July 07,2008

Grassley Update on Ministry Responses, Background Questions and Answers Document


To: Reporters and Editors
Re: Ministry responses
Da: Monday, July 7, 2008

On Nov. 5, 2007, Sen. Chuck Grassley, ranking member of the Committee on Finance, wroteto six media-based ministries, seeking information about various issues related to tax-exempt policy.

The Committee on Finance has exclusive Senate jurisdiction over tax policy. On March 11, Grassleyand Sen. Max Baucus, committee chairman, wrote follow-up letters to four ministries that had notprovided information in response to Grassley’s Nov. 5 letter. Grassley’s staff has conducted numerous meetings and conference calls with representatives of the ministries and with various religious groups and leaders to answer questions and concerns about issues such as confidentialityof sensitive information and to discuss the purpose of Grassley’s policy review. Here is an accounting of the responses so far:

Joyce Meyer Ministries provided extensive answers to all questions. Staff continues toreview the materials submitted but generally is finding the responses to be in good faith andsubstantively informative.

Benny Hinn of World Healing Center Church provided extensive answers to all questionsin a series of submissions. Staff continues to review the materials submitted but is finding theresponses to be in good faith and substantively informative.

Randy and Paula White of Without Walls International Church provided only responses tothe “general” and “real and personal assets” questions. Staff deems their submissions to beincomplete as a result and is engaged in dialogue with attorneys for the ministry to secure responsesto the remaining questions.

Eddie Long of New Birth Missionary Baptist Church/Eddie L. Long Ministries submitteda response that contained only general information about the organization’s operations as well ascopies of articles of incorporation and bylaws (which the committee did not request) for theorganization’s affiliates and subsidiaries. Staff deems this submission to be not responsive as a resultand is engaged in dialogue with attorneys for the ministry to secure responses to the remainingquestions.

Kenneth and Gloria Copeland of Kenneth Copeland Ministries submitted partial responsesto the majority of questions but did not provide a response to any of the compensation questions.

Staff deems this submission to be not responsive and is hoping to engage the attorneys for theministry in a dialogue to secure responses to all of the questions. However, since Kenneth Copelandhas declared publicly that he will not submit responses even if a subpoena is issued, staff also isconsulting with Senate attorneys about next steps.

Creflo and Taffi Dollar of World Changers Church International/Creflo Dollar Ministrieshave declined to provide any of the requested information. Staff has engaged the church’s attorneysin a number of conversations but the attorneys have indicated that the church’s decision not torespond remains the same. Staff has reached out to church officials directly to confirm the church’sdecision.

Here’s a Sen. Grassley comment on the status:

“Joyce Meyer and Benny Hinn have engaged in open and honest dialogue with committeestaff. They have not only provided responses to every question but, in the spirit of true cooperation,also have provided information over and above what was requested.

“Both Joyce Meyer and Benny Hinn have indicated that they are also instituting reformswithout waiting for the committee to complete its review. Self-reform can be faster and moreeffective than government regulation and is the hallmark of my oversight of The NatureConservancy, the Smithsonian Institution, American University and the American Red Cross. Theseorganizations are all going strong and are arguably better off than they were before. I supportvoluntary, independent accreditation programs like those sponsored by the Land Trust Alliance andthe Evangelical Council for Financial Accountability and encourage these ministries to pursuesimilar accreditation. The most successful non-profit organizations recognize the need fortransparency about their operations and accountability to their donors and the taxpaying public. Theyappreciate that Congress has a responsibility to review the effectiveness and fairness of tax laws fortaxpayers and tax-exempt groups alike.

“The ministries that continue not to cooperate appear to be heeding the advice of attorneyswho are not familiar with congressional oversight in general and specifically the FinanceCommittee’s oversight and legislative work in the area of tax-exempt organizations over the lastseven years. These attorneys who aren’t part of the ministries themselves have a natural incentiveto prolong the process as long as possible.”

Following is a background questions-and-answers document regarding the ministries inquiry.


Background Questions and Answers
July 7, 2008

Q: How does the tax code define a church?

