How to Help Your Church Avoid Getting Scammed after a Hurricane
Here’s what you can do to keep vulnerable people in your care from being taken advantage of.
Jamie Aten
You may have seen the warnings after last year’s slate of hurricanes: disaster fraud made headlines as vendors, volunteers, and scammers tried to take advantage of vulnerable people in response and recovery efforts. If your church has been hit by Hurricane Florence or another major disaster, you don’t need to be scared; you just need to be prepared. Having worked with churches around the globe, I’ve seen firsthand how disasters can bring out the good in people—but also the worst.
After Hurricane Katrina, I learned of a small rural church in South Mississippi that hired a construction company from out of state that promised to help them. But there was a catch: they wanted payment up front to buy supplies. You probably know how this ends: the contractor took the money and was never seen again.
No one wants to imagine something like this could happen to them, or that they could make this kind of mistake, but it’s often difficult to think clearly in the midst of a disaster. Imagine a storm has destroyed your church or your community: your stress is high, it feels like everyone is counting on you, resources are strapped, you aren’t sure where to turn for help—every decision can feel overwhelming. Though most people responding to a disaster are doing so to help, it’s important to put safeguards into place to keep what happened to this church from happening to yours.
Vet Vendors
Most people would hear the warning bells if a vendor wanted payment up front for something as large as a major construction job. But sadly, there are lots of other ways churches can get taken advantage of by vendors post-disaster that might be less obvious at first. For example, I worked with a church in New Orleans after Hurricane Katrina that knew better than to pay for everything up front, but got taken advantage of when the builders actually turned out to be looters. In another situation, a vendor working on the computer system got a hold of key financial information and slowly started milking the church’s finances a little at a time so as not to set off alarms.
Price gouging—selling or renting goods or lodging “at an unconscionable price”—is a common problem after a disaster.
When possible, try to use local companies with whom you already have a relationship. You already know you can trust them, and it’s good to support local businesses that have also likely been impacted by the event. But it’s still important to have a clear contract and to protect your own interests. Just because you’ve had a prior good experience with a local vendor, you could find out that this time the temptation to make a quick buck is too tempting for them.
Price gouging— selling or renting goods or lodging “at an unconscionable price”—is a common problem after a disaster. It’s currently illegal in 35 states, but it’s still good to get quotes from multiple vendors to ensure you’re getting a fair price.
This doesn’t mean outside companies are bad—there are lots of great people and organizations that arrive from out of town because they truly want to help. And it’s highly likely that needs in your community will outweigh local resources so you’ll need to work with some outside vendors. But be mindful of red flags, like an unfamiliar company that doesn’t seem to have any public information available. I’m not just talking about searching for a website; anyone can throw up a website on the internet. Keep digging. Look for online reviews and ratings, a social media presence, call the better business bureau, check references, interview the vendors, ask around to others in your community for references.
Supervise Volunteers
Not all people who are out to take advantage of others are out for financial gain. It breaks my heart how many times I’ve heard of churches welcoming in volunteers—including their own congregation members—who ended up being wolves in sheep’s clothing.
If you have volunteers working with your church after the disaster, take proper precautions to do what you can, even amidst the chaos, to prevent survivors from possibly being taken advantaged of or hurt. Vulnerability to sexual and domestic violence increases during a disaster, particularly at evacuation sites and shelters. You can find a list of precautions your church can take to help prevent this here.
Ideally you will have trained and vetted staff or volunteers in place to supervise the likely influx of volunteers, some of whom you’ll know and some of whom you won’t. But the reality of a disaster is that your staff and volunteers who have had background checks and gone through your usual system may not be available to help because they evacuated, can’t get to the church because of debris, or are now the ones that need help.
Be aware that disaster donations can be more difficult to manage
This doesn’t mean you can’t accept outside help, but be sure to have trusted leaders supervising and on site at all times to keep an eye on things. Make sure they know what warning signs to look for and what to do if they see something suspect. If people are on your church property, it’s your responsibility to do what you can to protect them. Children and the elderly are particularly vulnerable after a disaster, so be extra careful to monitor their safety.
Track Donations
If your church or community finds itself in the middle of a disaster zone, it’s likely you will not just be managing vendors and volunteers, but also donations. Your church probably already has a system of some sort in place to manage financial donations, but be aware that disaster donations can be more difficult to manage. Make sure you don’t just track dollars coming in to the church; keep tally of goods and services that are given, too. Don’t fool yourself by thinking you’ll remember and will go back to document later. Even if your computer systems are down, start jotting down gifts as they come in and saving receipts in a folder.
There are several reasons you need to be dutiful in this process. One is that you will need to report the donations you received in disaster aid for tax purposes. These records will help improve transparency of how your church is handling its finances. This will also help prevent possible future accusations that funds or donations were mishandled down the road as the dust starts to settle. In 2013, a New Orleans church had to pay back $200,000 in federal disaster funds after it was found that the building repairs meant to be done with the money were incomplete and they were unable to provide documentation for how they had used the funds on the work they had done.
Hope for the Best, Prepare for the Worst
When disaster strikes, be careful not to let go out the door all the precautions and safety checks your church has in place to keep your congregation members safe go out the door, especially when you are caring for children and other vulnerable survivors. Do your homework about any vendors you contract or allow access to your space or information. Keep an eye on donations being made throughout the entire disaster recovery process. Ask yourself if your current approach to tracking finances and donations will be able to adapt to a possible influx, especially of goods and services your church hasn’t had to track before. The solution doesn’t have to be high tech, just be intentional about documenting donations as they arrive.
By no means is this an exhaustive list of how to avoid being scammed after a disaster, but it should provide some principles to help you identify if something is off, and avoid potential problems down the road. Remember: If something looks, sounds, or feels suspicious, there’s a good chance it is.
Dr. Jamie Aten is an award-winning disaster psychologist and disaster ministry expert. He is the founder and executive director of the Humanitarian Disaster Institute and the Blanchard Chair of Humanitarian & Disaster Leadership at Wheaton College.
The Supreme Court’s Same-Sex Marriage Rulings
How these key decisions do—and don’t—affect churches and clergy.
On June 26, 2013, the United States Supreme Court issued two rulings addressing same-sex marriages. In the first ruling, the Court struck down a provision in the federal Defense of Marriage Act (“DOMA”) defining marriage for purposes of federal law as a union between a man and woman. In the second case, the Court dismissed on technical grounds an appeal of a 2010 federal district court ruling invalidating on constitutional grounds a referendum by the voters of California (“Proposition 8”) that amended the state constitution to define marriage as a union between a man and woman. Both cases are addressed in this article, along with an assessment of their effects on churches and other religious organizations.
The Defense of Marriage Act
United States v. Windsor, 2013 WL3196928 (2013)
In 1996, as some states were beginning to consider same-sex marriages, and before any state had acted to permit them, Congress enacted the Defense of Marriage Act (DOMA). DOMA contains two main provisions. Section 2 allows states to refuse to recognize same-sex marriages performed under the laws of other states. Section 3 provides:
In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.
In short, section 3 defines “marriage” for purposes of federal laws and regulations as a union between a man and woman. Same-sex marriages are not recognized even if allowed under state law. This definition of marriage—for purposes of all federal statutes and other regulations or directives covered—controls more than 1,100 federal laws in which marital or spousal status is addressed.
Facts of the Case
Two women met in New York City in 1963 and began a long-term relationship. They registered as domestic partners when New York City gave that right to same-sex couples in 1993. One of the partners died in 2009, and left her entire estate to the surviving partner (the “plaintiff”). Because DOMA denied federal recognition to same-sex spouses, the plaintiff did not qualify for the marital exemption from the federal estate tax, which excludes from taxation “any interest in property which passes or has passed from the decedent to his surviving spouse.” As a result, the plaintiff paid $363,053 in estate taxes and sought a refund. The IRS denied the refund, concluding that, under DOMA, she was not a “surviving spouse.” The plaintiff filed suit in federal court, seeking a refund of the taxes she paid. She claimed that DOMA violates the guarantee of equal protection of the laws as applied to the federal government under the Fifth Amendment to the United States Constitution.
A federal district court in New York ruled that section 3 of DOMA was unconstitutional and ordered the government to refund the tax, with interest, to the plaintiff. A federal appeals court affirmed this ruling, and the case was appealed to the United States Supreme Court.
The Supreme Court’s Ruling
The Supreme Court, in a 5-4 decision, concluded that section 3 of DOMA, by defining marriage for purposes of federal law to be limited to unions between a man and woman, violated the equal protection of the laws provision of the Fifth Amendment to the Constitution.
The Court gave considerable emphasis to the historic and plenary authority of the states to define and regulate marriage:
The recognition of civil marriages is central to state domestic relations law applicable to its residents and citizens …. The definition of marriage is the foundation of the state’s broader authority to regulate the subject of domestic relations with respect to the protection of offspring, property interests, and the enforcement of marital responsibilities. The states, at the time of the adoption of the Constitution, possessed full power over the subject of marriage and divorce [and] the Constitution delegated no authority to the government of the United States on the subject of marriage and divorce ….
(A) same-sex couple who were married in a state in which same-sex marriages are lawful will be treated as married for Medicare purposes.
Consistent with this allocation of authority, the federal government, through our history, has deferred to state-law policy decisions with respect to domestic relations …. Federal courts will not hear divorce and custody cases even if they arise in diversity because of the virtually exclusive primacy of the states in the regulation of domestic relations.
The significance of state responsibilities for the definition and regulation of marriage dates to the nation’s beginning; for when the Constitution was adopted the common understanding was that the domestic relations of husband and wife and parent and child were matters reserved to the states. Marriage laws vary in some respects from state to state. For example, the required minimum age is 16 in Vermont, but only 13 in New Hampshire. Likewise the permissible degree of consanguinity can vary (most states permit first cousins to marry, but a handful—such as Iowa and Washington—prohibit the practice). But these rules are in every event consistent within each state.
The Court noted that New York, along with 11 other states and the District of Columbia, by statute or court ruling, have defined marriage to include same-sex couples (statutes in Minnesota and Rhode Island went into effect after the Court’s ruling). It then observed: “DOMA departs from this history and tradition of reliance on state law to define marriage ….
The Court concluded:
DOMA seeks to injure the very class New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the federal government …. DOMA’s unusual deviation from the usual tradition of recognizing and accepting state definitions of marriage here operates to deprive same-sex couples of the benefits and responsibilities that come with the federal recognition of their marriages. This is strong evidence of a law having the purpose and effect of disapproval of that class. The avowed purpose and practical effect of the law here in question are to impose a disadvantage, a separate status, and so a stigma upon all who enter into same-sex marriages made lawful by the unquestioned authority of the states ….
DOMA’s principal effect is to identify a subset of state-sanctioned marriages and make them unequal …. DOMA contrives to deprive some couples married under the laws of their state, but not other couples, of both rights and responsibilities. By creating two contradictory marriage regimes within the same state, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the state has found it proper to acknowledge and protect. By this dynamic DOMA undermines both the public and private significance of state-sanctioned same-sex marriages; for it tells those couples, and all the world, that their otherwise valid marriages are unworthy of federal recognition ….
The class to which DOMA directs its restrictions and restraints are those persons who are joined in same-sex marriages made lawful by the state. DOMA singles out a class of persons deemed by a state entitled to recognition and protection to enhance their own liberty. It imposes a disability on the class by refusing to acknowledge a status the state finds to be dignified and proper. DOMA instructs all federal officials, and indeed all persons with whom same-sex couples interact, including their own children, that their marriage is less worthy than the marriages of others. The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the state, by its marriage laws, sought to protect in personhood and dignity. By seeking to displace this protection and treating those persons as living in marriages less respected than others, the federal statute is in violation of the Fifth Amendment. This opinion and its holding are confined to those lawful marriages.
Relevance to Church Leaders
The Court’s invalidation of section 3 of DOMA means that the definition of “marriage” for purposes of federal laws, regulations, and directives includes same-sex as well as opposite-sex couples. The Court referenced “over 1,000 federal laws in which marital or spousal status is addressed as a matter of federal law.” It provided the following examples:
Eligibility for government healthcare benefits.
The Bankruptcy Code’s special protections for domestic-support obligations.
Filing a joint tax return.
Joint burials in veterans’ cemeteries.
Taxation of health benefits provided by employers to their workers’ same-sex spouses.
Denial or reduction in benefits allowed to families upon the loss of a spouse and parent under the Social Security program.
In a 2003 report, the General Accounting Office identified 1,138 federal statutory provisions in the United States Code in which marital status was a factor in determining or receiving benefits, rights, and privileges.
Many other federal laws now apply to same-sex couples, although in some cases this will only be true for same-sex marriages that were lawful where and when they were performed. These laws include:
Automatic treatment of spouses as beneficiaries under 403(b) and other retirement programs.
If you are the widow or widower of a person who worked long enough under Social Security, you can receive full benefits at full retirement age for survivors or reduced benefits as early as age 60, or begin receiving benefits as early as age 50 if you are disabled and the disability started before or within seven years of the worker’s death. If a widow or widower who is caring for the worker’s children receives Social Security benefits, he or she is still eligible if their disability starts before those payments end or within seven years after they end.
When a worker files for retirement benefits, the worker’s spouse may be eligible for a benefit based on the worker’s earnings. Another requirement is that the spouse must be at least age 62 or have a qualifying child in his or her care. A qualifying child is a child who is younger than age 16 or who receives Social Security disability benefits. The “spousal benefit” can be as much as half of the worker’s “primary insurance amount,” depending on the spouse’s age at retirement. If the spouse begins receiving benefits before “normal (or full) retirement age,” the spouse will receive a reduced benefit. However, if a spouse is caring for a qualifying child, the spousal benefit is not reduced. If a spouse is eligible for a retirement benefit based on his or her own earnings, and if that benefit is higher than the spousal benefit, then [the Social Security Administration] pay[s] the retirement benefit. Otherwise [the Social Security Administration] pays the spousal benefit.
“Proposition 8 does not affect the First Amendment rights of those opposed to marriage for same-sex couples. Prior to Proposition 8, no religious group was required to recognize marriage for same-sex couples.”
While DOMA did not prevent an employer from offering health-care benefits to the same-sex spouse of an employee, it did impose discriminatory tax treatment. Under the Internal Revenue Code, the fair market value of health-care benefits for a qualified employee’s spouse who is not otherwise a dependent of the qualified employee is not subject to federal income tax, but DOMA forced both employer and employee to treat that value as taxable income when the qualified employee and his spouse were of the same sex. Even when an employer provided coverage under a “family plan,” in which the addition of a beneficiary could not add a premium cost, an employee who elected such coverage for a same-sex spouse or for the children of a same-sex spouse was taxed on the imputed fair market value of that coverage, unless the individuals covered qualified as tax dependents through independent means.
An employer may allow a married employee to reduce her taxable income by paying, on a pre-tax basis, the cost of coverage for a different-sex spouse, but not for a same-sex spouse.
A married employee may reduce his or her tax burden through pre-tax contributions to a “cafeteria” plan on behalf of a spouse, or be reimbursed on a pre-tax basis for spousal medical expenses from a health savings account or flexible savings account—but only for a different-sex spouse.
Employees will be able to get reimbursements from health flexible spending accounts and health reimbursement accounts for medical expenses of same-sex spouses.
While an employer may allow an employee to reduce his or her salary on a pre-tax basis to cover certain day-care or elder-care expenses through a dependent care assistance plan, such plans may not extend to care of children or adults who are tax dependents of a same-sex spouse.
The earned income credit, and child tax credit, often are higher for married couples.
Married couples filing joint returns are allowed to exclude up to $500,000 of the gain on the sale of a principal residence, if certain conditions are met. In the past, the exclusion of gain for same-sex couples was the same as for single persons—$250,000.
Transfers of assets from one spouse to another at death ordinarily are exempt from estate tax. In the past, this benefit was not available to same-sex couples.
Spouses of deceased employees can roll over, tax free, a qualifying distribution from a deceased spouse’s 403(b) retirement plan to another eligible retirement plan.
Permanent residents can petition to have their spouse immigrate to the United States.
Continued health care coverage under COBRA is available to spouses.
The Family and Medical Leave Act (FMLA) requires every employer that is “engaged in commerce or in any industry or activity affecting commerce that employs 50 or more employees” to grant eligible employees up to 12 workweeks of unpaid leave during any 12-month period in several situations, including the care of a spouse, son, daughter, or parent, of the employee, if such spouse, son, daughter, or parent has a serious health condition. At the end of the FMLA leave, workers are entitled to resume their same or an equivalent job.
Married persons filing a joint tax return often pay less taxes than if they were single. This may occur for several reasons. For example, a couple with a high-income spouse and a low-income spouse may pay less taxes because their tax bracket is determined by their combined income (rather than a higher tax bracket for the high-income person). If both spouses are high-income taxpayers, the opposite may be true. By permitting same-sex couples to marry, they may pay less taxes in some cases. Note, however, that the IRS is likely to treat same-sex couples as married only if their marriage was legal in the state where it occurred. Watch for clarification from the IRS prior to the 2013 filing season.
The tax code permits taxpayers to deduct alimony they pay to a former spouse.
Federal law provides various benefits to the spouses of veterans, although these benefits may be available to same-sex couples only if their marriage was legally valid where it occurred.
Several aspects of the Medicare program depend on marital status. Marital status generally will be determined by the laws of the state where a marriage occurred. So, a same-sex couple who were married in a state in which same-sex marriages are lawful will be treated as married for Medicare purposes.
Most employee pension plans are controlled by ERISA, which provides substantive rights to spouses—but under DOMA, only to spouses of a different sex. For example, most defined-benefit pension plans and certain defined-contribution retirement plans are required to distribute benefits in a form, such as a qualified joint and survivor annuity or qualified pre-retirement survivor annuity, that ensures that a participant’s different-sex spouse may receive a portion of the participant’s benefit absent express waiver by the participant (with spousal consent), and most retirement plans must provide different-sex spouses with special rights to the participant spouse’s benefit if the participant dies while still employed.
Church leaders should be familiar with these changes in the law brought about by the Supreme Court’s ruling striking down section 3 of DOMA as unconstitutional. This is especially true for churches that do not discriminate in hiring decisions on the basis of a person’s sexual orientation or a person’s involvement in a same-sex marriage.
Is All of DOMA Repealed?
No. The Supreme Court only invalidated section 3, which defines marriage for purposes of federal law as a union between a man and woman. Section 2 of DOMA, which was not addressed by the Court, states: “No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.”
Several members of Congress have introduced the “Respect for Marriage Act,” which would amend federal law to read: “For the purposes of any Federal law in which marital status is a factor, an individual shall be considered married if that individual’s marriage is valid in the State where the marriage was entered into or, in the case of a marriage entered into outside any State, if the marriage is valid in the place where entered into and the marriage could have been entered into in a State.”
Examples
The following examples illustrate the effects of the Supreme Court’s DOMA ruling on churches and other religious organizations.
Example. Church A is doctrinally opposed to same-sex marriage, and its employee handbook defines homosexuality as a lifestyle incompatible with the church’s moral and biblical beliefs. Church A is located in one of the 37 states that do not recognize same-sex marriages as legally valid. A same-sex couple asks the pastor of Church A to marry them. The pastor refuses to do so based on his religious beliefs. Does the Supreme Court’s decision striking down section 3 of DOMA expose the pastor to legal liability for failing to perform a marriage ceremony for a same-sex couple? The answer is no. Nothing in the Court’s DOMA decision addresses this issue, or creates any liability for clergy for failing to perform same-sex marriages. This conclusion is reinforced by the fact that the church is located in one of the 37 states that define marriage as a union solely between a man and woman.
Example. Same facts as the previous example, but assume that the United States Supreme Court in a future ruling decides that the right of two persons to marry, regardless of gender, is a fundamental right guaranteed by the federal constitution. Such a ruling would likely invalidate every state statute and constitutional provision defining marriage solely as a union between a man and woman. But, as noted later in this article, it is highly unlikely that such a ruling will create civil liability for clergy who fail to perform such marriages.
Example. Church B is doctrinally opposed to same-sex marriage, and its employee handbook defines homosexuality as a lifestyle incompatible with the church’s moral and biblical beliefs. Church A is located in one of the 13 states that recognize same-sex marriages as legally valid. A same-sex couple asks the pastor of Church B to marry them. The pastor refuses to do so based on his religious beliefs. Does the Supreme Court’s decision striking down section 3 of DOMA expose the pastor to legal liability for failing to perform a marriage ceremony for a same-sex couple? The answer is no. Nothing in the Court’s DOMA decision addresses this issue, or creates any liability for clergy for failing to perform same-sex marriages.
Example. Church C is not doctrinally opposed to same-sex marriage, or the employment of homosexuals, and is in one of the 13 states that recognizes same-sex marriages as legally valid. One of its employees informs the pastor that she is planning on marrying a person of the same gender. When the employee marries, the church will need to treat her the same as it does any employee who is married to a person of the opposite sex. This means that church leaders should be familiar with the consequences listed in this article. As an example, the church should ask the employee to submit a new Form W-4 (withholding allowance certificate) so that the withholding of taxes will take into account the employee’s new marital status.
Example. Church D is not doctrinally opposed to same-sex marriage, or the employment of homosexuals, and is in one of the 37 states that do not recognize same-sex marriages as legally valid. One of its employees informs the pastor that she is planning on marrying another person of the same gender. Marital status for federal tax purposes generally is based on applicable state law. Since this marriage will not be recognized as legally valid under state law, none of the tax consequences summarized in this article will apply. The Supreme Court, in both of its recent rulings addressing same-sex marriages, declined to recognize marriage between persons of the same sex to be a fundamental right protected by the federal Constitution. Therefore, the legal status of same-sex marriages is, for now, a matter of state law.
Key point. The previous two examples illustrate the conflicting status of same-sex couples based on state law. Some legal analysts predict that this disparity in treatment will lead to legal challenges that ultimately will result in another Supreme Court ruling addressing the question of whether same-sex marriage is a fundamental right protected by the federal Constitution. If the Court accepts such a case, and rules that marriage of two persons regardless of gender is a right protected by the federal Constitution, then this will invalidate the seven state statutes and 30 state constitutional provisions defining marriage solely as a union between a man and woman.
Example. Church E is doctrinally opposed to same-sex marriage, and its employee handbook defines homosexuality as a lifestyle incompatible with the church’s moral and biblical beliefs. Church E is located in one of the 13 states that recognizes same-sex marriages as legally valid. One of its employees informs the pastor that she is planning on marrying a person of the same gender. The pastor informs her that a same-sex marriage violates the church’s moral and biblical teachings, and would result in her dismissal. As a result, there would be no tax consequences for the church to consider. The legal authority of religious employers to discriminate against employees based on sexual orientation is not addressed in this article. See § 8-21.2 in Richard Hammar’s four-volume series, Pastor, Church & Law (4th ed.) or in the “Library” on ChurchLawAndTax.com for a discussion of this issue.
Example. Church F is doctrinally opposed to same-sex marriage, and its employee handbook defines homosexuality as a lifestyle incompatible with the church’s moral and biblical beliefs. Church F is located in one of the 37 states that do not recognize same-sex marriages as legally valid. One of its employees informs the pastor that she is planning on marrying a person of the same gender. The pastor informs her that a same-sex marriage violates the church’s moral and biblical teachings, and would result in her dismissal. As a result, there would be no tax consequences for the church to consider. The legal authority of religious employers to discriminate against employees based on sexual orientation is not addressed in this article. See § 8-21.2 in Richard Hammar’s four-volume series, Pastor, Church & Law (4th ed.) or in the “Library” on ChurchLawAndTax.com for a discussion of this issue.
The “Proposition 8” Case
Hollingsworth v. Perry, 2013 WL 3196927 (2013)
In 2008, the California Supreme Court ruled that limiting the official designation of marriage to opposite-sex couples violated the equal protection clause of the California Constitution. In re Marriage Cases, 76 Cal.Rptr.3d 683 (Cal. 2008). The Court concluded that the California Constitution further guarantees same-sex couples “all of the constitutionally based incidents of marriage,” including the right to have that marriage “officially recognized” as such by the state.
The California Supreme Court, in its 2008 ruling, clarified that its ruling would not affect clergy or churches:
Affording same-sex couples the opportunity to obtain the designation of marriage will not impinge upon the religious freedom of any religious organization, official, or any other person; no religion will be required to change its religious policies or practices with regard to same-sex couples, and no religious officiant will be required to solemnize a marriage in contravention of his or her religious beliefs.
Later that year, California voters passed a ballot initiative known as Proposition 8 that effectively overruled the decision of the state supreme court recognizing a legal right under the state constitution for same-sex couples to marry. The proposition amended the California Constitution to provide that “only marriage between a man and a woman is valid or recognized in California.”
Two same-sex couples who wished to marry filed suit in federal district court in San Francisco, challenging Proposition 8 under the Due Process and Equal Protection Clauses of the Fourteenth Amendment to the Federal Constitution. The complaint named as defendants California’s Governor, attorney general, and various other state and local officials responsible for enforcing California’s marriage laws. Those officials refused to defend the law, even though it had been approved by the voters of the state in a statewide ballot initiative. Without a party to defend Proposition 8, the court allowed the official proponents of Proposition 8 to intervene and defend it (the “petitioners”). After a 12-day bench trial, the federal district court declared Proposition 8 unconstitutional, and permanently enjoined the defendants from enforcing the law. Perry v. Schwarzenegger, 704 F. Supp. 2d 921 (N.C. Cal. 2010).
The court responded to the concern that pastors and churches now would have to perform marriages contrary to their religious beliefs by noting:
Marriage in the United States has always been a civil matter. Civil authorities may permit religious leaders to solemnize marriages but not to determine who may enter or leave a civil marriage. Religious leaders may determine independently whether to recognize a civil marriage or divorce but that recognition or lack thereof has no effect on the relationship under state law ….
Proposition 8 does not affect the First Amendment rights of those opposed to marriage for same-sex couples. Prior to Proposition 8, no religious group was required to recognize marriage for same-sex couples.
The defendant state officials elected not to appeal the district court decision, so the petitioners did. The Ninth Circuit Court of Appeals affirmed the district court ruling. Perry v. Brown 671 F.3d 1052 (9th Cir. 2012). The appeals court, responding to the concern of many clergy and churches that they would be required to perform marriages in violation of their religious beliefs, observed:
There is no dispute that even before Proposition 8, “no religion [was] required to change its religious policies or practices with regard to same-sex couples, and no religious officiant [was] required to solemnize a marriage in contravention of his or her religious beliefs” [quoting the district court’s opinion]. Rather, the religious-liberty interest that Proposition 8 supposedly promoted was to decrease the likelihood that religious organizations would be penalized, under California’s antidiscrimination laws and other government policies concerning sexual orientation, for refusing to provide services to families headed by same-sex spouses. But Proposition 8 did nothing to affect those laws. To the extent that California’s antidiscrimination laws apply to various activities of religious organizations, their protections apply in the same way as before …. This argument is in no way addressed by Proposition 8 and could not have been the reason for Proposition 8.
The United States Supreme Court agreed to review the appeals court’s ruling.
The Supreme Court’s Decision
The Court ruled that the petitioners—the original proponents of Proposition 8 who were allowed to defend its legality after the governor and other state officials refused to do so—lacked “standing” to defend it. Standing is a technical requirement in any federal court lawsuit, and derives from Article III of the United States Constitution that confines the judicial power of the federal courts to actual “cases” or “controversies.” The Court explained:
One essential aspect of this requirement is that any person invoking the power of a federal court must demonstrate standing to do so. This requires the litigant to prove that he has suffered a concrete and particularized injury that is fairly traceable to the challenged conduct, and is likely to be redressed by a favorable judicial decision. In other words, for a federal court to have authority under the Constitution to settle a dispute, the party before it must seek a remedy for a personal and tangible harm. The presence of a disagreement, however sharp and acrimonious it may be, is insufficient by itself to meet Article III’s requirements.
The Court conceded that the governor and state officials had standing to defend the constitutionality of Proposition 8, but they declined to do so and no one else had standing:
To have standing, a litigant must seek relief for an injury that affects him in a “personal and individual way.” He must possess a “direct stake in the outcome” of the case. Here, however, petitioners had no “direct stake” in the outcome of their appeal. Their only interest in having the district court order reversed was to vindicate the constitutional validity of a generally applicable California law. We have repeatedly held that such a “generalized grievance,” no matter how sincere, is insufficient to confer standing. A litigant “raising only a generally available grievance about government—claiming only harm to his and every citizen’s interest in proper application of the Constitution and laws, and seeking relief that no more directly and tangibly benefits him than it does the public at large—does not state an Article III case or controversy.
But once Proposition 8 was approved by the voters, the measure became “a duly enacted constitutional amendment or statute.” Petitioners have no role—special or otherwise—in the enforcement of Proposition 8. They therefore have no “personal stake” in defending its enforcement that is distinguishable from the general interest of every citizen of California.
Article III standing is not to be placed in the hands of “concerned bystanders,” who will use it simply as a ‘vehicle for the vindication of value interests.’ No matter how deeply committed petitioners may be to upholding Proposition 8 or how zealous their advocacy, that is not a “particularized” interest sufficient to create a case or controversy under Article III.
