Federal

Legal Developments

Taxpayers Must Meet Strict Requirements for Continuing Education Expense Deductions

Key point. Continuing education expenses that are part of a program of study that will


Key point. Continuing education expenses that are part of a program of study that will lead to qualifying a taxpayer in a new trade or business are not deductible as a business expense even if the taxpayer did not intend to enter that trade or business.

The Tax Court denied a taxpayer's deduction for continuing education expenses because he failed to meet the strict requirements of the tax code. A physician claimed a business expense deduction on his tax return for flight lessons that would enable him to provide medical services to persons in remote areas. The IRS denied the deduction, and the taxpayer appealed. The Tax Court observed:

Section 162 [of the tax code] allows a deduction for all ordinary and necessary expenses paid in carrying on a trade or business. Section 162 does not explicitly provide for a deduction for continuing education expenses, but such expenses may be deductible under section 162 if they fall within its regulations. The regulations under section 162 allow a taxpayer to deduct expenditures for education if that education either (1) maintains or improves skills that are required by an individual in his employment, trade, or business or (2) meets express requirements set by the individual's employer or by a law or regulation as a condition of continued employment, status, or compensation. Education undertaken by an individual to meet minimum education requirements for qualification in his own or any other trade or business are not deductible.

The court noted that "in deciding whether the taxpayer's flying lessons are deductible education expenses under section 162, we need to determine whether the education expenses were incurred to maintain or improve his skills for use in his business or whether the education would qualify him to meet the minimum education requirements of some other trade or business."

The court cited previous decisions in which it held that if the education for which deductions are claimed qualify a taxpayer "to perform tasks and activities that are significantly different from those that he could perform before receiving the education, then the education qualifies the taxpayer for a new trade or business … . It is irrelevant whether this education actually leads to qualification in a new trade or business." The court concluded:

The taxpayer paid educational expenses for flight instruction. He testified that he intended to use these skills in his business. However, he failed to demonstrate that his flying lessons improved or maintained his skills as a doctor. The skills petitioner learned during the flying lessons were significantly different from the skills he already possessed. Consequently, the cost of his flying lessons are not deductible continuing education expenses under section 162. It is irrelevant that these lessons may have helped him reach patients in rural areas.

What This Means For Churches:

It is common for pastors to enroll in continuing education courses at local universities and seminaries, or through online courses. Can the costs of these educational opportunities be deducted as a business expense on a pastor's tax return? As the Tax Court noted, you may deduct expenses you incur for education, such as tuition, books, supplies, correspondence courses, and certain travel and transportation expenses, even though the education may lead to a degree, if the education (1) is required by your employer, or by law or regulation, to keep your salary, status, or job or (2) maintains or improves skills required in your present work.

However, you may not deduct expenses incurred for education, even if one or both of the above-mentioned requirements are met, if the education (1) is required in order to meet the minimum educational requirements to qualify you in your trade or business or (2) is part of a program of study that will lead to qualifying you in a new trade or business, even if you did not intend to enter that trade or business. You can deduct the costs of qualifying, work-related education as a business expense even if the education could lead to a degree.

Once you have met the minimum educational requirements for your job, your employer may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met:

• it is required for you to keep your present salary, status, or job;

• the requirement serves a bona fide business purpose of your employer; and

• the education is not part of a program that will qualify you for a new trade or business.

If you get more education than your employer requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in present work.

In a previous case, the Tax Court ruled that a minister could not deduct the cost of courses he took at a local university to complete his undergraduate degree, even though he took the courses to enhance his ministerial skills. The minister enrolled in various courses at a local university (including Introduction to Counseling, Internship in Ministry Practice, Death and Dying as a Life Cycle, Modern Social Problems, The Family, Community, Ethics in Human Services, Symphonic Choir, Basic Writing, and Writing Strategies). These courses were not required for him to continue as a local pastor. He later earned a bachelor's degree in human services. On his tax return he claimed a deduction of $9,698 for "continuing education." The amount claimed represented tuition, books, and course-related fees incurred for the courses taken at the university.

The IRS disallowed the deduction, and the minister appealed. The Tax Court agreed that the educational expenses were not deductible. It acknowledged that education expenses are deductible as business expenses if the education "maintains or improves skills required by the taxpayer in his employment or meets the express requirements of an employer imposed as a condition for the taxpayer's continued employment." However, education expenses are not deductible if they are "made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business." This is so even if the courses meet the express requirements of the employer.

Whether the education qualifies a taxpayer for a new trade or business depends upon the "tasks and activities which he was qualified to perform before the education and those which he is qualified to perform afterwards." The court noted that it had "repeatedly disallowed education expenses where the education qualified the taxpayer to perform significantly different tasks and activities. Further, the taxpayer's subjective purpose in pursuing the education is irrelevant, and the question of deductibility is not satisfied by a showing that the taxpayer did not in fact carry on or did not intend to carry on a new trade or business." The court agreed that the courses the minister took qualified him for a new trade or business and that the expenses of a college education are almost always nondeductible personal expenses.

The court concluded, "We conclude that the courses, which ultimately led to his bachelor's degree, qualified him in a new trade or business. The courses provided him with a background in a variety of social issues that could have prepared him for employment with several public agencies and private nonprofit organizations outside of the ministry. Whether or not he remains in the ministry is irrelevant; what is important under the regulations is that the degree 'will lead' him to qualify for a new trade or business." The court noted that it is "all but impossible" for taxpayers to establish that a bachelor's degree program does not qualify them for a new trade or business. Warren v. Commissioner, T.C. Memo. 2003-175 (2003). Holden v. Commissioner, T.C. Memo. 2015-83 (2015).

Legal Developments

Court Rules Schools’ Vaccination Requirements Trump Parents’ Religious Exemption

Church Law and Tax Report Court Rules Schools’ Vaccination Requirements Trump Parents’ Religious Exemption Key

Church Law and Tax Report

Court Rules Schools’ Vaccination Requirements Trump Parents’ Religious Exemption

Key point. Restrictions imposed by state law on unvaccinated children attending public schools may not violate parents’ constitutional right of religious freedom.

A federal appeals court ruled that the constitutional right of parents to the free exercise of their religion was not violated by a state law excluding unvaccinated children from public schools under specified circumstances. New York requires that students in the state’s public schools be immunized against various vaccine-preventable illnesses. The New York Public Health Law provides that “no principal, teacher, owner or person in charge of a school shall permit any child to be admitted to such school, or to attend such school, in excess of fourteen days” without a certificate of immunization. The statute provides two exemptions from the immunization mandate. First, a medical exemption is available “if any physician licensed to practice medicine in this state certifies that such immunization may be detrimental to a child’s health.” Second, a religious exemption is available for “children whose parent, parents, or guardian hold genuine and sincere religious beliefs which are contrary to the practices herein required.”

Two unrelated parents (the “Plaintiffs A and B”) received religious exemptions for their children. In November 2011 and January 2012, however, the plaintiffs’ children were excluded from school when a fellow student was diagnosed with chicken pox, pursuant to a state regulation that provides, “in the event of an outbreak … of a vaccine-preventable disease in a school, the commissioner, or his or her designee … may order the appropriate school officials to exclude from attendance” students who received exemptions from mandatory vaccination.

Another parent (Plaintiff C) was denied a religious exemption on the ground that her objection to vaccinations was not based on genuine and sincere religious beliefs. The three plaintiffs filed a lawsuit in a federal district court in New York, claiming that their constitutional right to the free exercise of their religion had been violated. The court rejected the claims of Plaintiffs A and B that a state regulation permitting school officials to temporarily exclude students who are exempted from the vaccination requirement during an outbreak of a vaccine-preventable disease was unconstitutional. Defendants moved to dismiss for summary judgment. The court further concluded that Plaintiff C’s views on vaccination were primarily health-related and did not constitute a genuine and sincere religious belief. This plaintiff testified at a hearing that she is Catholic and stated, “How I treat my daughter’s health and her well-being is strictly by the word of God.” She also testified, however, that she believed that vaccination “could hurt my daughter. It could kill her. It could put her into anaphylactic shock. It could cause any number of things.” She further testified that she did not know of any tenets of Catholicism that prohibited vaccinations. The court noted especially that “plaintiff’s testimony that she did not adopt her views opposing vaccination until she believed that immunization jeopardized her daughter’s health is compelling evidence that plaintiff’s refusal to immunize her child is based on medical considerations and not religious beliefs.”

The three plaintiffs appealed, and a federal appeals court affirmed the district court’s conclusions. Plaintiffs A and B argued that the temporary exclusion from school of their children during the chicken pox outbreak unconstitutionally burdened their free exercise of religion. The court disagreed, citing a 1944 ruling by the Supreme Court noting that a parent “cannot claim freedom from compulsory vaccination for the child more than for himself on religious grounds. The right to practice religion freely does not include liberty to expose the community or the child to communicable disease or the latter to ill health or death.” Prince v. Massachusetts, 321 U.S. 158 (1944). The court concluded: “New York could constitutionally require that all children be vaccinated in order to attend public school. New York law goes beyond what the Constitution requires by allowing an exemption for parents with genuine and sincere religious beliefs. Because the state could bar [these] children from school altogether … the state’s more limited exclusion during an outbreak of a vaccine-preventable disease is clearly constitutional.”

The court further concluded that since Plaintiff C’s objections to the statute were not religious in nature, she lacked standing to challenge the mandate on religious freedom grounds.

What This Means For Churches:

An increasing number of elementary and secondary public schools have adopted policies requiring the vaccination of students. Many of these policies are based on state law. While religious exemptions are recognized in some states, many exemptions are conditional and, as this case demonstrates, will not always apply. Phillips v. City of New York, 775 F.3d 538 (2nd Cir. 2015).

Legal Developments

Refusal to Hire Worker Without Social Security Number Does Not Constitute Religious Discrimination in Federal Case

Church Law and Tax Report Refusal to Hire Worker without Social Security Number Does Not

Church Law and Tax Report

Refusal to Hire Worker without Social Security Number Does Not Constitute Religious Discrimination in Federal Case

A federal appeals court ruled that an employer had not engaged in unlawful religious discrimination by rejecting an applicant for employment on the basis of his refusal, on religious grounds, to have a Social Security number. The applicant (the “plaintiff”) sued the employer in a federal district court in Ohio seeking monetary damages and a court order compelling the employer to hire him. The court dismissed the lawsuit, and the plaintiff appealed.