A: While the term “church” is found in the Internal Revenue Code, the term is not specificallydefined. It includes anything from religions with traditional brick-and-mortar buildings, such aschurches, mosques and temples, to religions that are media or home-based. For practical purposes,the term “church” is used in its broadest sense to encompass all forms of worship just as “minister”is used to refer to pastors, priests, rabbis, imams, and other spiritual leaders.

IRS publication 1828, Tax Guide for Churches and Religious Organizations, contains additionalinformation about the benefits and responsibilities of churches under the Internal Revenue Code.http://www.irs.gov/pub/irs-pdf/p1828.pdf

Q: What tax rules apply to churches?

A: Just like all other organizations described in section 501(c)(3) of the Internal Revenue Code,churches are generally exempt from income tax, able to raise funds through tax-exempt bonds, andeligible to receive tax-deductible contributions.

Unlike other 501(c)(3) organizations, however, churches are not required to file a Form 1023,Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code,and they do not have to file a Form 990, Return of Organization Exempt from Income Tax.The following tax code rules apply to all 501(c)(3) organizations, including churches:

--a complete prohibition on inurement of net earnings to insiders;

--a complete prohibition on political activity;

--a tax on lobbying activity that is a substantial part of its activities;

--a tax on income earned from activities unrelated to its exempt purpose;

--employment taxes; and,

--charitable contribution deduction and substantiation rules.

An organization’s tax-exempt status can be revoked if it is found to violate the inurement or politicalactivity prohibitions or if its lobbying or unrelated business activities are substantial.

Q: What tax rules apply to ministers?

A: Just like all individuals, ministers must pay individual income taxes and Social Security andMedicare taxes.

Ministers, like insiders of all other 501(c)(3) organizations, are subject to taxes on any “excessbenefits” arising from transactions with the organization or a tax if they approve such transactions.

Q: Why is Senator Grassley investigating churches?

A: Senator Grassley’s investigation of the ministries is consistent with his prior investigations because a church is subject to the same tax rules as all other charitable organizations. The differences are in how church tax compliance is documented. A church does not have to file a Form 1023 to notify the IRS when it starts up. A church also does not have to file a Form 990 every year. These differences make it harder for the IRS to enforce the rules with churches, even though all ofthe same compliance and enforcement concerns applicable to other charitable organizations areapplicable to churches.

As chairman, and now ranking member, of the Senate Committee on Finance, Senator Grassley has conducted numerous investigations of tax-exempt organizations. Since 2001, he has reviewed the American Red Cross, the Nature Conservancy, The Smithsonian Institution, the United Way, American University, foundation management, the use of supporting organizations, donor-advisedfunds, non-profit hospitals, and tax-preferred university endowments.

These investigations have examined the misuse of assets owned by the tax-exempt organization, abusive spending of an organization’s funds by its leaders, and abuse of the tax break provided tothose contributing to tax-exempt organizations. A summary can be found on the Finance Committee website.

The scrutiny also has resulted in self-corrective measures by the non-profit sector. For example, the Land Trust Alliance significantly revised its Land Trust Standards and Practices and launched a voluntary accreditation program for conservation organizations. The Catholic Health Association is promoting new guidelines and accountability measures for charity care at its member non-profit hospitals. The Panel on the Nonprofit Sector, under the leadership of The Independent Sector,issued Principles for Good Governance and Ethical Practice: A Guide for Charities andFoundations.

Q: What are some the compliance and enforcement issues involving churches?

A: Abuse of Church Status: A church is not required to notify the IRS when it forms. As a result,anybody can claim to be church just to exempt from IRS scrutiny. Because this also enables themto claim audit protections under the Church Audit Procedures Act, it is harder for the IRS to reviewthem. The use of state Corporation Sole statutes to evade taxes is one example of such abuse. Morei n formation is available about this abuse on the IRS web s i t ehttp://www.irs.gov/newsroom/article/0,,id=136337,00.html. Another example is an individual whoorganizes a church from his or her home and then solicits contributions over the phone or internet.

Inurement & Private benefit: Some churches, especially those not affiliated with a largerorganization, do not have independent trustees or board members. Poor governance practices canlead to lax tax compliance especially in the areas of compensation and related party transactions,both of which have significant inurement and private benefit implications.