So, the Court left Proposition 8 undefended. The governor and state officials refused to defend it, even though it was an amendment to the state constitution duly approved by the voters of California, and the proponents of Proposition 8 lacked standing to do so. The takeaway point seems to be that those opposing state statutes or constitutional provisions defining marriage as a union between a man and woman need only challenge the constitutionality of the provision in federal court. If the state governor refuses to defend it, no one else will have standing to do so and therefore the challenged statute or constitutional provision will be invalidated by default, just like Proposition 8.
The Supreme Court, in both the DOMA and Proposition 8 rulings, declined to rule that the right of same-sex couples to marry is a right protected by the federal constitution. The fact that same-sex couples will now be treated differently under federal laws based on the validity of same-sex marriages under state law will inevitably and quickly result in further litigation. Eventually, and probably sooner than later, the Supreme Court will decide if same-sex marriage is a fundamental right guaranteed by the federal constitution.
Will ministers be required to perform same-sex marriages?
Many ministers who are opposed on religious grounds to same-sex marriages are voicing concern over their potential liability for not performing such marriages. Is this fear well-founded, or exaggerated? Consider the following:
1. The Supreme Court’s two same-sex marriage rulings
There is nothing in the Supreme Court’s two recent rulings involving same-sex marriages (the DOMA and Proposition 8 cases summarized above) remotely suggesting that ministers who refuse to perform same-sex marriages on the basis of their religious beliefs will be subject to civil liability for not doing so.
2. Continuing validity of laws in 37 states defining marriage as a union between a man and woman
The Supreme Court, in the DOMA and Proposition 8 rulings, declined to recognize same-sex marriage as a fundamental right guaranteed by the federal constitution. As a result, the statutes or constitutional provisions in 37 states defining marriage as a union between a man and woman were left intact.
3. Prior Supreme Court rulings
Several decisions of the United States Supreme Court strongly suggest that the First Amendment guaranty of religious freedom permits clergy to perform marriages consistently with their religious beliefs. Consider the following:
But it is a very different thing where a subject-matter of dispute, strictly and purely ecclesiastical in its character—a matter over which the civil courts exercise no jurisdiction—a matter which concerns theological controversy, church discipline, ecclesiastical government or the conformity of the members of the church to the standard of morals required of them—becomes the subject of its action. It may be said here, also, that no jurisdiction has been conferred on the tribunal to try the particular case before it, or that, in its judgment, it exceeds the powers conferred upon it. Watson v. Jones, 80 U.S. 679, 733 (1871).
Because the appointment is a canonical act, it is the function of the church authorities to determine what the essential qualifications of a [clergyman] are and whether the candidate possesses them. In the absence of fraud, collusion, or arbitrariness, the decisions of the proper church tribunals on matters purely ecclesiastical, although affecting civil rights, are accepted in litigation before the secular courts as conclusive, because the parties … made them so by contract or otherwise. Gonzalez v. Roman Catholic Archbishop, 280 U.S. 1, 16-17 (1928).
In the 237-year history of the United States, no minister has ever been found liable for refusing to perform a marriage … A minister’s refusal to marry a same-sex couple in contravention of his or her religious beliefs should be viewed in the same light.
Legislation that regulates church administration, the operation of the churches, the appointment of clergy … prohibits the free exercise of religion …. Watson v. Jones … radiates, however, a spirit of freedom for religious organizations, and independence from secular control or manipulation, in short, power to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine. Kedroff v. St. Nicholas Cathedral of Russian Orthodox Church, 344 U.S. 94, 105-106, 116 (1952).
First Amendment values are plainly jeopardized when church property litigation is made to turn on the resolution by civil courts of controversies over religious doctrine and practice. If civil courts undertake to resolve such controversies in order to adjudicate the property dispute, the hazards are ever present of inhibiting the free development of religious doctrine and of implicating secular interests in matters of purely ecclesiastical concern. Presbyterian Church in the United States v. Mary Elizabeth Blue Hull Memorial Presbyterian Church, 393 U.S. 440, 449 (1969).
The fallacy fatal to the judgment of the Illinois Supreme Court is that it … impermissibly substitutes its own inquiry into church polity …. To permit civil courts to probe deeply enough into the allocation of power within a hierarchical church so as to decide religious law governing church polity would violate the First Amendment …. For where resolution of disputes cannot be made without extensive inquiry by civil courts into religious law and polity, the First and Fourteenth Amendments mandate that civil courts shall not disturb the decisions of the highest ecclesiastical tribunal within a church of hierarchical polity, but must accept such decisions as binding on them in their application to the religious issues of doctrine of policy before them …. In short, the First and Fourteenth Amendments permit hierarchical religious organizations to establish their own rules and regulations for internal discipline and government …. Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696, 708-09, 724 (1976).
4. Other grounds for not performing marriages have never been questioned
Clergy routinely decline to perform some marriages based on their religious beliefs. To illustrate, some ministers refuse to perform some or all of the following marriages:
Marriages between more than two persons (bigamy and polygamy).
Marriages between a parent and child (incest).
Marriages between siblings (incest).
Marriages between first cousins (even though this is now allowed in at least 21 states).
Marriages in which one or both spouses is under age.
Marriages in which one or both spouses was previously married and divorced.
Marriages in which one or both spouses is not a member of the pastor’s faith (i.e., “Do not be yoked together with unbelievers. For what do righteousness and wickedness have in common? Or what fellowship can light have with darkness?”) 2 Cor. 6:14 (NIV).
Marriages in which the pastor believes one or both spouses, while of legal age, are too spiritually immature to enter into so important a relationship.
In the 237-year history of the United States, no minister has ever been found liable for refusing to perform a marriage on these or similar grounds. A minister’s refusal to marry a same-sex couple in contravention of his or her religious beliefs should be viewed in the same light. If clergy can be found liable for refusing to perform same-sex marriages on religious grounds, then they are exposed to liability for refusing to perform any marriages as a result of their religious beliefs, including those described above.
5. State laws recognizing same-sex marriages contain broad clergy exemptions
Same-sex marriages are recognized as legally valid in 13 states and the District of Columbia, either by statute or court ruling. The states recognizing same-sex marriages are CA, CT, DE, IA, ME, MA, MD, MN, NH, NY, RI, VT, and WA. In each of these states, there is an explicit and unequivocal recognition of the right of clergy to marry, or not marry, any couple on the basis of their religious beliefs. The relevant provisions in the statutes and court rulings of all 13 states, and the District of Columbia, are summarized below.
(1) California
The California Supreme Court, in its 2008 ruling recognizing a constitutional right of same-sex couples to marry, declared:
Affording same-sex couples the opportunity to obtain the designation of marriage will not impinge upon the religious freedom of any religious organization, official, or any other person; no religion will be required to change its religious policies or practices with regard to same-sex couples, and no religious officiant will be required to solemnize a marriage in contravention of his or her religious beliefs.
This ruling prompted a statewide referendum (Proposition 8) in which the citizens of California voted to amend the state constitution to define marriage as a union between a man and woman. In 2010, a federal district court judge in San Francisco ruled that Proposition 8 violated the due process and equal protection guarantees of the United States Constitution. The judge responded to the concern that pastors would now have to perform marriages contrary to their religious beliefs by noting:
Marriage in the United States has always been a civil matter. Civil authorities may permit religious leaders to solemnize marriages but not to determine who may enter or leave a civil marriage. Religious leaders may determine independently whether to recognize a civil marriage or divorce but that recognition or lack thereof has no effect on the relationship under state law ….
Proposition 8 does not affect the First Amendment rights of those opposed to marriage for same-sex couples. Prior to Proposition 8, no religious group was required to recognize marriage for same-sex couples.
This case was appealed to a federal appeals court, which affirmed the district court’s ruling. The United States Supreme Court vacated the appeals court ruling on technical grounds, which had the effect of leaving the district court ruling intact.
(2) Connecticut
The Connecticut Supreme Court in 2008 ruled that same-sex couples have a constitutional right under the state constitution to marry. The court observed:
Religious autonomy is not threatened by recognizing the right of same sex couples to marry civilly. Religious freedom will not be jeopardized by the marriage of same sex couples because religious organizations that oppose same sex marriage as irreconcilable with their beliefs will not be required to perform same sex marriages or otherwise to condone same sex marriage or relations. Because, however, marriage is a state sanctioned and state regulated institution, religious objections to same sex marriage cannot play a role in our determination of whether constitutional principles of equal protection mandate same sex marriage.
The legislature added the following section to the state marriage law following the ruling by the state supreme court:
(a) No member of the clergy authorized to join persons in marriage … shall be required to solemnize any marriage in violation of his or her right to the free exercise of religion guaranteed by the first amendment to the United States Constitution or section 3 of article first of the Constitution of the state.
(b) No church or qualified church-controlled organization, as defined in 26 USC 3121, shall be required to participate in a ceremony solemnizing a marriage in violation of the religious beliefs of that church or qualified church-controlled organization. Conn. Stat. 46b-22b.
(3) Delaware
The state legislature adopted the “Civil Marriage Equality and Religious Freedom Act” in 2013, which expands the definition of marriage to include same-sex couples. The Act also added the following section to the marriage statute:
Other than as provided in this subsection, nothing in this section shall be construed to require any person (including any clergyperson or minister of any religion) authorized to solemnize a marriage to solemnize any marriage, and no such authorized person who fails or refuses for any reason to solemnize a marriage shall be subject to any fine or other penalty for such failure or refusal. Notwithstanding the preceding sentence, a clerk of the peace who issues a marriage license, or a deputy thereof, shall be required to perform a solemnization of such marriage if requested by the applicants for such license. 13 Del. Code 106(e).
(4) District of Columbia
Same-sex marriage has been recognized in the District of Columbia since enactment of the “Religious Freedom And Civil Marriage Equality Amendment Act.” The Act amended the District of Columbia Code by adding the following provision:
(a) For the purposes of this section, the term:
(1) “Religious” includes or pertains to a belief in a theological doctrine, a belief in and worship of a divine ruling power, a recognition of a supernatural power controlling man’s destiny, or a devotion to some principle, strict fidelity or faithfulness, conscientiousness, pious affection, or attachment ….
(c) No priest, imam, rabbi, minister, or other official of any religious society who is authorized to solemnize or celebrate marriages shall be required to solemnize or celebrate any marriage.
(d) Each religious society has exclusive control over its own theological doctrine, teachings, and beliefs regarding who may marry within that particular religious society’s faith.
(e)(1) Notwithstanding any other provision of law, a religious society, or a nonprofit organization that is operated, supervised, or controlled by or in conjunction with a religious society, shall not be required to provide services, accommodations, facilities, or goods for a purpose related to the solemnization or celebration of a marriage, or the promotion of marriage through religious programs, counseling, courses, or retreats, that is in violation of the religious society’s beliefs.
(2) A refusal to provide services, accommodations, facilities, or goods in accordance with this subsection shall not create any civil claim or cause of action, or result in a District action to penalize or withhold benefits from the religious society or nonprofit organization that is operated, supervised, or controlled by or in conjunction with a religious society.
(5) Iowa
The Iowa Supreme Court in 2009 ruled that same-sex couples have a constitutional right under the state constitution to marry. Varnum v. Brien, 763 N.W.2d 862 (Iowa 2009). The court observed:
It is quite understandable that religiously motivated opposition to same-sex civil marriage shapes the basis for legal opposition to same-sex marriage, even if only indirectly. Religious objections to same-sex marriage are supported by thousands of years of tradition and biblical interpretation. The belief that the “sanctity of marriage” would be undermined by the inclusion of gay and lesbian couples bears a striking conceptual resemblance to the expressed secular rationale for maintaining the tradition of marriage as a union between dual-gender couples, but better identifies the source of the opposition. Whether expressly or impliedly, much of society rejects same-sex marriage due to sincere, deeply ingrained—even fundamental—religious belief ….
“No religious ceremony has ever been required to validate a Massachusetts marriage …. Our decision in no way limits the rights of individuals to refuse to marry persons of the same sex for religious or any other reasons. It in no way limits the personal freedom to disapprove of, or to encourage others to disapprove of, same-sex marriage.”
We, of course, have a constitutional mandate to protect the free exercise of religion in Iowa, which includes the freedom of a religious organization to define marriages it solemnizes as unions between a man and a woman. This mission to protect religious freedom is consistent with our task to prevent government from endorsing any religious view. State government can have no religious views, either directly or indirectly, expressed through its legislation. This proposition is the essence of the separation of church and state ….
In the final analysis, we give respect to the views of all Iowans on the issue of same-sex marriage—religious or otherwise—by giving respect to our constitutional principles. These principles require that the state recognize both opposite-sex and same-sex civil marriage. Religious doctrine and views contrary to this principle of law are unaffected, and people can continue to associate with the religion that best reflects their views. A religious denomination can still define marriage as a union between a man and a woman, and a marriage ceremony performed by a minister, priest, rabbi, or other person ordained or designated as a leader of the person’s religious faith does not lose its meaning as a sacrament or other religious institution. The sanctity of all religious marriages celebrated in the future will have the same meaning as those celebrated in the past. The only difference is civil marriage will now take on a new meaning that reflects a more complete understanding of equal protection of the law. This result is what our constitution requires.”
(6) Maine
In 2009 the Maine legislature made same-sex marriages legal. However, a public referendum launched on the day the legislation took effect was successful and resulted in a repeal of the legislation. Another initiative in 2012 titled “An Act to Allow Marriage Licenses for Same-Sex Couples and Protect Religious Freedom” put the following question on a statewide ballot: “Do you want to allow the State of Maine to issue marriage licenses to same-sex couples?” This initiative succeeded by a vote of 53 percent to 47 percent, and the new law took effect at the end of 2012. It contains the following exemption:
This chapter does not require any member of the clergy to perform or any church, religious denomination or other religious institution to host any marriage in violation of the religious beliefs of that member of the clergy, church, religious denomination or other religious institution. The refusal to perform or host a marriage under this subsection cannot be the basis for a lawsuit or liability and does not affect the tax-exempt status of the church, religious denomination or other religious institution. 19-A Me. Stats. § 655.
(7) Massachusetts
In ruling that same-sex couples have a constitutional right under the state constitution to marry, the Massachusetts Supreme Court observed:
We begin by considering the nature of civil marriage itself. Simply put, the government creates civil marriage. In Massachusetts, civil marriage is, and since pre-Colonial days has been, precisely what its name implies: a wholly secular institution. No religious ceremony has ever been required to validate a Massachusetts marriage ….
Our decision in no way limits the rights of individuals to refuse to marry persons of the same sex for religious or any other reasons. It in no way limits the personal freedom to disapprove of, or to encourage others to disapprove of, same-sex marriage. Our concern, rather, is whether historical, cultural, religious, or other reasons permit the State to impose limits on personal beliefs concerning whom a person should marry.” Goodridge v. Department of Public Health, 798 N.E.2d 941 (Mass. 2003).
(8) Maryland
The Maryland legislature passed the “Civil Marriage Protection Act” in 2012, legalizing same-sex marriage. A statewide referendum conducted in 2012 asked voters to approve or reject the new law. The referendum contained the following question:
Establishes that Maryland’s civil marriage laws allow gay and lesbian couples to obtain a civil marriage license, provided they are not otherwise prohibited from marrying; protects clergy from having to perform any particular marriage ceremony in violation of their religious beliefs; affirms that each religious faith has exclusive control over its own theological doctrine regarding who may marry within that faith; and provides that religious organizations and certain related entities are not required to provide goods, services, or benefits to an individual related to the celebration or promotion of marriage in violation of their religious beliefs.
The voters approved the same-sex marriage law by a vote of 52 percent. The new statute contains the following provision:
An official of a religious order or body authorized by the rules and customs of that order or body to perform a marriage ceremony may not be required to solemnize or officiate any particular marriage or religious rite of any marriage in violation of the right to free exercise of religion guaranteed by the First Amendment to the United States Constitution and by the Maryland Constitution and Maryland Declaration of Rights. Each religious organization, association, or society has exclusive control over its own theological doctrine, policy teachings, and beliefs regarding who may marry within that faith. An official of a religious order or body authorized to join individuals in marriage under § 2-406(a)(2)(i) of the Family Law Article and who fails or refuses to join individuals in marriage is not subject to any fine or other penalty for the failure or refusal.
(9) Minnesota
The citizens of Minnesota turned down an attempt in 2013 to amend the state constitution to define marriage as a union between a man and woman. As a result, same-sex marriages became legal in August of 2013. The new law provides:
Subd. 2. Refusal to solemnize; protection of religious doctrine. Each religious organization, association, or society has exclusive control over its own theological doctrine, policy, teachings, and beliefs regarding who may marry within that faith. A licensed or ordained member of the clergy or other person authorized by section 517.04 to solemnize a civil marriage is not subject to any fine, penalty, or civil liability for failing or refusing to solemnize a civil marriage for any reason.
Subd. 3. Refusal to participate or support solemnization; protection of religious belief. (a) Except for secular business activities engaged in by a religious association, religious corporation, or religious society, the conduct of which is unrelated to the religious and educational purposes for which it is organized, no religious association, religious corporation, or religious society shall be required to provide goods or services at the solemnization or celebration of any civil marriage or be subject to civil liability or any action by the state that penalizes, fines, or withholds any benefit to the religious association, religious corporation, or religious society under the laws of this state, including, but not limited to, laws regarding tax exempt status, for failing or refusing to provide goods or services at the solemnization or celebration of any civil marriage, if providing such goods or services would cause the religious association, religious corporation, or religious society to violate their sincerely held religious beliefs.
(b) The exception in paragraph (a) applies to employees, agents, and volunteers acting within the capacity of their employment or responsibilities with a religious association, religious corporation, or religious society. Minn. Stats. § 517.09.
(10) New Hampshire
In 2010 the New Hampshire legislature enacted “An Act Affirming Religious Freedom Protections with Regard to Marriage.” The Act provides:
Each religious organization, association, or society has exclusive control over its own religious doctrine, policy, teachings, and beliefs regarding who may marry within their faith.
I. Members of the clergy … or other persons otherwise authorized under law to solemnize a marriage shall not be obligated or otherwise required by law to officiate at any particular civil marriage or religious rite of marriage in violation of their right to free exercise of religion protected by the First Amendment to the United States Constitution or by part I, article 5 of the New Hampshire constitution.
II. No religious organization, association, or society, or any nonprofit institution or organization operated, supervised, or controlled by or in conjunction with a religious organization, association, or society, shall be required to participate in a ceremony solemnizing marriage in violation of the religious beliefs of such organization, association, or society.
III. Notwithstanding any other provision of law, a religious organization, association, or society, or any individual who is managed, directed, or supervised by or in conjunction with a religious organization, association, or society, or any nonprofit institution or organization operated, supervised, or controlled by or in conjunction with a religious organization, association, or society, shall not be required to provide services, accommodations, advantages, facilities, goods, or privileges to an individual if such request for such services, accommodations, advantages, facilities, goods, or privileges is related to the solemnization of a marriage, the celebration of a marriage, or the promotion of marriage through religious counseling, programs, courses, retreats, or housing designated for married individuals, and such solemnization, celebration, or promotion of marriage is in violation of his or her religious beliefs and faith. Any refusal to provide services, accommodations, advantages, facilities, goods, or privileges in accordance with this section shall not create any civil claim or cause of action or result in any state action to penalize or withhold benefits from such religious organization, association, or society, or any individual who is managed, directed, or supervised by or in conjunction with a religious organization, association, or society, or any nonprofit institution or organization operated, supervised, or controlled by or in conjunction with a religious organization, association, or society.
IV. The marriage laws of this state shall not be construed to affect the ability of a fraternal benefit society to determine the admission of members pursuant to RSA 418:5, and shall not require a fraternal benefit society that has been established and is operating for charitable or educational purposes and which is operated, supervised, or controlled by or in connection with a religious organization to provide insurance benefits to any person if to do so would violate the fraternal benefit society’s free exercise of religion as guaranteed by the First Amendment of the United States Constitution and part I, section 1, part 5 of the New Hampshire constitution.
V. Nothing in this chapter shall be deemed or construed to limit the protections and exemptions provided to religious organizations under RSA 354-A:18. N.H. Stats. 457:37.
(11) New York
The New York legislature enacted the “Marriage Equality Act in 2011,” which recognized same-sex marriages. The Act contains the following section: “A refusal by a clergyman or minister … to solemnize any marriage under this subdivision shall not create a civil claim or cause of action or result in any state or local government action to penalize, withhold benefits or discriminate against such clergyman or minister.” N.Y. Domestic Rel. Law § 11.
In addition, New York law was amended in 2011 to include the following protection:
Notwithstanding any state, local or municipal law, rule, regulation, ordinance, or other provision of law to the contrary, a religious entity … or a not-for-profit corporation operated, supervised, or controlled by a religious corporation, or any employee thereof, being managed, directed, or supervised by or in conjunction with a religious corporation, benevolent order, or a not-for-profit corporation as described in this subdivision, shall not be required to provide services, accommodations, advantages, facilities, goods, or privileges for the solemnization or celebration of a marriage. Any such refusal to provide services, accommodations, advantages, facilities, goods, or privileges shall not create any civil claim or cause of action or result in any state or local government action to penalize, withhold benefits, or discriminate against such religious corporation, benevolent order, a not-for-profit corporation operated, supervised, or controlled by a religious corporation, or any employee thereof being managed, directed, or supervised by or in conjunction with a religious corporation, benevolent order, or a not-for-profit corporation. N.Y. Domestic Rel. Law § 10-b.
(12) Rhode Island
Same-sex marriages have been recognized in Rhode Island since August of 2013. The state legislature also enacted the following religious liberty provision:
(a) Consistent with the guarantees of freedom of religion set forth by both the First Amendment to the United States constitution and article I, section 3 of the Rhode Island constitution, each religious institution has exclusive control over its own religious doctrine, policy, and teachings regarding who may marry within their faith, and on what terms, as long as such policies are consistent with sections 15-1-2, 15-1-3, 15-1-4 and 15-1-5. No court or other state or local governmental body, entity, agency or commission shall compel, prevent, or interfere in any way with any religious institution’s decisions about marriage eligibility within that particular faith’s tradition.
(b) Consistent with the guarantees of freedom of religion set forth by both the first amendment to the United States constitution and article I, section 3 of the Rhode Island constitution, no regularly licensed or ordained clergyperson, minister, elder, priest, imam, rabbi, or similar official of any church or religious denomination as described and authorized in sections 15-3-5 and 15-3-6 of the general laws to officiate at a civil marriage, is required to solemnize any marriage. A regularly licensed or ordained clergyperson, minister, elder, priest, imam, rabbi, or similar official of any church or religious denomination shall be immune from any civil claim or cause of action based on a refusal to solemnize any marriage under this chapter. No state agency or local government may base a decision to penalize, withhold benefits from, or refuse to contract with any church or religious denomination on the refusal of a person associated with such church or religious denomination to solemnize a marriage under this chapter. R.I. Stats. 15-3-6.1.
(13) Vermont
Same-sex marriages have been recognized in Vermont since 2009 with the enactment of “An Act to Protect Religious Freedom and Recognize Equality in Civil Marriage.” The Act contains the following protection of religious liberty:
(a) Marriages may be solemnized by a … member of the clergy residing in this state and ordained or licensed, or otherwise regularly authorized thereunto by the published laws or discipline of the general conference, convention, or other authority of his or her faith or denomination, or by such a clergy person residing in an adjoining state or country, whose parish, church, temple, mosque, or other religious organization lies wholly or in part in this state, or by a member of the clergy residing in some other state of the United States or in the Dominion of Canada, provided he or she has first secured from the probate division of the superior court in the unit within which the marriage is to be solemnized a special authorization, authorizing him or her to certify the marriage if the probate judge determines that the circumstances make the special authorization desirable ….
(b) This section does not require a member of the clergy authorized to solemnize a marriage as set forth in subsection (a) of this section … to solemnize any marriage, and any refusal to do so shall not create any civil claim or cause of action. 18 Vt. Stats. §5144.
The civil marriage laws shall not be construed to affect the ability of a society to determine the admission of its members as provided in section 4464 of this title, or to determine the scope of beneficiaries in accordance with section 4477 of this title, and shall not require a society that has been established and is operating for charitable and educational purposes and which is operated, supervised, or controlled by or in connection with a religious organization to provide insurance benefits to any person if to do so would violate the society’s free exercise of religion, as guaranteed by the First Amendment to the Constitution of United States or by Chapter I, Article 3 of the Constitution of the State of Vermont. 8 Vt. Stats. 4501.
(14) Washington
Same-sex marriages have been recognized in Washington since 2012. However, the Washington legislature enacted the following provisions in order to protect religious liberty:
[In Washington], “No religious organization is required to provide accommodations, facilities, advantages, privileges, services, or goods related to the solemnization or celebration of a marriage.” While clergy are explicitly shielded from liability for refusing to perform marriages, many of these state laws also clarify that churches are not subject to civil liability for refusing to allow their facilities to be used for same-sex marriages.
(4) No regularly licensed or ordained minister or any priest, imam, rabbi, or similar official of any religious organization is required to solemnize or recognize any marriage. A regularly licensed or ordained minister or priest, imam, rabbi, or similar official of any religious organization shall be immune from any civil claim or cause of action based on a refusal to solemnize or recognize any marriage under this section. No state agency or local government may base a decision to penalize, withhold benefits from, or refuse to contract with any religious organization on the refusal of a person associated with such religious organization to solemnize or recognize a marriage under this section.
(5) No religious organization is required to provide accommodations, facilities, advantages, privileges, services, or goods related to the solemnization or celebration of a marriage.
(6) A religious organization shall be immune from any civil claim or cause of action, including a claim pursuant to chapter 49.60 RCW, based on its refusal to provide accommodations, facilities, advantages, privileges, services, or goods related to the solemnization or celebration of a marriage.
(7) For purposes of this section:
(a) “Recognize” means to provide religious-based services that:
(i) Are delivered by a religious organization, or by an individual who is managed, supervised, or directed by a religious organization; and
(ii) Are designed for married couples or couples engaged to marry and are directly related to solemnizing, celebrating, strengthening, or promoting a marriage, such as religious counseling programs, courses, retreats, and workshops; and
(b) “Religious organization” includes, but is not limited to, churches, mosques, synagogues, temples, nondenominational ministries, interdenominational and ecumenical organizations, mission organizations, faith-based social agencies, and other entities whose principal purpose is the study, practice, or advancement of religion. Wash. Code §26.04.010.
Another statute contains the following additional protection of religious liberty:
(5) No state agency or local government may base a decision to penalize, withhold benefits from, license, or refuse to contract with any religious organization based on the opposition to or refusal to provide accommodations, facilities, advantages, privileges, services, or goods related to the solemnization or celebration of a marriage.
(6) No religiously affiliated educational institution shall be required to provide accommodations, facilities, advantages, privileges, service, or goods related to the solemnization or celebration of a marriage, including a use of any campus chapel or church. A religiously affiliated educational institution shall be immune from a civil claim or cause of action, including a claim pursuant to chapter 49.60 RCW, based on its refusal to provide accommodations, facilities, advantages, privileges, service, or goods related to the solemnization or celebration of a marriage under this subsection shall be immune for civil claim or cause of action, including a claim pursuant to chapter 49.60 RCW. Wash. Code §26.04.020.
Presidential Statement
President Obama made the following announcement following the Supreme Court’s two rulings addressing same-sex marriages: “On an issue as sensitive as this, knowing that Americans hold a wide range of views based on deeply held beliefs, maintaining our nation’s commitment to religious freedom is also vital. How religious institutions define and consecrate marriage has always been up to those institutions. Nothing about this decision – which applies only to civil marriages – changes that.”
6. In a unanimous decision in 2012, the United States Supreme Court affirmed the so-called “ministerial exception” to employment discrimination laws.
E.E.O.C. v. Hosanna-Tabor Church and School, 132 S.Ct. 694 (2012). The Court concluded:
We agree that there is such a ministerial exception. The members of a religious group put their faith in the hands of their ministers. Requiring a church to accept or retain an unwanted minister, or punishing a church for failing to do so, intrudes upon more than a mere employment decision. Such action interferes with the internal governance of the church, depriving the church of control over the selection of those who will personify its beliefs. By imposing an unwanted minister, the state infringes the Free Exercise Clause, which protects a religious group’s right to shape its own faith and mission through its appointments. According the state the power to determine which individuals will minister to the faithful also violates the Establishment Clause, which prohibits government involvement in such ecclesiastical decisions.
This exception, which is rooted in the First Amendment’s religion clauses, prevents the civil courts from resolving employment discrimination disputes between churches and clergy. This will protect the decisions of churches and religious denominations regarding the selection, ordination, and discipline of clergy on the basis of sexual orientation or a same-sex marriage.
Can a church prohibit its facilities to be used for a same-sex wedding?
The previous section surveyed the “religious liberty” provisions in the laws and court rulings of the 13 states and District of Columbia that presently recognize same-sex marriages. While clergy are explicitly shielded from liability for refusing to perform marriages, many of these state laws also clarify that churches are not subject to civil liability for refusing to allow their facilities to be used for same-sex marriages.