A federal appeals court affirmed the district court’s dismissal of the plaintiff’s lawsuit. The court applied a two-step analysis in evaluating the legitimacy of the plaintiff’s religious discrimination claim:

First, we determine whether [the plaintiff] has established a “prima facie case of religious discrimination,” which requires proof that “(1) he holds a sincere religious belief that conflicts with an employment requirement, (2) he has informed the employer about the conflicts, and (3) he was discharged or disciplined for failing to comply with the conflicting employment requirement.”

Second, if [the plaintiff] establishes his prima facie case, his employer has the burden to show that it could not “reasonably accommodate” his religious beliefs without “undue hardship.”

The court noted that every federal appeals court to consider the issue has applied one of the above two steps to hold that an employer need not attempt to reasonably accommodate an employee’s religious beliefs if such accommodation would violate a federal statute. The court concluded: “The Internal Revenue Code requires employers … to collect and provide the Social Security numbers of their employees. See 26 U.S.C. § 6109(a)(3). In this case, the district court [held] that the plaintiff’s prima facie claim fails under step one because the employer’s collection of his Social Security number is a ‘requirement imposed by law. … ‘ We therefore affirm the district court’s conclusion.”

What This Means For Churches:

Some churches have been confronted by applicants for employment who have never obtained a Social Security number, often on religious grounds. This case demonstrates that a church’s refusal to hire such persons may not constitute religious discrimination under federal law. The fact that this ruling was by a federal appeals court, which noted that its conclusion was in accord with rulings by every other federal appeals court to consider the issue, adds considerable force to the court’s opinion. Nevertheless, since not every federal appeals court has weighed in on this issue, it would be prudent for church leaders to seek legal counsel before refusing to hire persons who refuse to obtain a Social Security number. Yeager v. FirstEnergy Generation Corporation, 777 F.3d 362 (6th Cir. 2015).

Legal Developments

‘Ministerial Exception’ Bars Court from Resolving InterVarsity Employee’s Sex Discrimination Claim

Church Law and Tax Report ‘Ministerial Exception’ Bars Court from Resolving InterVarsity Employee’s Sex Discrimination

Church Law and Tax Report

‘Ministerial Exception’ Bars Court from Resolving InterVarsity Employee’s Sex Discrimination Claim

Key point 8-10.1. The civil courts have consistently ruled that the First Amendment prevents the civil courts from applying employment laws to the relationship between a church and a minister.

A federal appeals court ruled that it was barred by the “ministerial exception” from resolving a sex discrimination claim by a former employee of a Christian campus ministry. InterVarsity Christian Fellowship/USA (IVCF) is “an evangelical campus mission serving students and faculty on college and university campuses nationwide,” whose vision is “to see students and faculty transformed, campuses renewed and world changers developed.” IVCF’s purpose “is to establish and advance at colleges and universities witnessing communities of students and faculty who follow Jesus as Savior and Lord: growing in love for God, God’s Word, God’s people of every ethnicity and culture and God’s purposes in the world.”

IVCF “believes in the sanctity of marriage and desires that all married employees honor their marriage vows.” It is part of IVCF’s policy that “where there are significant marital issues, IVCF encourages employees to seek appropriate help to move towards reconciliation” and IVCF reserves the right “to consider the impact of any separation/divorce on colleagues, students, faculty, and donors.”

IVCF hires only candidates who agree with its Statement of Agreement: Purpose and Doctrinal Basis.

A woman (the “plaintiff”) began working for IVCF in 1986. In 1988, she married. From 2004 to 2011, the plaintiff was a “Spiritual Formation Specialist” for IVCF staff members, and obtained a certification in Spiritual Direction. Her duties included assisting others to cultivate “intimacy with God and growth in Christ-like character through personal and corporate spiritual disciplines.

In March of 2011, the plaintiff and her husband were considering divorce, and, as required by IVCF policy, she informed her supervisor. Her supervisor placed her on paid leave in an attempt to repair her marriage, as authorized by IVCF policy. The plaintiff claimed her repeated requests to return to work were denied. Her employment was terminated in December of 2011 for “failing to reconcile her marriage.” At that time the plaintiff was still married. She claimed that two or more similarly situated male employees divorced their spouses during their employment, but were not disciplined or terminated. In January 2012, the plaintiff’s husband filed for divorce.

Shortly after her termination, the plaintiff filed a complaint with the Equal Employment Opportunity Commission (EEOC). The EEOC gave her a right-to-sue letter that also informed her that EEOC would not be filing suit. The plaintiff filed suit in a federal district court in Michigan in 2013, alleging sex discrimination in violation of Title VII of the Civil Rights Act of 1964. IVCF filed a motion to dismiss the lawsuit, asserting the ministerial exception as an affirmative defense. The district court granted the motion to dismiss, and the plaintiff appealed to a federal appeals court.

The ministerial exception, which is rooted in the First Amendment’s religion clauses, bars the civil courts from resolving employment disputes between churches and ministers. It was explicitly affirmed by the United States Supreme Court in a 2012 decision, Hosanna-Tabor Evangelical Lutheran Church & School v. EEOC, 132 S.Ct. 694 (2012). In Hosanna-Tabor, the Supreme Court concluded that the ministerial exception prevented it from resolving a claim by a teacher in a church-operated school that her dismissal violated the federal Americans with Disabilities Act. The Court noted that the ministerial exception “precludes application of [employment discrimination laws] to claims concerning the employment relationship between a religious institution and its ministers.”

The appeals court then addressed five issues, including: (1) Did the ministerial exception apply to IVCF? (2) Was the plaintiff a “minister”? (3) Did IVCF “waive” the ministerial exception?

(1) Did the ministerial exception apply to IVCF?

Did the ministerial exception apply to an organization like IVCF that was not a “church”? The court concluded that it did:

It is undisputed that InterVarsity Christian Fellowship is a Christian organization, whose purpose is to advance the understanding and practice of Christianity in colleges and universities. It is therefore a “religious group” under Hosanna-Tabor … . The ministerial exception’s applicability does not turn on its being tied to a specific denominational faith; it applies to multidenominational and nondenominational religious organizations as well … . A religiously affiliated entity is one whose mission is marked by clear or obvious religious characteristics … . That is clearly the case for IVCF, with not only its Christian name, but its mission of Christian ministry and teaching.

(2) Did the ministerial exception apply to the plaintiff?

In Hosanna-Tabor, the Supreme Court addressed a Lutheran church school’s decision to terminate a teacher and “commissioned minister” who the school believed was not able to perform her duties because of a disability. The Court held that the ministerial exception precluded the courts from entertaining claims that the teacher’s employment had been terminated because of her disability or in retaliation for her filing a complaint with the EEOC alleging disability discrimination. Though the Court did not “adopt a rigid formula for deciding when an employee qualifies as a minister,” it identified four factors that led it to conclude that the teacher was a minister covered by the exception: (1) the formal title given to her by the church, (2) the substance reflected in that title, (3) her own use of that title, and (4) the important religious functions she performed for the church.

The appeals court concluded that the plaintiff satisfied the first and fourth factors, but not the second and third, and so “two of the four Hosanna-Tabor factors are clearly present.” The Supreme Court declined to rule upon whether the exception would apply in the absence of one or more of those factors. But the appeals court ruled that “where both factors—formal title and religious function—are present, the ministerial exception clearly applies and so IVCF may assert the ministerial exception regarding the plaintiff’s former position.”

(3) Did IVCF “waive” the ministerial exception?

The plaintiff insisted that the ministerial exception did not preclude her claims because IVCF had “waived” it. She pointed to the following statement on the IVCF website:

InterVarsity Christian Fellowship/USA is both an equal opportunity employer and a faith-based religious organization. We conduct hiring without regard to race, color, ancestry, national origin, citizenship, age, sex, marital status, parental status, membership in any labor organization, political ideology, or disability of an otherwise qualified individual. The status of [IVCF] as an Equal Opportunity Employer does not prevent the organization from hiring staff based on their religious beliefs so that all staff share the same religious commitment.

The website states that all employees must annually reaffirm their agreement with IVCF’s Purpose Statement and Doctrinal Basis. The website further states: “Pursuant to the Civil Rights Act of 1964 [IVCF] has the right to, and does, hire only candidates who agree with its Statement of Agreement: Purpose and Doctrinal Basis.”

The court concluded that IVCF had not “waived” the ministerial exception since “the ministerial exception is a structural limitation imposed on the government by the [First Amendment’s] religion clauses, a limitation that can never be waived.”

The court noted that the Supreme Court’s ruling in Hosanna-Tabor forecloses such waiver, since the Court concluded that “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.” The Court’s clear language “recognizes that the Constitution does not permit private parties to waive the First Amendment’s ministerial exception. This constitutional protection is not only a personal one; it is a structural one that categorically prohibits federal and state governments from becoming involved in religious leadership disputes.”

(4) Does the ministerial exception bar discrimination claims against supervisors?

The plaintiff claimed that the ministerial exception did not prevent her from suing her supervisors for sex discrimination since they could not claim the exception. The court disagreed: “They cannot be held liable. Nothing in federal court or Michigan court precedent suggests that [supervisors] cannot claim the ministerial exception when personally sued for discrimination as the agents of a religious employer. Holding the individual decision maker liable for the very employment decision for which the organization cannot be held liable would vitiate both the purpose and the effect of the ministerial exception.”

(5) An affirmative defense

The court cautioned that the ministerial exception is an “affirmative defense” that will be lost if a religious employer fails to assert it in its response to a lawsuit.

The court concluded its opinion by quoting from the Supreme Court’s decision in Hosanna-Tabor:

The interest of society in the enforcement of employment discrimination statutes is undoubtedly important. But so too is the interest of religious groups in choosing who will preach their beliefs, teach their faith, and carry out their mission. When a minister who has been fired sues her church alleging that her termination was discriminatory, the First Amendment has struck the balance for us. The church must be free to choose those who will guide it on its way.

What This Means For Churches:

This case is significant for these reasons:

First, it demonstrates that the ministerial exception is not limited to churches. It applies to any religious employer “whose mission is marked by clear or obvious religious characteristics.” The exception applied to IVCF not only because of “its Christian name, but its mission of Christian ministry and teaching.”

Second, the court referred to the Supreme Court’s four-factor test in deciding if an employee of a religious organization is a “minister” to whom the ministerial exception applies. And, significantly, the court concluded that the plaintiff was a “minister” even though she failed to meet the second and third factors. The court noted that she satisfied the first and fourth factors (her title and functions were clearly religious), and that “where both factors—formal title and religious function—are present, the ministerial exception clearly applies.”