Related Entities & Corporate Income Taxes: A church is not required to file a Form 990, so the IRSis at a disadvantage in determining whether churches are properly reporting taxable income fromrelated entities or from activities unrelated to their exempt purpose.

Employment Taxes & Parsonage/Housing allowances: A church is not required to withholdemployment taxes on compensation paid to ministers even though the ministers are required to paytaxes on their compensation. Ministers also are permitted to exclude from their own taxable incomethe fair rental value of any parsonage provided to them or any amounts provided for a housingallowance provided certain conditions are met. Because “church” and “minister” are not defined,it is easy to claim that all employees are ministers so that they can be exempt from withholding bythe church and also eligible to take advantage of the parsonage or housing allowances.

Q: Why isn’t the IRS conducting this investigation?

A: The IRS is responsible for administering the laws that are already on the books and making surethat organizations, including churches, are complying with the laws that apply to them. The IRS isresponsible for enforcement of the tax laws. It has the power to assess and collect taxes and, in thecase of tax-exempt organizations, revoke their tax-exempt status. The IRS must work with the toolsit is given, while Congress can refine the tools with which the IRS works.

A separate branch of government under the U.S. Constitution, the Congress, and in particular theSenate Finance Committee, is responsible for oversight of the IRS and for considering whetherexisting tax laws are adequate. The Committee does not have the authority to assess taxes or revokeexemption. A congressional investigation to review tax policy and consider tax legislation isdifferent from an IRS examination to determine tax compliance.

Q: Why shouldn’t the Church Audit Procedures Act (CAPA) apply to the Finance Committee investigation?

A: As the previous chairman of the Senate Finance Committee’s Subcommittee on Oversight of theInternal Revenue Service, Senator Grassley chaired the hearing on this bill on September 30, 1983.His support for this Act remains as strong today as it was at that time.

CAPA was enacted in response to concerns about the IRS auditing churches and that these churcheswere committing significant time and resources to these audits. CAPA was designed specificallyto ensure that the IRS thought long and hard before auditing churches and to ensure that examinationof religious doctrine was not the basis for an audit.

CAPA was not intended to be a shield for churches to put up in the face of legitimate IRS inquiriesrelated to church tax liability, and this is supported by the testimony of Rep. Mickey Edwards andofficials from the Treasury Department and the Internal Revenue Service during the hearing.Congressman Edwards, the sponsor of the original House bill, stated: “We don’t mean in thislegislation to try to protect delinquent churches from penalties that ought to be assessed.”

CAPA does not govern investigations conducted by congressional committees, nor should it. Giventhe Committee on Finance’s role in oversight, it is uniquely positioned to study the compliance andenforcement issues facing the IRS without actually initiating an enforcement action.Senator Grassley’s current investigation is not focused on what the churches are doing that is inviolation of existing law – the committee is not conducting an audit of the organization. Thecommittee is focused on the adequacy of the federal tax laws that govern the tax-exempt sector,including churches.

Q: How were the six churches who received letters selected?

A: Senator Grassley has conducted his investigations of tax-exempt organizations since 2001 basedon information that he has received from constituents, whistleblowers, other insiders, and newsreports. The same is true in this case. The information of concern that he received about these sixchurches led to these ministries receiving the November 2007 and March 2008 letters of inquiry.

Q: Will Senator Grassley write to any other churches?

A: That is possible, but it has not been determined. As in other investigations and reviews involvingoversight of the tax laws, additional questions may be asked of additional churches or organizationsbased on review and study of the information that has been gathered and other information thatmight be provided.

Q: Doesn’t the investigation raise constitutional issues because the six ministries preach the same doctrine?

A: Senator Grassley is a strong supporter of First Amendment protections for religious liberty. Hewas one of the champions of the Church Audit Procedures Act in 1983, which places a tremendousburden on the IRS to ensure that any audit is warranted. Separately, the U.S. courts have upheldthe application of the tax code to churches in numerous instances.