When Katy left her position as a CPA at one of the country's largest accounting firms and took a position as financial administrator for her church, she looked forward to using her professional skills to help build the Kingdom. What she didn't expect was the steep learning curve she'd encounter. While serving in the church often fulfills an individual's need for meaningful work, the transition into the nonprofit world is rarely a seamless transition.
For starters, the organizational culture and politics vary drastically. Depending on the size and sophistication of a church, people new to the ministry may be surprised to learn how poorly the business details are managed. When I held my first volunteer treasurer position at the local church I attended several years ago, I was stunned to receive financial records in a box. They had been keeping the accounting information in a computerized agriculture package and crossing off the headers such as pounds and acres on the reports given to the church council.
Cultural and organizational differences aside, there are also a few significant differences relating to accounting and business issues for nonprofits versus for-profits. The first difference is the revenue stream. Corporations obviously cannot accept contributions; churches, on the other hand, rely on tithes and offerings as the main source of funding for the church. It is important for a "second-career administrator" to learn the details of accounting for and reporting contributions.
Accounting for the differences
Contributions can be given for specific exempt purposes (rather than a gift that can be used at the discretion of church management for any exempt purpose). They are then required by accounting standards to be treated as temporarily restricted. Unspent balances of temporarily restricted amounts at year-end (referred to as net assets) are carried forward to the next year.
There are also specific donation-receipting criteria that are required by the Internal Revenue Service, which include disclosing any benefit received by a donor for a charitable contribution that was given. Non-cash gifts (such as marketable securities or land) can be received by a church and should be reported in the accounting records at fair market value on the date of the gift. The gift receipt should simply include a detailed description of the gift without any valuation noted. The church should carefully consider whether to accept non-cash gifts besides marketable securities unless adequate due diligence is performed. Some gifts just aren't worth accepting because of all the complexities and constraints they place on a ministry.
Another difference is the reporting of expenses in externally distributed financial statements, such as those that have been audited. Accounting standards require that financial statements prepared in accordance with generally accepted accounting principles in the U.S. must at least disclose the expenses in a functional manner if they are not presented in the statement of activities (income statement) that way. The functional allocation reflects expenses in the following three categories:
program/ministry
administration?
fundraising
These allocations are made based on the nature and purpose of how the funds were used. The disclosure is probably more important for someone considering giving to the Red Cross than to your local church, however, it is still required and can be an interesting measure to monitor on an annual basis.
Other miscellaneous areas will pose unique challenges for "second-career administrators," such as the benevolence policy or deacon's fund. Missionary funding and the details surrounding church-sponsored mission trips also require specific accounting methods. Overall, the differences are not difficult to grasp; knowing that they exist is the main hurdle.
As churches try to increase the capabilities and staff expertise in the support functions of the church, "second-career administrators" can be an invaluable blessing. These individuals are able to find fulfillment and take part in a ministry that offers lasting impact in the lives of people. The church finds expertise that they otherwise would seldom be able to afford.
Churches should help these individuals transition successfully into their new roles. They could visit with some of the service providers to the church early on in the transition to understand the differences. Accountants, bankers, insurance agents, and others would be happy to share their expertise and provide a better understanding of the new environment. The board and leadership team should communicate information about the culture and known expectations. I know one ministry leader that made it a point to have a face-to-face meeting with each of the department heads to find out their concerns with the accounting department and to learn in an informal setting some of the unwritten rules and expectations of the organization. I also know a business administrator that meets with each of the new pastors that come on staff. He helps them to understand the expectations from a business standpoint of each of their roles. It's good to remember that you may have individuals in various capacities that come in to the ministry from a position outside of the "ministry world." Helping acclimate each of them will be a win/win for everyone.
Starting the work relationship properly, with good communication and wise counsel, will help lead to a long-term partnership that benefits the individual and the church. With adequate planning, sufficient time, and an awareness of the key differences, this new arrangement should fulfill the expectations of both parties and lead to potential administrative benefits that increase the capacity for greater ministry accomplishments.
Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.
Criminal Liability of Clergy for Sexual Misconduct Involving Adults
Church Law and Tax 2006-07-01 Criminal Liability of Clergy for Sexual Misconduct Involving Adults Richard
Criminal Liability of Clergy for Sexual Misconduct Involving Adults
Richard R. Hammar, J.D., LL.M., CPA
State of Wisconsin v. Draughon, 702 N.W.2d 412 (Wis. App. 2005)
Article summary. Ministers who engage in sexual contact with adult members of their congregation expose their church to potentially substantial liability. Many of these cases have been reported in this newsletter. Such behavior also has other consequences, including criminal liability. Several states have enacted laws that make sexual misconduct by clergy in a counseling relationship a crime punishable by imprisonment. This article reviews a recent case in which a minister was prosecuted under such a statute, and then reviews existing laws in all 50 states.
Some ministers have engaged in sexual contact with adults in the course of their ministry. Most of these cases occur in the context of a counseling relationship with a member of the congregation, but they also can occur with staff members and non-members. However they occur, such incidents can be devastating to a church. The minister may be suspended or dismissed, the congregation may be divided over the appropriate response, and the church may be sued by the “victim” who may claim that the sexual contact was nonconsensual. These cases may result in negative publicity in the media, which can be devastating to a church’s reputation.
Another possible consequence in such cases is often overlooked. A minister who engages in the sexual acts may be charged with criminal behavior for nonconsensual sexual contacts. If convicted, the minister faces imprisonment. A recent case in Wisconsin addresses this kind of liability. This article also reviews the relevant criminal statutes of all 50 states so that churches will be able to assess this risk in their state.
Facts of the case
Tim became the pastor of a church in Wisconsin. He soon befriended and began socializing with two church members who were engaged to be married. Pastor Tim provided premarital counseling to the couple and later performed their marriage ceremony. Shortly after the wedding, concerns arose about the husband’s use of church computers to access pornography. The couple agreed to talk to Pastor Tim about the problem, and they began counseling sessions, which lasted approximately ten weeks. During this time Pastor Tim gave the husband a book to read with worksheets to be completed after each chapter. Pastor Tim and the husband became “accountability partners.”
The couple also sought Pastor Tim’s help because of financial difficulties. Pastor Tim suggested that the wife work one day per week in the church office to help ease the financial burden. She began working Wednesday afternoons, attending counseling sessions later in the afternoon, and then staying for the Wednesday evening Bible study. The husband’s attendance at counseling became sporadic and eventually stopped.
The wife later claimed that a change occurred over time in the nature of her relationship with Pastor Tim. He repeatedly said he loved her, asked to hug her, and sent her flowers. Soon after he said he loved her, the wife discovered email messages that suggested her husband was having affairs with other women. On Pastor Tim’s advice, the wife confronted her husband about the email messages. The husband denied that they were true.
Pastor Tim’s relationship with the wife progressed. Eventually, the two engaged in sexual activity in a room in the church basement. The wife disclosed this incident to the police, and Pastor Tim was charged with violating a Wisconsin law making sexual contact between a counselor and a counselee a felony. The law provides:
Any person who is or who holds himself or herself out to be a therapist and who intentionally has sexual contact with a patient or client during any ongoing therapist-patient or therapist-client relationship, regardless of whether it occurs during any treatment, consultation, interview or examination, is guilty of a Class F felony. Consent is not an issue in an action under this subsection. Wisconsin Statutes § 940.22.
This statute defines “therapist” to include “a member of the clergy or other person, whether or not licensed or certified by the state, who performs or purports to perform psychotherapy.” It defines “psychotherapy” as “the use of learning, conditioning methods and emotional reactions in a professional relationship to assist persons to modify feelings, attitudes and behaviors that are intellectually, socially or emotionally maladjustive or ineffectual.”
A jury found Pastor Tim guilty of engaging in sexual contact in violation of this statute, and the court sentenced him to a term of twelve years, with five years of confinement in prison followed by seven years of extended supervision. Pastor Tim appealed.
The court’s ruling
Pastor Tim argued that the state, in charging him with the crime of sexual exploitation by a therapist, was required to prove that he held himself out to be a therapist. The statute making sexual exploitation by a therapist a crime defines a therapist to include a member of the clergy, whether or not licensed or certified by the state, “who performs or purports to perform psychotherapy.” Pastor Tim did not dispute that he was a member of the clergy but claimed that the jury instruction given to the jury by the trial judge improperly concluded that as a member of the clergy he was automatically a therapist—without proof that he was engaging in psychotherapy.
The court concluded:
Pastor Tim conceded two key factors in the state’s case: (1) that the sexual contact occurred, and (2) that he was a member of the clergy. His defense rested on whether he practiced psychotherapy and therefore met the statutory definition of a therapist and, if so, whether the sexual contact occurred during a therapist-patient relationship. The jury instruction, in syllogistic fashion, presents two propositions: (1) therapists perform psychotherapy, and (2) therapists include members of the clergy. These propositions lead to the faulty conclusion that by definition, clergy members perform psychotherapy …. Here, the instruction given never directed the jury to make an independent, “beyond-a-reasonable-doubt decision” as to whether Pastor Tim performed or purported to perform psychotherapy …. Jury instructions that have the effect of relieving the state of its burden of proving beyond a reasonable doubt every element of the offense charged are unconstitutional [under the constitutional guarantees of due process and trial by jury].
In summary, the court reversed Pastor Tim’s conviction on a technicality pertaining to the trial judge’s instructions to the jury.
State laws making sexual contact by clergy with a counselee a crime
Twelve states have laws that specifically make sexual contact between a minister and a counselee a crime. Each of these laws is reproduced below.
Arkansas
Code § 5-14-126
(a) A person commits sexual assault in the third degree if the person engages in sexual intercourse or deviate sexual activity with another person, not the person’s spouse, and the person … is a professional under [the child abuse reporting law] or a member of the clergy and is in a position of trust or authority over the victim and uses the position to engage in sexual intercourse or deviate sexual activity ….
(b) It is no defense to prosecution under this section that the victim consented to the conduct.
(c) Sexual assault in the third degree is a Class C felony.
Connecticut
Statutes § 53a-65. Definitions
As used in this part … the following terms have the following meanings …
(9) “Psychotherapist” means a … clergyman … whether or not licensed or certified by the state, who performs or purports to perform psychotherapy.
(10) “Psychotherapy” means the professional treatment, assessment or counseling of a mental or emotional illness, symptom or condition.
(11) “Emotionally dependent” means that the nature of the patient’s or former patient’s emotional condition and the nature of the treatment provided by the psychotherapist are such that the psychotherapist knows or has reason to know that the patient or former patient is unable to withhold consent to sexual contact by or sexual intercourse with the psychotherapist.
(12) “Therapeutic deception” means a representation by a psychotherapist that sexual contact by or sexual intercourse with the psychotherapist is consistent with or part of the patient’s treatment.
§ 53a-71. Sexual assault in the second degree: Class C or B felony
(a) A person is guilty of sexual assault in the second degree when such person engages in sexual intercourse with another person and … (6) the actor is a psychotherapist and such other person is (A) a patient of the actor and the sexual intercourse occurs during the psychotherapy session, (B) a patient or former patient of the actor and such patient or former patient is emotionally dependent upon the actor, or (C) a patient or former patient of the actor and the sexual intercourse occurs by means of therapeutic deception; or (7) the actor accomplishes the sexual intercourse by means of false representation that the sexual intercourse is for a bona fide medical purpose by a health care professional … or (10) the actor is twenty years of age or older and stands in a position of power, authority or supervision over such other person by virtue of the actor’s professional, legal, occupational or volunteer status and such other person’s participation in a program or activity, and such other person is under eighteen years of age.
• Key point. Subsection (10) was added in 2004. It makes some church volunteers subject to criminal liability for engaging in sexual intercourse with a minor who participates in the church’s youth program.
(b) Sexual assault in the second degree is a class C felony or, if the victim of the offense is under sixteen years of age, a class B felony, and any person found guilty under this section shall be sentenced to a term of imprisonment of which nine months of the sentence imposed may not be suspended or reduced by the court.
§ 53a-73a. Sexual assault in the fourth degree: Class A misdemeanor or class D felony
(a) A person is guilty of sexual assault in the fourth degree when … (4) such person is a psychotherapist and subjects another person to sexual contact who is (A) a patient of the actor and the sexual contact occurs during the psychotherapy session, or (B) a patient or former patient of the actor and such patient or former patient is emotionally dependent upon the actor, or (C) a patient or former patient of the actor and the sexual contact occurs by means of therapeutic deception; or (5) such person subjects another person to sexual contact and accomplishes the sexual contact by means of false representation that the sexual contact is for a bona fide medical purpose by a health care professional … or (8) such person subjects another person to sexual contact and (A) the actor is twenty years of age or older and stands in a position of power, authority or supervision over such other person by virtue of the actor’s professional, legal, occupational or volunteer status and such other person’s participation in a program or activity, and (B) such other person is under eighteen years of age.
• Key point. Subsection (8) was added in 2004. It makes some church volunteers subject to criminal liability for engaging in sexual contact with a minor who participates in the church’s youth program.
(b) Sexual assault in the fourth degree is a class A misdemeanor or, if the victim of the offense is under sixteen years of age, a class D felony.
Delaware
11 Del. Code § 761. Definitions
(h) “Without consent” means …
(4) Where the defendant is a health professional, as defined herein, or a minister, priest, rabbi or other member of a religious organization engaged in pastoral counseling, the commission of acts of sexual contact, sexual penetration or sexual intercourse by such person shall be deemed to be without consent of the victim where such acts are committed under the guise of providing professional diagnosis, counseling or treatment and where at the times of such acts the victim reasonably believed the acts were for medically or professionally appropriate diagnosis, counseling or treatment, such that resistance by the victim could not reasonably have been manifested.
11 Del. Code § 767. Unlawful sexual contact in the third degree; class A misdemeanor
A person is guilty of unlawful sexual contact in the third degree when the person has sexual contact with another person or causes the victim to have sexual contact with the person or a third person and the person knows that the contact is either offensive to the victim or occurs without the victim’s consent. Unlawful sexual contact in the third degree is a class A misdemeanor.
11 Del. Code § 768. Unlawful sexual contact in the second degree; class G felony
A person is guilty of unlawful sexual contact in the second degree when the person intentionally has sexual contact with another person who is less than 16 years of age or causes the victim to have sexual contact with the person or a third person.
Unlawful sexual contact in the second degree is a class G felony.
11 Del. Code § 769. Unlawful sexual contact in the first degree; class F felony
A person is guilty of unlawful sexual contact in the first degree when, in the course of committing unlawful sexual contact in the third degree or in the course of committing unlawful sexual contact in the second degree, or during the immediate flight from the crime, or during an attempt to prevent the reporting of the crime, the person causes physical injury to the victim or the person displays what appears to be a deadly weapon or represents by word or conduct that the person is in possession or control of a deadly weapon or dangerous instrument.
Unlawful sexual contact in the first degree is a class F felony.
Iowa
Code section 709.15. Sexual exploitation by a counselor, therapist, or school employee
1. As used in this section:
a. “Counselor or therapist” means a … member of the clergy, or any other person, whether or not licensed or registered by the state, who provides or purports to provide mental health services.
b. “Emotionally dependent” means that the nature of the patient’s or client’s or former patient’s or client’s emotional condition or the nature of the treatment provided by the counselor or therapist is such that the counselor or therapist knows or has reason to know that the patient or client or former patient or client is significantly impaired in the ability to withhold consent to sexual conduct … by the counselor or therapist.
2. Sexual exploitation by a counselor or therapist occurs when any of the following are found …
a. A pattern or practice or scheme of conduct to engage in any of the conduct described in paragraph “b” or “c.”
b. Any sexual conduct, with an emotionally dependent patient or client or emotionally dependent former patient or client for the purpose of arousing or satisfying the sexual desires of the counselor or therapist or the emotionally dependent patient or client or emotionally dependent former patient or client ….
c. Any sexual conduct with a patient or client or former patient or client within one year of the termination of the provision of mental health services by the counselor or therapist for the purpose of arousing or satisfying the sexual desires of the counselor or therapist or the patient or client or former patient or client ….
4.a. A counselor or therapist who commits sexual exploitation in violation of subsection 2, paragraph “a”, commits a class “D” felony.
b. A counselor or therapist who commits sexual exploitation in violation of subsection 2, paragraph “b”, commits an aggravated misdemeanor.
c. A counselor or therapist who commits sexual exploitation in violation of subsection 2, paragraph “c”, commits a serious misdemeanor.
Minnesota
Statutes § 148A.01. Definitions
2. “Emotionally dependent” means that the nature of the patient’s or former patient’s emotional condition and the nature of the treatment provided by the psychotherapist are such that the psychotherapist knows or has reason to believe that the patient or former patient is unable to withhold consent to sexual contact by the psychotherapist.
5. “Psychotherapist” means a … member of the clergy … or other person, whether or not licensed by the state, who performs or purports to perform psychotherapy.
6. “Psychotherapy” means the professional treatment, assessment, or counseling of a mental or emotional illness, symptom, or condition.
8. “Therapeutic deception” means a representation by a psychotherapist that sexual contact with the psychotherapist is consistent with or part of the patient’s or former patient’s treatment.
Statutes § 609.345. Criminal sexual conduct in the fourth degree
1. A person who engages in sexual contact with another person is guilty of criminal sexual conduct in the fourth degree if any of the following circumstances exists …
(h) the actor is a psychotherapist and the complainant is a patient of the psychotherapist and the sexual contact occurred: (i) during the psychotherapy session; or (ii) outside the psychotherapy session if an ongoing psychotherapist-patient relationship exists. Consent by the complainant is not a defense;
(i) the actor is a psychotherapist and the complainant is a former patient of the psychotherapist and the former patient is emotionally dependent upon the psychotherapist;
(j) the actor is a psychotherapist and the complainant is a patient or former patient and the sexual contact occurred by means of therapeutic deception. Consent by the complainant is not a defense;
(l) the actor is or purports to be a member of the clergy, the complainant is not married to the actor, and:
(i) the sexual contact occurred during the course of a meeting in which the complainant sought or received religious or spiritual advice, aid, or comfort from the actor in private; or
(ii) the sexual contact occurred during a period of time in which the complainant was meeting on an ongoing basis with the actor to seek or receive religious or spiritual advice, aid, or comfort in private. Consent by the complainant is not a defense;
2. A person convicted under subdivision 1 may be sentenced to imprisonment for not more than ten years or to a payment of a fine of not more than $20,000, or both.
Mississippi
Code § 97-5-23. Fondling child; punishment
(2) Any person above the age of eighteen (18) years, who, for the purpose of gratifying his or her lust, or indulging his or her depraved licentious sexual desires, shall handle, touch or rub with hands or any part of his or her body or any member thereof, any child younger than himself or herself and under the age of eighteen (18) years who is not such person’s spouse, with or without the child’s consent, when the person occupies a position of trust or authority over the child shall be guilty of a felony and, upon conviction thereof, shall be fined in a sum not less than One Thousand Dollars ($1,000.00) nor more than Five Thousand Dollars ($5,000.00), or be committed to the custody of the State Department of Corrections not less than two (2) years nor more than fifteen (15) years, or be punished by both such fine and imprisonment, at the discretion of the court. A person in a position of trust or authority over a child includes without limitation a child’s teacher, counselor, physician, psychiatrist, psychologist, minister, priest, physical therapist, chiropractor, legal guardian, parent, stepparent, aunt, uncle, scout leader or coach.
(3) Upon a second conviction for an offense under this section, the person so convicted shall be punished by commitment to the State Department of Corrections for a term not to exceed twenty (20) years, however, upon conviction and sentencing, the offender shall serve at least one-half of the sentence so imposed.
New Mexico
§ 30-9-10. Definitions
A. “force or coercion” means …
(5) the perpetration of criminal sexual penetration or criminal sexual contact by a psychotherapist on his patient, with or without the patient’s consent, during the course of psychotherapy or within a period of one year following the termination of psychotherapy ….
F. “psychotherapist” means a person who is or purports to be a … (11) minister, priest, rabbi or other similar functionary of a religious organization acting in his role as a pastoral counselor;
G. “psychotherapy” means professional treatment or assessment of a mental or an emotional illness, symptom or condition;
§ 30-9-12. Criminal sexual contact
C. Criminal sexual contact in the fourth degree consists of all criminal sexual contact perpetrated:
(1) by the use of force or coercion that results in personal injury to the victim ….
Whoever commits criminal sexual contact in the fourth degree is guilty of a fourth degree felony.
North Dakota
Century Code § 12.1-20-06.1 Sexual exploitation by therapist—Definitions—Penalty
Any person who is or who holds oneself out to be a therapist and who intentionally has sexual contact with a patient or client during any treatment, consultation, interview, or examination is guilty of a class C felony. Consent by the complainant is not a defense under this section …. Local law enforcement agencies and the bureau of criminal investigation shall cooperate in investigations of violations of this section. As used in this section, unless the context or subject matter otherwise requires:
1. “Psychotherapy” means the diagnosis or treatment of a mental or emotional condition, including alcohol or drug addiction.
2. “Therapist” means a physician, psychologist, psychiatrist, social worker, nurse, chemical dependency counselor, member of the clergy, or other person, whether licensed or not by the state, who performs or purports to perform psychotherapy.
South Dakota
Codified Laws § 22-22-27. Definition of terms—Sex offenses by psychotherapists
(1) “Emotional dependency,” a condition of the patient brought about by the nature of the patient’s own emotional condition or the nature of the treatment provided by the psychotherapist which is characterized by significant impairment of the patient’s ability to withhold consent to sexual acts or contact with the psychotherapist and which the psychotherapist knows or has reason to know exists …
(3) “Psychotherapist,” any physician, psychologist, nurse, chemical dependency counselor, social worker, member of the clergy, marriage and family therapist, mental health service provider, or other person, whether or not licensed or certified by the state, who performs or purports to perform psychotherapy; and
(4) “Psychotherapy,” the professional treatment, assessment, or counseling of a mental or emotional illness, symptom, or condition.
Codified Laws § 22-22-28. Sexual contact by psychotherapist—Felony
Any psychotherapist who knowingly engages in sexual contact with a person who is not his or her spouse and who is a patient who is emotionally dependent on the psychotherapist at the time of contact, commits a Class 5 felony. Consent by the patient is not a defense.
Codified Laws § 22-22-29. Sexual penetration by psychotherapist—Felony
Any psychotherapist who knowingly engages in an act of sexual penetration, as defined in section 22-22-2, with a person who is not his or her spouse and who is a patient who is emotionally dependent on the psychotherapist at the time that the act of sexual penetration is committed, commits a Class 4 felony. Consent by the patient is not a defense.
Texas
Penal Code, § 22.011. Sexual Assault
(b) A sexual assault under Subsection (a)(1) is without the consent of the other person if:
(10) the actor is a clergyman who causes the other person to submit or participate by exploiting the other person’s emotional dependency on the clergyman in the clergyman’s professional character as spiritual adviser ….
(f) An offense under this section is a felony of the second degree.
Utah
Code § 76-5-406. Sexual offenses against the victim without consent of victim—Circumstances
An act of [sexual contact] is without consent of the victim under any of the following circumstances …
(12) the actor is a health professional or religious counselor, the act is committed under the guise of providing professional diagnosis, counseling, or treatment, and at the time of the act the victim reasonably believed that the act was for medically or professionally appropriate diagnosis, counseling, or treatment to the extent that resistance by the victim could not reasonably be expected to have been manifested. For purposes of this subsection (12) …
(b) “religious counselor” means a minister, priest, rabbi, bishop, or other recognized member of the clergy.
Wisconsin
Statutes § 895.441. Sexual exploitation by a therapist
(1) Definitions. In this section …
(c) “Psychotherapy” means the use of learning, conditioning methods and emotional reactions in a professional relationship to assist persons to modify feelings, attitudes and behaviors which are intellectually, socially or emotionally maladjustive or ineffectual ….
(e) “Therapist” means a … member of the clergy or other person, whether or not licensed or certified by the state, who performs or purports to perform psychotherapy.
(2) (a) Any person who suffers, directly or indirectly, a physical, mental or emotional injury caused by, resulting from or arising out of sexual contact with a therapist who is rendering or has rendered to that person psychotherapy, counseling or other assessment or treatment of or involving any mental or emotional illness, symptom or condition has a civil cause of action against the psychotherapist for all damages resulting from, arising out of or caused by that sexual contact. Consent is not an issue in an action under this section, unless the sexual contact that is the subject of the action occurred more than 6 months after the psychotherapy, counseling, assessment or treatment ended.
Statutes § 940.22. Sexual exploitation by therapist; duty to report
(1) Definitions. In this section …
(d) “Psychotherapy” means the use of learning, conditioning methods and emotional reactions in a professional relationship to assist persons to modify feelings, attitudes and behaviors which are intellectually, socially or emotionally maladjustive or ineffectual.
(i) “Therapist” means a … member of the clergy or other person, whether or not licensed or certified by the state, who performs or purports to perform psychotherapy.
(2) Any person who is or who holds himself or herself out to be a therapist and who intentionally has sexual contact with a patient or client during any ongoing therapist-patient or therapist-client relationship, regardless of whether it occurs during any treatment, consultation, interview or examination, is guilty of a Class F felony. Consent is not an issue in an action under this subsection.
(3) Reports of sexual contact. (a) If a therapist has reasonable cause to suspect that a patient or client he or she has seen in the course of professional duties is a victim of sexual contact by another therapist or a person who holds himself or herself out to be a therapist in violation of subdivision (2), as soon thereafter as practicable the therapist shall ask the patient or client if he or she wants the therapist to make a report under this subsection. The therapist shall explain that the report need not identify the patient or client as the victim. If the patient or client wants the therapist to make the report, the patient or client shall provide the therapist with a written consent to the report and shall specify whether the patient’s or client’s identity will be included in the report.
(b) Within 30 days after a patient or client consents to a report, the therapist shall report the suspicion to:
1. The department, if the reporter believes the subject of the report is licensed by the state. The department shall promptly communicate the information to the appropriate examining board or affiliated credentialing board.
2. The district attorney for the county in which the sexual contact is likely, in the opinion of the reporter, to have occurred, if subdivision 1. is not applicable.
(c) A report under this subsection shall contain only information that is necessary to identify the reporter and subject and to express the suspicion that sexual contact has occurred in violation of sub. (2). The report shall not contain information as to the identity of the alleged victim of sexual contact unless the patient or client requests under par. (a) that this information be included.
(d) Whoever intentionally violates this subsection by failing to report as required under paragraphs (a) to (c) is guilty of a Class A misdemeanor.
(4) Confidentiality of reports and records. (a) All reports and records made from reports under subdivision (3) and maintained by the department, examining boards, affiliated credentialing boards, district attorneys and other persons, officials and institutions shall be confidential and are exempt from disclosure …. Information regarding the identity of a victim or alleged victim of sexual contact by a therapist shall not be disclosed by a reporter or by persons who have received or have access to a report or record unless disclosure is consented to in writing by the victim or alleged victim ….
(5) Immunity from liability. Any person or institution participating in good faith in the making of a report or record under this section is immune from any civil or criminal liability that results by reason of the action. For the purpose of any civil or criminal action or proceeding, any person reporting under this section is presumed to be acting in good faith. The immunity provided under this subsection does not apply to liability resulting from sexual contact by a therapist with a patient or client.
State laws making sexual contact by psychotherapists (possibly including clergy) with a counselee a crime
Several states have laws that make sexual contact between a “psychotherapist” and a counselee a crime, and, unlike the statutes mentioned in the previous section, do not specifically define “psychotherapist” to include a member of the clergy. However, the definition of “psychotherapist” under some of these laws may be broad enough to include a member of the clergy. Examples of such statutes are reproduced below.
Definition of “psychotherapist” may include clergy
Colorado
Revised Statutes § 18-3-405.5. Sexual assault on a client by a psychotherapist
(1)(a) Any actor who knowingly inflicts sexual penetration or sexual intrusion on a victim commits aggravated sexual assault on a client if:
(I) The actor is a psychotherapist and the victim is a client of the psychotherapist; or
(II) The actor is a psychotherapist and the victim is a client and the sexual penetration or intrusion occurred by means of therapeutic deception.
(b) Aggravated sexual assault on a client is a class 4 felony.
(2)(a) Any actor who knowingly subjects a victim to any sexual contact commits sexual assault on a client if:
(I) The actor is a psychotherapist and the victim is a client of the psychotherapist; or
(II) The actor is a psychotherapist and the victim is a client and the sexual contact occurred by means of therapeutic deception.
(b) Sexual assault on a client is a class 1 misdemeanor.
(3) Consent by the client to the sexual penetration, intrusion, or contact shall not constitute a defense to such offense.
(4) As used in this section, unless the context requires otherwise:
(a) “Client” means a person who seeks or receives psychotherapy from a psychotherapist.
(b) “Psychotherapist” means any person who performs or purports to perform psychotherapy, whether or not such person is licensed by the state pursuant to title 12, C.R.S., or certified by the state ….
(c) “Psychotherapy” means the treatment, diagnosis, or counseling in a professional relationship to assist individuals or groups to alleviate mental disorders, understand unconscious or conscious motivation, resolve emotional, relationship, or attitudinal conflicts, or modify behaviors which interfere with effective emotional, social, or intellectual functioning.