Third, the court concluded that “equal opportunity” language on the IVCF website did not amount to a “waiver” of the ministerial exception, since the exception was based on the First Amendment’s religion clauses which cannot be waived.

Fourth, the court rejected the argument that individual supervisory employees can be sued for violations of state and federal nondiscrimination laws even though a religious employer cannot.

Fifth, the court noted that the ministerial exception is an affirmative defense that must be asserted in a religious employer’s formal answer to a lawsuit or it will be lost. Church leaders should review the answer prepared by their attorney in an employment discrimination case to be certain that the ministerial exception is raised as an affirmative defense. Trial attorneys with little if any experience in representing religious employers may not be familiar with the ministerial exception, or with its status as an affirmative defense that must be pleaded or lost. Conlon v. Intervarsity Christian Fellowship, 777 F.3d 829 (6th Cir. 2015).

Legal Developments

Defective Charitable Contribution Receipt from Church Bars Donor’s Deduction

Church Law and Tax Report Defective Charitable Contribution Receipt from Church Bars Donor’s Deduction Key

Church Law and Tax Report

Defective Charitable Contribution Receipt from Church Bars Donor’s Deduction

Key point. Taxpayers are subject to substantial penalties for not filing a tax return (if one is required) and for reporting inaccurate information on a tax return. Some taxpayers view the risk of being audited as so low that they deliberately underreport income, overstate expenses, or adopt questionable interpretations of the tax laws. You should bear in mind the following penalties before adopting aggressive tax positions.

The United States Tax Court ruled that a taxpayer was not entitled to deduct charitable contributions made to her church because the church’s receipt was defective. A taxpayer made several donations to her church in 2009, many of which were for more than $250. The donations were recorded in the church’s financial records. In 2014, after the IRS audited the taxpayer’s 2009 tax return and questioned contributions of $250 or more that she had made to her church, the church sent her a letter certifying that she had made $3,230 in contributions to the church in 2009. The IRS denied this deduction, and the taxpayer appealed to the Tax Court.

The Tax Court began its opinion by observing:

Contributions of cash or property of $250 or more generally require the donor to obtain a contemporaneous written acknowledgment of the donation from the donee. At a minimum, the contemporaneous written acknowledgment must contain a description of any property contributed, a statement as to whether any goods or services were provided in consideration by the donee, and a description and good-faith estimate of the value of any goods or services provided in consideration. A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of (1) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing such return.

The IRS insisted that canceled checks for donations of $250 or more and the written statement from the church were insufficient to substantiate her contributions. The court agreed: “The canceled checks do not qualify as contemporaneous written acknowledgments because they do not state whether the taxpayer received any goods or services in exchange for her contributions. Additionally, the written statement from the church does not qualify as a contemporaneous written statement because it was written more than four years after the taxpayer’s tax return had been filed.”

The Tax Court also affirmed the IRS’s imposition of a “negligence penalty” upon the taxpayer. The tax code allows the IRS to assess a penalty of 20 percent of the amount of an understatement of taxes that is due to negligence. Negligence includes (1) failure to make a reasonable attempt to comply with the tax law; (2) failure to exercise reasonable care in the preparation of a tax return; or (3) failure to keep adequate records or to substantiate items properly. Reliance on the advice of a tax adviser does not relieve the liability for a negligence penalty.

Taxpayers can avoid the negligence penalty only “with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” The Court upheld the assessment of this penalty on the taxpayer: “The IRS satisfied its burden of production with regard to negligence. It established that the taxpayer … did not substantiate several items properly … . Accordingly, we hold that the taxpayer is liable for a penalty.”

What This Means For Churches:

This case illustrates the consequences that can result from a church’s failure to comply with the substantiation requirements for charitable contributions. Those requirements are stricter for contributions of $250 or more, and, as this case demonstrates, require the written acknowledgment (receipt) provided by a charity to donors to be contemporaneous and include a statement indicating whether the charity provided goods or services to the donor in consideration of the contribution. If goods or services were provided, the church’s written acknowledgment must provide a description and good faith estimate of the value of those goods or services, or, if only intangible religious benefits were provided, a statement to that effect.

Churches that fail to provide donors with a proper acknowledgment are jeopardizing the deductibility of donors’ contributions.

On many occasions the IRS and the Tax Court have stressed that whether or not a donor actually made a donation is irrelevant. What matters is strict compliance with the technical substantiation requirements imposed by the tax code. When it comes to the substantiation of charitable contributions, it is form over substance.

This case also illustrates that a church’s failure to provide donors with valid acknowledgments of their contributions may result in the IRS assessing a negligence penalty. Beaubrun v. Commissioner, T.C. Memo. 2015-217.

Key point. The income tax regulations clarify that separate contributions of less than $250 are not subject to these additional requirements “regardless of whether the sum of the contributions made by the taxpayer to a charity during a taxable year equals $250 or more.”

Tip. Be alert to any donation of noncash property that may be valued by the donor at more than $500. Be sure the donor is aware of the need to complete Section A of Form 8283 for donations of property valued at more than $500 but not more than $5,000, and Section B of Form 8283 for donations of property (other than publicly traded stock) valued at more than $5,000. The instructions to Form 8283 contain a helpful summary of the substantiation requirements that apply to these kinds of gifts. Different rules apply to donations of vehicles. Failure to comply with these rules may lead to a loss of a deduction. It is a good practice for churches to have some of these forms on hand to give to donors who make contributions of noncash property.

Substantiating Contributions of $250 or More—a Summary

Section 170(f)(8) of the tax code imposes special substantiation requirements for individual contributions of $250 or more:

(A) No deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the [charity] that meets the requirements of subparagraph (B).

(B) An acknowledgement meets the requirements of this subparagraph if it includes the following information:

(i) The amount of cash and a description (but not value) of any property other than cash contributed.

(ii) Whether the [charity] provided any goods or services in consideration, in whole or in part, for any property described in clause (i).

(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction [e.g., worship services, teaching, and sacraments].

(C) An acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of (i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii) the due date (including extensions) for filing such return.

Legal Developments

Couple’s Charitable Contribution Deductions Denied after Failing to Meet Precise Requirements

Church Law and Tax Report Couple’s Charitable Contribution Deductions Denied after Failing to Meet Precise

Church Law and Tax Report

Couple’s Charitable Contribution Deductions Denied after Failing to Meet Precise Requirements

Key point. Charitable contribution deductions are subject to a variety of substantiation requirements depending on the type and amount of a contribution. Failure to comply with these requirements can result in loss of a deduction.

The United States Tax Court ruled that a married couple was not entitled to a charitable contribution deduction for scholarships they made to three students using funds from a memorial account they established in the name of their deceased son. In 2006, a married couple received $75,000 in life insurance proceeds from the death of their son. That same year, the couple used the life insurance proceeds to establish a scholarship fund in honor of their son. The scholarship fund was structured as an irrevocable trust. The trust agreement states that income from the trust is to be used exclusively for educational purposes. The trust is irrevocable, although the couple reserved the right to amend the trust so long as all funds would be distributed to students solely for educational purposes. The trust did not apply to the Internal Revenue Service (IRS) for tax-exempt status as a charitable organization.

During 2008, the trust made payments of $2,000 each to three high school students. Each payment was by check directly to the student. The money for the three payments came from the trust’s investment income, and the checks were written on an account owned solely in the name of the trust.

In filing their 2008 Form 1040, U.S. Individual Income Tax Return, the couple did not include the investment income from the trust in their gross income; however, they claimed the $6,000 of payments as a charitable contribution deduction. In 2012, the IRS audited the couples’ 2008 tax return and denied the $6,000 charitable contribution deduction. The couple appealed to the Tax Court.

The Tax Court concluded that the couple was not entitled to a charitable contribution deduction for “multiple reasons.” These included:

First, the trust’s payments “do not qualify as charitable contributions.” The court noted that “section 170(c) of the tax code lays out specific rules for who must be the recipient of a contribution or gift in order for the payment to qualify as a charitable contribution deduction. Here, the trust paid the money directly to the students, and the students do not fall into any of the recipient categories under section 170(c).”

Second, the couple “did not produce any evidence of a contemporaneous written acknowledgment of the charitable contribution. The closest thing to a contemporaneous written acknowledgment was the list of charitable contributions that they attached to their [tax return] which showed three $2,000 contributions. That document does not show the dates of the contributions or any of the other information required to comply with the more stringent substantiation requirements for contributions over $250.”

What This Means For Churches:

Memorial scholarship funds are often established by the relatives of a deceased family member. This case demonstrates that these arrangements often fail to comply with the requirements for a charitable contribution, and therefore distributions from the fund may not be deductible. Kalapodis v. Commissioner, T.C. Memo. 2014-205.

Legal Developments

Zoning and Free Speech

Church Law and Tax Report Zoning and Free Speech Key point 7-08. Most cities have

Church Law and Tax Report

Zoning and Free Speech

Key point 7-08. Most cities have enacted building codes that prescribe minimum standards in the construction of buildings. The courts have ruled that these laws may be applied to churches so long as they are reasonably related to the promotion of public health and safety.

The Supreme Court of the United States ruled that a city ordinance containing strict limitations on the display of signs by churches and some other charities constituted a content-based restriction on speech in violation of the First Amendment’s free speech clause. The town of Gilbert, Arizona (or Town), adopted a comprehensive “Sign Code” governing the manner in which people may display outdoor signs. The Sign Code prohibits the display of outdoor signs anywhere within the Town without a permit, but it then exempts 23 categories of signs from that requirement. This includes any “Temporary Sign intended to direct pedestrians, motorists, and other passersby to a qualifying event.” A “qualifying event” is defined as any “assembly, gathering, activity, or meeting sponsored, arranged, or promoted by a religious, charitable, community service, educational, or other similar non-profit organization.” Temporary directional signs may be no larger than six square feet. They may be placed on private property or on a public right-of-way, but no more than four signs may be placed on a single property at any time. And, they may be displayed no more than 12 hours before the “qualifying event” and no more than 1 hour afterward. Other exemptions, such as signs communicating a political or ideological message, were much less stringent.

