Mark Driscoll may have imperiled his church’s nonprofit status and, with it, cost his congregation millions of dollars in tax deductions. I am neither a lawyer nor an accountant, but I can read IRS publications that describe the kind of hot water that Mars Hill Church and other churches can get into when they use donated money to buy their pastors’ books.
You can read the 50-page IRS description of inurement here, but I’ll try and summarize it for you here and explain why this applies to Driscoll’s NYT campaign and perhaps many other churches that use church resources to benefit their pastors’ publishing careers.
Churches and other charities are granted non-profit status so long as they use the money they raise exclusively for religious, educational or charitable purposes. Although they can pay staff and officers for work they perform to advance their stated purposes for the public, they cannot take special measures to direct the resources of the organization to any private individual or corporate entity, especially an individual that is an insider of the charity. Such activity is considered inurement, but before considering it in more detail, it’s worth reviewing what we know of the Mars Hill/Driscoll arrangement.
What we know about Driscoll’s publishing arrangements
Mars Hill spent approximately $220,000 that had been donated to it to purchase services and books to have Driscoll’s book appear on the New York Times best seller list.
Mark Driscoll solicited tax-deductible donations in amounts greater than $25 to generate mailing lists for Result Source, the service that was going to get the book on the NYT list, and pay for the costs of those books. The offer for the “free” book in exchange for the donation ended two weeks before the book’s sale date, meeting Result Source’s deadline for the list of customers.
Mark Driscoll claimed to have donated the “proceeds” of those sales to Mars Hill Church.
Mars Hill Church says that all “monies” from its bookstore sales of Driscoll’s book have gone to the church.
The copyright of “Real Marriage” is held by a company called “On Mission LLC,” which is owned by Mark Driscoll. The purpose of the company is “to manage book royalties, printing and publishing and all related and derivative activities.”
Mark Driscoll earns enough money from his publishing enterprises to retire from the ministry. He told Christianity Today’s Leadership Journal that “I’m probably at the point that I could write books and speak and hang out by my pool and coach Little League.” Enough money flows to the Driscolls that his family could live comfortably from royalties and speaking fees.
What we know about what the IRS thinks about this
The IRS defines inurement as “any unjust enrichment” of an individual or corporation out of the earnings of a tax-exempt organization. Remember that all of the activities of the organization must be devoted “exclusively” to its mission. If the efforts aren’t exclusive, the tax exemption can be revoked.
An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private individuals.
Mars Hill doesn’t need all of its income to go to Mark Driscoll, so just a little bit of “unjust enrichment” is enough to violate the exclusivity rule. From the IRS:
An individual is not entitled to unjustly enrich himself at the organization’s expense….
Any transaction between an organization and a private individual in which the individual appears to receive a disproportionate share of the benefits of the exchange relative to the charity served presents an inurement issue. Such transactions may include assignments of income, compensation arrangements, sales or exchanges of property, commissions, rental arrangements, gifts with retained interests, and contracts to provide goods or services to the organization….
The general rule is that if the arrangements are indistinguishable from ordinary prudent business practices in comparable circumstances, a fair exchange of benefits is presumed and inurement will not be found. If the transactions depart from that standard to the benefit of an individual, a finding of inurement should be made. [Emphasis added]
By saying that this was an unwise and one-time decision have Mars Hill actually acknowledged that this is not an “ordinary prudent business practice”? The church’s statement also conceded that the campaign had cost them a significant amount of money, even though they had recouped some of it from resales of its bulk purchases. It does not appear that they made a profit from this exercise (not that it would matter much to the IRS).
The Mars Hill statement asserts — without evidence — that Driscoll “did not profit from the Real Marriage books sold either at the church or through the Result Source marketing campaign.” That claim seems unlikely for several reasons.
First, he was surely paid an advance before the book was even published. Advances, which can be massive, are essentially a prepayment on commissions from books sold. Once an author has sold enough copies to earn commissions beyond the prepayment, the publisher starts sending author regular commission checks. The point is that Mark Driscoll had already been paid for the thousands of books that were purchased in the campaign. Just because he didn’t get a second commission check from them is meaningless.
Second, the whole point of the campaign was to generate income. As Throckmorton points out, just two days ago Mars Hill were describing the campaign as an “investment.” The placement on the NYT list generated its own sales from an increase in buzz and reputation, from which Driscoll and his publishers profited. As we see in so many celebrity pastors’ biographies, they market themselves as NYT best sellers to drive up their value on the speaking circuit. Remember how Driscoll was sure that publishing and speaking would be enough to keep him wealthy for the rest of his life? The activities go together.
