Monday, October 5, 2009

Payment of Personal Expenses Kills Religious Organization

In a recent private letter ruling, the IRS issued a final adverse determination letter to an organization due to the extensive nature of personal expenses paid on behalf of its founder. The organization had been formed to spread the Christian Gospel though speaking engagements and conferences. Revenues were generated through contributions, love offerings for speaking engagements and conference registration fees.

During the course of an examination, the IRS noted a consistent pattern of expenditures for clothing, hair cuts, spa services, auto expenses, payments on personal credit cards and other miscellaneous personal living expenses. None of these expenses had been treated in the accounting records as compensation to the founder. However, the outside accountant would often take steps to clean up the activity after it had occurred by filing delinquent payroll tax returns and attempting to report the personal expenses as compensation to the founder.

The IRS found that the regular occurence of this activity over a period of years indicated that the organization was not operated exclusively for exempt purposes but rather for the private benefit of the founder. The exempt status was revoked. Additionally, the founder was required to pay the intermediate sanctions on personal expenses as well as pay the corrections amount required under IRC Section 4958 to another charity.

This ruling illustrates one more time the importance of drawing definite lines between the persons involved in an exempt organization and the organization. It is important that compensation be clearly defined and that there be no comingling of personal funds and organizational funds.

Private Letter Ruling 200928046 7/10/2009