The Good News Community Church (Church) and its pastor wanted to advertise the time and location of their Sunday church services. The Church is a small, cash-strapped entity that owns no building, so it holds its services at elementary schools or other locations in or near the Town. In order to inform the public about its services, which are held in a variety of different locations, the Church began placing 15 to 20 temporary signs around the Town, frequently in the public right-of-way abutting the street. The signs typically displayed the Church’s name, along with the time and location of the upcoming service. Church members would post the signs early in the day on Saturday and then remove them around midday on Sunday. The display of these signs requires little money and manpower, and thus has proved to be an economical and effective way for the Church to let the community know where its services are being held each week.

This practice caught the attention of the Town’s Sign Code compliance manager, who twice cited the Church for violating the Code. The first citation noted that the Church exceeded the time limits for displaying its temporary directional signs. The second citation referred to the same problem, along with the Church’s failure to include the date of the event on the signs. Town officials even confiscated one of the Church’s signs, which the pastor had to retrieve from the municipal offices.

The pastor contacted the Sign Code Compliance Department in an attempt to reach an accommodation. His efforts proved unsuccessful. The Town’s Code compliance manager informed the Church that there would be “no leniency under the Code” and promised to punish any future violations.

Shortly thereafter, the Church and its pastor (the “plaintiffs”) filed a complaint in a federal district court in Arizona, arguing that the Sign Code abridged their freedom of speech in violation of the federal Constitution. The court rejected the plaintiffs’ claims, as did a federal appeals court. The plaintiffs appealed to the Supreme Court.

The Court began its opinion by noting that “the First Amendment … prohibits the enactment of laws abridging the freedom of speech.” As a result, a city “has no power to restrict expression because of its message, its ideas, its subject matter, or its content.” Content-based laws that target speech based on its communicative content “are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.”

The Court concluded:

The Town’s Sign Code is content based on its face. It defines “Temporary Directional Signs” on the basis of whether a sign conveys the message of directing the public to church or some other qualifying event … . Because the Town’s Sign Code imposes content-based restrictions on speech, those provisions can stand only if [the Town] proves that the restriction furthers a compelling interest and is narrowly tailored to achieve that interest … . Thus, it is the Town’s burden to demonstrate that the Code’s differentiation between temporary directional signs and other types of signs, such as political signs and ideological signs, furthers a compelling governmental interest and is narrowly tailored to that end. The Town cannot do so. It has offered only two governmental interests in support of the distinctions the Sign Code draws: preserving the Town’s aesthetic appeal and traffic safety. Assuming for the sake of argument that those are compelling governmental interests, the Code’s distinctions fail … .

The Court observed that its decision “will not prevent governments from enacting effective sign laws” since the Town “has ample content-neutral options available to resolve problems with safety and aesthetics.” For example, the Town’s current Code “regulates many aspects of signs that have nothing to do with a sign’s message: size, building materials, lighting, moving parts, and portability. And on public property, the Town may go a long way toward entirely forbidding the posting of signs, so long as it does so in an evenhanded, content-neutral manner.” Further, “a sign ordinance narrowly tailored to the challenges of protecting the safety of pedestrians, drivers, and passengers—such as warning signs marking hazards on private property, signs directing traffic, or street numbers associated with private houses—well might survive strict scrutiny.” But “the signs at issue in this case, including political and ideological signs and signs for events, are far removed from those purposes. They are facially content based and are neither justified by traditional safety concerns nor narrowly tailored.”

What This Means For Churches:

This case will be relevant to any church that encounters governmental opposition to the display of “content based” signs that are intended to communicate a message. Reed v. Town of Gilbert, 2015 WL 2473374 (U.S. 2015).

Legal Developments

Married Couple’s $37,315 Charitable Contribution Deduction Disallowed

The deduction lacked proper substantiation.

Key point. Charitable contribution deductions for contributions of noncash property are subject to various substantiation requirements. Failure to comply with these requirements can result in a loss of any deduction even if there is no doubt that a contribution was made.

The United States Tax Court disallowed a married couple's $37,315 charitable contribution deduction for lack of proper substantiation.

On Schedule A, Itemized Deductions, of their 2011 federal income tax return, a married couple (the "taxpayers") claimed a charitable contribution deduction of $37,315 for noncash charitable contributions, which the IRS disallowed in its entirety.

Taxpayers did not produce a receipt

The taxpayers contend that they donated property during 2011 to four charitable organizations: the Upper Dublin Lutheran Church (Church), Goodwill Industries (Goodwill), the Military Order of the Purple Heart Service Foundation (Purple Heart), and Vietnam Veterans of America (Vietnam Veterans). The taxpayers' noncash contributions to the Church consisted of items they allegedly donated to its 2011 annual flea market. These items included books valued at $8,000, household items valued at $1,303, clothing valued at $1,000, toys valued at $822, telescopes valued at $800, jewelry valued at $780, and household furniture valued at $410, for a total of $13,115.

The taxpayers did not produce a receipt or an acknowledgment from the Church for their donations of any of these items. The Church was evidently equipped to provide such receipts, because petitioners claimed to have a receipt from the Church for their contributions to the 2012 flea market. The taxpayers produced no evidence, such as photographs, that any of the listed items were actually delivered to the Church. The Church did not inform the taxpayers whether any of the items allegedly contributed were sold or at what price.

The taxpayers' noncash contributions to Goodwill, Purple Heart, and Vietnam Veterans allegedly consisted of clothing valued at $20,920, household furniture valued at $2,680, household items valued at $350, and toys valued at $250, for a total of $24,200. They produced no documentary evidence, and had no recollection, as to which items were donated to which charity. They produced a spreadsheet, created during the IRS audit, that listed various items—e.g., 67 blouses, 45 dresses, 70 dress shirts, 22 dress coats, and 100 baby outfits—and assigned "estimated amounts" as the fair market values of these items. The taxpayers contended that these items, in the aggregate, were divided in some manner among the three charities.

For Goodwill, the taxpayers testified that they took batches of items at various times to a Goodwill location. They generally made these trips in the early morning or evening, when the Goodwill warehouse was unattended. They placed soft goods in large bins intended for after-hours drop-offs. They left large items, such as furniture, outside the warehouse door. The taxpayers testified that they were careful to ensure that the items in each batch were worth less than $250 because they thought this eliminated the need to get receipts.

For Purple Heart and Vietnam Veterans, the taxpayers allegedly scheduled a pickup and left the items outside their house. The charity sent a truck to pick up the items, generally while petitioners were away, and usually left a doorknob hanger saying, "Thank you for your contribution." These doorknob hangers contained no other information. They were undated; they were not specific to the taxpayers; and they did not list or describe the property contributed.

The taxpayers testified that they created index cards recording the items as they were delivered to Goodwill or left for pickup by Purple Heart or Vietnam Veterans. They later aggregated this information into a master list. When the time came to prepare their 2011 tax return, they assigned estimated values to the items. The taxpayers did not introduce into evidence the index cards they allegedly prepared or any other contemporaneous records supporting their contention that they made the alleged gifts. They supplied no evidence concerning their cost bases in these items or the manner in which they determined fair market values.

The IRS timely issued petitioners a notice of deficiency disallowing for lack of substantiation all of their claimed noncash contributions totaling $37,315. The IRS also determined an accuracy-related penalty. Petitioners timely sought review in the Tax Court.

Substantiation of charitable contributions

The court began its opinion by noting that charitable contribution deductions are allowed "only if the taxpayer satisfies substantiation requirement," and that "the nature of the required substantiation depends on the size of the contribution and on whether it is a gift of cash or property."

For contributions of $250 or more, the taxpayer must obtain a "contemporaneous written acknowledgment" from the charity. Separate contributions of less than $250 are not subject to this requirement regardless of whether the sum of the contributions made by a taxpayer to a charity during a taxable year equals $250 or more. The main substantiation requirements are summarized below.

Contributions of property valued at $250 or more

Contributions of noncash property valued by a donor at $250 or more must be substantiated with a contemporaneous written acknowledgment that

(1) includes "a description (but not value) of any property other than cash contributed"; (2) states whether the donee provided any goods or services in exchange for the gift; and (3) if the donee did provide goods or services, include a description and good-faith estimate of their value. The acknowledgment is "contemporaneous" if the taxpayer obtains it from the donee on or before the earlier of: (1) the date the taxpayer files a return for the year of contribution; or (2) the due date, including extensions, for filing that return.

Contributions of property valued at more than $500

The court noted that while the taxpayers' failure to satisfy the substantiation requirements for contributions of $250 or more "was fatal to their claim," it went on to summarize the substantiation requirements for noncash contributions in excess of $500:

Taxpayers are required to maintain additional reliable written records with respect to each item of donated property. These records must include, among other things: (1) the approximate date the property was acquired and the manner of its acquisition; (2) a description of the property in detail reasonable under the circumstances; (3) the cost or other basis of the property; (4) the fair market value of the property at the time it was contributed; and (5) the method used in determining its fair market value.

The taxpayers claimed that they made noncash contributions to four different charities of seven categories of items, each with a claimed value exceeding $500, "but they did not maintain written records establishing when or how these items were acquired or what their cost bases were. Nor did they maintain written records establishing how they calculated the items' fair market value."

Donations of clothing and household items

No deduction is allowed for "any contribution of clothing or a household item" unless such property is "in good used condition or better." The tax regulations specify that the term "'household items" includes "furniture, furnishings, electronics, appliances, linens, and other similar items." Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition.

A deduction may be allowed for a charitable contribution of an item of clothing or a household item not in good used condition or better only if the amount claimed for the item is more than $500 and the taxpayer obtains a qualified appraisal of the property and attaches a qualified appraisal summary (Form 8283) to the tax return claiming the deduction.

If the donated item is in good used condition or better and a deduction in excess of $500 is claimed, the taxpayer must file a completed Form 8283 (Section A or B, depending on the type of contribution and claimed amount), but a qualified appraisal is required only if the claimed contribution amount exceeds $5,000.

If the donor claims a deduction of less than $250, the donor must obtain a receipt from the church or charity or maintain reliable written records of the contribution. A reliable written record for a contribution of clothing or a household item must include a description of the condition of the item. If the donor claims a deduction of $250 or more, the donor must obtain from the church or charity a receipt that meets the requirements of a contemporaneous written acknowledgment (see above).

The court concluded:

Most of the items the taxpayers allegedly donated consisted of clothing and household items. They failed to present credible evidence that these items were "in good used condition or better," and they did not furnish a qualified appraisal with their return. For all these reasons, petitioners have not satisfied the substantiation requirements for donations of property valued over $500.

