TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, March 16, 2014

Church Marketing Campaigns for Their Pastor's Books and Private Inurement

Pajama Pages, On Driscoll, It’s Called Inurement, and It’s Probably Illegal:

Real MarriageMark Driscoll may have imperiled his church’s nonprofit status and, with it, cost his congregation millions of dollars in tax deductions. I am neither a lawyer nor an accountant, but I can read IRS publications that describe the kind of hot water that Mars Hill Church and other churches can get into when they use donated money to buy their pastors’ books.

You can read the 50-page IRS description of inurement here, but I’ll try and summarize it for you here and explain why this applies to Driscoll’s NYT campaign and perhaps many other churches that use church resources to benefit their pastors’ publishing careers.

Churches and other charities are granted non-profit status so long as they use the money they raise exclusively for religious, educational or charitable purposes. Although they can pay staff and officers for work they perform to advance their stated purposes for the public, they cannot take special measures to direct the resources of the organization to any private individual or corporate entity, especially an individual that is an insider of the charity. Such activity is considered inurement, but before considering it in more detail, it’s worth reviewing what we know of the Mars Hill/Driscoll arrangement.

Mars Hill spent approximately $220,000 that had been donated to it to purchase services and books to have Driscoll’s book [Real Marriage: The Truth About Sex, Friendship & Life Together] appear on the New York Times best seller list. ... Mars Hill reports that it received $25m in tithes and offerings last year. Assuming an average deduction value of a contribution to be 25 percent, as the Congressional Research Service does, Mars Hill members saved $6.25m in tax payments because of the church’s exempt status. So, a $220,000 investment has the potential to cost church members $6,250,000.

Patheos, Do We Need a Code of Ethics for Mega-Pastors Who Write?:

Recently World Magazine had a piece on Unreal Sales for Mark Driscoll’s Real Marriage to the effect that the Mars Hill Church bought Driscoll’s book a place on the NYT best seller list through a marketing company with a deliberate intent to by-pass the NYT’s own safe guards against authors or publishers artificially inflating the sales figures for their book. This might even violate IRS rules and regulations about non-for-profits committing inurement. CT also has a piece on this where they link to Mars Hill Church’s official response to the issue.

Book Club, Celebrity Tax Lore, Tax | Permalink


(Here's what I just posted as a comment elsewhere)
The clearest tax problem here has nothing to do with Mars Hill's tax-exempt status (though the use of tax-deductible donations is indeed problematic). It is, rather, evasion of personal income tax and medicare tax.

Mars Hill spent some tens of thousands of dollars for the benefit of an employee, but neither he nor they reported it as taxable income to him. Even if this was an independent board decision, and even if it isn't part of an excessive compensation, that's still illegal. He should have paid tax on that as part of his compensation.

THe exact amount of that compensation might not be the full $220,000, but it will still be in the thousands. It won't be the full $220,000 because the net church expense seems to be have been lower because the church bought books which it resold, perhaps even at a profit. But the church could have done this at lower cost anyway--- the marketong frim and the trickery increased the expenses.

I think the church should issue a revised W-2 and the employee should file a revised tax return, if W2s and txa returns have already been filed. THis sounds like hte kind of thing that is clearly illegal, but not the kind of thing anybody would go to jail for, since they probably did not think about the tax implications when they did it. If I were the IRS I'd make them pay fines, though.
Also, if they 'fess up now, they could get out of the possible loss of their tax-exempt status. Paying Driscoll extra this way would be perfectly legal for a nonprofit IF it reports it as income to him. I guess they'd have to revise their 990 form too, since nonprofits use that to report the amount they pay their top employees.

Posted by: Eric Rasmusen | Mar 17, 2014 10:59:15 AM

Churches do not have to file Form 990.

Posted by: Chris Jones | Mar 17, 2014 5:13:15 PM