Driscoll doesn’t actually need to make a penny from his book sales to make money from its publication. He can do that from the conferences and appearance fees that he derives from it. Result Source itself markets its services understanding that link:
What would a Bestseller do for your brand? Your business? Your future? Publishing a book builds credibility, but having a Bestseller initiates incredible growth—exponentially increasing the demand for your thought leadership, skyrocketing your speaking itinerary and value, giving you a national (even global) spotlight, and solidifying your author brand as the foremost leader in your niche. [Emphasis added]
Even though I’m sure Driscoll did make real immediate money from the Result Source campaign, even without it he would have benefited unjustly from the church’s “investment” on his behalf. One analogous case in the IRS description is of a non-profit art gallery that arranged to sell artists’ work and cut them a commission on the sales.
A prohibited direct economic benefit is conferred on the individual artists by the gallery’s sale and rental of the art works. ….
[T]he sale activity provides the artist with a direct monetary benefit and serves to enhance his artistic career. This benefit cannot be dismissed as being merely incidental to the organization’s other exempt purposes and activities as it is substantial by any measure.
It thus appears that any private benefit arising from an organization’s activities must be “incidental” in both a qualitative and quantitative sense if that organization is to be entitled to exemption. [Emphasis added]
Neither a quarter-million dollar investment nor a #1 placement on the best seller list can possibly be considered as incidental expenses or benefits, especially when the benefit was directed to an insider, but even if the benefit turned out to be small, it would still run afoul of the inurement rule.
If an activity provides a direct benefit to private interests, it does not matter that the benefit may be quantitatively insubstantial; the direct private benefit is “deemed repugnant to the idea of an exclusively public charitable purpose” and the organization cannot be exempt.
While on the topic of analogous cases, the IRS document discusses the case of Jim and Tammy Faye Bakker, who used donations to their ministry to grow fabulously wealthy. Their board was singled out for particular criticism:
Although PTL had a Board of 6 or 7 persons, some Board members were insiders. The unrelated Board members received contributions for their own ministries for their service on the Board. While nominally independent, the Board functioned as a rubber stamp, approving without discussion unspecified amounts of “bonuses” for the Bakkers which amounted to millions of dollars…. In addition to their “bonuses,” the Bakkers drained millions of dollars from their ministry through excessive salaries, expenses, and fringe benefit payments. [Emphasis added]
Wanatchee the Hatchet has documented the cozy relationship between Driscoll and his board, but the Board of Advisers and Accountabilty’s statement last night looks familiar:
The BOAA stands unreservedly behind Pastors Mark Driscoll, Sutton Turner and Dave Bruskas as the Executive Elders of Mars Hill Church. We deeply appreciate their endurance through false accusation, their submission to authority, and their humility where regrettable decisions from the past have come to light. [Emphasis added]
After the recent scandals involving plagiarism and deceptive marketing, a board that unreservedly endorses the people it’s supposed to be overseeing can be of little more value than a rubber stamp.
At this point you may be wondering how churches get away with the massive promotions of their pastor’s commercial products, as I described in this post. The reason seems to be that the IRS has few options short of the “nuclear option” of completely revoking a church’s tax exemption, though with other nonprofits it can take intermediate measures of just regulating or applying an excise tax to the inurement activities. In some high-profile cases, it has exercised its authority to revoke a church’s tax-exempt status, even after the offending party or pastor has left.
With no enforcement tool other than revocation the [Internal Revenue] Service is in a poor position to curb abuses, since its only remedy is to punish the organization even though the actual wrongdoing may be traceable to particular individuals who have taken advantage of the organization as well as the public at large.
Elevation Church has acknowledged that it used church funds to boost the sales of Steven Furtick’s books, and we have a right to wonder whether other churches that have achieved the same kind of results as Driscoll and Furtick — a fleeting appearance on the NY Times list — have used church resources to do so. According to these inurement rules, all those churches are violating the law and risking the loss of their tax-exempt status.
Sure, so far most have got away with it (with the exception of big names like the Bakkers and Ron Hubbard), though I wonder whether this Driscoll story might just be high profile enough to pressure the IRS into action. If they’re picking on the tax-exempt status of little Tea Party groups, how can they let Driscoll flout the rules so publicly?
That would hurt Driscoll, who’d have to pay an excise tax on the books he sold through Mars Hill. But the damage would be much larger when applied to all the givers to his church — actually, to anyone who gives money to the whole Mark Driscoll enterprise. If Driscoll’s organizations lose their exemptions, the tax bill of every tither will be higher because they won’t be able to count Mars Hill giving as deductible.
Mars Hill reports that it received $25m in tithes and offerings last year. Assuming an average deduction value of a contribution to be 25 percent, as the Congressional Research Service does, Mars Hill members saved $6.25m in tax payments because of the church’s exempt status.
So, a $220,000 investment has the potential to cost church members $6,250,000.
Last night, the board described the decision as unwise. On that, they are awfully correct.