The court has no doubt that the taxpayers did donate some property to charitable organizations during 2011. But the tax code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when they consist of property rather than cash. Because the taxpayers did not satisfy these requirements, we are unable to allow a deduction for their claimed noncash gifts.

What this means for churches

Americans love to donate used clothing and household items to charity. The IRS reports that the amount claimed as deductions in a recent year for clothing and household items was more than $9 billion. These items are notoriously difficult to value, and the attempt to do so wastes valuable time and resources.

The tax code responds to this dilemma by denying a charitable contribution deduction for a contribution of clothing or household items unless the clothing or household items are in "good used condition or better." The Treasury Department is authorized to deny (by regulation) a deduction for any contribution of clothing or a household item that has minimal monetary value, such as used socks and used undergarments.

A deduction may be allowed for a charitable contribution of an item of clothing or a household item not in good used condition or better only if the amount claimed for the item is more than $500 and the taxpayer obtains a qualified appraisal of the property and attaches a qualified appraisal summary (Form 8283) to the tax return claiming the deduction.

Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition.

If the donated item is in good used condition or better and a deduction in excess of $500 is claimed, the taxpayer must file a completed Form 8283 (Section A or B, depending on the type of contribution and claimed amount), but a qualified appraisal is required only if the claimed contribution amount exceeds $5,000.

Failure to understand and comply with these rules can lead to a loss of a charitable contribution deduction. As a result, it is helpful for church leaders to be familiar with these rules so they can advise persons who donate clothing and household itemss. Kunkel v. Commissioner, T.C. Memo. 2015-71 (U.S. Tax Court 2015).

Legal Developments

Secular Income and Vows of Poverty

Church Law and Tax Report Secular income and vows of poverty Key point. Attempts to

Church Law and Tax Report

Secular income and vows of poverty

Key point. Attempts to avoid taxes on wages earned from secular employment by taking a vow of poverty and assigning the wages to a “religious order” are considered fraudulent by the IRS and courts, and result in substantial penalties.

A federal appeals court rejected a minister’s attempt to avoid taxation of his secular income by taking a vow of poverty and “assigning” his income to a religious order. A man (the “defendant”) was designated as a minister by a mail-order religious order, took a vow of obedience and a vow of poverty, and transferred title to all of his property to the order. He also assigned to the order all income earned from his secular employment, either endorsing their employment checks in favor of the order or directing his employer to deposit his earnings directly into various accounts of the order. The minister’s home, now owned by the order, was designated as a parsonage, and his mortgage and other expenses were paid for by the order.

The order’s Minister’s Handbook, which the defendant drafted, states: “When ministers take the Vow of Poverty, even the IRS recognizes that they have no income and that any income that they would receive belongs to the religious order. If a minister under a Vow of Poverty has no income, nor assets, then it would be futile for someone to sue them. If a minister has no income, then there is no income tax.”

A federal district court ruled that the minister’s secular employment resulted in taxable income, and this ruling was affirmed by a federal appeals court. The court conceded that secular income may be exempt from income tax and self-employment tax if a person is a member of a religious order who (1) has taken a vow of poverty, (2) receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and (3) renounces the earnings and gives them to the order. The court stressed that the tax code “provides tax-exempt status to a minister’s earnings only when the minister earns the income as an agent of the church and not in his individual capacity.”

In deciding if a minister is receiving funds as an agent of a religious order, the court considered “various factors pertinent to the relationships between the religious order and the minister, between the minister and the third-party employer, and between the employer and the order.” The court concluded that the relationship between the defendant and the order “provides little evidence to support the conclusion that he acted as an agent of the order in this employment.” The defendant claimed that he was formally “assigned” by the order to his secular job, and this made him an agent of the order with respect to his secular employment. The court disagreed, noting that “the agency assignment simply directed him to continue in his present employment, and nothing in the record suggests the agency assignment should be treated as anything other than illusory… . The defendant was already employed by [his secular employer] when he became a minister of the order, and there is no evidence that anything about his employment—with the sole exception of the payee on his employment checks—changed as a result of his ministry. His testimony reflects that he simply continued as usual with his employment and that the order has never exercised any control over the work he performed there.”

The court concluded that under the anticipatory assignment of income doctrine, “when income is assigned to a third party before the moment of receipt, the income is still considered earned by the assignor if he retains dominion over the income-generating asset. And here, the defendant retained control over the income-generating asset because he had the unfettered ability to direct [his employer] to deposit his salary into his own account instead of the order’s.”

What This Means For Churches:

One of the three appeals court judges who issued the ruling commented: “Paying income taxes is a statutory duty; some also consider it a civic duty. Few gladly pay, but most faithfully do. Faithful compliance is tested, sometimes beyond elastic limits, by the siren’s song of the unscrupulous—pay 10% of your income to the “church” and completely avoid the much higher extractions demanded by the taxman AND do so without changing your life circumstances in any significant manner. Sounds great! To the unprincipled or the naïve, it is precisely what the doctor ordered. It is also illegal.” 2014 WL 2443023 (10th Cir. 2014).

Legal Developments

Aurora Movie Theater Could Be Liable for 2012 Shooting

Federal court rules armed assailant’s shooting could have been prevented if security measures were taken.

Church Law and Tax Report

Aurora Movie Theater Could Be Liable for 2012 Shooting

Federal court rules armed assailant’s shooting could have been prevented if security measures were taken.

Key point 7-20.4. A church may be legally responsible for assaults occurring on its premises if similar assaults occurred on or near the premises in the recent past and the church failed to take reasonable precautions.

A federal district court in Colorado ruled that a movie theater in Aurora, Colorado, could be liable for the acts of an armed assailant who killed 12 patrons. On the night of July 20, 2012, James Holmes entered the Century Aurora 16 theater complex in Aurora, Colorado, purchased a ticket for the midnight premiere showing of The Dark Knight Rises, and took a seat in Auditorium 9. During the previews he left the auditorium through the exit door to the outside, leaving it propped open with a plastic clip. He went to his car, which he had parked immediately behind the auditorium, donned body armor and a gas mask, and armed himself with a tear gas canister, a shotgun, a rifle, at least one handgun, and extra ammunition. Twenty minutes after the movie started Holmes reentered the auditorium through the exit door, disbursed tear gas, and began randomly shooting patrons. After killing 12 individuals and wounding many others, Holmes returned to his car, again through the exit door, and waited there until he was arrested by police.

Several victims and their families sued the theater and its parent company (the “defendants”) claiming that the injuries and deaths could have been prevented had the defendants taken reasonable steps to provide security for its patrons. The defendants asserted that the shootings were so unprecedented as to be legally unforeseeable, and therefore they had no legal duty to protect against such acts. They asked the court to issue a summary judgment in its favor on the ground that they neither knew nor should have known of this danger because the danger was unforeseeable as a matter of law.

In support of its position, the defendants relied on a 1987 case in California in which a state appeals court ruled that McDonald’s was not liable for the deaths and injuries caused by an armed assailant at one of its restaurants in California. Lopez v. McDonald’s Corporation, 238 Cal. Rptr. 436 (Cal. App. 1987). In 1984, an adult male walked into a McDonald’s restaurant armed with a rifle, a handgun, and a shotgun and indiscriminately shot patrons and employees, ultimately leaving 21 people dead and 11 others injured. Survivors and surviving family members sued McDonald’s, arguing that the restaurant was in a high-crime area; that it had considered, but ultimately declined to retain, a private security company; and that McDonald’s should be liable on theories of negligence and premises liability. McDonald’s countered that, as a matter of law, the incident was so unlikely as to fall outside the boundaries of a restaurant’s general duty to protect patrons from reasonably foreseeable criminal acts. The court agreed with McDonald’s that its general duty to its patrons did not include protection against a “once-in-a-lifetime” massacre. In affirming the trial court’s grant of summary judgment, a state appeals court concluded:

We conclude as a matter of law … that the unforeseeability of the unique, horrific event requires negligence liability to be restricted here. First, as to the foreseeability of harm to plaintiffs, the theft-related and property crimes of the type shown by the history of its operations, or the general assaultive-type activity which had occurred in the vicinity bear no relationship to purposeful homicide or assassination. In other words, under all the circumstances presented, the risk of a maniacal, mass murderous assault is not a hazard the likelihood of which makes McDonald’s’ conduct unreasonably dangerous. Rather, the likelihood of this unprecedented murderous assault was so remote and unexpected that, as a matter of law, the general character of McDonald’s nonfeasance did not facilitate its happening. [The suspect’s] deranged and motiveless attack, apparently the worst mass killing by a single assailant in recent American history, is so unlikely to occur within the setting of modern life that a reasonably prudent business enterprise would not consider its occurrence in attempting to satisfy its general obligation to protect business invitees from reasonably foreseeable criminal conduct.

The Colorado court did not disagree with this reasoning, but observed that “what was so unlikely to occur within the setting of modern life as to be unforeseeable in 1984 was not necessarily so unlikely by 2012 … . If one Googles ‘mass shooting incidents’ one finds dozens of lists of the major incidents.” The court referenced an article that lists 31 mass shooting incidents between the 1984 McDonald’s disaster and the Aurora shootings. These incidents occurred in “schools, businesses, military bases, shopping malls, a supermarket, on a train, in an immigration center and, as we now know, in a theater.”

The court acknowledged that the plaintiffs had not discovered “any instance of an assailant’s entering a theater auditorium through a surreptitiously propped open exit door and committing a violent act against someone watching the movie.” However, the court declined to rule that nothing short of a previous similar act in another theater could possibly support the existence of a genuine dispute of fact. It observed:

To establish that an incident is foreseeable, it is not necessary that an owner or occupier of land held open for business purposes be able to ascertain precisely when or how an incident will occur. Rather, foreseeability includes whatever is likely enough in the setting of modern life that a reasonably thoughtful person would take account of it in guiding practical conduct … . Simply because something has not yet happened does not mean that its happening is not foreseeable. Instead, foreseeability is based on common sense perceptions of the risks created by various conditions and circumstances … .

One such relevant fact in the setting of modern life is simply the changed landscape in which any school or base or business where large numbers of people congregate operated in July 2012. Although theaters had theretofore been spared a mass shooting incident, the patrons of a movie theater are, perhaps even more than students in a school or shoppers in a mall, “sitting ducks.” One might reasonably believe that a mass shooting incident in a theater was likely enough (that is, not just a possibility) to be a foreseeable next step in the history of such acts by deranged individuals.