Not all of the six ministries are “Pentecostal” or preach the “prosperity gospel.” When SenatorGrassley first wrote to the six churches under review today, he was not aware of these terms and,most importantly, was not aware that some of them label themselves this way. The doctrine of thechurches was not part of his inquiry in any way. He asked them for information based on concernsabout application of the tax laws and is reviewing the responses for consideration of tax policy.Some have construed certain of the senator’s comments as targeting the doctrine of the prosperitygospel. However, these comments are similar to comments he made in questioning the spendingpractices of leaders of other tax-exempt organizations:

“I am worried about what appears to be an “anything goes” culture by the Smithsonian Secretaryand his staff that allow his champagne lifestyle to be subsidized by the taxpayer… I am shockedat what the Smithsonian is spending its money on when it comes to food, flowers, alcohol and otheritems … I cannot explain to my constituents why they need to pay more taxes so that, to take oneexample, the Secretary and his direct reports can enjoy in September 2002 a dinner for $1,368,eating off china and linen rented for the occasion for $775.20 while enjoying a $300 flowerarrangement and alcohol of $186.04 (Letter to Chief Justice John Roberts regarding spending at theSmithsonian Institution, February 21, 2007, as reported in The Washington Post, February 25, 2007“Smithsonian Head’s Expenses Lavish, Audit Says)

“The report shows expenses that would make for a good episode of ‘Lifestyles of the Rich andFamous’ – a lifestyle paid for by AU students and their parents.” (Letter to Chair and Vice-Chairof the Board of Directors of American University, May 17, 2006, as reported in The WashingtonPost, May 18, 2006 “Senator Questions School’s Governance”)

“Charities shouldn’t be funding their executives’ gold-plated lifestyles.” (“Senator Rebukes Getty”,The Los Angeles Times, June 23, 2005.)

Q: What are some of the issues the investigation has uncovered so far?

A: Related Entities: Preliminary research conducted by staff indicates that there are almost 100entities related to the six churches as well as the ministers. It is unclear whether these entities arefor-profit or nonprofit, whether they conduct activities directly with the churches, and if so, whetherthey are conducted on terms favorable to the church. For example, the tax laws do not allow forprofitentities to enrich themselves by overcharging non-profits that are controlled by the samepeople. It is also unclear as to whether any of these entities might also be claiming church status.

Inurement & Private Benefit: Aside from transactions with related entities, there are concerns aboutwhether the churches are complying with the requirements of section 4958 of the Internal RevenueCode when determining compensation of the ministers as well entering into transactions with therelated entities. Concerns are heightened by the fact that the churches share financial and legaladvisors and by the fact that, in at least one case, a lawyer that raised section 4958 concerns mayhave been fired for raising these concerns.

Parsonage/Housing Allowances: There is concern that churches may be awarding minister statusto employees for the sole purpose of making them eligible for tax-free housing benefits. Someministers may also be claiming parsonage allowances for multiple personal residences across thecountry, as well as overseas.

Whistleblower Intimidation: Some of the churches have required employees to sign confidentialityagreements prohibiting employees from speaking about a church’s activities. Some formeremployees have received phone calls reminding them of their confidentiality agreements andthreatening lawsuits if the agreements are breached.

Overseas Activities: Some of the churches conduct activities overseas, including the collection ofsignificant cash contributions which may not be tracked or recorded for tax purposes.

Q: Will the responses be considered confidential?

A: Senator Grassley and Senator Baucus have served as chairmen and ranking member alternatelysince 2001, and they have a proven record of conducting investigations in as open and public manneras possible, while also protecting the privacy rights of taxpayers and respecting sensitiveinformation. Letters to organizations are made available to the public and the press. Responses tothe letters, however, will not be made available until after staff has completed its review andanalysis.

However, documents provided pursuant to a congressional investigation are generally a matter ofpublic record. They can be released in the course of committee action such as a hearing or report.With respect to the committee’s investigations of tax-exempt organizations, such as The NatureConservancy and the American Red Cross, the committee has provided organizations theopportunity to review in advance the documents to be made public, including what informationwould be redacted.

Senator Grassley’s staff have explained these practices to the ministries that have chosen to speakdirectly with his staff and, in turn, secured complete cooperation from those ministries. Thechurches not yet cooperating also have retained Washington, D.C., lawyers who stand to gain fromdragging out response time to requests for information.