(d) “Therapeutic deception” means a representation by a psychotherapist that sexual contact, penetration, or intrusion by the psychotherapist is consistent with or part of the client’s treatment.
Note: The Colorado statute does not specifically include “clergy” in the definition of a psychotherapist, but the definition is so broad that it is reasonable to assume that the courts of Colorado would conclude that it includes clergy to the extent that they engage in “counseling.”
Georgia
Code § 16-6-5.1. Sexual assault
(a) As used in this Code section, the term …
(3) “Psychotherapy” means the professional treatment or counseling of a mental or emotional illness, symptom, or condition.
(4) “Sexual contact” means any contact for the purpose of sexual gratification of the actor with the intimate parts of a person not married to the actor ….
(c) (2) A person commits sexual assault when, as an actual or purported practitioner of psychotherapy, he or she engages in sexual contact with another person who the actor knew or should have known is the subject of the actor’s actual or purported treatment or counseling, or, if the treatment or counseling relationship was used to facilitate sexual contact between the actor and said person.
(3) Consent of the victim shall not be a defense to a prosecution under this
subsection.
(4) A person convicted of sexual assault under this subsection shall be punished by imprisonment for not less than one nor more than three years.
Idaho
Code § 18-919 Sexual exploitation by a medical care provider
(a) Any person acting or holding himself out as a … psychotherapist … or other medical care provider as defined in this section, who engages in an act of sexual contact with a patient or client, is guilty of sexual exploitation by a medical care provider. For the purposes of this section, consent of the patient or client receiving medical care or treatment shall not be a defense …. Violation of this section is punishable by a fine not exceeding one thousand dollars ($1,000), or by imprisonment in the county jail not to exceed one (1) year, or both.
(b) For the purposes of this section …
(2) “Medical care provider” means a person who gains the trust and confidence of a patient or client for the examination and/or treatment of a medical or psychological condition, and thereby gains the ability to treat, examine and physically touch the patient or client.
Definition of “psychotherapist” may not include clergy
Some states have laws that make sexual contact between a “psychotherapist” and a counselee a crime, but define “psychotherapist” so narrowly that clergy may be excluded. An example of such statutes is reproduced below.
California
Business and Professions Code § 728. Definitions
“Psychotherapist” means a physician and surgeon specializing in the practice of psychiatry or practicing psychotherapy, a psychologist, a clinical social worker, a marriage and family therapist, a psychological assistant, marriage and family therapist registered intern or trainee, or associate clinical social worker.
Business and Professions Code § 729. Sexual exploitation by physicians, surgeons, psychotherapists, or alcohol and drug abuse counselors
(a) Any … psychotherapist … or any person holding himself or herself out to be a … psychotherapist … who engages in an act of … sexual contact with a patient or client, or with a former patient or client when the relationship was terminated primarily for the purpose of engaging in those acts … is guilty of sexual exploitation by a … psychotherapist …. An act in violation of [this section] shall be punishable by imprisonment in a county jail for a period of not more than six months, or a fine not exceeding one thousand dollars ($1,000), or by both that imprisonment and fine.
General sexual assault crimes
Every state has enacted a law making it a crime to engage in nonconsensual sexual contact with another person. These laws constitute another potential basis of criminal liability for ministers who engage in sexual contact with a counselee or member of their congregation. A typical statute makes it a felony for anyone to “engage in sexual contact with another person without consent of that person.”
Assault and battery
Every state has enacted a law making assault and battery a crime. These laws constitute another potential basis of criminal liability for ministers who engage in nonconsensual sexual contact with a counselee or member of their congregation.
Insurance coverage
Church insurance policies exclude any claims based on intentional or criminal misconduct. As a result, ministers who are prosecuted for a sexual offense involving a counselee or member of their congregation ordinarily cannot expect the church insurance company to pay for a legal defense.
Other consequences
There are numerous other consequences of clergy sexual misconduct. To illustrate, clergy who engage in such behavior may have to register as a sex offender under state law; and, churches and denominations increasingly are removing the ministerial credentials of ministers who engage in such behavior. Removal of ministerial credentials generally is motivated by several considerations, including the protection of others, the scriptural standards for ministry, accountability, and an avoidance of legal liability.
Other cases
Other courts have addressed the criminal liability of clergy for sexual contacts with adults. For example:
Case 1. A Minnesota minister was convicted on four felony counts of “psychotherapist-patient criminal sexual conduct” for engaging in sexual relations with a female counselee. The minister served as senior pastor of a Christian Missionary Alliance Church. He was approached by a married female member who desired counseling for low self-esteem, suicidal thoughts, grief, compulsions, an eating disorder, and premenstrual syndrome (PMS). The first several counseling sessions consisted of a discussion of Bible passages. In time, the pastor began discussing sexual issues although the woman insisted that she had not sought counseling for such matters. The pastor persisted in discussing sex, saying that sex was a “gift from God” and that he was “working” with her on her sexuality.
After several sessions, the woman’s husband and a close friend advised her to seek other help since she did not appear to be improving. The pastor insisted that terminating the counseling relationship had to be a mutual decision, and that it was “nobody else’s business.” At the conclusion of one counseling session that explored the subject of grief, the pastor gave the woman a brief hug, which she thought was appropriate but did not want to continue. The following week she asked the pastor if they were engaged in “normal counseling,” and he replied that he loved her. The session ended with the two engaged in hugging and passionate kissing.
Two days later, the woman went back to clarify that their relationship would remain “platonic” and non-sexual. At that meeting, the two engaged in hugging and kissing. The pastor gave the woman a rose as a symbol that their relationship would forever remain “pure and chaste from afar” and that he would “maintain her virginity.”
A couple of weeks later, the woman returned to the pastor’s office one evening and again the following morning. The two engaged in sexual fondling. This conduct was during her menstrual period, and the pastor assured her that their behavior would “help her work through negative issues about her menstrual period.” A month later, the two went to a motel and engaged in sexual intercourse for the first time. The woman testified that the pastor assured her that it was a “good” sexual encounter because he was unselfish. He also informed her that sex between a counselor and counselee was a felony in Minnesota. Shortly after this incident, the woman gave the pastor a signed letter stating “I, the undersigned, have given [my pastor] control of my life—my future—out of my abiding love for him.” The two engaged in sexual intercourse on at least two other occasions over the next few months. The woman testified that the pastor assured her that sexual intercourse was consistent with her “treatment” because it would remove her inhibitions about sex and “set her free” from her sexual “hang-ups.” A short time later, the two left town at the pastor’s request. At his request, the woman issued him checks amounting to $11,000.
The pastor was later prosecuted for four felony counts of criminal sexual contact. Minnesota law imposes a penalty of up to 15 years in prison for either (1) “sexual contact” by a “psychotherapist” with an “emotionally dependent” patient, or (2) sexual contact by a psychotherapist with a patient occurring by means of “therapeutic deception.” Minnesota law imposes a penalty of up to 20 years for either (1) sexual intercourse by a “psychotherapist” with an “emotionally dependent” patient, or (2) sexual intercourse by a psychotherapist with a patient occurring by means of “therapeutic deception.” A jury convicted the pastor on all four felony counts, and he appealed. In upholding the conviction, a state appeals court concluded that the pastor was a psychotherapist since he had assumed the role of a counselor, and that he had in fact committed both sexual contact and sexual intercourse with an “emotionally dependent” patient, and that the sexual contact and intercourse occurred because of “therapeutic deception.”
In concluding that the woman was “emotionally dependent” on the pastor, the court relied on the testimony of expert witnesses who stated that “there is a power imbalance in a pastoral counseling setting because the client idealizes the pastor.” The court also referred to (1) 32 notes and cards the woman had sent the pastor, (2) the fact that the woman had “signed over her life” to the pastor, (3) the fact that the woman had violated her strongly held religious beliefs and instincts to engage in what she felt was a sinful relationship, and (4) the $11,000 she gave the pastor at his request.
The court also concluded that the sexual contact had occurred “because of therapeutic deception.” In reaching this conclusion, the court referred to the pastor’s frequent assurances that sexual contact and intercourse were part of the woman’s “ongoing treatment” and were necessary to remove her hang-ups. In rejecting the pastor’s claim that he had a constitutional right to engage in consensual sexual relations with whomever he chose, the court ruled that no constitutional right protects a pastor who engages in sexual activity as part of religious counseling. The court observed: “These statutes are meant to protect vulnerable persons and allow them to reposit trust in those who can help them. The legislature has recognized the emotional devastation that can result when a psychotherapist takes advantage of a patient.” State v. Dutton, 450 N.W.2d 189 (Minn. App. 1990).
Case 2. A minister was sentenced to two consecutive life sentences for three acts of rape and eight first-degree sexual offenses perpetrated on four women. The minister professed his innocence during his trial, but the prosecutor introduced into evidence several “love letters” the minister had written to at least one of the victims, along with several pornographic magazines and videos found in the minister’s apartment. The magazines and videos were introduced by the prosecutor to rebut the minister’s attempt to portray himself as an exemplary “family man” and minister. A North Carolina appeals court rejected the minister’s claim that the two consecutive life sentences constituted “cruel and unusual punishment” in violation of the Constitution. This case illustrates the significant criminal liability that clergy face for acts of sexual misconduct. Of course, this is in addition to civil liability. State v. Woodard, 404 S.E.2d 6 (N.C. App. 1991).
Case 3. A church hired a minister (the “counselor”) to provide counseling to members of the congregation. A female member (the “victim”) of the church had been experiencing emotional problems, including depression related to her father’s death. She claimed that she was encouraged to seek counseling from the church counselor by a church leader. Shortly thereafter, the counselor allegedly called the victim to offer his services as a counselor. The counselor supposedly told her that she needed secular psychological, and not religious, counseling, which he was well qualified to provide. He further explained that such treatment was included in his job description at the church. The victim began psychotherapy sessions with the counselor at his office at the church. According to the victim, the counselor quickly insisted that she increase the frequency and length of her therapy sessions and he told her that “religion does not apply here. Your problems are so deep you need more psychological treatment from me.” The victim contends that she became very involved in her therapy and extremely attached to the counselor. The counselor allegedly represented to her that he was a capable, trained professional who could be relied on to assist her with her serious personal problems and who could be trusted to act in her best interest. Some time later, the victim alleged that the counselor gave her the following ultimatum: “I have been giving to you, and I need something back for my services, you must give back to me or I will not work with you anymore.” From that time on, for a period of nearly two years, the victim’s “therapy sessions” consisted, in part, of sexual relations with the counselor.
The victim filed a lawsuit in federal court against the counselor, her church, and denomination. The lawsuit alleged several theories of liability, including professional negligence. A federal district court dismissed the victim’s lawsuit. In rejecting the victim’s claim of professional negligence, the court observed: “In Illinois, while cases such as this one suggest that it may be appropriate, it appears that neither the courts nor the legislature have established a cause of action for clergy malpractice …. Moreover, the Illinois legislature explicitly excluded the clergy from the statute which imposes liability upon psychotherapists for sexual exploitation.” Dausch v. Ryske, 1993 WL 34873 (N.D. Ill. 1993).
Case 4. A federal court in Iowa ruled that a woman who had been seduced by a priest could not sue her church and diocese for violating the federal Violence Against Women Act. An adult female claimed that when she arrived at church one evening to participate in the choir during evening mass she was sexually assaulted by her priest. As a result, the woman claimed she suffered severe emotional trauma. She later sued the priest, her church, and diocese, on the basis of a number of theories. The first count of her lawsuit asserted that the priest’s actions amounted to a violation of the federal Violence Against Women Act (VAWA). VAWA, enacted by Congress in 1994, declares that all persons “have the right to be free from crimes of violence motivated by gender.” It further specifies that a person who commits a “crime of violence” motivated by gender “shall be liable to the party injured” for both compensatory and punitive damages. VAMA defines a “crime of violence” as an act or series of acts that would constitute a felony.
The woman claimed that the priest’s behavior would constitute a felony under a state law making it a crime for a pastoral counselor to engage in sexual contacts with a counselee. The Iowa statute in question prohibits “[s]exual exploitation by a counselor or therapist.” Iowa Code § 709.15.1.f. A “counselor or therapist” is defined to include members of the clergy “or any other person, whether or not licensed or registered by the state, who provides or purports to provide mental health services.” Mental health service is defined as “the treatment, assessment, or counseling of another person for a cognitive, behavioral, emotional, mental, or social dysfunction.” The woman alleged that the priest “served as a counselor to [her].” A federal district court in Iowa ruled in favor of the woman, and also found that the church and diocese were liable for the priest’s behavior on the basis of negligent supervision.
A federal appeals court reversed the lower court decision for two reasons. First, the woman failed to prove that the priest was her “counselor or therapist” within the meaning of the Iowa statute. Second, for the priest’s actions to violate VAWA, they would have to be a “crime of violence” amounting to a felony under state law. The court concluded that this requirement was not met. Under the Iowa statute, a “pattern or practice or scheme of conduct” to engage in any sexual conduct with a patient or client is a felony. Sexual conduct with a patient or client that is not part of a pattern, practice, or scheme is an aggravated misdemeanor. The court concluded that the one instance of sexual conduct alleged in the lawsuit did not constitute a pattern, practice, or scheme of conduct within the meaning of the statute. Therefore, the most serious violation the priest committed under state law was an aggravated misdemeanor.
This case illustrates a new basis of liability for churches. In those states in which sexual misconduct by a minister with a counselee is a felony, a church may be liable (for both compensatory and punitive damages) for its minister’s acts of sexual misconduct with a counselee on the basis of the federal Violence Against Women Act. Ministers who engage in counseling activities are subject to criminal liability in many states for engaging in sexual contact with a counselee, and so the importance of this case to church leaders is clear. However, as this court noted, this basis of liability is subject to important limitations. Most importantly, the acts of the minister must constitute a felony under state law. As a result, the requirements of applicable state statutes must be reviewed to determine a church’s potential liability under the Violence Against Women Act. In many states, this will be a new basis of liability. Doe v. Hartz, 134 F.3d 1339 (8th Cir. 1998).
Case 5. A Minnesota court ruled that a church and denominational agency could not be liable on the basis of negligent hiring for the sexual misconduct of a pastor, but could be liable on the basis of a state law imposing liability on the “employer” of a “psychotherapist.” Based on his degree from a seminary, references, and a test to determine his doctrinal positions, a young man (Pastor Ted) was licensed as a pastor by a denominational agency (the “regional church”). Pastor Ted’s first employment was as an associate pastor. During this assignment, a young woman complained to the senior pastor that Pastor Ted had inappropriately touched her. The senior pastor advised Pastor Ted to have no further contact with the woman. No other church officials were involved and no further action was taken.
Pastor Ted later began looking for a position as a senior pastor. The regional church recommended him as a candidate for senior pastor in an affiliated church. Pastor Ted went through the church’s selection process and was hired by the church as its senior pastor. The church did not make any inquiries of his former employer. A few years later, a woman (“Vicky”) and her family joined the church. When Vicky’s husband was diagnosed with a life-threatening illness, she became more actively involved in the church and sought counseling from Pastor Ted. In time, the two began spending large amounts of time together and became involved in a clandestine sexual relationship. A member of the church’s board of deacons spoke with Pastor Ted about the poor impression created by his attention to Vicky.
About one month later, Vicky revealed the relationship to a visiting pastor who informed the church’s board members. A board member contacted the regional church. Pastor Ted was confronted and admitted the relationship. The church requested and received his resignation, and the regional church revoked his ministerial credentials.
Vicky later sued Pastor Ted, her church, and the regional church. She settled her claims against Pastor Ted, but pursued legal claims against the church defendants for negligent hiring and employer liability under chapter 148A of the Minnesota Statutes (defined below). The church defendants asked the trial court to dismiss the claims against them on the ground that the First Amendment bars the civil courts from finding churches liable for their hiring decisions. The trial court denied the church defendants’ request, and the case was appealed.
Negligent hiring
The court agreed with the church defendants that a resolution of Vicky’s negligent hiring claim against the church defendants would “entangle” church and state in violation of the First Amendment’s nonestablishment of religion clause. It observed,
The establishment clause is not implicated where neutral principles of law, developed and applied without particular regard to religious doctrines, establish the applicable standard of care. In this case, even though neutral principles of law can be applied to determine whether a member of the clergy is performing psychotherapy and neutral principles of law can be applied to determine what the church and the council knew or should have known about a pastor’s employment history at the time of hiring, the church defendants argue that Vicky’s hiring-related claims implicate core, fundamental church doctrines governing identification of individuals “called” to the ministry. We agree. A determination of whether the statutorily required inquiries were made of a pastor-candidate’s former employers does not involve church doctrine, but a determination of how that information should be used in a hiring decision would force the court into an examination of church doctrine governing who is qualified to be a pastor. When claims involve “core” questions of church discipline and internal governance, the Supreme Court has acknowledged that the inevitable danger of governmental entanglement precludes judicial review.
Chapter 148A of the Minnesota Statutes
Chapter 148A of the Minnesota Statutes imposes liability on the employer of a member of the clergy who performs or purports to perform psychotherapy and who sexually exploits a patient if:
(1) the employer fails or refuses to take reasonable action when the employer knows or has reason to know that the psychotherapist engaged in sexual contact with the plaintiff or any other patient or former patient of the psychotherapist; or (2) the employer fails or refuses to make inquiries of an employer or former employer, whose name and address have been disclosed to the employer and who employed the psychotherapist as a psychotherapist within the last five years, concerning the occurrence of sexual contacts by the psychotherapist with patients or former patients of the psychotherapist.
The regional church insisted that it was not Pastor Ted’s “employer,” and that the First Amendment prohibited the civil courts from rejecting this conclusion. The court disagreed, noting that deciding if the regional church was an employer for purposes of chapter 148A “is not a doctrinal matter, so there is no First Amendment barrier to resolution by civil courts.” The court remanded the case back to the trial court to determine whether or not the regional church was Pastor Ted’s employer.
The church conceded that it was Pastor Ted’s employer, but asserted that the First Amendment prohibited chapter 148A from being applied to it. The church claimed that a determination of whether Pastor Ted was acting as a psychotherapist would involve excessive entanglement between church and state. The court disagreed, noting that “the statute provides neutral standards to guide the determination. A psychotherapist is defined as a ‘member of the clergy … whether or not licensed by the state, who performs or purports to perform psychotherapy.’ Psychotherapy is defined as ‘the professional treatment, assessment or counseling of a mental or emotional illness, symptom, or condition.’ A determination whether a minister was providing services equivalent to psychotherapy, such that he was an unlicensed mental health practitioner for purposes of chapter 148B of the Minnesota Statutes does not excessively entangle the court in religion.”
The church also argued that the application of the statute “involves the state telling the church how its ministers shall conduct their counseling sessions with parishioners.” Once again, the court disagreed, “But the application of the statute to the church does not create such a danger. Chapter 148A neither prescribes any particular behavior on the part of those providing psychotherapy, nor does the statute require the courts to examine the merits or methods of the psychotherapy provided. The statute imposes liability on an employer for the employer’s acts or failure to act, to the extent it was a proximate and actual cause of any injuries sustained. The argument that application of the statute involves the state dictating to the church how ministers conduct counseling sessions with parishioners is without merit.” J.M. v. Minnesota District Council, 658 N.W.2d 589 (Minn. App. 2003).
Sexual harassment
Clergy who engage in inappropriate sexual behavior with other church employees may be liable for sexual harassment. Sexual harassment is a form of “sex discrimination” prohibited by Title VII of the Civil Rights Act of 1964. Title VII only applies to employers that (1) have 15 or more employees, and (2) are engaged in interstate commerce. Accordingly, it does not apply to most churches (it does apply to many denominational agencies engaged in interstate sales). Nevertheless, many state and federal courts have permitted women to file sexual harassment lawsuits even though their employer is not subject to Title VII, and such courts often follow cases decided under Title VII. Therefore, Title VII and the Equal Employment Opportunity Commission (EEOC) regulations interpreting it are relevant to churches and other religious organizations. A current EEOC regulation entitled “EEOC Guidelines on Discrimination Because of Sex” specifies, in part:
(a) Harassment on the basis of sex is a violation of Sec. 703 of Title VII. Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when (1) submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s employment, (2) submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual, or (3) such conduct has the purpose or effect of unreasonably interfering with an individual’s work performance or creating an intimidating, hostile, or offensive working environment.
This regulation confirms the conclusion reached by numerous state and federal courts that sexual harassment includes at least two separate types of conduct: (1) “Quid pro quo” harassment, which refers to conditioning employment opportunities on submission to a sexual or social relationship, or (2) “hostile environment” harassment, which refers to the creation of an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature. Clergy who engage in such behavior with church employees may be subject to liability for sexual harassment under Title VII (if applicable), a similar state statute, or other theories of liability (such as assault or infliction of emotional distress). Note however that this theory of liability applies only to inappropriate conduct with employees.
A woman’s “consent” is not a defense to an allegation of sexual harassment. The United States Supreme Court has observed: “[T]he fact that sex-related conduct was voluntary in the sense that the complainant was not forced to participate against her will, is not a defense to a sexual harassment suit …. The gravamen of any sexual harassment claim is that the alleged sexual advances were unwelcome …. The correct inquiry is whether [the victim] by her conduct indicated that the alleged sexual advances were unwelcome, not whether her actual participation in sexual intercourse was voluntary.” In other words, a female employee may engage in voluntary sexual contact with a supervisor because of her belief that her job (or advancement) depends on it. While such contact would be voluntary, it is not necessarily welcome. Sexual harassment addresses unwelcome sexual contact, whether or not that contact is voluntary.
To illustrate, in one case a woman was hired as an associate pastor of a church in Minnesota. A year later, she filed a discrimination charge with the state department of human rights against her supervising pastor. She claimed that her supervising pastor repeatedly made unwelcome sexual advances toward her. He allegedly referred to themselves as “lovers,” physically contacted her in a sexual manner, and insisted on her companionship outside the work place despite her objections. The woman informed her local church leaders as well as her synod before filing the complaint with the state. Although the church and synod investigated the woman’s allegations, no action was taken to stop the alleged harassment. Less than three months after the complaint was filed with the state, the church held a congregational meeting at which it voted to dismiss the woman as pastor. The reason stated for the discharge was the woman’s “inability to conduct the pastoral office efficiently in this congregation in view of local conditions.” A state appeals court ruled that the woman could sue her former supervising pastor for sexual harassment. The court also rejected the supervising pastor’s claim that the woman was prevented from suing because she had “consented” to the supervising pastor’s conduct.
The “Tax Guide for Churches and Religious Organizations” (the “Guide”) was updated in 2002 and continues to provide churches and ministers with guidance on a variety of common tax issues. I will review the main provisions of the Guide, and point out its strengths and weaknesses. Perhaps most importantly, the Guide contains useful information regarding political activities by churches.
Introduction
The Guide, which is 25 pages long, begins with the following comments:
Congress has enacted special tax laws applicable to churches, religious organizations and ministers in recognition of their unique status in American society and of their rights guaranteed by the First Amendment of the Constitution of the United States.
Churches and religious organizations are generally exempt from income tax and receive other favorable treatment under the tax law; however, certain income of a church or religious organization may be subject to tax, such as income from an unrelated business. It is also important for a church or religious organization to understand the tax law to avoid losing its tax-exempt status by engaging in activity that violates the Internal Revenue Code (IRC).
The Internal Revenue Service (IRS) offers this quick reference guide of Federal tax law and procedures for churches and religious organizations to help them voluntarily comply with tax rules. The contents of this publication reflect the IRS’s interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. The information given is not comprehensive, however, and does not cover every situation. Thus, it is not intended to replace the law or be the sole source of information.
The resolution of any particular issue may depend on the specific facts and circumstances of a given taxpayer. In addition, this publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will present the interpretation of the IRS.
A number of points need to be emphasized. First, the Guide is a “quick reference guide” that should not be relied upon as a “sole source of information.” As we will see, the Guide is quite sketchy on most topics, and does not address a number of issues of interest to churches and clergy.
To illustrate, the Guide devotes only six paragraphs to the housing allowance, one paragraph to the definition of the term “minister” for federal tax purposes, one paragraph to the question of whether ministers and other church workers should report their income as employees or as self-employed, one page to accountable and non-accountable business expense reimbursement arrangements, one page to church reporting requirements, and two pages to the substantiation of charitable contributions.
It does not address a number of important issues, including special occasion gifts such as Christmas or anniversary gifts; retirement gifts to ministers; personal use of a church-provided vehicle; no-interest loans to ministers; discretionary funds that are disbursed by a minister; handling the travel expenses of a minister’s spouse; forgiven debts; and church-paid trips to the Holy Land.
The real value of the IRS tax guide is that it gives us the IRS perspective on a number of issues for which little clarification is available at this time.
Tax-Exempt Status
(1) automatic exemption of churches
The Guide correctly notes that a church is not required to apply for and obtain recognition of tax-exempt status from the IRS in order to be treated as tax exempt—provided it meets the requirements of section 501(c)(3) of the tax code. However, the tax guide goes on to contain the following discussion regarding why some churches might want to obtain IRS recognition of tax-exempt status:
Although there is no requirement to do so, many churches seek recognition of exempt status from the IRS because such recognition assures church leaders, members and contributors that the church is recognized as exempt and qualifies for related tax benefits. For example, contributors to a church that has been recognized as tax-exempt would know that their contributions are tax-deductible.
(2) church exemption through a central/parent organization
Under the current group exemption procedure, exemption may be obtained on a group basis for “subordinate organizations” affiliated with and under the supervision or control of a “central organization.” IRS Rev. Proc. 80-27. To be eligible for a group exemption ruling, a central organization must satisfy several conditions, including the exercise of “general supervision or control” over “subordinate” local churches and church agencies.
While many “connectional” or hierarchical church denominations exercise “general supervision or control” over affiliated churches, there are many “congregational” denominations that do not. Congregational denominations are referred to as “associations of churches” in the tax code and regulations. They consist essentially of associations of independent congregations over which the denomination exercises little if any control other than conformity to ecclesiastical doctrine.
These congregational denominations have had to interpret the “general supervision or control” requirement very liberally in order to qualify for a group exemption ruling. Many have obtained group exemption rulings even though they exercise no “general supervision and control” over affiliated churches covered by their group exemption ruling. As anyone familiar with church polity can attest, it is ludicrous to say that many of the national churches that have obtained group exemption rulings exercise “general supervision and control” over affiliated congregations. This requirement is routinely flaunted with impunity, and makes a mockery of the entire procedure.
This issue is more than academic. Lamentably, in recent years plaintiffs’ attorneys have cited the “general supervision or control” requirement of the group exemption procedure in their attempts to hold congregational denominations responsible for the malfeasance of ministers and lay workers in affiliated churches. To illustrate, a child is molested by a volunteer worker in a local Baptist church. An attorney sues the national Baptist Church, claiming that it is legally responsible for the local church’s failure to adequately screen or supervise the molester because it represented to the IRS in its application for a group exemption ruling that it exercises “general supervision or control” over each affiliated church.
The problem here is that the “general supervision or control” requirement in the current group exemption procedure limits it to hierarchical churches in which the “general supervision or control” requirement is a reality. But, because of the undeniable convenience of a group exemption ruling, many congregational denominations that exercise no “general supervision or control” over affiliated congregations have obtained such a ruling.
The previous version of the IRS Tax Guide for Churches (1994) went a long way in resolving this “pro-hierarchical church” bias in the group exemption procedure by providing the following helpful information:
An organization has a parent if, for example, another organization manages, financially or ecclesiastically, the first organization. If the parent holds a group exemption letter, then the organization seeking exemption may already be recognized as exempt by the IRS. Under the group exemption process, one organization, the parent organization, becomes the holder of a group exemption ruling naming other affiliated churches as included within the ruling. Under these rules, a church is recognized as exempt if it is included in the annual update of the parent organization. If the church is included on such a list, it need take no further action in order to obtain such recognition. (emphasis added)
This language was significant because it explicitly recognized that the “control” needed to qualify for a group exemption may be “ecclesiastical.” Unfortunately, the 2002 Tax Guide for Churches and Religious Organization deletes this helpful recognition of “ecclesiastical” control.
The current publication includes the following discussion of group exemption rulings:
A church with a parent organization may wish to contact the parent to see if it has a group ruling. If the parent holds a group ruling, then the IRS may already recognize the church as tax-exempt. Under the group exemption process, the parent organization becomes the holder of a group ruling that identifies other affiliated churches or other affiliated organizations. A church is recognized as tax-exempt if it is included in a list provided by the parent organization. The parent is then required to submit an annual group exemption update to the IRS in which it provides additions, deletions and changes within the group. If the church or other affiliated organization is included on such a list, it does not need to take further action in order to obtain recognition of tax-exempt status.
An organization that is not covered under a group ruling should contact its parent organization and see whether it is eligible to be included in the parent’s application for the group ruling. For general information on the group exemption process, see Revenue Procedure 80-27.
This language will make it more likely that plaintiffs’ attorneys will use group exemption rulings to hold congregational denominations liable in civil litigation for the acts of ministers or lay workers in affiliated churches. This is unfortunate, because many of these denominations do not exercise any “supervision or control” over affiliated congregations.