The court concluded that the violent acts in this case were not so overwhelmingly unforeseeable as to deny the plaintiffs their day in court. The case now proceeds to trial.

At the end of its ruling, the court conceded that the plaintiffs will have many “hurdles” in pursuing their claims at trial, including the following:

(1) What should a reasonable theater have done before July 2012 even if it recognized that a shooting by an armed assailant “could happen to us?” The problem “is illustrated by the example of schools. What do we reasonably expect a school to do even now when we know that school shootings have become a repeated phenomenon?” Whether the defendants “reasonably could be expected to have implemented any specific additional security measure in light of what was known at the time and the realities of the theater business is not an easy question to answer.”

(2) Would any reasonable preventive measure or combination of measures have stopped the assailant in this case?

What This Means For Churches:

This case is instructive for one reason—while recognizing that a theater’s liability for the acts of an armed assailant require that those acts be reasonably foreseeable, the court concluded that “to establish that an incident is foreseeable, it is not necessary that an owner or occupier of land held open for business purposes be able to ascertain precisely when or how an incident will occur. Rather, foreseeability includes whatever is likely enough in the setting of modern life that a reasonably thoughtful person would take account of it in guiding practical conduct … . Simply because something has not yet happened does not mean that its happening is not foreseeable. Instead, foreseeability is based on common sense perceptions of the risks created by various conditions and circumstances.”

This expansive definition of foreseeability suggests that a church could be liable for the acts of armed assailants even if no similar acts have occurred on church property. Such rulings support the implementation of reasonable risk management procedures on church premises during worship services and other events. We have addressed this issue in prior issues of this newsletter, and suggested several ways to manage this risk, recognizing that the risk can never be eliminated entirely. Working with local law enforcement, your insurance company, and an attorney in formulating your response will be crucial. Another resource is the 38-page guide released in 2013 by the Federal Emergency Management Agency (“FEMA”) to assist churches in responding to several emergencies, including “active shooters.” The guide, titled “Developing High Quality Emergency Operation Plans for Houses of Worship,” is available at fema.gov. It is addressed fully in the November/December 2013 issue of this newsletter, which is available in the archives on ChurchLawAndTax.com and as a part of Preventing a Violent Incident at Your Church, a downloadable Feature Report available on ChurchLawAndTaxStore.com. Axelrod v. Cinemark Holdings, Inc., 2014 WL 4470728 (D. Colo. 2014).

* See also “Privacy,” Clay Center Christian Church, 746 F.3d 375 (8th Cir. 2014), in the Recent Developments section of this newsletter.

Legal Developments

Pollution Exclusion in Insurance Policy Prevents Lawsuit

Pastor killed by carbon monoxide in church parsonage; wife is unable to sue for damages.


Key point 10-16.7. A liability insurance policy provides a church with a legal defense to lawsuits claiming that the church is responsible for an injury, and it will pay any adverse settlement or judgment up to the limit specified in the policy. Liability insurance policies exclude a number of claims. For example, some policies exclude injuries based on criminal or intentional acts and claims for punitive damages. A church has an obligation to promptly notify its insurer of any potential claim, and to cooperate with the insurer in its investigation of claims.

A federal appeals court ruled that a pollution exclusion in a church's liability insurance policy prevented the spouse of a pastor who was killed by carbon monoxide poisoning in the church parsonage from recovering any damages against the insurer. A pastor and his wife resided in their church's parsonage. One evening the parsonage's heating system malfunctioned and released carbon monoxide throughout the residence. The pastor died as a result of his exposure to the carbon monoxide, and his wife was seriously injured. The church had a multi-peril insurance policy and an umbrella policy. The multi-peril policy contained a pollution exclusion that excluded coverage for:

"Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants:

(a) At or from any premises, site, or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

The umbrella policy included identical language. "Pollutants" are defined under both policies as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed."

Although it was evident that the carbon monoxide had been emitted from the parsonage's heating system, the exact source and cause of the carbon monoxide leak were not clear. The surviving spouse (the "plaintiff") entered into a consent agreement in which she agreed not to "pursue or collect on any of the church's assets or assets of any members of the church, except for any rights to indemnity under any insurance policies." In exchange, the church assigned to the plaintiff all rights it had under its insurance policies.

A federal district court concluded that the pollution exclusions were unambiguous, that carbon monoxide was a "pollutant" as defined by the policies, and that the plaintiff's claims were not covered under the plain terms of the policies.

A federal appeals court agreed, noting that "as an appellate court reviewing terms of an insurance contract, we cannot say that the language of the pollution exclusion is ambiguous in any way. The language in the instant pollution exclusion is clear and susceptible of only one possible interpretation."

What This Means For Churches:

There are two points worth noting. First, be sure that any church-owned residences are thoroughly inspected periodically, including an inspection of the furnace each fall. Second, be familiar with the exclusions under church insurance policies, and consider obtaining excluded coverages through a special endorsement or separate policy. Clay Center Christian Church, 746 F.3d 375 (8th Cir. 2014).

Legal Developments

Church Agency Not Liable for Nudity in Video as Harassment

Woman recording conversations can’t sue when fellow employee shows video with flash of nudity.

Church Law and Tax Report

Church Agency Not Liable for Nudity in Video as Harassment

Woman recording conversations can’t sue when fellow employee shows video with flash of nudity.

Key point 8-12.5. Sexual harassment is a form of sex discrimination prohibited by Title VII of the Civil Rights Act of 1964. It consists of both “quid pro quo” harassment and “hostile environment” harassment. Religious organizations that are subject to Title VII are covered by this prohibition. An employer is automatically liable for supervisory employees’ acts of harassment, but a defense is available to claims of hostile environment harassment if they have adopted a written harassment policy and an alleged victim fails to pursue remedies available under the policy. In some cases, an employer may be liable for acts of sexual harassment committed by nonsupervisory employees, and even nonemployees.

A federal appeals court ruled that a church agency was not liable on the basis of sexual harassment for an employee’s alleged display of a video showing a momentary image of male nudity to a co-employee. A church agency hired a woman (the “plaintiff”) as a clerical employee. The plaintiff’s employment was terminated when her employer discovered that she had been secretly recording her conversations with co-workers without their consent. The employer concluded that her behavior violated its employment standards, and a state eavesdropping law. After her termination, the plaintiff filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) alleging that she was sexually harassed on one occasion when another employee showed her a supposedly humorous video on his computer that included a brief display of male nudity. She also claimed that her employer discriminated against her on the basis of race and national origin when it failed to promote her on four occasions.

A federal district court dismissed all claims against the employer, and the plaintiff appealed.

Race and national origin discrimination
A federal appeals court concluded that the plaintiff “has offered no direct evidence that her race or national origin motivated any decision by the employer. The court pointed out that the plaintiff had failed to submit a timely application for most of the four promotions she sought, and that these positions had already been filled by the time it received the plaintiff’s applications.

Further, the employer presented “non-discriminatory reasons for the decisions not to promote the plaintiff.” In particular, the employer believed she lacked the leadership and interpersonal skills necessary for the jobs.

Sexual harassment
The court concluded that the plaintiff’s sexual harassment claim based on seeing one video with nudity on a co-worker’s computer was also properly dismissed: “The sole alleged incident was not severe enough to support a claim [of sexual harassment]. Although a single instance of behavior can give rise to liability if it is sufficiently severe, past cases finding liability for a single incident have involved facts much more severe than those claimed by the plaintiff … . Showing the plaintiff one video containing a momentary display of male nudity does not come close to reaching the required level of severity for a sexual harassment claim.” As a result, this claim was properly dismissed by the district court.

What This Means For Churches:

Sexual harassment is a form of “sex discrimination” prohibited by Title VII of the Civil Rights Act of 1964. Equal Employment Opportunity Commission (EEOC) regulations define sexual harassment as follows:

“The sole alleged incident was not severe enough to support a claim [of sexual harassment]. Although a single instance of behavior can give rise to liability if it is sufficiently severe, past cases finding liability for a single incident have involved facts much more severe than those claimed by the plaintiff.”

(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 definition demonstrates 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, and

(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.

This case dealt with the second variety of sexual harassment. The court concluded that “hostile environment” sexual harassment is not implicated by every offensive comment or act. Rather, the harassment must be severe or pervasive enough to create an environment that a reasonable person would find hostile or abusive, and the victim must subjectively regard that environment as abusive. Johnson v. General Board, 733 F.3d 722 (7th Cir. 2013).

Legal Developments

Ministerial Exemption Bars Court’s Ruling in Music Director’s Dismissal

Federal Court unable to resolve claim that director’s dismissal was based on age or disability.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax Report

Ministerial Exemption Bars Court’s Ruling in Music Director’s Dismissal

Federal Court unable to resolve claim that director’s dismissal was based on age or disability.

Richard R. Hammar

Key point 8-10.1. The civil courts have consistently ruled that the First Amendment prevents the civil courts from applying employment laws to the relationship between a church and a minister.

A federal appeals court ruled that it was barred by the “ministerial exception” from resolving a church music director’s claim that he was dismissed in violation of federal laws prohibiting employment discrimination based on age or disability. A church’s music director (the “plaintiff”) oversaw the music department’s budget and expenditures, managed the sound systems and maintained the sound equipment, music room, and music area in the sanctuary, and rehearsed with members of the choir and accompanied them on the piano during services while running the soundboard. The plaintiff’s employment was terminated by the church, and he filed a lawsuit claiming that his termination was in violation of the Age Discrimination in Employment Act and the Americans with Disabilities Act. The church asked the court to dismiss the lawsuit on the basis of the ministerial exception, which generally bars the civil courts from resolving employment disputes between churches and clergy. A federal district court agreed that the ministerial exception applied, and it dismissed the case.

A federal appeals court affirmed the dismissal of the plaintiff’s claims. It relied on a 2012 ruling by the United States Supreme Court unanimously affirming the ministerial exception. Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012). In the Hosanna-Tabor case, the Supreme Court ruled that “there is a ministerial exception” that “bars the government from interfering with the decision of a religious group to fire one of its ministers.”

The Starkman Test

In Hosanna-Tabor, the Supreme Court specifically declined to adopt a “rigid formula” for determining when an employee is a minister within the meaning of the ministerial exception, concluding instead that “all the circumstances of employment” must be considered.

