Church Loans to Board Members and Officers
Dear Clients and Friends,
Occasionally I am asked to advise a church client desiring to loan money to a church leader who has a financial need. You would think a ministry should be able to give a lending hand to a leader in need. But think again.
The legal question is bifurcated between state and federal law. First, would such a loan violate Florida law? Second, would the transaction jeopardize the churches 501(c) (3) status with the IRS?
I will answer both questions starting with state law.
Florida law addresses this issue directly:
617.0833 Loans to directors or officers.- Loans, other than through the purchase of bonds, debentures, or similar obligations of the type customarily sold in public offerings, or through ordinary deposit of funds in a bank, may not be made by a corporation to its directors or officers, or to any other corporation, firm, association, or other entity in which one or more of its directors or officers is a director or officer or holds a substantial financial interest, except a loan by one corporation which is exempt from federal income taxation under s. 501(c)(3) of the Internal Revenue Code of 1986, as amended, to another corporation which is exempt from federal income taxation under s. 501(c)(3) of the Internal Revenue Code of 1986, as amended. A loan made in violation of this section is a violation of the duty to the corporation of the directors or officers authorizing it or participating in it, but the obligation of the borrower with respect to the loan is not affected.
Florida law aside, Federal law specifically the (IRS) also prohibits this transaction because the loan may be considered a violation of the IRS requirement of its “No Inurement” policy for non profit corporations.
The IRS clearly says no part of a nonprofits earnings should inure to the benefit of any person, in particular any insider. A director or officer is an insider.
So the next time you are in a Board or similar meeting and there is discussion about financially benefiting a key leader such as an officer or director reflect on the above.
Remember, churches receive tax free income to assist the communities they serve. But society does not want churches to receive tax favored donations to benefit insiders.
Rev. John P. Joseph, Esq. CCA