We have contacted the IRS national office about this problem, and received a response acknowledging that many “congregational” denominations that exercise no “general supervision or control” over affiliated churches have obtained group exemptions. The IRS national office stated that the “general supervision or control” requirement is set forth in a Revenue Procedure, so the appropriate course of action is to have the Revenue Procedure amended rather than the tax guide that merely summarizes it. We are exploring this option.
If unsuccessful, and one or more congregational denominations is found liable for the acts of a minister or lay worker in an affiliated church, then such denominations should seriously consider abandoning their group exemption and urging affiliated churches to obtain their own exemption ruling directly from the IRS. Of course, this would mean that the IRS would be flooded with thousands of applications for exemption. A far better option would be for the IRS to either change the language of Revenue Procedure 80-27, or amend the Guide to clarify that “general supervision or control” may be ecclesiastical in nature.
Key Point Some congregational denominations are including a “disclaimer” in the annual renewals of their group exemption ruling to the effect that they do not exercise general supervision or control over affiliated congregations covered by their group exemption ruling, or that they satisfy this requirement only if it is interpreted to apply exclusively to ecclesiastical control pertaining to religious doctrine.
(3) employer identification number
The Guide contains some helpful information about employer identification numbers:
Every tax-exempt organization, including a church, should have an Employer Identification Number (EIN), whether or not the organization has any employees. There are many instances in which an EIN is necessary. For example, a church needs an EIN when it opens a bank account, in order to be listed as a subordinate in a group ruling, or if it files returns with the IRS (e.g., Forms W-2, 1099, 990-T). An organization that does not have an EIN should file Form SS-4, Application for Employer Identification Number, in accordance with the instructions.
(4) “tax exemption number”
Many pastors and church treasurers think their church has a special “tax exemption number” confirming that it is exempt from federal income tax. This is not the case. While in some states churches have “tax exemption numbers” for sales tax purposes, there is no corresponding number issued by the IRS. The Guide addresses this important point by noting that “the IRS does not assign a special number or other identification as evidence of an organization’s exempt status.”
Jeopardizing Tax-Exempt Status
The Guide notes that churches must comply with the following rules in order to be exempt from federal income taxes:
· Their net earnings may not inure to any private shareholder or individual,
· They must not provide a substantial benefit to private interests,
· They must not devote a substantial part of their activities to attempting to influence legislation,
· They must not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public officer, and
· No part of their purposes or activities may be illegal or violate fundamental public policy.
Churches that violate any one or more of these rules risk losing their tax-exempt status!
(1) inurement
The Guide explains the prohibition of “inurement” as follows:
Churches and religious organizations, like all exempt organizations … are prohibited from engaging in activities that result in inurement of the church’s or organization’s income or assets to insiders (i.e., persons having a personal and private interest in the activities of the organization). Insiders could include the minister, church board members, officers, and in certain circumstances, employees. Examples of prohibited inurement include the payment of dividends, the payment of unreasonable compensation to insiders, and transferring property to insiders for less than fair market value. The prohibition against inurement to insiders is absolute; therefore, any amount of inurement is, potentially, grounds for loss of tax-exempt status.
The Guide clarifies that inurement “does not include reasonable payments for services rendered, or payments that further tax-exempt purposes, or payments made for the fair market value of real or personal property.”
The Guide notes that insiders may be subject to special excise taxes called “intermediate sanctions” if a church’s income or assets inures to their private benefit: “The IRS may impose an excise tax on any insider who improperly benefits from an excess benefit transaction, as well as on organization managers who participate in such a transaction knowing that it is improper. An insider who benefits from an excess benefit transaction is also required to return the excess benefits to the organization.”
(2) private benefit
In addition to the prohibition on inurement to “insiders,” a section 501(c)(3) organization’s activities may not serve private interests. The tax guide explains this limitation as follows:
An [exempt] organization’s activities must be directed exclusively toward charitable, educational, religious, or other exempt purposes. Such an organization’s activities may not serve the private interests of any individual or organization. Rather, beneficiaries of an organization’s activities must be recognized objects of charity (such as the poor or the distressed) or the community at large (for example, through the conduct of religious services or the promotion of religion). Private benefit is different from inurement to insiders. Private benefit may occur even if the persons benefited are not insiders. Also, private benefit must be substantial in order to jeopardize exempt status.
(3) substantial lobbying activity
In general, no organization, including a church, may qualify for tax-exempt status if a substantial part of its activities is attempting to influence legislation. The Guide clarifies that “legislation” includes “action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive offices) or by the public in a referendum, ballot initiative, constitutional amendment or similar procedure. It does not include actions by executive, judicial, or administrative bodies.”
According to the Guide, “a church or religious organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.” (emphasis added)
On the other hand, some lobbying activities will not jeopardize a church’s exempt status: “Churches and religious organizations may, however, involve themselves in issues of public policy without the activity being considered lobbying. For example, churches may conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues in an educational manner without jeopardizing their tax-exempt status.”
Only “substantial” lobbying activity will jeopardize a church’s exempt status. While the tax code does not define the term “substantial,” The Guide notes that:
whether a church or religious organization’s attempts to influence legislation constitute a substantial part of its overall activities is determined on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial. Churches must use the substantial part test since they are not eligible to use the expenditure test described in the next section.
The Guide clarifies several key points.
First, it clarifies that a church’s exempt status is not jeopardized by attempts to influence legislation unless those attempts are substantial. The Guide indicates that in determining whether a church’s efforts are “substantial” a number of factors must be considered, including (1) all pertinent facts and circumstances; (2) the time devoted by the organization to the activity (by both compensated and volunteer workers); (3) funds spent on the attempt to influence legislation.
Second, the Guide clarifies that the prohibition on substantial attempts to influence legislation refers to attempts to oppose as well as promote legislation.
Third, the Guide acknowledges that churches can conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues in an educational manner without jeopardizing their exempt status—so long as they do so in a neutral and nonpartisan manner.
Comment It is truly lamentable that the IRS continues to refuse to provide churches with any meaningful guidance regarding the definition of “substantial” lobbying activities. Churches may engage in “insubstantial” efforts to influence legislation, but once such efforts become “substantial,” then the church’s tax-exempt status is in jeopardy. For now, church leaders must remain in the dark concerning the definition of these terms. The only clarification the Guide provides is that the IRS will consider both time and expenses devoted to lobbying activities in assessing whether those activities are substantial. But what amount of time or expenses constitutes “substantial” activity?
Key Point The Guide notes that a church or religious organization that conducts excessive lobbying activity in any taxable year not only may lose its tax-exempt status, but it also may be subject to an excise tax equal to five percent of its lobbying expenditures. Further, a tax equal to five percent of the lobbying expenditures for the year may be imposed against organization “managers,” jointly and individually, who agree to the making of such expenditures knowing that the expenditures would likely result in loss of tax-exempt status.
(4) political campaign activity — in general
All section 501(c)(3) organizations, including churches, are prohibited from participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office (including the publication or distribution of statements). Violation of this prohibition results in denial or revocation of exempt status and the imposition of certain excise taxes. The IRS tax guide for churches explains this important limitation as follows:
Churches and religious organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made by or on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.
Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, certain voter education activities (including the presentation of public forums and the publication of voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not constitute prohibited political campaign activity if conducted in a non-partisan manner. On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another, or (b) oppose a candidate in some manner, or (c) have the effect of favoring a candidate or group of candidates, will constitute prohibited participation or intervention.
(5) political campaign activity—individual political activity by religious leaders
The Guide acknowledges that the campaign activity prohibition “is not intended to restrict free expression on political matters by leaders of churches or religious organizations speaking for themselves, as individuals.” Nor are leaders “prohibited from speaking about important issues of public policy.” However, “religious leaders cannot make partisan comments in official organization publications or at official church functions.” To avoid potential “attribution” of their comments outside of church functions and publications, “religious leaders who speak or write in their individual capacity are encouraged to clearly indicate that their comments are personal and not intended to represent the views of the organization.” The Guide illustrates political activity by religious leaders with the following examples.
Example Minister A is the minister of Church J and is well-known in the community. With their permission, Candidate T publishes a full-page ad in the local newspaper listing five prominent ministers who have personally endorsed Candidate T, including Minister A. Minister A is identified in the ad as the minister of Church J. The ad states, “Titles and affiliations of each individual are provided for identification purposes only.” The ad is paid for by Candidate T’s campaign committee. Since the ad was not paid for by Church J, the ad is not otherwise in an official publication of Church J, and the endorsement is made by Minister A in a personal capacity, the ad does not constitute campaign intervention by Church J.
Example Minister B is the minister of Church K. Church K publishes a monthly church newsletter that is distributed to all church members. In each issue, Minister B has a column titled “My Views.” The month before the election, Minister B states in the “My Views” column, “It is my personal opinion that Candidate U should be reelected.” For that one issue, Minister B pays from his personal funds the portion of the cost of the newsletter attributable to the “My Views” column. Even though he paid part of the cost of the newsletter, the newsletter is an official publication of the church. Since the endorsement appeared in an official publication of Church K, it constitutes campaign intervention attributed to Church K.
Example Minister C is the minister of Church L and is well-known in the community. Three weeks before the election he attends a press conference at Candidate V’s campaign headquarters and states that Candidate V should be reelected. Minister C does not say he is speaking on behalf of his church. His endorsement is reported on the front page of the local newspaper, and he is identified in the article as the minister of Church L. Since Minister C did not make the endorsement at an official church function, in an official church publication, or otherwise use the church’s assets, and did not state that he was speaking as a representative of Church L, his actions did not constitute campaign intervention attributable to Church L.
Example Minister D is the minister of Church M. During regular services of Church M shortly before the election, Minister D preached on a number of issues, including the importance of voting in the upcoming election, and concludes by stating, “It is important that you all do your duty in the election and vote for Candidate W.” Since Minister D’s remarks indicating support for Candidate W were made during an official church service, they constitute political campaign intervention attributable to Church M.
(6) political campaign activity—inviting a candidate to speak
Many churches have invited political candidates to address the congregation during a worship service. Sometimes the candidate is a member of the church. In other cases, the candidate contacts the senior pastor and asks for permission to address the congregation. Do such activities jeopardize a church’s tax-exempt status? The Guide addresses these questions directly in two separate contexts: (1) political candidates who address a church congregation as a candidate, and (2) political candidates who do not address a church congregation as a candidate.
speaking as a candidate
The Guide notes that when a candidate is invited to speak at a church as a political candidate, the church must take steps to ensure that:
(1) it provides an equal opportunity to the other political candidates seeking the same office
(2) it does not indicate any support of or opposition to the candidate (this should be stated explicitly when the candidate is introduced and in communications concerning the candidate’s attendance), and
(3) no political fundraising occurs
The Guide notes that in determining whether candidates are given an equal opportunity to participate, a church should consider the nature of the event to which each candidate is invited, in addition to the manner of presentation. For example, “a church that invites one candidate to speak at its well attended annual banquet, but invites the opposing candidate to speak at a sparsely attended general meeting, will likely be found to have violated the political campaign prohibition, even if the manner of presentation for both speakers is otherwise neutral.”
Sometimes a church invites several candidates to speak at a public forum. The Guide warns that if such a forum is operated to show a bias for or against any candidate, then it would be prohibited campaign activity since it would be considered intervention or participation in a political campaign. The Guide suggests that when a church invites several candidates to speak at a forum, it should consider the following factors: (1) whether questions for the candidate are prepared and presented by an independent nonpartisan panel; (2) whether the topics discussed by the candidates cover a broad range of issues that the candidates would address if elected to the office sought and are of interest to the public; (3) whether each candidate is given an equal opportunity to present his or her views on the issues discussed; (4) whether the candidates are asked to agree or disagree with positions, agendas, platforms or statements of the organization; and (5) whether a moderator comments on the questions or otherwise implies approval or disapproval of the candidates.
The Guide illustrates these rules with the following examples.
Example Minister E is the minister of Church N. In the month prior to the election, Minister E invited the three Congressional candidates for the district in which Church N is located to address the congregation, one each on three successive Sundays, as part of regular worship services. Each candidate was given an equal opportunity to address and field questions on a wide variety of topics from the congregation. Minister E’s introduction of each candidate included no comments on their qualifications or any indication of a preference for any candidate. The actions do not constitute political campaign intervention by Church N.
Example Minister F is the minister of Church O. The Sunday before the November election, Minister F invited Senate Candidate X to preach to her congregation during worship services. During his remarks, Candidate X stated, “I am asking not only for your votes, but for your enthusiasm and dedication, for your willingness to go the extra mile to get a very large turnout on Tuesday.” Minister F invited no other candidate to address her congregation during the Senatorial campaign. Because these activities took place during official church services they are attributed to Church O. By selectively providing church facilities to allow Candidate X to speak in support of his campaign, Church O’s actions constitute political campaign intervention.
speaking as a non-candidate
The Guide acknowledges that a church may invite political candidates (including church members) to speak in a non-candidate capacity. For example, some candidates are invited to speak at church services because they are “public figures” (such as “an expert in a non-political field,” a celebrity, or one who has “led a distinguished military, legal, or public service career”). When a candidate is invited to speak at an event in a non-candidate capacity, it is not necessary for the church or religious organization to provide equal access to all political candidates. However, the church or religious organization must ensure that:
(1) the individual speaks only in a non-candidate capacity
(2) neither the individual nor any representative of the church makes any mention of his or her candidacy or the election, and
(3) no campaign activity occurs in connection with the candidate’s attendance
In addition, “the church should clearly indicate the capacity in which the candidate is appearing and should not mention the individual’s political candidacy or the upcoming election in the communications announcing the candidate’s attendance at the event.”
The Guide lists the following examples of a public official appearing at a church in an official capacity, and not as a candidate.
Key Point Note that the significance of a candidate speaking in a non-candidate capacity is that the church is not required to give other candidates an equal opportunity to address the congregation.
Example Church P is located in the state capital. Minister G customarily acknowledges the presence of any public officials present during services. During the state gubernatorial race, Lieutenant Governor Y, a candidate, attended a Wednesday evening prayer service in the church. Minister G acknowledged the Lieutenant Governor’s presence in his customary manner, saying, “We are happy to have worshiping with us this evening Lieutenant Governor Y.” Minister G made no reference in his welcome to the Lieutenant Governor’s candidacy or the election. Minister G’s actions do not constitute political campaign intervention by Church P.
Example. Minister H is the minister of Church Q. Church Q is building a community center. Minister H invites Congressman Z, the representative for the district containing Church Q, to attend the groundbreaking ceremony for the community center. Congressman Z is running for reelection at the time. Minister H makes no reference in her introduction to Congressman Z’s candidacy or the election. Congressman Z also makes no reference to his candidacy or the election and does not do any fundraising while at Church Q. Church Q has not intervened in a political campaign.
(7) political campaign activity—voters education
Some churches engage in voter education activities by distributing voter guides. Voter guides, generally, are distributed during an election campaign and provide information on how candidates stand on various issues. A church will jeopardize its tax-exempt status if it distributes a voter guide that favors or opposes candidates for public elected office, since this will amount to prohibited political campaign activity.
The Guide lists the following factors to consider in deciding if a voter guide constitutes prohibited political campaign activity:
(1) whether the candidates’ positions are compared to the organization’s position
(2) whether the guide includes a broad range of issues that the candidates would address if elected to the office sought
(3) whether the description of issues is neutral
(4) whether all candidates for an office are included, and
(5) whether the descriptions of candidates’ positions are either: (1) the candidates’ own words in response to questions, or (2) a neutral, unbiased and complete compilation of all candidates’ positions.
The Guide addresses voter guides with the following examples.
Example Church R distributes a voter guide prior to elections. The voter guide consists of a brief statement from the candidates on each issue made in response to a questionnaire sent to all candidates for governor of State I. The issues on the questionnaire cover a wide variety of topics and were selected by Church R based solely on their importance and interest to the electorate as a whole. Neither the questionnaire nor the voter guide, through their content or structure, indicate a bias or preference for any candidate or group of candidates. Church R is not participating or intervening in a political campaign.
Example Church S distributes a voter guide during an election campaign. The voter guide is prepared using the responses of candidates to a questionnaire sent to candidates for major public offices. Although the questionnaire covers a wide range of topics, the wording of the questions evidences a bias on certain issues. By using a questionnaire structured in this way, Church S is participating or intervening in a political campaign.
Key Point Voter education activities are permissible and will not constitute intervention in political campaigns so long as the activities are neutral and nonpartisan. If the questions or presentation of the voter education activity demonstrate a particular bias in favor of or in opposition to a particular candidate or candidates, then the church’s exempt status is threatened.
(8) consequences of political campaign activity
The Guide cautions that a church not only jeopardizes its tax exempt status by participating in political campaign activities, but also may become subject to an excise tax on its political expenditures. This excise tax “may be imposed in addition to revocation, or it may be imposed instead of revocation. Also, the church or religious organization should correct the violation.” An initial tax is imposed on an organization at the rate of 10% of the political expenditures. Also, a tax at the rate of 2.5% of the expenditures is imposed “against the organization managers who, without reasonable cause, agreed to the expenditures knowing they were political expenditures. The tax on management may not exceed $5,000.” In any case in which an initial tax is imposed against an organization, and the expenditures are not corrected within the period allowed by law, an additional tax equal to 100% of the expenditures is imposed against the organization. In that case, an additional tax is also imposed against the organization managers who refused to agree to make the correction. The additional tax on management is equal to 50% of the expenditures and may not exceed $10,000 with respect to any one expenditure. Correction of a political expenditure requires the recovery of the expenditure, to the extent possible, and establishment of safeguards to prevent future political expenditures.
Key Point The Guide warns that “a church that engages in any political campaign activity also needs to determine whether it is in compliance with the appropriate federal, state or local election laws, as these may differ from the requirements under section 501(c)(3).”
Unrelated Business Income Tax (“UBIT”)
(1) overview
The Guide devotes two pages to the “unrelated business income tax” (UBIT)—a federal tax that can be assessed against a church as a result of income generated from an unrelated trade or business that is regularly carried on. If a church has gross receipts of $1,000 or more from the conduct of any unrelated trade or business, it is required to file Form 990-T (Exempt Organization Business Income Tax Return) with the IRS. Form 990-T is due the l5th day of the fifth month following the end of the church’s tax year.
The Guide notes that income from an activity will be subject to the unrelated business income tax if three conditions are met: (1) the activity constitutes a trade or business; (2) the trade or business is regularly carried on; and (3) the trade or business is not substantially related to the organization’s exempt purpose. The fact that the organization uses the income to further its charitable or religious purposes does not make the activity substantially related to its exempt purposes.
The Guide notes that there are some exceptions to the tax on unrelated business income:
Even if an activity meets the above three criteria, the income may not be subject to tax if it meets one of the following exceptions: (a) substantially all of the work in operating the trade or business is performed by volunteers, (b) the activity is conducted by the organization primarily for the convenience of its members, or (c) the trade or business involves the selling of merchandise substantially all of which was donated. In general, rents from real property, royalties, capital gains, and interest and dividends are not subject to the unrelated business income tax unless financed with borrowed money.
(2) examples of unrelated trades or businesses
The Guide addresses several possible examples of church-generated unrelated business income:
Advertising. Many tax-exempt organizations sell advertising in their publications or other forms of public communication. Generally, income from the sale of advertising is unrelated trade or business income. This may include the sale of advertising space in weekly bulletins, magazines or journals, or on church or religious organization websites.
Gaming Activities. Most forms of gaming, if regularly conducted, may be considered the conduct of an unrelated trade or business. This can include the sale of pull-tabs and raffles. Income derived from the conduct of bingo games may be eligible for a special tax exception (in addition to the exception regarding uncompensated volunteer labor discussed above), if the following conditions are met: (a) The bingo game is the traditional type of bingo (as opposed to Instant Bingo, a variation of pull-tabs), (b) the conduct of the bingo game is not an activity carried out by for-profit organizations in the local area, and (c) the conduct of the bingo game does not violate any State or local law.
Sale of Merchandise and Publications. The sale of merchandise and publications (including the actual publication of materials) can be considered the conduct of an unrelated trade or business if the items involved do not have a substantial relationship to the exempt purposes of the organization.
Rental Income. Generally, income derived from the rental of real property and incidental personal property is excluded from unrelated business income. However, there are certain situations in which rental income may be unrelated business taxable income.
• If a church rents out property on which there is debt outstanding (for example, a mortgage note), the rental income may constitute unrelated debt-financed income subject to UBIT. (However, if a church or convention or association of churches acquires debt-financed land for use in its exempt purposes within 15 years of the time of acquisition, then income from the rental of the land may not constitute unrelated business income.)
• If personal services are rendered in connection with the rental then the income may be unrelated business taxable income.
• If a church charges for the use of the parking lot, the income may be unrelated business taxable income.
Parking Lots. If a church owns a parking lot that is used by church members and visitors while attending church services, any parking fee paid to the church would not be subject to UBIT. However, if a church operates a parking lot that is used by members of the general public, parking fees would be taxable, as this activity would not be substantially related to the church’s exempt purpose, and parking fees are not treated as rent from real property. If the church enters into a lease with a third party who operates the church’s parking lot and pays rent to the church, such payments would not be subject to tax, as they would constitute rent from real property.
Special Rules for Compensation of Ministers
The Guide summarizes several tax issues involving the compensation of ministers. Here is a summary of what the Guide says:
(1) withholding income tax for ministers
The Guide correctly notes that churches are not required to withhold income tax from the compensation that it pays to a duly ordained, commissioned, or licensed minister for performing services in the exercise of ministry. However, “an employee minister may enter into a voluntary withholding agreement with the church by completing IRS Form W-4.”
I recommended to the IRS national office that the tax guide be modified to note that voluntary withholding does not subject a minister to FICA taxes. Many churches who withhold income taxes from their minister’s compensation pursuant to a voluntary withholding arrangement also treat the minister as an employee for Social Security and withhold FICA taxes.
This is incorrect. Ministers are never subject to FICA taxes with respect to their church income. They pay the self-employment tax, even if they report their income taxes as an employee. A minister’s self-employment taxes can be withheld under a voluntary withholding arrangement, but only as additional income taxes.
IRS Publication 517 specifically states that “if you perform your services as an employee of the church (under the common law rules), you may be able to enter into a voluntary withholding agreement with your employer, the church, to cover any income and self-employment tax that may be due.”
(2) parsonage or housing allowances
The Guide notes that a minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities, and that a minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. The Guide explains the housing allowance as follows:
Generally [housing] expenses include rent, mortgage payments, utilities, repairs, and other expenses directly relating to providing a home. If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or (c) the fair rental value of the home. The minister’s church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment. If a minister is employed and paid by a local congregation, a designation by a national church agency will not be effective. The local congregation must make the designation. A national church agency may make an effective designation for ministers it directly employs. If none of the minister’s salary has been officially designated as a housing allowance, the full salary must be included in gross income.
The Guide correctly notes that the fair rental value of a parsonage or a housing allowance is excludable from income only for income tax purposes. These amounts are not excluded in determining the minister’s net earnings from self-employment for self-employment tax purposes.
There are four points to note about this brief explanation.
(1) The IRS has begun using the term “housing allowance” instead of “parsonage allowance” or “rental allowance.” Your author suggested this change in terminology in a letter to the IRS national office following the publication of its original (1994) Tax Guide for Churches since the term “housing allowance” is broader and applies whether a minister owns or rents a home or lives in a parsonage.
(2) the IRS has ignored your author’s suggestion that the list of home expenses that are includable in calculating a minister’s housing allowance exclusion be expanded to include furnishings and property insurance. There is no doubt that these expenses are directly related to owning or maintaining a home, and that a housing allowance can be used to pay for them.
(3) The Guide clarifies that the nontaxable amount of a housing allowance may never exceed the annual fair rental value of a minister’s home (furnished, including utilities). This reflects the recently enacted Clergy Housing Allowance Clarification Act of 2002, which amended the tax code to incorporate the fair rental value limit.
(4) The Guide fails to provide ministers with a definition of the critical phrase “fair rental value.”
(3) the Deason rule
The Guide explains the Deason rule as follows: “A minister who receives a parsonage or rental allowance excludes that amount from his income, and the portion of expenses allocable to the excludable amount is not deductible. This limitation, however, does not apply to interest on a home mortgage or real estate taxes, nor to the calculation of net earnings from self-employment for SECA tax purposes.”
(4) FICA Taxes vs. SECA Tax
The Guide correctly notes that compensation a church pays to its ministers for performing services in the exercise of ministry is not subject to FICA taxes (Social Security and Medicare taxes). However, income that a minister earns in performing services in the exercise of his ministry is subject to self-employment tax, unless the minister has timely applied for and received an exemption.
Payment of Employee Business Expenses
Most ministers and lay church employees incur business expenses in the course of their employment. Unfortunately, the correct handling of these expenses for tax purposes is often not well understood. The Guide devotes one page to this important topic. It makes the following points:
(1) accountable reimbursement plan
A church or religious organization is treated like any other employer as far as the tax rules regarding employee business expenses. The rules differ depending upon whether the expenses are paid through an accountable or non-accountable plan, and these plans determine whether the payment for these expenses is included in the employee’s income.
An arrangement that an employer establishes to reimburse or advance employee business expenses will be an accountable plan if it meets three requirements: (1) involves a business connection, (2) requires the employee to substantiate expenses incurred, and (3) requires the employee to return any excess amounts.
Employees must provide the organization with sufficient information to identify the specific business nature of each expense and to substantiate each element of an expenditure. It is not sufficient for an employee to aggregate expenses into broad categories such as travel or to report expenses through the use of non-descriptive terms such as miscellaneous business expenses. Both the substantiation and the return of excess amounts must occur within a reasonable period of time.
Employee business expenses reimbursed under an accountable plan are (a) excluded from an employee’s gross income, (b) not required to be reported on the employee’s IRS Form W-2, Wage and Tax Statement, and (c) exempt from the withholding and payment of wages subject to FICA taxes and income tax withholdings.
While this language is based on the income tax regulations, it will be confusing to many ministers and church employees. For example, the Guide does not mention that expenses must be reimbursed within 60 days under an accountable plan, or that excess reimbursements must be returned to the employer within 120 days.
I suggested to the IRS national office the following definition: “An accountable plan is one that reimburses only those business expenses that are substantiated as to the amount, date, place, and business purpose of each expense, and requires any excess reimbursements to be returned to the church. Ordinarily, expenses must be substantiated within 60 days, and any excess reimbursements must be returned to the church within 120 days.” Unfortunately, many ministers, lay church employees, and church treasurers who rely on the Guide will end up having a nonaccountable expense reimbursement arrangement.
(2) non-accountable reimbursement plan
If the church reimburses or advances the employee for business expenses, but the arrangement does not satisfy the three requirements of an accountable plan, the amounts paid to the employees are considered wages subject to FICA taxes and income tax withholding, if applicable, and are reportable on Form W-2. (Amounts paid to employee ministers are treated as wages reportable on Form W-2, but are not subject to FICA taxes or income tax withholding.)
For example, if a church or religious organization pays its secretary a $200 per month allowance to reimburse monthly business expenses the secretary incurs while conducting church business, and the secretary is not required to substantiate the expenses or return any excess, then the entire $200 must be reported on Form W-2 as wages subject to FICA taxes and income tax withholding. In the same situation involving an employee-minister, the allowance must be reported on the minister’s Form W-2, but no FICA or income tax withholding is required.
(3) car expenses
One common business expense reimbursement is for automobile mileage. If a church pays a mileage allowance at a rate that is less than or equal to the federal standard [mileage] rate, the amount of the expense is deemed substantiated. (Each year, the federal government establishes a standard mileage reimbursement rate.) There are no income or employment tax consequences to the reimbursed individual provided that the employee substantiates the time, place and business purposes of the automobile mileage for which reimbursement is sought. Of course, reimbursement for automobile mileage incurred for personal purposes are includible in the individual’s income.
If a church reimburses automobile mileage at a rate exceeding the standard mileage rate, the excess is treated as paid under a non-accountable plan. This means that the excess is includible in the individual’s income and is subject to the withholding and payment of income and employment taxes, if applicable. In addition, any mileage reimbursement that is paid without requiring the individual to substantiate the time, place, and business purposes of each trip is included in the individual’s income, regardless of the rate of reimbursement.
No income is attributed to an employee or a volunteer who uses an automobile owned by the church to perform church-related work.
Recordkeeping Requirements
The Guide notes that “tax-exempt organizations are required to maintain books and records that are necessary to accurately file any federal tax and information returns that may be required.” It acknowledges that “there is no specific format for keeping records. However, the types of required records frequently include organizing documents (charter, constitution, articles of incorporation) and bylaws, minute books, property records, general ledgers, receipts and disbursements journals, payroll records, banking records, and invoices. The extent of the records necessary generally varies according to the type, size, and complexity of the organization’s activities.”