In 1999, a federal appeals courtadopted a three-part test for deciding if a church employee was a minister for purposes of the ministerial exception. Starkman v. Evans, 198 F.3d 173 (5th Cir. 1999):

First, this court must consider whether employment decisions regarding the position at issue are made largely on religious criteria … . Second, to constitute a minister for purposes of the “ministerial exception,” the court must consider whether the plaintiff was qualified and authorized to perform the ceremonies of the Church … . Third, and probably most important, is whether [the employee] engaged in activities traditionally considered ecclesiastical or religious, including whether the plaintiff attends to the religious needs of the faithful.

This three-part test became known as the “Starkman test” for determining ministerial status, and it was applied by several other courts. The court in the church music director’s case concluded that this test was no longer viable in light of the Hosanna-Tabor case:

Reviewing the arguments advanced by the parties … we conclude that the Supreme Court’s decision in Hosanna-Tabor at most invalidates and at least modifies Starkman‘s three-part test … . The Hosanna-Tabor Court engaged in a fact-intensive inquiry and explicitly rejected the adoption of a “rigid formula” or bright-line test. In light of this, Starkman‘s three-part test cannot survive in its precise form. First, given the totality-of-the-circumstances analysis in which the Hosanna-Tabor Court engaged, limiting the inquiry in ministerial exception cases to a three-part test is invalid … . Some of the facts the Hosanna-Tabor Court underscored may not be able to be considered under Starkman‘s three prongs, which would not be permissible. Second, because the Supreme Court eschewed a “rigid formula” in favor of an all-things-considered approach, courts may not emphasize any one factor at the expense of other factors. Thus, Starkman‘s “most important” factor—whether the plaintiff “engaged in activities traditionally considered ecclesiastical or religious”—may no longer serve as the gravamen of a ministerial exception case. However, this is not to place too great an emphasis on Hosanna-Tabor. Any attempt to calcify the particular considerations that motivated the Court in Hosanna-Tabor into a “rigid formula” would not be appropriate.

We are mindful of the benefit that clear standards provide to lower courts and religious employers seeking to structure their actions in accordance with the law. However, Hosanna-Tabor‘s rejection of a bright-line test likely reflects the diversity of religious practice in this country; given the pluralism of religious thought for which America is known and celebrated, it may not be possible to develop a one-size-fits-all approach to the ministerial exception … . Following the example of the Hosanna-Tabor Court, it is enough for us to conclude that, under the circumstances [the plaintiff] falls within the ministerial exception.

The Plaintiff’s Ministry

The crux of the plaintiff’s argument was that he merely played the piano during church services and that his only responsibilities were keeping the books, running the sound system, and doing custodial work, none of which was religious in nature. However, the court noted that “the performance of secular duties may not be overemphasized in the context of the ministerial exception.”

“The Hosanna-Tabor Court engaged in a fact-intensive inquiry and explicitly rejected the adoption of a ‘rigid formula’ or bright-line test. In light of this, Starkman’s three-part test cannot survive in its precise form.”

The church focused on the important role music plays in worship. It introduced evidence that all musicians, regardless of whether they are professional or volunteer or work full- or part-time, “exercise a genuine liturgical ministry.” An expert on canon law testified:

The church believes that music in the liturgy is sacred and has ritual and spiritual dimensions. Music enhances the prayer that occurs in the Catholic Mass by enriching its elements. It also draws the congregation closer to Christ, and allows the congregation to act together in celebration by singing praises and hymns to the Lord, which in turn strengthens the faith that is in them. Music is a part of the celebration and prayer that is occurring at the Mass and enhances the liturgy.

The court concluded that the plaintiff was a “minister” for purposes of the ministerial exception since playing the piano during worship “furthered the mission of the church and helped convey its message to the congregants.”

The plaintiff also insisted that he could not be considered a minister since he was not ordained and he did not conduct Mass, deliver a sermon, or write the music or lyrics for the ceremony, and lacked the education, training, and experience to be considered a minister. The court rejected this reasoning:

[The plaintiff’s] lack of formal training in Catholic doctrine is immaterial; this is because the ministerial exception does not apply only to those who are ordained. Moreover, the church introduced evidence, prepared by the United States Conference of Catholic Bishops and intended to aid in the preparation and celebration of the liturgy, that “as a matter of both religious belief and canon law, the Church considers music in the liturgy to be sacred, with ritual and spiritual dimensions; and a church musician to be a minister who shares faith, serves the community, and expresses the love of God and neighbor through music.” For Appellees, the argument is simple: Mass is the center of the Catholic faith, and the plaintiff was at the center of Mass.

The court noted that the Supreme Court in Hosanna-Tabor observed that “the heads of congregations themselves often have a mix of duties, including secular ones, such as helping to manage the congregation’s finances, supervising purely secular personnel, and overseeing the upkeep of facilities.” Accordingly, “that the plaintiff lacked the religious training present in Hosanna-Tabor is insufficient to insulate him from the application of the ministerial exception, particularly in light of the important part his ostensibly secular duties—working on the music department budget, managing the sound system, running the soundboard during Mass, maintaining the music room, rehearsing with choir members and cantors, and playing piano during services—played in furthering the mission and message of the church at Mass.”

What This Means For Churches:

This case is important for two reasons. First, the court rejected the three-part Starkman test for determining ministerial status in applying the ministerial exception, noting that it could not survive the “facts and circumstances” approach articulated by the Supreme Court in Hosanna-Tabor. Second, the court emphasized the significance of music in the ministry of a church, and therefore those who are integrally involved in music ministry should be deemed “ministers” covered by the ministerial exception. Cannata v. Catholic Diocese, 700 F.3d 169 (5th Cir. 2012).

Legal Developments

Boy Scouts Had Legal Duty to Disclose Molestation

Its failure to do so could expose liability for individual acts of molestation.

Key point 10-13.1. A few courts have found churches and denominational agencies liable on the basis of a breach of a fiduciary duty for the sexual misconduct of a minister. In some cases, the church or agency is found to be vicariously liable for the minister's breach of a fiduciary duty, but in other cases, the church or agency is found to have breached a fiduciary duty that it had with the victim.

A federal district court in Idaho ruled that the Boy Scouts of America had a legal duty to disclose to the public the risk of child molestation in scouting programs, and that its failure to do so could expose it to liability for individual acts of molestation. An adult male (the "plaintiff") was a member of a church-based Boy Scouts troop when he was a minor during the years 1965 through 1971. He claimed that he was repeatedly sexually abused by his scoutmaster on various overnight trips and day trips. Only the plaintiff and scoutmaster participated on some of these trips, which typically involved fishing and searching for campsites for the troop.

In 2008, when he was 55 years old, the plaintiff sued national and regional organizations of the Boy Scouts of America (BSA), and the church that hosted his former scout troop. He claimed that the BSA organizations and church knew about the danger of abuse. But instead of disclosing this danger to him, they promoted scouting as a safe, trustworthy, and fun activity for boys. According to the plaintiff, the BSA organizations and church also represented that the perpetrator was a trusted youth leader worthy of his scoutmaster role, despite knowing that he had previously molested another boy.

In short, the plaintiff asserted that the BSA organizations, and host church, had a relationship of trust and confidence that imposed upon them a "duty to disclose" the general danger of child molestation inherent in scouting.

The plaintiff's lawsuit claimed that the BSA "has always had a known problem with adult volunteers abusing scouts." In the early 1900s, the BSA began keeping "Ineligible Volunteer Files" on individuals banned from volunteering in scouting. The "Perversion" category contains the most files and comprises any type of sexual misconduct, including child abuse. Before the plaintiff became a Scout, the BSA had compiled "thousands of incidents of child abuse" within scouting involving its adult volunteers. And by the time the plaintiff joined scouting, BSA was creating approximately 40 to 60 Perversion files each year.

The plaintiff further claimed that the BSA and church had specific notice that the perpetrator was a child molester and danger to children. In 1964, a church member told a church official that his son, a scout in the same troop, had also been molested by him. The church official allegedly responded that he would "take care of it." And a week later, he told the father that he "had taken care of it."

The plaintiff's lawsuit asserted that the BSA organizations, and host church, were liable for the scoutmaster's acts on the basis of "constructive fraud." The court explained this basis of liability as follows: "An action in constructive fraud exists when there has been a breach of a duty arising from a relationship of trust and confidence, as in a fiduciary duty … . To prove constructive fraud, a party must prove the existence of a confidential relationship. When a confidential relationship is found to exist, the one in whom confidence was reposed may be held to a higher standard of disclosure and fairness than in an arm's-length relationship."

In short, the plaintiff asserted that the BSA organizations, and host church, had a relationship of trust and confidence that imposed upon them a "duty to disclose" the general danger of child molestation inherent in scouting. Their failure to do so amounted to constructive fraud.

The court concluded that a confidential relationship existed between the plaintiff and the BSA organizations and host church, based on four factors:

(1) he was a minor child when he was allegedly abused; (2) he was an active and regular participant in camping trips and other activities provided through a church-sponsored organization; (3) he was strongly encouraged by the church to participate in those camping trips and activities; and (4) the church allegedly knew of the specific danger that the scoutmaster posed. Also, the church taught the plaintiff to respect and trust his church and scout youth leaders. And presumably, his parents trusted the scoutmaster enough, in his role as a church and scout leader, to allow him to take the plaintiff on overnight camping trips and individual day trips. On these scouting trips, the parents entrusted the perpetrator to ensure their son's safety and act as his caretaker.

What This Means For Churches:
This case is important for two reasons. First, the court insinuated that the church and BSA organizations could be liable for a 50-year-old case of child molestation because at, or prior to, the time the victim became involved in scouting they failed to "disclose" to him, and more generally to the public, that child molestation by scoutmasters was a risk that parents should consider before allowing their children to participate in scouting. This extraordinary conclusion will expose youth-serving charities to liability for their actions decades ago based on modern-day standards of proper care.

Second, the court concluded that the pastor could be viewed as an "agent" of the national and regional BSA organizations, and as a result, the father's disclosure to a church official that his son had been molested by the same scoutmaster who molested the plaintiff could be imputed to the BSA organizations, even though they lacked any direct knowledge of the incident. Doe v. Presiding Bishop, 2012 WL 3782454 (D. Idaho 2012).

Legal Developments

Church Sued for Supervisor’s Sexual Harassment

Court in Oklahoma ruled that plaintiff was treated wrongfully by the church.

