Originally published on Forbes.com Nov 2nd, 2012
The legal structure of City of Refuge Christian Fellowship was originally a corporation recognized as a 501(c)(3) organization. Then Pastor Bruce Gunkle met Elizabeth and Frederic Gardner, who ran Church Restoration Ministries at a church leadership conference. They recommended a different model – corporation sole. Based on the outcome of a recent tax court decision corporation sole did not work out so well for Pastor Gunkle. For 2007 a deficiency of about $20,000 in tax and penalty was upheld. Reading the case, it seems that much of the tax could have been legitimately avoided under the original structure.
According to that nearly infallible source – Wikidpedia:
The concept of corporation sole originated as a means to the orderly transfer of church or religious society property, serving to keep title within the church or religious society. In order to keep the religious property from being treated as the estate of the vicar of the church, the property was titled to the office of the corporation sole. In the case of the Roman Catholic Church, the property is usually titled to the diocesan bishop, who serves in the office of the corporation sole. …… Similarly, The Church of Jesus Christ of Latter-day Saints (LDS church) uses the corporation sole form for its president (The Corporation of the President of the Church of Jesus Christ of Latter-day Saints).
So far. so good. Then it goes on:
The corporation sole form can also serve the needs of a very small church or religious society, just as well as a large diocese. By reducing the complexity of the organization to one office and one office holder, the need for by-laws is eliminated. Also, the pastor of the church or overseer of the society does not have to deal with the complexity of a board of directors.
I think the wisdom of crowd sourcing may be letting us down there. Corporation sole is a title holding device not a governance structure. It fits well with the needs of hierarchical organizations but when it is used by congregations that have no earthly governance standing over the pastor, it is fraught with peril.
The Evangelical Center for Financial Accountability places a lot of emphasis on governance:
Every organization shall be governed by a responsible board of not less than five individuals, a majority of whom shall be independent, who shall meet at least semiannually to establish policy and review its accomplishments.
One of the board functions is to:
Approve organization’s top leader’s compensation and any housing allowances (in advance).
If all there is a corporation sole and there is no governing body that can dismiss or replace the office-holder, there is no way to distinguish between the property of the church and that of the pastor. That is the problem that the Gunkles ended up with. Over $62,000 that they claimed belonged to the church was taxed to them. Under their original structure, a board could have approved a salary and housing allowance for the pastor. Under Code Section 107, the housing allowance would have been exempt from income tax. Although a “vow of poverty”, by itself, has no tax effect, it is possible for a minister to elect out of social security coverage on earnings from ministry, if based on conscientious objection. It is likely not generally a good idea, but it may have worked for Rev. Gunkle who was collecting social security and a Navy pension.
According to the American Religious Identification Survey in 2008 of the 228 million adult Americans 173 million identified as Christians. Of those 57 million were Catholics. I spend a lot of my time reading tax decisions. Believe it or not, I actually at least look at all of them. This gives me a pretty high level of confidence in some of the impressions I have even though I have not gone back and counted. Given the numbers you would expect that most tax cases involving religion would involve Protestants. That is the case based on my unscientific sampling, but actually it is disproportionate. Protestants have more than their share of church tax cases.
The large variety of governance structures is probably the source of the difficulties. If the governance structure of the congregation is the pastor listening to Jesus and filling the flock in on the message with no one else knowing anything about how the money is accounted for, there are bound to be problems from time to time. A Catholic priest might be able to divert parish funds into a personal account, but there will be no ambiguity as to what is going on. Essentially he would be stealing. Interestingly, a Mormon bishop couldn’t even do that as accounting for cash receipts is centralized. An evangelical church with a strong pastor governance model allows for the ambiguity that created problems for the Gunkles. An even sadder case was that of Thomas Chambers, clearly a legitimate pastor, who managed to blunder into about everything a phony church does, including corporation sole.
Bottom line, despite what Wikipedia says, small churches with a congregational polity should probably avoid corporation sole. You probably cannot get the package for setting one up from the Garnders anymore, as there is an injunction against them offering it.
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