The Guide addresses a frequently-asked question, “How long should church records be kept?” Of course, there are dozens of answers to this question, depending on the specific context. The Guide addresses two rules:
“records of revenue and expenses, including payroll records, should be kept for at least four years after filing the return to which they relate”
“records relating to acquisition and disposition of property (real and personal, including investments)” should be kept “for at least four years after the filing of the return for the year in which disposition occurs”
Filing Requirements
The Guide briefly addresses a number of church filing requirements, including the following forms:
Form W-2. Annual wage statement issued to each employee by January 31 of the following year, reporting wages and withholdings.
Form 941. Quarterly employer’s tax return, which reports wages paid and taxes withheld. The return is due “quarterly on April 30, July 31, October 31, and January 31 (10 days later if the organization deposited all taxes when due).”
Form 945. Annual return of withheld federal income tax. The Guide explains that “if a church withholds income tax, including backup withholding, from non-payroll payments, it must file Form 945 by January 31. This form is not required for those years in which there is no non-payroll tax liability.” Many churches engage in backup withholding. Perhaps the most common example is backup withholding on compensation paid to self-employed persons who do not furnish their Social Security number. Backup withholding is reported on Form 945.
Form 990-T. The Guide explains that “churches must file Form 990-T if they generate gross income from an unrelated business of $1,000 or more for a taxable year. Form 990-T must be filed by the 15th day of the 5th month after the organization’s accounting period ends (May 15 for a calendar year accounting period).” In addition, if the tax on unrelated business income is expected to be $500 or more, the church must make estimated tax payments. Form 990-W is used to compute the estimated tax liability.
Form 1099. Many churches issue this form. The Guide explains it as follows: “A church must file Form 1099-MISC if it pays an unincorporated individual or an entity $600 or more in any calendar year for one of the following payments: gross rents; commissions, fees, or other compensation paid to non-employees; prizes and awards; or other fixed and determinable income …. The church must furnish each payee with copies of Form 1099-MISC by January 31 and file Copy A of Form 1099-MISC with the IRS by February 28.”
Form 5578. A church that operates a private school is required to file Form 5578 with the IRS each year. This commonly overlooked requirement is explained by the Guide as follows:
A church that operates a private school, whether separately incorporated or operated as part of its overall operations, that teaches secular subjects and generally complies with state law requirements for public education must file Form 5578 to certify that it does not discriminate based on race or ethnic origin …. Form 5578 must be filed on or before the 15th day of the 5th month following the end of the organization’s taxable year (May 15 for a calendar year). If an organization files Form 990 or Form 990-EZ, the certification must be made on Schedule A (Form 990 or Form 990-EZ). It is not considered racially discriminatory for a parochial school to select students on the basis of membership in a religious denomination if membership in the denomination is open to all on a racially nondiscriminatory basis. Further, a seminary, or other purely religious school, that primarily teaches religious subjects usually with the purpose of training students for the ministry, is not subject to the racially nondiscriminatory requirements because it is considered to be a religious rather than an educational organization.
Some independent religious schools that are not affiliated with a particular church or denomination will not use Form 5578. These schools will make their annual certification of racial nondiscrimination directly on Form 990 (or Form 990-EZ).
Form 8282. A church must file Form 8282 “if it sells, exchanges, transfers, or otherwise disposes of certain non-cash donated property within two years of the date it originally received the donation. This applies to non-cash property that had an appraised value of $5,000 or more at time of donation. The church or religious organization must file Form 8282 with the appropriate IRS Customer Service Center within 125 days of date of disposition of the property and furnish the original donor with a copy of the form.”
Charitable Contributions—Substantiation and Disclosure Requirements
The Guide notes that “there are two general rules that a church needs to be aware of to meet substantiation and disclosure requirements for federal income tax return reporting purposes.”
(1) substantiation
The Guide explains this rule as follows:
A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his or her federal income tax return. A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous, written acknowledgment of the contribution from the recipient church or religious organization. A church or religious organization that does not acknowledge a contribution incurs no penalty; but without a written acknowledgment the donor cannot claim a tax deduction. Although it is a donor’s responsibility to obtain a written acknowledgment, a church or religious organization can assist a donor by providing a timely, written statement containing the following information: (1) name of the church or religious organization; (2) date of the contribution; (3) amount of any cash contribution; (4) description (but not the value) of non-cash contributions; (5) statement that no goods or services were provided by the church or religious organization in return for the contribution, if that is the case; (6) description and good faith estimate of the value of goods or services, if any, that the church or religious organization provided in return for the contribution; and (7) statement that goods or services, if any, that a church or religious organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
The church or religious organization may either provide separate acknowledgments for each single contribution of $250 or more or one acknowledgment to substantiate several single contributions of $250 or more. Separate contributions are not aggregated for purposes of measuring the $250 threshold.
(2) disclosure rules for “quid pro quo” contributions
The Guide points out that “a contribution made by a donor in exchange for goods or services is known as a quid pro quo contribution,” and that “a donor may only take a contribution deduction to the extent that his or her contribution exceeds the fair market value of the goods and services the donor receives in return for the contribution. Therefore, donors need to know the value of the goods or services. A church must provide a written statement to a donor who makes a payment exceeding $75 partly as a contribution and partly for goods and services provided by the organization. The church or religious organization must provide the written disclosure statement with either the solicitation or the receipt of the contribution and in a manner that is likely to come to the attention of the donor. For example, a disclosure in small print within a larger document may not meet this requirement.” The Guide provides the following example.
Example If a donor gives a church a payment of $100 and, in return, receives a ticket to an event valued at $40, this is a quid pro quo contribution, and only $60 is deductible by the donor ($100 – $40 = $60). Even though the deductible amount does not exceed $75, since the quid pro quo contribution the church received is in excess of $75, the church must provide the donor with a written disclosure statement. The statement must include the: (a) amount of the payment, (b) value of the goods and services received by the donor, and (c) amount of the contribution, which would be tax deductible (the amount in excess of the value of the goods and services provided).
The Guide notes that a church is not required to provide a disclosure statement for quid pro quo contributions when (a) the goods or services meet the standards for insubstantial value, or (b) the only benefit received by the donor is an intangible religious benefit. Additionally, if the goods or services the church provides are intangible religious benefits, the acknowledgement for contributions of $250 or more does not need to describe those benefits. Generally, intangible religious benefits are “benefits provided by a church that are not usually sold in commercial transactions outside a donative (gift) context. Intangible religious benefits include admission to a religious ceremony, and de minimis tangible benefits, such as wine used in religious ceremony. Benefits that are not intangible include tuition for education leading to a recognized degree, travel services, and consumer goods.”
Special Rules Limiting IRS Authority to Audit a Church
A feature in the Tax Guide for Churches is a discussion of IRS audits of churches:
Congress has imposed special limitations, found in section 7611 [of the tax code] on how and when the IRS may conduct civil tax inquiries and examinations of churches. The IRS may only initiate a church tax inquiry if the Director, Exempt Organizations, Examinations reasonably believes, based on a written statement of the facts and circumstances, that the organization: (a) may not qualify for the exemption, or (b) may not be paying tax on an unrelated business or other taxable activity.
Restrictions on church inquiries and examinations apply only to churches (including organizations claiming to be churches if such status has not been recognized by IRS) and conventions or associations of churches. They do not apply to related persons or organizations. Thus, for example, the rules do not apply to schools that, although operated by a church, are organized as separate legal entities. Similarly, the rules do not apply to integrated auxiliaries of a church.
Restrictions on church inquiries and examinations do not apply to all church inquiries by the IRS. The most common exception relates to routine requests for information. For example, IRS requests for information from churches about filing of returns, compliance with income or Social Security and Medicare tax withholding requirements, supplemental information needed to process returns or applications, and other similar inquiries are not covered by the special church audit rules. Restrictions on church inquiries and examinations do not apply to criminal investigations or to investigations of the tax liability of any person connected with the church, e.g., a contributor or minister.
However, the procedures of section 7611 will be used in initiating and conducting any inquiry or examination into whether an excess benefit transaction (as that term is used in section 4958) has occurred between a church and an insider.
This last paragraph is an important clarification. Ministers are subject to substantial penalties in the form of excise taxes if they are paid excessive compensation. In addition, members of the church board that approved the excessive compensation are subject to individual penalties. These penalties are often referred to as “intermediate sanctions,” and they are addressed fully in Chapter 4, Section A.3, of Richard Hammar’sChurch & Clergy Tax Guide.
The Guide describes the church “audit process” as follows:
1. If the reasonable belief requirement is met, the IRS must begin an inquiry by providing a church with written notice containing an explanation of its concerns.
2. The church is allowed a reasonable period in which to respond by furnishing a written explanation to alleviate IRS concerns.
3. If the church fails to respond within the required time, or if its response is not sufficient to alleviate IRS concerns, the IRS may, generally within 90 days, issue a second notice, informing the church of the need to examine its books and records.
4. After issuance of a second notice, but before commencement of an examination of its books and records, the church may request a conference with an IRS official to discuss IRS concerns. The second notice will contain a copy of all documents collected or prepared by the IRS for use in the examination and subject to disclosure under the Freedom of Information Act, as supplemented by IRC Section 6103 relating to disclosure and confidentiality of tax return information.
5. Generally, examination of a church’s books and records must be completed within two years from the date of the second notice from the IRS.
if at any time during the inquiry process the church supplies information sufficient to alleviate the concerns of the IRS, the matter will be closed without examination of the church’s books and records. There are additional safeguards for the protection of churches under IRC Section 7611. For example, the IRS cannot begin a subsequent examination of a church for a five-year period unless the previous examination resulted in a revocation, notice of deficiency of assessment, or a request for a significant change in church operations, including a significant change in accounting practices.
Definition of the Term “Minister”
There is considerable confusion today among churches and ministers concerning the definition of the term minister for federal tax purposes. Yet a definition is critical, for it determines the application of a number of federal tax provisions, including eligibility for the housing allowance exclusion, self-employed status for Social Security with respect to services performed in the exercise of ministry, exemption from income tax withholding, and eligibility for exemption from self-employment tax (if several conditions are met).
Unfortunately, while the tax code uses the term “minister” in each of these contexts, it provides no definition. Incredibly, neither does the IRS Tax Guide for Churches. It simply states that “as used in this booklet, the term minister denotes members of clergy of all religions and denominations and includes priests, rabbis, imams, and similar members of the clergy.”
It is hard to fathom why the IRS chose not to provide any assistance in defining this critical term in a book that is designed to help churches “voluntarily comply with tax rules.” This is a major flaw in the Guide. The best that can be said is that no definition is preferable to the awful definition contained in the 1994 IRS Tax Guide for Churches (a definition so restrictive that it excluded countless bona fide ministers).
Much of the confusion regarding the definition of the term minister could be eliminated by the following two recommendations (I submitted these recommendations to the IRS national office):
(1) Define the term minister to include anyone who satisfies two requirements:
(a) the individual is ordained, commissioned, or licensed by a bona fide religious organization exempt from tax under section 501(c)(3) of the tax code—or the “functional equivalent” of an ordained, commissioned, or licensed minister in a non-Christian faith; and
(b) the individual, by virtue of his or her status as an ordained, commissioned, or licensed minister, has the authority (whether exercised or not) to function as a minister in his or her religious community, including the authority to conduct worship, administer sacraments, or perform sacerdotal functions (preaching, teaching, marriages, funerals, counseling, baptisms, communion).
(2) Retain the present definition of the term services performed in the exercise of ministry as reflected in the income tax regulations, but acknowledge that a minister need perform all of the functions of a pastoral minister in order to satisfy this definition.
Definition of the Term “Church”
As with the term minister, the term church is used frequently in the tax code, but no definition is provided. The Guide contains the following analysis of the definition of the term church for federal tax purposes:
Certain characteristics are generally attributed to churches. These attributes of a church have been developed by the IRS and by court decisions. They include: distinct legal existence; recognized creed and form of worship; definite and distinct ecclesiastical government; formal code of doctrine and discipline; distinct religious history; membership not associated with any other church or denomination; organization of ordained ministers; ordained ministers selected after completing prescribed courses of study; literature of its own; established places of worship; regular congregations; regular religious services; Sunday schools for the religious instruction of the young; schools for the preparation of its ministers. The IRS generally uses a combination of these characteristics, together with other facts and circumstances, to determine whether an organization is considered a church for Federal tax purposes. The IRS makes no attempt to evaluate the content of whatever doctrine a particular organization claims is religious, provided the particular beliefs of the organization are truly and sincerely held by those professing them and the practices and rites associated with the organization’s belief or creed are not illegal or contrary to clearly defined public policy.
This definition is pathetic. It is a restatement of the misguided “14 criteria” definition that the IRS has been using for many years. These criteria clearly are vague and inadequate. Some apply exclusively to local churches, others do not. And the IRS does not indicate how many criteria an organization must meet in order to be classified as a church, or if some criteria are more important than others. These criteria are troubling because they are so restrictive that many, if not most, bona fide churches fail to satisfy several of them. In part, the problem results from the apparent attempt to draft criteria that apply to both local churches and religious denominations. To illustrate, few if any local churches would meet the seventh, ninth, and fourteenth criteria, since these ordinarily would pertain only to religious denominations. In addition, many newer, independent churches often will fail the first and fifth criteria and may also fail the second, third, fourth, sixth, and eighth. It is therefore possible for a legitimate church to fail as many as ten of the fourteen criteria.
Key Point The original Christian churches described in the New Testament Book of Acts easily would have failed a majority of the 14 criteria.
The vagueness of the criteria necessarily means that their application in any particular case will depend on the discretionary judgment of a government employee. This is the very kind of conduct that the courts repeatedly have condemned in other contexts as unconstitutional. To illustrate, the courts consistently have invalidated municipal ordinances that condition the constitutionally protected interests of speech and assembly upon compliance with criteria that are so vague that decisions essentially are a matter of administrative discretion. The United States Supreme Court has held that “it is a basic principle of due process that an enactment is void for vagueness if its prohibitions are not clearly defined …. A vague law impermissibly delegates basic policy matters to [government officials] for resolution on an ad hoc and subjective basis with the attendant dangers of arbitrary and discriminatory application.” Grayned v. City of Rockford, 408 U.S. 104, 108-09 (1972).
This same reasoning also should apply in the context of other fundamental constitutional rights, such as the first amendment right to freely exercise one’s religion. The IRS should not be permitted to effectively limit the right of churches and church members to freely exercise their religion on the basis of criteria that are as vague as the 14 criteria listed above, and whose application in a particular case is essentially a matter of administrative discretion.
The criteria also are constitutionally suspect on the related ground of “overbreadth.” The Supreme Court “has repeatedly held that a governmental purpose to control or prevent activities constitutionally subject to state regulation may not be achieved by means which sweep unnecessarily broadly and thereby invade the area of protected freedoms. The power to regulate must be so exercised as not, in attaining a permissible end, unduly to infringe the protected freedom. Even though the governmental purpose be legitimate and substantial, that purpose cannot be pursued by means that broadly stifle fundamental personal liberties when the end can be more narrowly achieved.” N.A.A.C.P. v. Alabama, 377 U.S. 288, 307-08 (1964).
Congress and the IRS undoubtedly have the authority to identify those churches that are not qualified for the tax benefits afforded by federal law, but they may not do so on the basis of criteria that sweep so broadly as to jeopardize the standing of legitimate churches. The courts understandably find the task of defining the term church perplexing, but they should avoid referring to the 14 criteria as support for their conclusions.
I made the following recommendation to the IRS national office regarding this definition:
Modify the criteria to apply solely to local churches, and use only the following factors:
1. a distinct legal existence
2. a recognized creed and form of worship
3. a formal code of doctrine and discipline
4. a membership not associated with any other church or denomination
5. an established place of worship
6. regular worship services
7. a program for the religious instruction of the young
Not all of these factors should be required, but these should be the factors to consider in reaching an informed judgment regarding the status of a particular entity as a “church.” All bona fide churches will satisfy a majority of these criteria.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
The Economic Growth and Tax Relief Reconciliation Act of 2001
Over 440 tax code changes-here is what church leaders need to know.
The Economic Growth and Tax Relief Reconciliation Act of 2001
Richard R. Hammar, J.D., LL.M., CPA
Over 440 tax code changes-here is what church leaders need to know
Article summary. On June 7, 2001, President Bush signed a massive new tax law known as the Economic Growth and Tax Relief Reconciliation Act of 2001. While the Act’s most prominent feature is a $1.35 trillion tax-cut package, it also makes more than 440 other changes to the Internal Revenue Code. This feature article will review those changes of most relevance to ministers and church treasurers.
President Bush promised tax relief during the presidential campaign, and Congress delivered by enacting the Economic Growth and Tax Relief Reconciliation Act (EGTRA) in May of this year with strong bipartisan support (the votes were 240-154 in the House and 58-33 in the Senate). The Act’s most publicized feature is a $1.35 trillion package of tax cuts. However, the Act also contains more than 440 other tax law changes, some of which are of special relevance to ministers and church treasurers. We have carefully reviewed the entire text of this massive law, and are summarizing in this feature article those provisions that are of most relevance to ministers and church treasurers.
• Key point. An unprecedented feature of the new law is a “sunset” provision that revokes all of the hundreds of tax law changes at the end of 2010 unless Congress votes to extend them. If Congress fails to take action, then the tax law in effect in 2001 will be reinstated. Because many taxpayers, in all income brackets, will increasingly rely on many of the tax law changes in the new law, it is inconceivable that Congress will allow all of the changes to expire at the end of 2010. It is reasonable to assume that many of the changes will be permanently adopted by Congress, but not necessarily all of them.
Individual Income Taxes
1. Reduction in income tax rates
Income taxes are computed by applying the applicable income tax rates to taxable income. The income tax rates are divided into several ranges of income, known as income brackets, and the tax rate increases as the individual’s income increases. Separate rate schedules apply based on filing status (single, heads of households, married individuals filing joint returns, married individuals filing separate returns, and estates and trusts). Tables 1 and 2 show the pre-EGTRA tax rates for single taxpayers and married taxpayers filing jointly.
Table 1: Pre-EGTRA 2001 Tax Rates for Single Persons
taxable income
pay
plus the following percent
of taxable income exceedin
over
but not over
$0
$27,050
$0
15%
$0
$27,050
$65,550
$4,057
28%
$27,050
$65,550
$136,750
$14,837
31%
$65,550
$136,750
$297,350
$36,909
36%
$136,750
$297,350
$94,725
39.6%
$297,350
Table 2: Pre-EGTRA 2001 Tax Rates for Married Persons Filing Jointly
taxable income
pay
plus the following percent
of taxable income exceedin
over
but not over
$0
$45,200
$0
15%
$0
$45,200
$109,250
$6,780
28%
$45,200
$109,250
$166,500
$24,714
31%
$109,250
$166,500
$297,350
$42,461
36%
$166,500
$297,350
$89,567
39.6%
$297,350
Note that prior to EGTRA there were five income tax rates, depending on a taxpayer’s income (15%, 28%, 31%, 36%, and 39.6%). These rates were modified by EGTRA as follows:
New 10% Rate
EGTRA creates a new 10% income tax bracket for a portion of taxable income that is currently taxed at 15%, effective for taxable years beginning after December 31, 2000. The 10% rate bracket applies to the first $6,000 of taxable income for single individuals, and $12,000 for married couples filing joint returns. This $6,000 increases to $7,000 and this $12,000 increases to $14,000 for 2008 and thereafter. The taxable income levels for the new low-rate bracket will be adjusted annually for inflation for taxable years beginning after December 31, 2008.
15% Bracket
The 15% income tax bracket is modified to begin at the end of the new low-rate regular income tax bracket. The 15% income tax bracket ends at the same level as under present law (Tables 1 and 2).
The 15% bracket is also adjusted in order to minimize the effect of the so-called “marriage penalty.” This is addressed later in this article.
Reduction of other brackets
The pre-EGTRA income tax rates of 28%, 31%, 36%, and 39.6% are phased down over six years to 25%, 28%, 33%, and 35%, effective after June 30, 2001, as described in Table 3. Since the tax rate changes do not take effect until July 1, 2001, rate reductions for 2001 will come in the form of a “blended” tax rate.
The taxable income levels for the new rates in all taxable years are the same as the taxable income levels that apply under the present-law rates.
Table 3: Income Tax Rate Reductions
calendar year
28% rate reduced to:
31% rate reduced to:
36% rate reduced to:
39.6% rate reduced to:
2001
27.5%
30.5%
35.5%
39.1%
2002-2003
27%
30%
35%
38.6%
2004-2005
26%
29%
34%
37.6%
2006 and later
25%
28%
33%
35%
Tables 4 and 5 show the tax rates and corresponding income levels for the year 2006, when the rate cuts are fully effective. Note that the income levels in these tables are projected amounts.
Table 4: Income Tax Rates for 2006 (Single Persons)
taxable income
pay
plus the following percent
of taxable income exceedin
over
but not over
$0
$6,000
$0
10%
$0
$6,000
$30,950
$600
15%
$6,000
$30,950
$74,950
$4,342
25%
$30,950
$74,950
$156,300
$15,342
28%
$74,950
$156,300
$339,850
$38,120
33%
$156,300
$339,850
$98,692
35%
$339,850
Table 5: Income Tax Rates for 2006
(Married Persons Filing Jointly)
taxable income
pay
plus the following percent
of taxable income exceedin
over
but not over
$0
$12,000
$0
10%
$0
$12,000
$57,850
$1,200
15%
$12,000
$57,850
$124,900
$8,077
25%
$57,850
$124,900
$190,300
$24,840
28%
$124,900
$190,300
$339,850
$43,152
33%
$190,300
$339,850
$92,503
35%
$339,850
• Key point. The IRS recently released Publication 15-T, “New Withholding Tables for 2001.” The new withholding tables reflect changes in the income tax rates on individuals beginning July 1, 2001 under the new tax law. Churches should begin withholding using the new tables as soon as possible for wages paid after June 30, 2001. The new tables are a supplement to Publications 15, 15-A, and 51 and should be used instead of the tables in those publications. You can obtain Publication 15-T by calling the IRS at 1-800-TAX-FORM, or by visiting the IRS web site at www.irs.gov.
• Tip. In some cases, ministers will be able to reduce taxes by deferring income to a future year when the income tax rates will be lower. A common way to do this is to contribute to a tax-deferred retirement program such as a “403(b) plan” (offered by many churches and denominational pension plans). Distributions from the plan will be taxed at the lower rates called for by EGTRA.
• Tip. Many donors will realize a greater tax benefit by making charitable contributions in 2001 than in future years since their contributions reduce taxes at the current higher rates. But high income donors may be better off deferring some contributions to future years when the current reduction in charitable contribution deductions for high income taxpayers is phased out. Under current law, itemized deductions for charitable contributions are reduced by 3% of the amount of the donor’s adjusted gross income in excess of $132,950 in 2001 (not less than 80%).
Table 6 shows the federal income tax that would be paid by a married couple filing jointly under several different levels of taxable income, in 2001 (without the EGTRA tax reductions), in 2001 (with the EGTRA tax reductions for that year), and in 2006. Note the following: (1) The table only reflects federal income taxes. Social security and state and local taxes are not included. (2) The 2006 taxes use estimated amounts of taxable income that will be needed to trigger the corresponding tax rates. The actual taxes in 2006 may be slightly different.
Table 6: The Bottom Line-Tax Savings Under Different Scenarios
taxable income (married, filing jointly), after credits
2001 taxes rates (pre-EGTRA), with effective tax rate in brackets
2001 taxes (with EGTRA changes), with effective tax rate in brackets
tax savings in dollars over pre-EGTRA rates [percentage drop in taxes in brackets]
2006 taxes (with EGTRA changes), with effective tax rate in brackets
tax savings in dollars over pre-EGTRA rates [percentage drop in taxes in brackets]
$10,000
$1,500 [15%]
$1,000 [10%]
$500 [33%]
$1,000 [10%]
$500 [33%]
$25,000
$3,750 [15%]
$3,150 [13%]
$600 [16%]
$3,150 [13%]
$600 [16%]
$50,000
$8,124 [16%]
$7,500 [15%]
$624 [8%]
$6,900 [14%]
$1,224 [15%]
$75,000
$15,124 [20%]
$14,375 [19%]
$749 [5%]
$12,364 [16%]
$2,760 [18%]
$100,000
$22,124 [22%]
$21,250 [21%]
$874 [4%]
$18,614 [19%]
$3,510 [16%]
2. Rate reduction credit for 2001
One of the purposes behind the new 10% tax rate was to provide a stimulus to the economy. In order to achieve this stimulus more quickly, EGTRA allows a rate reduction credit in lieu of the new 10% tax rate for 2001, and this credit will be distributed in advance to eligible taxpayers in the form of a check from the Treasury Department. The IRS will automatically process these advance payments. Taxpayers will not have to complete applications, file any extra forms, or call the IRS to request their payments. In general, individuals who had a federal income tax liability for 2000 and who could not be claimed as a dependent on someone else’s tax return are eligible for a rate reduction credit this year. You had a liability if your tax was greater than the amount of your nonrefundable credits, such as the child tax credit, education credits or child care credit. Refundable credits, such as the earned income tax credit, are not a factor in determining eligibility or computing the credit or the advance payment. Those who did not have an income tax liability will not receive an advance payment. However, persons who did not have an income tax liability for 2000 but who have one for 2001 will be able to claim the tax credit on their 2001 return, provided they are otherwise eligible. Taxpayers whose advance payment is less than the credit amount figured on their 2001 tax return will be able to claim the rest of the credit when they file their 2001 return. Taxpayers whose advance payment is larger than the credit amount figured on the 2001 tax return will not have to pay back any difference.
The 2001 advance payment amount is 5% (the difference between the 15% and the 10% rates) of the amount of “taxable income” shown on a taxpayer’s 2000 tax return (less any credits), up to a maximum of $300 for a single taxpayer and $600 for a married couple filing a joint return. Taxable income is reported on line 51 of Form 1040, line 33 of Form 1040A, and line 10 of Form 1040EZ. Most taxpayers will get the full amount as an advance payment this year; some will have it split between this year and next; and some may get all of it as a credit on the 2001 tax return.
If a taxpayer’s advance payment is less than the maximum dollar amount for his or her filing status, that person may be able to claim a credit on the 2001 return, up to the difference between the allowable amount and the payment already received.
• Key point. The advance payment will be reduced because of any outstanding government debt, such as back taxes, or a student loan, or because of past-due child support obligations. In such a case, the IRS will send the person an explanation of the offset. If the advance payment amount is larger than the debt, the taxpayer will get a check for the difference. If the full advance payment is applied to the debt, the taxpayer will not receive any check.
Eligible taxpayers should have received their check by October of 2001.
3. Elimination of the “marriage penalty”
When two persons are married, they often pay more taxes than if they had remained single. There are two reasons. First, their combined income may put them in a higher tax bracket; and second, the standard deduction for a married couple is less than the standard deductions for two single persons. These two consequences are generally referred to as the “marriage penalty.” EGTRA reduces this penalty in the following two ways:
#1-Income Tax Rates
Look at Tables 1 and 2 for a moment. Note that the tax rates prior to EGTRA (15%, 28%, 31%, 36%, 39.6%) correspond to ranges of taxable income, and these ranges are much higher for married couples filing jointly. This means that an unmarried couple paying the individual tax rates will pay less taxes than if they marry. The tax code “penalizes” them for marrying. Consider the following example.
• Example. Bob and Barb have been dating for two years. In 2001 they each have taxable income of $25,000, and they file individual income tax returns. Had EGTRA not been enacted, Bob and Barb would have paid an income tax rate of 15% on all their income, since the 15% tax rate applies to single persons’ taxable income all the way up to $27,050. However, let’s assume that Bob and Barb were married in 2001, and that they file a joint tax return. They report $50,000 of taxable income on their return, and pay the 15% tax rate only up to $45,200 (see Table 2). They pay the 28% rate on the remaining $4,800 of income. The net effect is an additional $624 in taxes ($45,200 x 15% = $6,780 plus $4,800 x 28% = $1,344 = $8,124 total taxes filing as a married couple, versus two returns x $25,000 x 15% = $7,500 if filing as two single persons).
EGTRA minimizes the effect of the marriage penalty by increasing the 15% income tax rate for a married couple filing a joint return to twice the size of the corresponding rate for a single person filing a single return. The increase is phased-in over four years, beginning in 2005. Therefore, this provision is fully effective (i.e., the size of the 15% income tax rate bracket for a married couple filing a joint return would be twice the size of the 15% tax rate bracket for single persons) for taxable years beginning after December 31, 2007. Table 7 summarizes the phase-in of this new rule.
Table 7: Increase in Size of 15% Rate for Married Couples Filing a Joint Return
taxable year
end point of 15% rate bracket for married couple filing jointly as a percentage of end point of 15% rate bracket for single persons
2005
180%
2006
187%
2007
193%
2008 and thereafter
200%
#2-The Standard Deduction
The standard deduction for married persons filing jointly is increased, beginning in 2005, to minimize the marriage penalty. Table 8 summarizes this change.
Table 8: Increase in the Standard Deduction
calendar year
standard deduction for joint returns as percentage of standard deduction for single returns
2005
174%
2006
184%
2007
187%
2008
190%
2009 and later
200%
• Key point. The attempt to reduce the impact of the marriage penalty by increasing the standard deduction for married couples does not help married couples who itemize their deductions instead of claiming the standard deduction.
