Policy Number:  12

Title:  Guidelines For Administering Discretionary Funds

The recognition of Discretionary Funds is found in General Convention Canon III.14.2 (f). This particular section originated in the General Convention of 1814. Basically the loose offering from one Holy Eucharist service is to go into a fund to be administered by the member of the clergy in charge together with "other offerings for the poor". Today it is customary to supplement the discretionary fund with gifts from individuals and from the church's general operating funds. To assist in the assessment of that section, it reads as follows:

"The Alms and Contributions, not otherwise specifically designated, at the Administration of the Holy Communion on one Sunday in each calendar month, and other offerings for the poor, shall be deposited with the Member of the Clergy in charge of the Congregation or with such Church officer as the Member of the Clergy in charge shall appoint to be applied to such pious and charitable uses as shall be thought fit by the Member of the Clergy. When a parish is without a Rector the Vestry shall appoint a responsible person to serve as Almoner."

The words "alms", "contributions, " and "offerings" are used and therefore indicate that these funds are given to the church and therefore belong to the church. In fact the last sentence of the canon notes that when there is no rector the vestry shall appoint a responsible person to serve as Almoner.

There can be no question that the offerings must be used for the relief of the poor or for "pious and charitable uses", but there is nothing in the canon to indicate that there is no accountability as to their use. The phrase "as shall be thought fit" does not mean that there is no accountability as to the proper use of the funds.

Since a discretionary fund is not the personal property of the member of the Clergy in charge, it must be conceded that the discretionary fund is a church fund. General Convention Canon 1.7.1(5) provides as follows:

"All accounts of the Diocese shall be audited annually by an independent Certified Public Accountant. All accounts of Parishes, Missions or other institutions shall be audited annually by an independent Certified Public Accountant, or independent Licensed Public Accountant, or such audit committee as shall be authorized by the Finance Committee,…” (Emphasis Supplied).

Diocesan Canon 10-2 of the Diocese of South Dakota provides as follows:

a. The Finance Committee shall set forth the audit procedure to be followed by all Parishes, Missions and other institutions....

b. Audits shall be done annually on report forms prescribed by the Finance Committee. These audits shall include a general examination of the financial condition of the Church and shall include, but not be limited to: examination of financial reports of all funds; the sufficiency of all related financial records; and the adequacy of insurance of all types." (Emphasis supplied)

As to the use of discretionary funds, two facts should be borne in mind.

First, as pointed out above, the discretionary fund is not now, nor was it ever intended to be the personal property of the Rector. These are funds which belong to the parish or mission and are entrusted to the Rector of Member of the Clergy in charge or a designated lay person, for proper distribution.

Second, while much that we do is controlled by the Canon Law, we are also subject to civil law. This is especially true in the case of tax laws. With regard to the matter of taxes, these general principles should help clarify the guidelines that follow:

A.  Money flowing from a church to the priest for the priest's personal use is generally taxable as income to the priest.

B.  Money given in exchange for services is taxable as income.

C. Gifts are deductible to the Donor only if given to an exempt organization, but they are not deductible if given to an individual, either directly or indirectly.

With all of the foregoing in mind, the following guidelines and statements hopefully will be of help in this rather murky field.

1.  The purposes for which discretionary funds may be used are outlined in the national canons - that is, for the poor and for other charitable and pious purposes. Obviously gifts to aid the poor are its primary purposes. Within the term "other charitable and pious purposes" would be included gifts to any recognized charitable organization (the same ones to which an ordinary individual could make a deductible gift), to the church itself, and for certain items such as vestments, books and other professional items which will remain the property of the church when the priest leaves. Since these are examples, they are not intended as an exclusive list. Books for a personal library, vestments as well as other personal expenses are clearly not a proper use. But before going further, it would be the much better practice for the business expenses of the clergy to be paid by the church in the form of an expenses account or an expenses allowance with the use of receipts, and not be funded through a discretionary fund.

2. Because discretionary funds are the property of the parish or mission, gifts should be made to the church, rather than to an individual. For example, “St. Paul's Discretionary Fund.”  A gift payable to the church is deductible. A gift payable to the priest is not. You must use the church's ID number for the account and NOT your own social security number.

3. A gift to the discretionary fund must be either unrestricted, or if it is restricted, it must be designated for one of the legitimate purposes of the church. For example, you cannot accept money into the discretionary fund to send any one's children to school, or to pay for a parishioner's stay in a nursing home or for any other specified individual, even though there may be a need. Such a gift could not be deductible on that donor's income tax return and the fact that it went into the discretionary fund does not alter the f act that it is not a deductible expenditure which can be used in a tax return. The clergy would have to look the other way when such an improper gift was made. Naturally IRS would not.

4. A donation to a priest, which is not payable to the church, is not deductible by the donor. Of course such a gift is not income to the priest, UNLESS it is a payment given in return for services rendered, such as a wedding. When this is the case, IT IS taxable income to the priest.

5. Funds allocated to the discretionary fund by the parish as a part of the budget, are not a part of the canon on discretionary funds, unless they are specifically designated by resolution for the poor, and therefore these funds are subject to whatever restrictions are placed on them by the Vestry.

6. Since discretionary funds are the property of the church, they must remain with that church when the rector is called elsewhere, along with any articles purchased with those discretionary funds. The records of the discretionary fund also are the property of the church and remain after the priest leaves.

7. A separate bank account needs to be set up for a discretionary fund. All gifts intended for that fund, whether delivered to the church or to the rector should pass through this account. Appropriate receipts should be given to the donors, except of course for moneys paid over through a budget.

8. Many checks written on the account may not be of a confidential mature. But as to those funds which are used for financial aid to individuals in situations which should be kept confidential, then a check could be written for cash. The priest must, however, keep a private record of just what was done with the proceeds of such a check. This is a protection to the priest in the event of an Internal Revenue Service audit and further if a question arises in the parish as to the use of these funds.

9. The procedure for the audit of these accounts will be established by the Finance Committee of the Diocese. Certain minimum requirements under the canon must be met. The individual must be independent - that is, he or she cannot be a member of the parish in which the audit is occurring and must be a person qualified to do audits and report on the same in the manner required by the Finance Committee. Finally the person selected must be approved by the Finance Committee.

10. The discretionary funds must not be used as petty cash funds, nor should professional expenses of the member of the clergy be paid out of the fund. All business-related items which are paid by discretionary funds and are intended for the personal use of the priest and not to be used by subsequent incumbents, since they are therefore taxable as personal income, must not be paid out of this fund. Valid expenses for the priest's ministry should be paid by the mission or parish and not run through discretionary funds.

11. Remember always that the IRS can and DOES audit churches, the clergy and individual donors.

12. As an observation - the person administering discretionary funds is in a position very similar to that of a trustee. He or she is handling funds which are not his or her property. That person is therefore obligated to do so with a very high degree of care not to waste the funds, not to let them be commingled with personal funds, and finally to use them for the purposes for which they were entrusted to his or her care.

As the opening title indicates, the foregoing is intended as a guide. It is impossible to comment on every conceivable situation which might possibly arise. That is when discretion has to enter. The exercise of good judgment, however, does contribute to the solution of most problems.

In the event that you incur a problem on which you have any doubt please feel free to contact the diocesan auditor or myself for assistance.

The text of these guidelines was the original work of the late Louis Farrell, the Chancellor of the Diocese of Tennessee. The Chancellor of Hawaii, Michael Porter added to the work and I have made certain changes and alterations as needed. Robert J. Maule.