents,
---Start of Excerpt--
Agreements that should be reviewed include:

 Employment agreements
 Deferred compensation agreements
 Bonus agreements
 Retirement agreements
 Severance agreements
---End of Excerpt--


For further information you may want to read "The Crux of Charity:
Inurement, Private Benefit, and Excess Benefit Transactions" which
is a 59 page pdf 2004 draft at:
www1.law.nyu.edu/ncpl/pdfs/2004/Conf2004_Dale_DRAFT.pdf

I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. Your issue may also be controlled by state law and states may differ somewhat with how they would treat such issues. Even though this forum is not for such state law issues, I will direct you to http://www.leg.state.or.us/ors/065.html
which is the Oregon Nonprofit Corporation Law on the state site.

You could also check with the Oregon Attorney General's Office as that office generally oversees charities within the state. http://www.doj.state.or.us/charigroup/pages/howto.aspx

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    



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

QUESTION: What would be the differences between Federal, State and County views on this subject?

Answer
As I wrote you earlier, I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. Anyway I directed you to some state sources but I have not analyzed those state sources.  I would be willing to work on your matter further, but I would need to spend a substantial amount of time and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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