A conflict of interest presents itself when a person who has a significant relationship with the church may also receive a benefit from something the church is doing.  The person may be able to obtain some personal benefit from these circumstances. 

For example, the church’s lead pastor may also serve on the church’s board. Whenever the church board considers increases in compensation or bonuses for that pastor, then the pastor has a conflict of interest. This common conflict can be easily remedied by having the pastor abstain from any vote regarding his or her own compensation.

Some conflicts are more complex. For example, a conflict may arise when a church enters into a facility building program. A church board member’s construction company may bid to work on the project.  This presents a potential conflict of interest.

Churches should adopt an official conflict of interest policy. Once such a policy is in place, the church should follow it precisely whenever conflicts, such as the two examples above, arise.

The IRS publishes a sample Conflict of Interest Policy as an Appendix to its Form 1023 Instructions:

https://www.irs.gov/pub/irs-pdf/i1023.pdf

This sample policy is a good starting place for churches to use in developing their own policy. A good policy provides for a basic framework of how to handle all potential conflicts, and should include provisions such as the following:

• Board members should promptly disclose a potential conflict of interest involving themselves or another board member. The chairman of the board should remind the board periodically of the conflict of interest policy, which may prompt board members to recognize a potential conflict.
• When a potential conflict arises, the board should determine whether the church can obtain a more advantageous transaction or arrangement with someone who would not be subject to a conflict of interest. The potentially conflicted board member should not participate in this decision.
• If a more advantageous arrangement is not possible, the disinterested board members should decide whether the arrangement in question is in the church’s best interest. This decision should be thoroughly documented.

When dealing with a conflict, keep in mind that the least expensive arrangement available to the church is not necessarily the arrangement that is in the best interest of the church, though it may be one of several significant factors to weigh.

Board members should be concerned about conflicts of interests because those members have “fiduciary” duties to the church, including:   

• A duty of loyalty (to act in the best interest of the church, not in the best interest of one’s self),

• A duty of care (to pay careful attention to issues that impact the church), and
• A duty of obedience (to make sure the church stays compliant to relevant federal, state, and local laws). 

Breaching these duties can trigger liability for the organization, or in some circumstances, the board members themselves. Enacting and following a conflict of interest policy can help protect against such liability.

Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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