• Example. Larry and Laura have been dating for two years. In 2000 they each earned annual income of $30,000, filed their tax returns as single persons, and they claimed the standard deduction ($4,400 each for 2000) instead of claiming itemized deductions. If they had married in 2000, their joint income would have been $60,000, and they would have been eligible for a standard deduction of only $7,350-or $1,450 less than their individual standard deductions when they were filing as single persons. Their taxable income would have increased, and they would have paid more taxes, simply because they chose to be married. EGTRA partially corrects this “marriage penalty” by increasing the standard deduction for joint returns, beginning in 2005, to eventually equally twice the standard deduction for a single return.
• Key point. The separate standard deduction for married persons filing separately is eliminated after 2005. Married persons filing separately thereafter will have to claim the standard deduction for single persons.
4. Increase and expand the child tax credit
Prior to EGTRA an individual could claim a $500 tax credit for each qualifying child under the age of 17. In general, a qualifying child is an individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer’s son or daughter (or descendent of either), stepson or stepdaughter, or eligible foster child. The child tax credit is phased-out for individuals with income over certain thresholds. Specifically, the credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or $110,000 for married individuals filing joint returns. Modified adjusted gross income is the taxpayer’s total gross income plus certain amounts excluded from gross income (such as the foreign earned income exclusion). The length of the phase-out range depends on the number of qualifying children. The child tax credit is not adjusted annually for inflation.
EGTRA increases the child tax credit to $1,000, phased-in over ten years, beginning in 2001.
Table 9: Increase in the Child Tax Credit
calendar year
credit amount per child
2001-2004
$600
2005-2008
$700
2009
$800
2010 and later
$1,000
• Key point. EGTRA makes the child credit refundable to the extent of 10 percent of a taxpayer’s earned income in excess of $10,000 for calendar years 2001-2004. The percentage is increased to 15 percent for calendar years 2005 and thereafter. The $10,000 amount is indexed for inflation beginning in 2002. Families with three or more children are allowed a refundable credit for the amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income credit if that amount is greater than the refundable credit based on the taxpayer’s earned income in excess of $10,000. The refundable portion of the child credit does not constitute income and is not treated as resources for purposes of determining eligibility or the amount or nature of benefits or assistance under any federal program or any state or local program financed with federal funds.
5. Expansion of dependent care credit
A taxpayer who maintains a household that includes one or more qualifying individuals may claim a nonrefundable credit against income tax liability for up to 30% of a limited amount of employment-related expenses. Eligible employment-related expenses are limited to $2,400 if there is one qualifying individual or $4,800 if there are two or more qualifying individuals. Thus, the maximum credit is $720 if there is one qualifying individual and $1,440 if there are two or more qualifying individuals. The applicable dollar limit ($2,400/$4,800) of otherwise eligible employment-related expenses is reduced by any amount excluded from income under an employer-provided dependent care assistance program. For example, a taxpayer with one qualifying individual who has $2,400 of otherwise eligible employment-related expenses but who excludes $1,000 of dependent care assistance must reduce the dollar limit of eligible employment-related expenses for the dependent care tax credit by the amount of the exclusion to $1,400 ($2,400 – $1,000 = $1,400).
A qualifying individual is (1) a dependent of the taxpayer under the age of 13 for whom the taxpayer is eligible to claim a dependency exemption, (2) a dependent of the taxpayer who is physically or mentally incapable of caring for himself or herself, or (3) the spouse of the taxpayer; if the spouse is physically or mentally incapable of caring for himself or herself.
The 30 percent credit rate is reduced, but not below 20 percent, by 1 percentage point for each $2,000 (or fraction thereof) of adjusted gross income above $10,000. The credit is not available to married taxpayers unless they file a joint return.
Amounts paid or incurred by an employer for dependent care assistance provided to an employee generally are excluded from the employee’s gross income and wages if the assistance is furnished under a program meeting certain requirements. These requirements include that the program be described in writing, satisfy certain nondiscrimination rules, and provide for notification to all eligible employees. Dependent care assistance expenses eligible for the exclusion are defined the same as employment-related expenses with respect to a qualifying individual under the dependent care tax credit.
The dependent care exclusion is limited to $5,000 per year, except that a married taxpayer filing a separate return may exclude only $2,500. Dependent care expenses excluded from income are not eligible for the dependent care tax credit (sec. 21(c)).
EGTRA makes the following changes in these rules, beginning in 2003:
It increases the maximum amount of eligible employment-related expenses from $2,400 to $3,000, if there is one qualifying individual (from $4,800 to $6,000, if there are two or more qualifying individuals).
It increases the maximum credit from 30% to 35% (the maximum credit is $1,200, if there is one qualifying individual and $2,400, if there are two or more qualifying individuals).
It modifies the phase-down of the credit. The 35% credit rate is reduced, but not below 20 percent, by 1 percentage point for each $2,000 (or fraction thereof) of adjusted gross income above $15,000. Therefore, the credit percentage is reduced to 20 percent for taxpayers with adjusted gross income over $43,000.
6. Marriage penalty relief and simplification relating to the earned income credit
Eligible low-income workers are able to claim a refundable earned income credit. The amount of the credit an eligible taxpayer may claim depends upon the taxpayer’s income and whether the taxpayer has one, more than one, or no qualifying children. No earned income credit is allowed if the taxpayer has disqualified income in excess of $2,450 (for 2001) for the taxable year. [ ]In addition, no earned income credit is allowed if an eligible individual is the qualifying child of another taxpayer.
To claim the earned income credit, a taxpayer must either (1) have a qualifying child or (2) meet the requirements for childless adults. A qualifying child must meet a relationship test, an age test, and a residence test. First, the qualifying child must be the taxpayer’s child, stepchild, adopted child, grandchild, or foster child. Second, the child must be under the age 19 (or under age 24 if a full-time student) or permanently and totally disabled regardless of age. Third, the child must live with the taxpayer in the United States for more than half the year (a full year for foster children).
An individual satisfies the relationship test under the earned income credit if the individual is the taxpayer’s: (1) son or daughter or a descendant of either; (2) stepson or stepdaughter; or (3) eligible foster child. A married child of the taxpayer is not treated as meeting the relationship test unless the taxpayer is entitled to a dependency exemption with respect to the married child (e.g., the support test is satisfied) or would be entitled to the exemption if the taxpayer had not waived the exemption to the noncustodial parent. If a child otherwise qualifies with respect to more than one person, the child is treated as a qualifying child only of the person with the highest modified adjusted gross income.
To claim the earned income credit, the taxpayer must have earned income. Earned income consists of wages, salaries, other employee compensation, and net earnings from self employment. Employee compensation includes anything of value received by the taxpayer from the employer in return for services of the employee, including nontaxable earned income. Nontaxable forms of compensation treated as earned income include the following: (1) elective deferrals under a 403(b) annuity; (2) employer contributions for non-taxable fringe benefits, including contributions for accident and health insurance, dependent care, adoption assistance, educational assistance, and miscellaneous fringe benefits; (3) salary reduction contributions under a cafeteria plan; (4) meals and lodging provided for the convenience of the employer, and (5) housing allowance or rental value of a parsonage for ministers.
The maximum earned income credit is phased in as an individual’s earned income increases. The credit phases out for individuals with earned income (or if greater, modified adjusted gross income) over certain levels. In the case of a married individual who files a joint return, the earned income credit both for the phase-in and phase-out is calculated based on the couples’ combined income.
The credit is determined by multiplying the credit rate by the taxpayer’s earned income up to a specified earned income amount. The maximum amount of the credit is the product of the credit rate and the earned income amount. The maximum credit amount applies to taxpayers with (1) earnings at or above the earned income amount and (2) modified adjusted gross income (or earnings, if greater) at or below the phase-out threshold level.
For taxpayers with modified adjusted gross income (or earned income, if greater) in excess of the phase-out threshold, the credit amount is reduced by the phase-out rate multiplied by the amount of earned income (or modified adjusted gross income, if greater) in excess of the phase-out threshold. In other words, the credit amount is reduced, falling to $0 at the “breakeven” income level, the point where a specified percentage of “excess” income above the phase-out threshold offsets exactly the maximum amount of the credit. The earned income amount and the phase-out threshold are adjusted annually for inflation. Table 10 shows the earned income credit parameters for taxable year 2001.
Table 10: Earned Income Credit Limits (2001)
2 or more qualifying children
1 qualifying child
no qualifying child
credit rate
40%
34%
7.65%
earned income amount
$10,020
$7,140
$4,760
maximum credit
$4,008
$2,428
$364
phase-out begins
$13,090
$13,090
$5,959
phase-out rate
21.06%
15.98%
7.65%
phase-out ends
$32,121
$28,281
$10,710
EGTRA makes the following changes in the earned income credit, beginning in 2002:
In the past, the earned income amount penalizes some individuals because they receive a smaller earned income credit if they are married than if they are not married. In order to minimize this penalty, EGTRA increases the phase-out amount for married taxpayers who file a joint return. For married taxpayers who file a joint return, EGTRA increases the beginning and ending of the earned income credit phase-out by $3,000. These beginning and ending points are to be adjusted annually for inflation after 2002.
• Key point. For married taxpayers filing a joint return, the earned income credit phase-out amount is increased as follows: by $1,000 in 2002, 2003, and 2004; by $2,000 in 2005, 2006, and 2007; and by $3,000 after 2007. The $3,000 amount is to be adjusted annually for inflation after 2008.
EGTRA simplifies the definition of earned income by excluding nontaxable employee compensation from the definition of earned income for earned income credit purposes. As a result, earned income includes wages, salaries, tips, and other employee compensation, if includible in gross income for the taxable year, plus net earnings from self employment.
• Key point. Housing allowances, and the annual rental value of church-provided parsonages, are examples of “nontaxable employee compensation” that in the past was included in the computation of “earned income” in calculating the earned income credit. The effect was to increase earned income and either disqualify many ministers for the earned income credit (because their earned income was too high), or reduce the value of the credit. By eliminating housing allowances and the annual rental value of parsonages from the definition of earned income, EGTRA will make the earned income credit available to many more ministers, and will result in a larger credit for those who qualify for the credit.
• Key point. Other examples of nontaxable employee compensation that no longer will be included in the definition of earned income when computing the earned income credit include contributions (by salary reduction) to either a cafeteria plan or 403(b) annuity.
• Example. Pastor Bob is the youth pastor at his church. He is married and has 3 minor children. In 2001, Pastor Bob is paid a salary of $25,000 and in addition receives a housing allowance of $8,000. Prior to EGTRA, Pastor Bob would not have qualified for the earned income credit, since his salary plus nontaxable employee compensation (the housing allowance) exceed $32,121. However, EGTRA eliminates nontaxable employee compensation from the definition of earned income, and therefore Pastor Bob qualifies for the credit since his earned income is his salary of $25,000 and does not include his housing allowance. He will receive a tax credit of $1,500, computed as follows: maximum credit ($4,008) less the excess of earned income over the phase-out threshold ($25,000 – $13,090 = $11,910) times the phase-out rate of 21.06% ($2,508) = a credit of $1,500. This means that because of EGTRA’s modification of the definition of earned income, Pastor Bob will qualify for a tax credit of $1,500. Note that a credit reduces actual taxes and therefore is more beneficial than deductions or exclusions which merely reduce taxable income. This change in the law will benefit many younger ministers with dependent children.
EGTRA simplifies the calculation of the earned income credit by replacing modified adjusted gross income with adjusted gross income.
EGTRA provides that the “relationship test” is met if the individual is the taxpayer’s son, daughter, stepson, stepdaughter, or a descendant of any such individuals. A brother, sister, stepbrother, stepsister, or a descendant of such individuals, also qualifies if the taxpayer cares for such individual as his or her own child. A foster child satisfies the relationship test as well. In order to be a qualifying child, in all cases the child must have the same principal place of abode as the taxpayer for over one-half of the taxable year.
EGTRA changes the so-called “tie-breaking rule.” If an individual would be a qualifying child with respect to more than one taxpayer, and more than one taxpayer claims the earned income credit with respect to that child, then the following tie-breaking rules apply. First, if one of the individuals claiming the child is the child’s parent (or parents who file a joint return), then the child is considered the qualifying child of the parent (or parents). Second, if both parents claim the child and the parents do not file a joint return together, then the child is considered a qualifying child first of the parent with whom the child resided for the longest period of time during the year, and second of the parent with the highest adjusted gross income. Third, if none of the taxpayers claiming the child as a qualifying child is the child’s parent, the child is considered a qualifying child with respect to the taxpayer with the highest adjusted gross income.
7. Phase-out of personal exemption reduction
In order to determine taxable income, an individual reduces adjusted gross income by any personal exemptions, deductions, and either the applicable standard deduction or itemized deductions. Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For 2001, the amount deductible for each personal exemption is $2,900. This amount is adjusted annually for inflation. Prior to EGTRA, the deduction for personal exemptions was phased-out for taxpayers with adjusted gross income over certain thresholds. For 2001, the thresholds are $132,950 for single individuals and $199,450 for married individuals filing a joint return (adjusted annually for inflation). The total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income exceeds the applicable threshold. For 2001, the point at which a taxpayer’s personal exemptions are completely phased-out is $255,450 for single individuals and $321,950 for married individuals filing a joint return.
EGTRA repeals the personal exemption phase-out over five years, beginning in 2006. The phase-out is reduced by one-third in taxable years beginning in 2006 and 2007, and is reduced by two-thirds in taxable years beginning in 2008 and 2009. The repeal is fully effective for taxable years beginning after December 31, 2009. In explaining the reason for repealing the phase-out, a congressional conference committee noted that “the personal exemption phase-out is an unnecessarily complex way to impose income taxes and the hidden way in which the phase-out raises marginal tax rates undermines respect for the tax laws.”
8. Increase the starting point for phase-out of itemized deductions
Taxpayers may choose to claim either the standard deduction or itemized deductions (subject to certain limitations) for certain expenses incurred during the year. Prior to EGTRA the total amount of allowable itemized deductions (with a few exceptions) was reduced by three percent of the amount of the taxpayer’s adjusted gross income in excess of $132,950 in 2001. However, itemized deductions could not be reduced by more than 80%. The starting point for the phase-out ($132,950 in 2001) was adjusted annually for inflation. EGTRA repeals this limitation on itemized deductions over a five year period beginning in 2006. The limit on itemized deductions is reduced by one-third in taxable years beginning in 2006 and 2007, and by two-thirds in taxable years beginning in 2008 and 2009. The overall limitation is repealed for taxable years beginning after December 31, 2009.
Education
9. Modifications to education IRAs
• Key point. Education IRAs can now be used to fund the education of children attending private religious elementary and secondary schools.
Current law allows taxpayers to create “education IRAs” for the purpose of paying the qualified higher education expenses of designated beneficiaries. Annual contributions to education IRAs may not exceed $500 per beneficiary (except in cases involving certain tax-free rollovers) and may not be made after the designated beneficiary reaches age 18. The $500 annual contribution limit for education IRAs is generally phased-out for single taxpayers with modified adjusted gross income between $95,000 and $110,000. The phase-out range for married taxpayers filing a joint return is $150,000 to $160,000 of modified adjusted gross income. Individuals with modified adjusted gross income above the phase-out range are not allowed to make contributions to an education IRA established on behalf of any individual. Earnings on contributions to an education IRA generally are subject to tax when withdrawn. However, distributions from an education IRA are excludable from the gross income of the beneficiary to the extent that the total distribution does not exceed the “qualified higher education expenses” incurred by the beneficiary during the year the distribution is made.
If the qualified higher education expenses of the beneficiary for the year are less than the total amount of the distribution (i.e., contributions and earnings combined) from an education IRA, then the qualified higher education expenses are deemed to be paid from a pro-rata share of both the principal and earnings components of the distribution. As a result, in such a case only a portion of the earnings are excludable (i.e., the portion of the earnings based on the ratio that the qualified higher education expenses bear to the total amount of the distribution) and the remaining portion of the earnings is includible in the beneficiary’s gross income. The earnings portion of a distribution from an education IRA that is includible in income is also subject to an additional 10-percent tax (unless a distribution is made on account of the death or disability of the designated beneficiary, or on account of a scholarship received by the designated beneficiary).
The term “qualified higher education expenses” includes tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the designated beneficiary at an eligible education institution, regardless of whether the beneficiary is enrolled at an eligible educational institution on a full-time, half-time, or less than half-time basis. Qualified higher education expenses include expenses with respect to undergraduate or graduate-level courses. Moreover, qualified higher education expenses include, within limits, room and board expenses for any academic period during which the beneficiary is at least a half-time student.
EGTRA makes the following changes to educational IRAs, effective in 2002:
The annual limit on contributions to education IRAs is increased from $500 to $2,000. As a result, the total contributions that may be made by all contributors to one (or more) education IRAs established on behalf of any particular beneficiary is limited to $2,000 for each year.
The definition of “qualified education expenses” for which tax-free distributions form an education IRA may be made is expanded to include “qualified elementary and secondary school expenses,” meaning expenses for (1) tuition, fees, academic tutoring, special need services, books, supplies, computer equipment (including related software and services), and other equipment incurred in connection with the enrollment or attendance of the beneficiary at a public, private, or religious school providing elementary or secondary education (kindergarten through grade 12) as determined under state law, and (2) room and board, uniforms, transportation, and supplementary items or services (including extended day programs) required or provided by such a school in connection with such enrollment or attendance of the beneficiary.
• Key point. Allowing education IRAs to fund private elementary school education will provide little financial benefit to parents, especially if they plan on applying the earnings to tuition for one of the early elementary grades.
• Example. A couple begins contributing $2,000 annually to an education IRA in the year their daughter is born, and they earn 7% per year on their account. They will generate nontaxable earnings of only $1,943 by the time their daughter starts kindergarten at a church school 5 years later. And this leaves no tax-free earnings for any future year. Had the couple waited until their daughter started 10th grade (at age 16), their tax-free earnings at an annualized rate of 7% would have accumulated to $26,609. Had they waited until their daughter started college at age 18, their tax-free earnings would have accumulated to $35,622.
• Key point. Computer software involving sports, games, or hobbies is not considered a qualified elementary and secondary school expense unless the software is predominantly educational in nature.
The phase-out range for married taxpayers filing a joint return is increased so that it is twice the range for single taxpayers. As a result, the phase-out range for married taxpayers filing a joint return is $190,000 to $220,000 of modified adjusted gross income.
The rule prohibiting contributions to an education IRA after the beneficiary attains 18 does not apply in the case of a special needs beneficiary (as defined by IRS regulations).
Corporations and other entities (including tax-exempt organizations) are permitted to make contributions to education IRAs, regardless of the income of the corporation or entity during the year of the contribution.
Individual contributors to education IRAs are deemed to have made a contribution on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than April 15 of the following year.
Taxpayers are permitted to claim a HOPE credit or Lifetime Learning credit for a taxable year and to exclude from gross income amounts distributed (both the contributions and the earnings portions) from an education IRA on behalf of the same student as long as the distribution is not used for the same educational expenses for which a credit was claimed.
10. Private prepaid tuition programs
• Key point. Private religious schools will be allowed to establish qualified tuition programs that up until now have been available only to state schools.
Section 529 of the Code provides tax-exempt status to “qualified state tuition programs,” meaning certain programs established and maintained by a state (or agency or instrumentality thereof) under which persons may (1) purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the beneficiary to a waiver or payment of qualified higher education expenses of the beneficiary, or (2) make contributions to an account that is established for the purpose of meeting qualified higher education expenses of the designated beneficiary of the account (a “savings account plan”). The term “qualified higher education expenses” generally has the same meaning as does the term for purposes of education IRAs (as described above) and, thus, includes expenses for tuition, fees, books, supplies, and equipment required for the enrollment or attendance at an eligible educational institution, as well as certain room and board expenses for any period during which the student is at least a half-time student.
No amount is included in the gross income of a contributor to, or a beneficiary of, a qualified State tuition program with respect to any distribution from, or earnings under, such program, except that (1) amounts distributed or educational benefits provided to a beneficiary are included in the beneficiary’s gross income (unless excludable under another section of the tax code) to the extent such amounts or the value of the educational benefits exceed contributions made on behalf of the beneficiary, and (2) amounts distributed to a contributor (e.g., when a parent receives a refund) are included in the contributor’s gross income to the extent such amounts exceed contributions made on behalf of the beneficiary.
A specified individual ordinarily must be designated as the beneficiary at the commencement of participation in a qualified State tuition program (i.e., when contributions are first made to purchase an interest in such a program).
EGTRA expands the definition of “qualified tuition program,” beginning in 2002, to include certain prepaid tuition programs established and maintained by one or more eligible educational institutions (which may be private institutions) that satisfy the requirements under code section 529. In the case of a qualified tuition program maintained by one or more private eligible educational institutions, persons are able to purchase tuition credits or certificates on behalf of a designated beneficiary but would not be able to make contributions to a “savings account plan” (as described in code section 529(b)(1)(A)(ii)). Except to the extent provided in regulations, a tuition program maintained by a private institution is not treated as qualified unless it has received a ruling or determination from the IRS that the program satisfies applicable requirements.
Distributions from qualified tuition programs established and maintained by an entity other than a State used to pay for qualified higher education expenses are excluded from the recipient’s taxable income beginning in 2004.
EGTRA allows a taxpayer to claim a HOPE credit or Lifetime Learning credit for a taxable year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a qualified tuition program on behalf of the same student as long as the distribution is not used for the same expenses for which a credit was claimed.
• Key point. In order for a tuition program of a private eligible education institution to be a qualified tuition program, assets of the program must be held in a trust created or organized in the United States for the exclusive benefit of designated beneficiaries that complies with the requirements under sections 408(a)(2) and (5) of the code. Under these rules, the trustee must be a bank or other person who demonstrates that it will administer the trust in accordance with applicable requirements and the assets of the trust may not be commingled with other property except in a common trust fund or common investment fund.
11. Exclusion for employer-provided educational assistance
Employer-paid educational expenses are excludable from the gross income and wages of an employee if provided under a “section 127” educational assistance plan. Section 127 provides an exclusion of $5,250 annually for employer-provided educational assistance. The exclusion does not apply to graduate courses beginning after June 30, 1996. The exclusion for employer-provided educational assistance for undergraduate courses expires with respect to courses beginning after December 31, 2001.
In order for the exclusion to apply, certain requirements must be satisfied. The educational assistance must be provided pursuant to a separate written plan of the employer and the educational assistance program must not discriminate in favor of highly compensated employees.
EGTRA extends the exclusion for employer-provided educational assistance to graduate education and makes the exclusion (as applied to both undergraduate and graduate education) permanent. This provision is effective with respect to courses beginning after December 31, 2001.
• Example. Pastor Ed is taking graduate-level counseling courses at a local seminary. His church pays his tuition, which amounts to $5,000 in 2001. The exclusion of employer provided educational assistance was not available in 2001 for graduate level courses. However, because of EGTRA, the church’s payment of Pastor Ed’s tuition in 2002 may be nontaxable employer provided educational assistance since this benefit no longer is limited to undergraduate education.
• Key point. Educational expenses that do not qualify for the section 127 exclusion may be excludable from income as a working condition fringe benefit. In general, education qualifies as a working condition fringe benefit if the employee could have deducted the education expenses under section 162 if the employee paid for the education. In general, education expenses are deductible by an individual under section 162 if the education (1) maintains or improves a skill required in a trade or business currently engaged in by the taxpayer, or (2) meets the express requirements of the taxpayer’s employer, applicable law or regulations imposed as a condition of continued employment. However, education expenses are generally not deductible if they relate to certain minimum educational requirements or to education or training that enables a taxpayer to begin working in a new trade or business.
12. Deduction for qualified higher education expenses
Under current law, taxpayers may not deduct the education and training expenses of either themselves or their dependents. However, a deduction for education expenses is allowed if the education or training (1) maintains or improves a skill required in a trade or business currently engaged in by the taxpayer, or (2) meets the express requirements of the taxpayer’s employer, or requirements of applicable law or regulations, imposed as a condition of continued employment. Education expenses are not deductible if they relate to certain minimum educational requirements or to education or training that enables a taxpayer to begin working in a new trade or business. In the case of an employee, education expenses (if not reimbursed by the employer) may be claimed as an itemized deduction only if such expenses meet the above described criteria for deductibility under section 162 and only to the extent that the expenses, along with other miscellaneous deductions, exceed 2 percent of the taxpayer’s adjusted gross income.
EGTRA permits taxpayers an above-the-line deduction for qualified higher education expenses paid by the taxpayer during a taxable year. Qualified higher education expenses are defined in the same manner as for purposes of the HOPE credit.
• Key point. For purposes of the HOPE credit, qualified higher education expenses include tuition and fees required to be paid to an eligible educational institution as a condition of enrollment or attendance of an eligible student at the institution. Charges and fees associated with meals, lodging, insurance, transportation, and similar personal, living, or family expenses are not eligible for the credit. The expenses of education involving sports, games, or hobbies are not qualified tuition and related expenses unless this education is part of the student’s degree program. Qualified tuition and related expenses do not include expenses covered by employer-provided educational assistance and scholarships that are not required to be included in the gross income of either the student or the taxpayer claiming the credit.
• Key point. Since this is an above-the-line deduction, it is available whether or not a taxpayer can itemize deductions on Schedule A.
In 2002 and 2003, taxpayers with adjusted gross income that does not exceed $65,000 ($130,000 in the case of married couples filing joint returns) are entitled to a maximum deduction of $3,000 per year. Taxpayers with adjusted gross income above these thresholds would not be entitled to a deduction. In 2004 and 2005, taxpayers with adjusted gross income that does not exceed $65,000 ($130,000 in the case of married taxpayers filing joint returns) are entitled to a maximum deduction of $4,000 and taxpayers with adjusted gross income that does not exceed $80,000 ($160,000 in the case of married taxpayers filing joint returns) are entitled to a maximum deduction of $2,000. This provision expires at the end of 2005.
• Key point. Taxpayers are not eligible to claim this deduction and a HOPE or Lifetime Learning Credit in the same year with respect to the same student. A taxpayer may claim an exclusion for distributions from a qualified tuition plan, distributions from an education individual retirement account, or interest on education savings bonds, as long as both a deduction and an exclusion are not claimed for the same expenses.
Estates and Gift Taxes
13. Phase-out and repeal of estate and generation-skipping transfer taxes
Under current law, a gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers at death. The gift tax and the estate tax are unified so that a single graduated rate schedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. The unified estate and gift tax rates begin at 18 percent on the first $10,000 in cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 million.
A generation-skipping transfer tax generally is imposed on transfers, either directly or through a trust or similar arrangement, to a “skip person” (i.e., a beneficiary in a generation more than one generation below that of the transferor). Transfers subject to the generation-skipping transfer tax include direct skips, taxable terminations, and taxable distributions. The generation-skipping transfer tax is imposed at a flat rate of 55 percent (i.e., the top estate and gift tax rate) on cumulative generation-skipping transfers in excess of $1 million (indexed for inflation occurring after 1997).
The congressional conference committee concluded that
the estate and generation-skipping transfer taxes are unduly burdensome on affected taxpayers, and particularly decedents’ estates, decedents’ heirs, and businesses, such as small business, family-owned businesses, and farming businesses. The committee further believes that it is inappropriate to impose a tax by reason of the death of a taxpayer. In addition, the committee believes that increasing the gift tax unified credit effective exemption amount and reducing gift tax rates will lessen the burden that gift taxes impose on all taxpayers and promote simplification for those taxpayers who would no longer be subject to the gift tax.
As a result, EGTRA makes the following changes:
Beginning in 2011, the estate and generation-skipping transfers taxes are repealed.
After repeal, the “basis” of assets received from a decedent generally will equal the basis of the decedent (i.e., carryover basis) at death. However, a decedent’s estate is permitted to increase the basis of assets transferred by up to a total of $1.3 million. The basis of property transferred to a surviving spouse can be increased (i.e., stepped up) by an additional $3 million. As a result, the basis of property transferred to a surviving spouse can be increased (i.e., stepped up) by a total of $4.3 million. In no case can the basis of an asset be adjusted above its fair market value. For these purposes, the executor will determine which assets and to what extent each asset receives a basis increase. The $1.3 million and $3 million amounts are adjusted annually for inflation occurring after 2010.
• Key point. The income tax exclusion of up to $250,000 of gain on the sale of a principal residence is extended to estates and heirs. Therefore, if the decedent’s estate or an heir sells the decedent’s principal residence, $250,000 of gain can be excluded on the sale of the residence, provided the decedent used the property as a principal residence for two or more years during the five-year period prior to the sale. In addition, if an heir occupies the property as a principal residence, the decedent’s period of ownership and occupancy of the property as a principal residence can be added to the heir’s subsequent ownership and occupancy in determining whether the property was owned and occupied for two years as a principal residence.
From 2002 and through 2010, the estate and gift tax rates are reduced, the unified credit effective exemption amount are increased (from up to $1 million for lifetime transfers in 2004 to up to $4 million for deathtime transfers in 2010), and the generation-skipping transfer tax exemption amount is increased. The new rate structure is summarized in Table 11.
