Disbanding Church Distributing Assets

[Gervaso]

Our church will be disbanding Sept 30, though we have not yet "officially" voted to do so(we will do so in the next couple of weeks).  The church sold the building and the parsonage to me(the pastor). We would like to use some of the proceeds from the sale to fix the plumbing of one of our members, and also provide a college scholarship for another one of our members.  The rest of our assets will go to a missionary. Can we legally provide for our two members in question, as long as it is done before the dissolution date?

ANSWER: I could help you with information as to a Michigan nonprofit that wishes to dissolve, but first I need to know whether your are actually an entity that is incorporated under that Michigan nonprofit corporation law.  If not, what type of entity. After you give me that information I will reply further.

In any case, the church might want to make sure that when it sells assets, like the church building and parsonage that it does not sell for less than market value, when it is sold to an insider.  Internal Revenue Code section 501(c)(3) which is available at:http://pages.citebite.com/w8p5e1ayxjv 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 term is defined in regulations 26 C.F.R. 1.501(a)-1(c) "The

words `private shareholder or individual' in section 501 refer to

persons having a personal and private interest in the activities of

the organization."http://goo.gl/GtQpz on the right column of page 2

See

www.irs.gov/pub/irs-pdf/p3833.pdf starting on pdf page 13 as to the

discussion of "Charitable Class"

--start of excerpt  ---

The group of individuals that may properly receive

assistance from a charitable organization is called a charitable

class. A charitable class must be large or indefinite enough that

providing aid to members of the class benefits the community as a

whole.

--end of excerpt  ---

As benevolence funds go only to members of a small congregation and

not to members of the community as a whole, the church's activity

of giving funds to its congregation, like one of its members who wants new plumbing work, or a scholarship for one of the members, could result in fines or penalties. Money given to a missionary.

The above, as to benevolence funds applies even when the organization is not dissolving.  However, as your organization is dissolving, it would need to comply with the dissolution clause in its articles of organization. In order to have obtained IRS exemption determination, a 501(c)(3)

organization would have had to have the IRS required clauses in its

Articles of Incorporation or articles of organization as discussed starting on page 19 at

"Organizational test" at:

www.irs.gov/pub/irs-pdf/p557.pdf

and the sample dissolution clause is on page 69:

---Start of Excerpt--

Sixth: Upon the dissolution of the corpora-

tion, assets shall be distributed for one or more

exempt purposes within the meaning of section

501(c)(3) of the Internal Revenue Code, or the

corresponding section of any future federal tax

code, or shall be distributed to the federal gov-

ernment, or to a state or local government, for a

public purpose. Any such assets not so dis-

posed of shall be disposed of by a Court of

Competent Jurisdiction of the county in which

the principal office of the corporation is then

located, exclusively for such purposes or to such

organization or organizations, as said Court

shall determine, which are organized and oper-

ated exclusively for such purposes.

---End of Excerpt--

Check the specifics of your Articles as they may be more stringent. Harvey Mechanic, Attorney at Law - [email protected]

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 ----------

Thank you for your quick answer! I have always assumed that our church is incorporated, but I don't have any documentation to prove that.  We are registered with the Michigan Department of Labor and Economic Growth.  The church building and parsonage were sold to us at below market value.  It was done before we decided to disband.  In fact, as I said before, we have not "officially" dissolved yet, nor have we voted to do so. There are no clauses in our bylaws or constitution which deals with disbanding or dissolving. The family we are thinking of helping has received help from us as a church before.  We have a benevolence category in our budget, so it would seem that we could help whomever we wish out of our church resources, right?  Any further help would be most appreciated!

[Bates]

You can search for the entity in the state's listing of corporations:

www.dleg.state.mi.us/bcs_corp/sr_corp.asp

Even if you organization has not yet officially decided to dissolve it appears to be what the law anticipates covering, in other words, the winding down of operations.  In any case, I wrote to you earlier that a church, especially a church with a relatively small congregation in proportion to the community may not limit the beneficiaries of its charitable activities to its congregation.l  Approximately how many members are in your congregation?

A sale to an insider for less than market value is considered by the IRS as compensation(the amount difference between the sale price and the fair market value) to that individual and there are fines available if that brings the worker to above reasonable compensation levels.

The Regulations are available at:

26 C.F.R. §53.4958-1 as to "Taxes on excess benefit transactions"

and the next few sections. That particular section is available at:http://goo.gl/SemT9

The recipient may come to be subject to a 25% excise tax as well as

paying regular income taxes on the fund. The  organization's

managers would be subject to an excise tax equal to 10% of the

excess benefit if they knew that the compensation was excessive but

gave it anyway. The regulations at §53.4958-1 include members of

the Board of Directors in the list of person subject to the tax.http://law.justia.com/us/cfr/title26/26-17.0.1.1.3.11.1.3.html Harvey Mechanic, Attorney at Law - [email protected]

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.