Beware: Duties of Church and Not-For-Profit Boards

The December, 2014 issue of the Richard R. Hammar publication, Church Law & Tax Report, included information every organization should have. This subject covered several pages of details, and we have highlighted some of the laws and regulations you should know.

  • A director or officer whose failure to supervise permits negligent mismanagement by others to go unchecked has committed an independent wrong against the organization.
  • Trustees and corporate directors for not-for-profit organizations are liable for losses occasioned by their negligent mismanagement.
  • No custom or practice can make a directorship a mere position of honor void of responsibility, or cause a name to become a substitute for care and attention.
  • A director or officer may be liable for a violation of fiduciary duty even in the absence of bad faith or dishonesty; affirmative malfeasance is not required – mere passive negligence can be enough to breach the duty and result in liability.
  • A directory or officer who fails to take the steps necessary to acquire a rudimentary understanding of the business and activities of the corporation may be held liable for damage resulting from that ignorance.
  • A church’s investments should be reviewed at every board meeting.
  • Directors of nonprofit corporations have a fiduciary duty of loyalty to the corporation. This duty generally requires that any transaction between the board and one of its directors by (a) fully disclosed, (b) approved by the board without the vote of the interested director, and (c) fair and reasonable to the corporation.
  • Nonprofit board members have a duty of obedience to be sure that the church:
  • Is organized and operated exclusively for religious or other exempt purpose.
  • Retains its exemption from state and federal taxes.
  • Is in compliance with its constitution, bylaws, or other governing instrument.
  • Is in compliance with applicable federal, state, and local laws and regulation.
  • Charitable organizations should include individuals with some financial literacy on their board of directors in accordance with the laws of their state or as a matter of recommended practice.
  • Churches and other tax-exempt organizations that pay unreasonable compensation to an employee are violating one of the requirements for exemption and are placing their exempt status in jeopardy.
  • An excess benefit occurs when an exempt organization pays a benefit to an insider in excess of the value of his or her services.
  • The IRS maintains that some transactions will be considered automatic excess benefit transactions resulting in intermediate sanctions regardless of the amount involved. This is an important interpretation, since it exposes virtually every pastor and lay church employee to intermediate sanctions that until now had been reserved for a few highly paid CEOs.
  • An automatic excess benefit is any benefit paid to a disqualified person that is not reported as taxable compensation by the recipient or the employer.
  • The most significant federal reporting obligation of most churches is the withholding and reporting of employee income taxes and Social Security taxes. Section 6672 of the Internal Revenue Code specifies that any person required to collect, truthfully account for, and pay over any income tax or FICA tax who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for a penalty equal to the total amount of the tax evaded, or not collect, or not accounted for and paid over. Many church board members will satisfy this definition, which makes them potentially liable for their church’s failure to withhold payroll taxes or transmit them to the government.