Table 11: Unified Credit Exemption; Highest Estate and Gift Tax Rates
calendar year
estate and generation skipping tax deathtime transfer exemption
highest estate and gift tax rate (percentage)
2002
$1 million
50
2003
$1 million
49
2004
$1.5 million
48
2005
$1.5 million
47
2006
$2 million
46
2007
$2 million
45
2008
$2 million
45
2009
$3.5 million
45
2010
taxes repealed
45
2011
taxes repealed
top individual income rate under EGTRA (gift tax only)
Beginning in 2011, the top gift tax rate will be 40 percent, and, except as provided in the tax regulations, a transfer to a trust will be treated as a taxable gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under the grantor trust provisions of the tax code.
• Tip. Charitable remainder trusts will become an even more attractive option for donors once the estate tax is repealed. Following repeal of the estate tax, gifts of property made at death will have a “carryover basis,” meaning that when an heir later sells the property any gain will be computed on the basis of what the decedent paid for the property, however long ago. This means that heirs will be stuck with paying tax on the appreciation or gain in the value of the property that occurred during the decedent’s lifetime, which in many cases will be substantial. In the past, persons receiving gifts of property by inheritance generally had a “stepped up” basis equal to the property’s market value at the date of the donor’s death. This meant that any appreciation or “gain” realized by the donor was not taxed. The carryover basis is the price Congress exacted for elimination of the estate tax. However, note that this harsh rule can be minimized or even avoided if donors transfer appreciated property to a charitable remainder trust. Here’s how it works. A donor creates a charitable remainder trust and then transfers appreciated, income-generating property to the trust. The trust makes annual (or more frequent) distributions to the donor or one or more family members for a term of years (ordinarily not more than 20), with an irrevocable remainder interest to a designated charity. In other words, property is given to a trust with income from the property being paid to the donor or the donor’s family for a period of years, and with a designated charity ultimately receiving the property. It is an excellent tool in tax planning for larger estates, as well as for persons with greatly appreciated property.
IRAs and Retirement Plans
14. Individual retirement arrangements (“IRAs”)
• Key point. The maximum annual contribution to an IRA account is $2,000-unchanged since 1978. EGTRA substantially boosts this amount, over several years.
Under current law, an individual may make deductible contributions to an IRA up to the lesser of $2,000 or the individual’s compensation if neither the individual nor the individual’s spouse is an active participant in an employer-sponsored retirement plan. In the case of a married couple, deductible IRA contributions of up to $2,000 can be made for each spouse (including, for example, a homemaker who does not work outside the home), if the combined compensation of both spouses is at least equal to the contributed amount. If the individual (or the individual’s spouse) is an active participant in an employer-sponsored retirement plan, the $2,000 deduction limit is phased-out for taxpayers with adjusted gross income (“AGI”) over certain levels for the taxable year.
EGTRA increases the maximum annual dollar contribution limit for IRA contributions from $2,000 to $3,000 for 2002 through 2004, $4,000 for 2005 through 2007, and $5,000 for 2008. After 2008, the limit is adjusted annually for inflation in $500 increments. In addition, individuals who have attained age 50 may make additional “catch-up” IRA contributions. The otherwise maximum contribution limit (before application of the AGI phase-out limits) for an individual who has attained age 50 before the end of the taxable year is increased by $500 for 2002 through 2005, and $1,000 for 2006 and thereafter.
• Key point. The congressional conference committee explained the increase in the IRA contribution limit as follows: “The committee is concerned about the low national savings rate, and that individuals may not be saving adequately for retirement. The present-law IRA contribution limits have not been increased since 1981. The committee believes that the limits should be raised in order to allow greater savings opportunities. The committee understands that, for a variety of reasons, older individuals may not have been saving sufficiently for retirement. For example, some individuals, especially women, may have left the workforce temporarily in order to care for children. Such individuals may have missed retirement savings options that would have been available had they remained in the workforce. Thus, the committee believes it appropriate to accelerate the increase in the IRA contribution limits for such individuals.”
• Example. A church has a senior pastor who is 52 years old, and a youth pastor who is 30 years old. The church does not participate in a retirement program for its staff. In 2001, the senior pastor and youth pastor can each contribute $2,000 to an IRA account. In 2002, however, the senior pastor will be able to contribute $3,500 (maximum annual contribution of $3,000 plus a “catch-up” contribution of $500), and the youth pastor will be able to contribute $3,000. In 2008, the senior pastor will be able to contribute $6,000 (maximum annual contribution of $5,000 plus a “catch-up” contribution of $1,000), and the youth pastor will be able to contribute $5,000.
15. “Deemed” IRAs
EGTRA provides that, if an “eligible retirement plan” permits employees to make voluntary employee contributions to a separate account or annuity that (1) is established under the plan, and (2) meets the requirements applicable to either traditional IRAs or Roth IRAs, then the separate account or annuity is deemed a traditional IRA or a Roth IRA, as applicable, for all purposes of the tax code. For example, the reporting requirements applicable to IRAs apply. The deemed IRA is not subject to the rules pertaining to the eligible retirement plan. In addition, the deemed IRA is not taken into account in applying such rules to any other contributions under the plan. The deemed IRA is subject to the exclusive benefit and fiduciary rules of ERISA to the extent otherwise applicable to the plan, and are not subject to the ERISA reporting and disclosure, participation, vesting, funding, and enforcement requirements applicable to the eligible retirement plan. An eligible retirement plan includes a qualified plan under code section 401 or a tax-sheltered annuity (403(b) plan).
This provision is effective for plan years beginning in 2003.
16. Increase in benefit and contribution limits
Under current law, annual additions to a defined contribution plan with respect to each plan participant cannot exceed the lesser of (1) 25% of compensation, or (2) $35,000 (for 2001). Annual additions are the sum of employer contributions and employee contributions. The $35,000 limit is indexed for cost-of-living adjustments in $5,000 increments. Under a defined benefit plan, the maximum annual benefit payable at retirement is generally the lesser of (1) 100% of average compensation, or (2) $140,000 (for 2001). The dollar limit is adjusted for cost-of-living increases in $5,000 increments.
EGTRA increases the $35,000 limit on annual additions to a defined contribution plan to $40,000. This amount is indexed in $1,000 increments. It also increases the $140,000 annual benefit limit under a defined benefit plan to $160,000. The dollar limit is reduced for benefit commencement before age 62 and increased for benefit commencement after age 65.
These changes are effective in 2002.
17. Increase in compensation limitation
Under current law, the annual compensation of each participant that may be taken into account for purposes of determining contributions and benefits under a plan, applying the deduction rules, and for nondiscrimination testing purposes is limited to $170,000 (for 2001). The compensation limit is indexed for cost-of-living adjustments in $10,000 increments. EGTRA increases the limit on compensation that may be taken into account under a plan to $200,000. This amount is indexed in $5,000 increments.
This provision takes effect in 2002.
18. Increase in elective deferral limit
• Key point. The amount that employees can contribute to a tax-sheltered annuity (a 403(b) plan) is limited to $10,500 in 2001. This amount will increase to $11,000 in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005, and $15,000 in 2006 at which time the amount will be indexed for inflation annually in $500 increments.
Under current law, under certain salary reduction arrangements, an employee may elect to have the employer make payments as contributions to a plan on behalf of the employee, or to the employee directly in cash. Contributions made at the election of the employee are called elective deferrals. The maximum annual amount of elective deferrals that an individual may make to a qualified cash or deferred arrangement (a “section 401(k) plan”), a tax-sheltered annuity (“section 403(b) annuity”) or a salary reduction simplified employee pension plan (“SEP”) is $10,500 (for 2001). The maximum annual amount of elective deferrals that an individual may make to a SIMPLE plan is $6,500 (for 2001). These limits are indexed for inflation in $500 increments.
EGTRA increases the dollar limit on annual elective deferrals under section 401(k) plans, section 403(b) annuities and salary reduction SEPs to $11,000 in 2002. In 2003 and thereafter, the limits are increased in $1,000 annual increments until the limits reach $15,000 in 2006, with indexing in $500 increments thereafter. The provision increases the maximum annual elective deferrals that may be made to a SIMPLE plan to $7,000 in 2002. In 2003 and thereafter, the SIMPLE plan deferral limit is increased in $1,000 annual increments until the limit reaches $10,000 in 2005. Beginning after 2005, the $10,000 dollar limit is indexed in $500 increments.
19. Treatment of self-employment income of members of certain religious faiths
In general, contributions to qualified plans and IRAs are based on compensation. For a self-employed individual, compensation generally means net earnings subject to self-employment taxes (“SECA taxes”). Members of certain religious faiths may elect to be exempt from SECA taxes on religious grounds. Because the net earnings of such individuals are not subject to SECA taxes, these individuals are considered to have no compensation on which to base contributions to a retirement plan. Under an exception to this rule, net earnings of such individuals are treated as compensation for purposes of making contributions to an IRA.
EGTRA amends the definition of compensation for purposes of all qualified plans and IRAs (including SIMPLE arrangements) to include an individual’s net earnings that would be subject to SECA taxes but for the fact that the individual is covered by a religious exemption. The provision is effective beginning in 2002.
• Key point. This provision does not apply to ministers who have elected to exempt themselves from self-employment taxes with respect to their ministerial services. Rather, it applies to another provision of the tax code that permits members of certain religious faiths (such as the Amish) to exempt themselves from social security. This exemption is addressed in chapter 9, section G, of Richard Hammar’s annual Church and Clergy Tax Guide.
20. Repeal of coordination requirements for “section 457 plans”
Compensation deferred under an eligible deferred compensation plan of a tax-exempt or state and local government employer (a “section 457 plan”) is not includible in gross income until paid or made available. In general, the maximum permitted annual deferral under such a plan is the lesser of (1) $8,500 (in 2001) or (2) 33 1/3% of compensation. The $8,500 limit is increased for inflation in $500 increments. In applying the $8,500 limit, contributions under a tax-sheltered annuity (“section 403(b) annuity”) are taken into account. Further, the amount deferred under a section 457 plan is taken into account in applying a special catch-up rule for section 403(b) annuities.
EGTRA repeals the rules coordinating the section 457 dollar limit with contributions under other types of plans, beginning in 2002.
21. “Roth contributions” to 403(b) plans
Individuals with adjusted gross income below certain levels generally may make nondeductible contributions to a Roth IRA and may convert a deductible or nondeductible IRA into a Roth IRA. Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includible in income and are not subject to the additional 10% tax on early withdrawals. A qualified distribution is a distribution that (1) is made after the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA, and (2) is made after attainment of age 59, is made on account of death or disability, or is a qualified special purpose distribution (i.e., for first-time home-buyer expenses of up to $10,000). A distribution from a Roth IRA that is not a qualified distribution is includible in income to the extent attributable to earnings, and is subject to the 10-percent tax on early withdrawals (unless an exception applies).
EGTRA allows a section 401(k) plan or a section 403(b) annuity to include a “Roth contribution program” that permits a participant to elect to have all or a portion of the participant’s elective deferrals under the plan treated as Roth contributions. Roth contributions are elective deferrals that the participant designates (at such time and in such manner as the IRS may prescribe) as not excludable from the participant’s gross income. The annual dollar limitation on a participant’s Roth contributions is the annual limitation on elective deferrals, reduced by the participant’s elective deferrals that the participant does not designate as Roth contributions. The plan is required to establish a separate account, and maintain separate recordkeeping, for a participant’s Roth contributions (and earnings).
A qualified distribution from a participant’s Roth contribution account is not includible in the participant’s gross income. A qualified distribution is a distribution that is made after the end of a specified nonexclusion period and that is (1) made on or after the date on which the participant attains age 59, (2) made to a beneficiary (or to the estate of the participant) on or after the death of the participant, or (3) attributable to the participant being disabled. The nonexclusion period is the 5-year-taxable period beginning with the earlier of (1) the first taxable year for which the participant made a Roth contribution to any Roth contribution account established for the participant under the plan, or (2) if the participant has made a rollover contribution to the Roth contribution account that is the source of the distribution from a Roth contribution account established for the participant under another plan, the first taxable year for which the participant made a Roth contribution to the previously established account. A participant is permitted to roll over a distribution from a Roth contribution account only to another Roth contribution account or a Roth IRA of the participant.
The Secretary of the Treasury is directed to require the plan administrator of each section 403(b) annuity that permits participants to make Roth contributions to make such returns and reports regarding Roth contributions to the Secretary, plan participants and beneficiaries, and other persons that the Secretary may designate.
This provision takes effect in 2006.
• Key point. In explaining this important change, the congressional conference committee observed, “The recently-enacted Roth IRA provisions have provided individuals with another form of tax-favored retirement savings. For a variety of reasons, some individuals may prefer to save through a Roth IRA rather than a traditional deductible IRA. The committee believes that similar savings choices should be available to participants in section 401(k) plans and tax-sheltered annuities.
• Key point. Higher income taxpayers cannot make contributions to “Roth IRAs.” For 2001, married couples filing jointly cannot make Roth IRA contributions if their adjusted gross income exceeds $160,000. For single taxpayers, the amount is $110,000. However, no one is disqualified from making Roth contributions to a 403(b) plan because of income. This will benefit highly paid clergy.
• Key point. Some churches have established their own 403(b) plans for their employees. Maintaining such plans in the future will become increasingly difficult because of a number of changes made by EGTRA, including the following: (1) Every 403(b) plan is required to establish a separate account, and maintain separate recordkeeping, for each participant’s Roth contributions (and earnings). This requirement will impose a heavy administrative burden on some churches. Some churches may attempt to avoid this burden by not allowing employees to make Roth contributions, but this will be a short-sighted solution since it is probable that many employees not only will be aware of the option of Roth contributions but will demand it. (2) EGTRA requires the IRS to require administrators of any 403(b) plan that allows Roth contributions to “make such returns and reports regarding Roth contributions to the [IRS], plan participants and beneficiaries, and other persons that the IRS may designate.” This is yet another administrative burden that will make the administration of a 403(b) plan by a local church undesirable. (3) The new law permits “rollovers” between Roth IRAs and Roth contributions to a 403(b) plan. Plan administrators need to be prepared for requests to roll funds in and out of Roth 403(b) accounts. Also, the new law appears to allow rollovers between Roth 403(b) accounts and Roth 401(k) accounts.
• Tip. Ministers and lay church employees who currently are participating in a 403(b) retirement plan should carefully consider whether or not they want to make designated Roth contributions when this option becomes available in 2006. For many taxpayers, the dual advantages of no taxes on gains or distributions are compelling and outweigh the loss of any deduction for annual contributions to their account.
22. Nonrefundable credit to certain individuals for elective deferrals and IRA contributions
EGTRA provides a temporary nonrefundable tax credit for contributions made by eligible taxpayers to a qualified retirement plan. The maximum annual contribution eligible for the credit is $2,000. The credit rate depends on the adjusted gross income (“AGI”) of the taxpayer. Only joint returns with AGI of $50,000 or less, head of household returns of $37,500 or less, and single returns of $25,000 or less are eligible for the credit. The credit is in addition to any deduction or exclusion that would otherwise apply with respect to the contribution. The credit offsets minimum tax liability as well as regular tax liability. The credit is available to individuals who are 18 or over, other than individuals who are full-time students or claimed as a dependent on another taxpayer’s return.
The credit is available with respect to elective contributions to a section 401(k) plan, section 403(b) annuity, SIMPLE or SEP plans, and contributions to a traditional or Roth IRA. The rules governing such contributions continue to apply.
The amount of any contribution eligible for the credit is reduced by taxable distributions received by the taxpayer and his or her spouse from any savings arrangement described above or any other qualified retirement plan during the taxable year for which the credit is claimed, the two taxable years prior to the year the credit is claimed, and during the period after the end of the taxable year and prior to the due date for filing the taxpayer’s return for the year. In the case of a distribution from a Roth IRA, this rule applies to any such distributions, whether or not taxable.
The credit rates based on AGI are summarized in Table 12.
Table 12: Credit Rates Based on AGI
joint returns
heads of household
all other filers
credit rate ($2,000 maximum)
$0-30,000
$0-22,500
$0-15,000
50%
$30,000-32,500
$22,500-24,376
$15,000-16,250
20%
$32,500-50,000
$24,375-37,500
$16,250-25,000
10%
over $50,000
over $37,500
over $25,000
0%
This provision is effective beginning in 2002. It expires at the end of 2007.
• Key point. In explaining this provision, a congressional conference committee observed, “The committee recognizes that the rate of private savings in the United States is low; in particular many low and middle-income individuals have inadequate savings or no savings at all. A key reason for these low levels of saving is that lower-income families are likely to be more budget constrained with competing needs such as food, clothing, shelter, and medical care taking a larger portion of their income. The Committee believes providing an additional tax incentive for low- and middle-income individuals will enhance their ability to save adequately for retirement.”
Example. Joan is a lay church employee who is married and files a joint tax return reporting $28,000 of adjusted gross income in 2002. Joan makes a $1,000 contribution, through salary reduction, to a 403(b) retirement plan offered by her denomination. Joan will be able to claim a $1,000 credit in computing her 2002 taxes. This credit will offset the “cost” of making the $1,000 contribution to the 403(b) plan, since the contribution reduces taxable income while the credit reduces taxes.
• Key point. Church employees who are over 50 years of age, and who are participants in a 403(b) annuity retirement program, will be permitted to make additional “catch-up” contributions to their plan.
The limit on elective deferrals under a section 401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or deferrals under a section 457 plan is increased for individuals who have attained age 50 by the end of the year. The catch-up contribution provision does not apply to after-tax employee contributions. Additional contributions may be made by an individual who has attained age 50 before the end of the plan year and with respect to whom no other elective deferrals may otherwise be made to the plan for the year because of the application of any limitation of the tax code (e.g., the annual limit on elective deferrals) or of the plan.
The additional amount of elective contributions that may be made by an eligible individual participating in such a plan is the lesser of (1) the applicable dollar amount, or (2) the participant’s compensation for the year reduced by any other elective deferrals of the participant for the year. The applicable dollar amount under a section 401(k) plan, section 403(b) annuity, SEP, or section 457 plan is $1,000 for 2002, $2,000 for 2003, $3,000 for 2004, $4,000 for 2005, and $5,000 for 2006 and thereafter. The applicable dollar amount under a SIMPLE is $500 for 2002, $1,000 for 2003, $1,500 for 2004, $2,000 for 2005, and $2,500 for 2006 and thereafter. The $5,000 and $2,500 amounts are adjusted for inflation in $500 increments in 2007 and thereafter.
Catch-up contributions are not subject to any other contribution limits and are not taken into account in applying other contribution limits. In addition, such contributions are not subject to applicable nondiscrimination rules.
An employer is permitted to make matching contributions with respect to catch-up contributions. Any such matching contributions are subject to the normally applicable rules.
This provision takes effect in 2002.
• Example. In 2006, Gwen is a church employee who is over 50 years of age and who is a participant in a section 403(b) plan. Gwen’s compensation for the year is $30,000. The maximum annual deferral limit (without regard to the catch-up provision) is $15,000. Under the terms of the plan, the maximum permitted deferral is 10% of compensation or, in Gwen’s case, $3,000. Under the new catch-up rule, Gwen can contribute up to $8,000 for the year ($3,000 under the normal operation of the plan, and an additional $5,000 catch-up contribution).
24. Revised limit on contributions to tax-sheltered annuities
In the case of a tax-sheltered annuity (a “section 403(b) annuity”), the annual contribution generally cannot exceed the lesser of the “exclusion allowance” or the section 415(c) defined contribution limit. The exclusion allowance for a year is equal to 20% of the employee’s includible compensation, multiplied by the employee’s years of service, minus excludable contributions for prior years under qualified plans, tax-sheltered annuities or section 457 plans of the employer. In addition to this general rule, employees of churches and some other charities may elect one of several “special rules” that increase the amount of allowable contributions. The election of a special rule is irrevocable, and an employee may not elect to have more than one special rule apply.
Under one special rule, in the year the employee separates from service, the employee may elect to contribute up to the exclusion allowance, without regard to the 25% of compensation limit under section 415. Under this rule, the exclusion allowance is determined by taking into account no more than 10 years of service.
Under a second special rule, the employee may contribute up to the lesser of: (1) the exclusion allowance; (2) 25% of the participant’s includible compensation; or (3) $15,000.
Under a third special rule, the employee may elect to contribute up to the section 415(c) limit, without regard to the exclusion allowance. If this option is elected, then contributions to other plans of the employer are also taken into account in applying the limit.
• Key point. For purposes of determining the contribution limits applicable to section 403(b) annuities, includible compensation means the amount of compensation received from the employer for the most recent period which may be counted as a year of service under the exclusion allowance. In addition, includible compensation includes elective deferrals and similar salary reduction amounts.
EGTRA repeals the exclusion allowance applicable to contributions to tax-sheltered annuities. As a result, such annuities are subject to the limits applicable to tax-qualified plans. A congressional conference committee explained this change as follows, “The present law rules that limit contributions to defined contribution plans by a percentage of compensation reduce the amount that lower and middle-income workers can save for retirement. The present-law limits may not allow such workers to accumulate adequate retirement benefits, particularly if a defined contribution plan is the only type of retirement plan maintained by the employer. Conforming the contribution limits for tax-sheltered annuities to the limits applicable to retirement plans will simplify the administration of the pension laws, and provide more equitable treatment for participants in similar types of plans.”
This change takes effect in 2002.
25. Increase in contribution percentage limit for defined contribution plans
In the case of a tax-qualified defined contribution retirement plan, section 415(c) of the tax code limits the annual additions that can be made to the plan on behalf of an employee to the lesser of $35,000 (for 2001) or 25% of the employee’s compensation. Annual additions include employer contributions, including contributions made at the election of the employee (through elective deferrals of salary), and after-tax employee contributions. For this purpose, compensation means taxable compensation of the employee, plus elective deferrals, and similar salary reduction contributions.
EGTRA increases the 25% of compensation limit on annual additions under a defined contribution plan to 100%. According to the congressional conference committee, the 25% limit was repealed because it has operated to reduce the amount that lower and middle-income workers can save for retirement. Further, conforming the contribution limits for tax-sheltered annuities to the limits applicable to retirement plans generally will simplify the administration of the pension laws, and provide more equitable treatment for participants in similar types of plans. This change takes effect in 2002.
• Key point. Under a special provision in the tax code, church employees with adjusted gross income of less than $17,000 can exclude from gross income a minimum amount called an “alternative exclusion allowance.” The minimum is the exclusion allowance as described above, but not less than the smaller of (1) $3,000, or (2) includible compensation. EGTRA eliminates the alternative exclusion allowance. This means that beginning in 2002 church employees may either (1) use the standard contribution limitation under code section 415, as amended or (2) elect the special contribution limit for church plans described in code section 415(c)(7), which allows employees to contribute up to $10,000 for the year, regardless of the percentage of income. The total contributions over an employee’s lifetime under this election cannot be more than $40,000. If the contributions are elective deferrals, they are also subject to the limit on elective deferrals, discussed earlier.
26. Provisions relating to hardship withdrawals
Elective deferrals under a tax-sheltered annuity (403(b) plan) may not be distributed prior to the occurrence of one or more specified events. One such event is the financial hardship of the employee, which IRS regulations define as an immediate and heavy financial need for which a premature distribution is needed. The regulations provide a safe harbor under which a distribution may be deemed necessary to satisfy an immediate and heavy financial need. One requirement of this safe harbor is that the employee be prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 12 months after receipt of the hardship distribution.
EGTRA directs the IRS to revise the regulations to reduce from 12 months to 6 months the period during which an employee must be prohibited from making elective contributions and employee contributions in order for a distribution to be deemed necessary to satisfy an immediate and heavy financial need. The revised regulations are to be effective for years beginning in 2002.
27. Rollovers of retirement plan and IRA distributions
Under current law, “eligible rollover distributions” from a tax-sheltered annuity (“section 403(b)” plan) may be rolled over into an IRA or another section 403(b) annuity. Distributions from a section 403(b) annuity cannot be rolled over into a tax-qualified plan, and section 403(b) annuities are not required to accept rollovers. In addition, distributions from an IRA cannot be rolled over into a section 403(b) annuity. Plan administrators of 403(b) annuities are required to provide a written explanation of rollover rules to individuals who receive a distribution eligible for rollover. In general, the notice is to be provided within a reasonable period of time before making the distribution and is to include an explanation of (1) the provisions under which the individual may have the distribution directly rolled over to another eligible retirement plan, (2) the provision that requires withholding if the distribution is not directly rolled over, and (3) the provision under which the distribution may be rolled over within 60 days of receipt.
As is the case with the rollover rules, different rules regarding taxation of benefits apply to different types of tax-favored arrangements. In general, distributions from a qualified plan, section 403(b) annuity, or IRA are includible in income in the year received. In certain cases, distributions from qualified plans are eligible for capital gains treatment and averaging. These rules do not apply to distributions from another type of plan. Distributions from a qualified plan, IRA, and section 403(b) annuity generally are subject to an additional 10% early withdrawal tax if made before age 59 1/2. There are a number of exceptions to the early withdrawal tax. Some of the exceptions apply to all three types of plans, and others apply only to certain types of plans. For example, the 10% early withdrawal tax does not apply to IRA distributions for educational expenses, but does apply to similar distributions from qualified plans and section 403(b) annuities.
EGTRA provides that eligible rollover distributions from qualified retirement plans or section 403(b) annuities can be rolled over to any of such plans or arrangements. Similarly, distributions from an IRA generally are permitted to be rolled over into a qualified plan or section 403(b) annuity. Section 403(b) annuities are not be required to accept rollovers.
28. Employer-provided retirement advice
Current law does not specifically exclude from taxable income the value of employer-provided retirement planning services. EGTRA contains a new exclusion for qualified retirement planning services provided to an employee and his or her spouse by an employer maintaining a “qualified plan.” The term “qualified plan” is defined to include 403(b) annuities and several other types of retirement plans. This means that the value of retirement planning advice provided by a church that maintains a 403(b) plan does not constitute taxable income for payroll tax reporting purposes (it is not reported on Form W-2, Form 941, and there is no tax withholding on the value of such advice), and employees do not report the value of the advice as taxable income on their tax return.
This new exclusion does not apply with respect to highly compensated employees (generally, those earning annual compensation of at least $85,000) unless the services are available on substantially the same terms to each member of the group of employees who normally are provided education and information regarding the employer’s qualified plan.
• Key point. “Qualified retirement planning services” are retirement planning advice and information. The exclusion is not limited to information regarding the qualified plan. For example, it applies to advice and information regarding retirement income planning for an individual and his or her spouse and how the employer’s plan fits into the individual’s overall retirement income plan. On the other hand, the exclusion does not apply to services that may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services.
The provision takes effect in 2002.
Miscellaneous changes
29. Backup withholding
Employers are required to engage in “backup withholding” at a rate of 31% for payments made to self-employed workers who do not disclose their social security number. The 31% is reported on the church’s 941 forms. Employers need the correct social security number to complete the worker’s Form 1099-MISC. EGTRA decreases the backup withholding rate from 31% to 30.5% for amounts paid to self-employed persons after August 6, 2001. For amounts paid after December 31, 2001, the backup withholding rate is equal to the fourth lowest income tax rate (for single persons). Table 13 shows the backup withholding rates for future years.
Table 13: Backup Withholding Rates
Year
Backup withholding rate
2001 (through August 6)
31%
2001 (after August 6)
30.5%
2002-2003
30%
2004-2005
29%
2006 and thereafter
28%
• Key point. The backup withholding rate shown in the December 2000 edition of Form W-9 is incorrect for amounts paid after August 6, 2001. Form W-9 (and instructions) will be revised in December 2001 to reflect the new backup withholding rate for amounts paid after December 31, 2001. In addition, the backup withholding rate shown in the 2001 version of Form 1099 is incorrect for amounts paid after August 6, 2001. The 2002 version of this form (and instructions) will show the new backup withholding rate for amounts paid after December 31, 2001.
• Example. A church invites a visiting pastor to conduct services for one week in September of 2001, and agrees to pay him $1,000. The visiting pastor declines to disclose his social security number. As a result, the church must withhold $305 from his compensation as backup withholding (30.5% of total compensation).
Advantages of a Charitable Remainder Trust
Church members with greatly appreciated property may be “better off” for tax purposes if they transfer their property to a charitable remainder trust. This is often a “win-win” situation, since both the church member and the church will benefit. Here’s how it works. A donor creates a charitable remainder trust and then transfers appreciated, income-generating property to the trust. The trust makes annual (or more frequent) distributions to the donor or one or more family members for a term of years (ordinarily not more than 20), with an irrevocable remainder interest to a designated charity. Many churches and other religious organizations are using these trusts to raise funds, since they provide the following benefits:
The donor receives a current charitable contribution deduction for the value of the “remainder” interest that will be distributed to the designated charity at the conclusion of the trust.
The donor, or anyone the donor designates, receives income payments for a specified number of years (up to 20).
The designated charity has the assurance that it will receive the trust property at some specified future date. This helps the charity with long-range planning.
The new carryover basis rule is avoided since the trust does not pay tax on any gain resulting from the sale of the property, so the property’s basis is irrelevant.