Richard R. Hammar, Attorney, CPA
Bio

Key point 8-12.5. Sexual harassment is a form of sex discrimination prohibited by Title VII of the Civil Rights Act of 1964. It consists of both "quid pro quo" harassment and "hostile environment" harassment. Religious organizations that are subject to Title VII are covered by this prohibition. An employer is automatically liable for supervisory employees' acts of harassment, but a defense is available to claims of hostile environment harassment if they have adopted a written harassment policy and an alleged victim fails to pursue remedies available under the policy. In some cases, an employer may be liable for acts of sexual harassment committed by nonsupervisory employees, and even nonemployees.

New study on sexual harassment in the Christian workplace: Learn about the extent of this troubling problem in churches and parachurch ministries.

Key point 8-16. State and federal civil rights laws generally prohibit employers from retaliating against an employee for filing a discrimination claim or otherwise exercising rights provided by the law.

A federal district court in Oklahoma ruled that a church could be sued on the basis of sexual harassment for the conduct of a supervisory employee even though it was not aware of it at the time it occurred. A female church employee (the "plaintiff") claimed that over the course of a year she was sexually harassed by her supervisor. The harassment included both language and physical conduct. The plaintiff resisted her supervisor's advances, and this led directly to a reduction in her hours.

Plaintiff reported the sexual harassment to the church. After doing so, her hours continued to be reduced until she was terminated. The church insisted that the plaintiff quit her job.

The plaintiff sued the church, alleging sexual harassment, retaliation, wrongful termination, and negligence.

Sexual Harassment

Title VII of the Civil Rights Act of 1964 prohibits employers with 15 or more employees from discriminating in employment decisions on the basis of race, color, national origin, sex, or religion. Sexual harassment is a form of sex discrimination prohibited by Title VII. The courts have identified two types of sexual harassment—"quid pro quo" and hostile environment. "Quid pro quo" harassment refers to conditioning employment opportunities on submission to a sexual or social relationship, while "hostile environment" harassment refers to the creation of an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature. In general, an employer is liable for a supervisory employee's hostile environment sexual harassment.

The plaintiff claimed that she was subjected to a sexually hostile work environment due to the actions of her supervisor. The court noted that "a plaintiff may prove the existence of hostile work environment sexual harassment in violation of Title VII where sexual conduct has the purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile, or offensive working environment … For sexual harassment to be actionable, it must be sufficiently severe or pervasive to alter the conditions of [the victim's] employment and create an abusive working environment."

The church claimed that the plaintiff had not shown that any alleged harassment was sufficiently severe or pervasive to alter the conditions of her employment. The court disagreed, and rejected the church's request that the lawsuit be dismissed:

The court finds plaintiff has set forth sufficient evidence to create a genuine issue of material fact as to whether she suffered sexual harassment that was sufficiently severe or pervasive to alter the conditions of her employment and create an abusive working environment. Specifically, plaintiff has submitted evidence that for a year … she was verbally and physically sexually harassed by her supervisor, in that on a weekly, and near daily basis, he referred to her by sexually offensive names and on some 15 occasions, on a weekly and near bi-weekly basis, he either grabbed, groped, pinched, slapped, and squeezed her breasts or buttocks … or he forcibly pinned her against a wall with his body and kissed or tried to kiss her, or he directly requested she engage in sexual intercourse.

The court rejected the church's argument that it could not be liable for the supervisor's conduct since it had no knowledge it was occurring. It observed, "An employer is subject to liability to a victimized employee for a hostile environment created by a supervisor with immediate (or successively higher) authority over the employee." Since the supervisor was the plaintiff's immediate supervisor having immediate authority over her, "whether the church had knowledge of any alleged sexual harassment is not dispositive of the church's liability."

Retaliation

The court rejected the church's request to dismiss the plaintiff's retaliation claim that she had been wrongfully retaliated against her pursuing her harassment claim. Many federal and state civil rights laws that ban discrimination in employment prohibit employers from "retaliating" against employees who oppose discriminatory practices or pursue claims of discrimination. To illustrate, Title VII of the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act, and the Americans with Disabilities Act all prohibit employer retaliation.

The court noted that for the plaintiff to establish a claim of discrimination she had to show that "(1) she engaged in opposition to discrimination; (2) she was subject to adverse employment action; and (3) a connection existed between the protected activity and the adverse action."

The church claimed that there was no retaliation since the plaintiff suffered no adverse employment action. The court disagreed:

The Court finds plaintiff has set forth sufficient evidence to create a genuine issue of material fact as to whether she was subject to an adverse employment action. Having reviewed the parties' submissions, it is clear there is a genuine dispute as to whether plaintiff quit her employment with the church or whether she was terminated. The court would also note that plaintiff has submitted evidence showing that her hours were greatly reduced both after she rejected her supervisor's alleged sexual advances and after she reported the sexual harassment to the church.

Accordingly, the Court finds that summary judgment should not be granted as to plaintiff's retaliation claim.

Constructive Discharge

The court refused to dismiss the plaintiff's claim of "constructive discharge," noting that "when an employer controls the working hours and reduces the number of working hours, a constructive discharge can occur if the employee quits."

Negligence

The plaintiff claimed that the church was responsible for its supervisor's acts of sexual harassment on the basis of negligence due to its failure to "investigate, respond, or discipline" the supervisor. In rejecting the church's request to dismiss this claim the court observed:

Employers may be held liable for negligence in hiring, supervising or retaining an employee. In such instances, recovery is sought for the employer's negligence. The claim is based on an employee's harm to a third party through employment. An employer is found liable, if—at the critical time of the tortious incident—the employer had reason to believe that the person would create an undue risk of harm to others. Employers are held liable for their prior knowledge of the employee's propensity to commit the very harm for which damages are sought … . The critical element for recovery is the employer's prior knowledge of the employee's propensities to create the specific danger resulting in damage.

The court concluded that there was sufficient evidence that the church was aware of prior acts of sexual harassment by the supervisor to allow this claim to proceed.

What this means for churches

This case is important because it demonstrates that a church may be liable for a supervisory employee's acts of sexual harassment even though it had no actual knowledge that they occurred.

Sexual harassment is a form of "sex discrimination" prohibited by Title VII of the Civil Rights Act of 1964. Equal Employment Opportunity Commission (EEOC) regulations define sexual harassment as follows:

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 definition 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, and

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.

An employer may be liable for a supervisor's acts of "hostile environment" sexual harassment even if it was not aware the acts were happening when they occurred. The basic rule may be stated as follows: If a supervisor creates an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature, this is "hostile environment" sexual harassment for which the employer will be legally responsible if the supervisor takes any "tangible employment action" against the employee. A tangible employment action includes "a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits." The employer is liable under such circumstances whether or not it was aware of the harassment.

An employer may be liable for a supervisor's acts of hostile environment sexual harassment even if it takes no tangible employment action against the victim. But, in such cases, the employer may assert an "affirmative defense" to liability. This defense consists of two elements:

i. The employer "exercised reasonable care to prevent and correct promptly any sexually harassing behavior." This generally means that the employer adopted a written sexual harassment policy that was communicated to employees, and that contains a complaint procedure.

ii. The victim "unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise." This generally means that the victim failed to follow the complaint procedure described in the employer's sexual harassment policy.

As a result, it is a "best practice" for a church with employees to adopt a sexual harassment policy, since this will serve as a defense to liability for a supervisor's acts of "hostile environment" sexual harassment to the extent that a victim of such harassment does not follow the policy. 2012 WL 2912516 (W.D. Okla. 2012).

Legal Developments

Synagogue Not Liable for Thousands of Dollars in Penalties

Court ruled rabbi in question wasn’t an employee of the synagogue.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax Report

Synagogue Not Liable for Thousands of Dollars in Penalties

Court ruled rabbi in question wasn’t an employee of the synagogue.

Richard R. Hammar

Key point. The Tax Court uses a seven-part test in deciding if a minister is an employee or an independent contractor for payroll reporting purposes.

The United States Tax Court ruled that a rabbi was not an employee of a synagogue, and therefore the synagogue was not liable for tens of thousands of dollars in penalties for failing to withhold Social Security and income taxes. A religious organization was incorporated to operate a synagogue. It paid a rabbi annual amounts ranging from $30,000 to $100,000 from 2004 to 2007. None of these amounts were reported as employee compensation, and so no FICA taxes or income taxes were withheld. The IRS audited the rabbi, determined that he was an employee, and assessed penalties (under section 6651 of the tax code) of more than $100,000 against the synagogue for failing to withhold and pay $95,000 in FICA taxes and $162,145 in federal income taxes. The synagogue appealed to the Tax Court, claiming that the rabbi was an independent contractor, rather than an employee, and so no taxes had to be withheld from his compensation.

The Tax Court began its opinion by noting: “Employers and employees are subject to employment taxes, including FICA. FICA provides a Social Security tax payable by both employers and employees. Employers are required to withhold FICA tax and federal income tax on wage payments that they make to their employees. These employment taxes do not apply to payments made to independent contractors.”

In resolving the rabbi’s status, the Court relied on a seven-step analysis it had adopted in a previous ruling involving the tax status of a minister. Weber v. Commissioner, 103 T.C. 378 (1994), aff’d 60 F.3d 1104 (4th Cir. 1995). The Court noted:

Whether an individual performing services for a principal is an employee (rather than an independent contractor) is a factual question to which common law principles apply … . In determining whether a worker is an employee, the court considers (1) the degree of control exercised by the principal over the details of the work; (2) which party invests in the facilities used by the worker; (3) the opportunity of the worker for profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believed they were creating … . We consider all facts and circumstances; no one factor dictates the outcome. Although the determination of employee status is to be made by common law concepts, a realistic interpretation of the term “employee” should be adopted, and doubtful questions should be resolved in favor of employment in order to accomplish the remedial purposes of the legislation involved.

The Tax Court concluded, on the basis of its examination of each of these seven factors, that the rabbi was an independent contractor rather than an employee, and so the synagogue was not required to withhold FICA taxes of income taxes from his compensation.

What This Means For Churches:

This case illustrates the continuing relevance of the seven-factor test adopted by the Tax Court in the Weber case (1994) for determining the correct reporting status of ministers. Unfortunately, however, the Court failed to explain that clergy are not subject to FICA taxes with respect to their ministerial compensation (they are regarded as self-employed for Social Security and pay self-employment taxes), and their ministerial wages are exempt from income tax withholding unless they elect voluntary withholding. Ungvar v. Commissioner, T.C. Memo. 2013-161.

Legal Developments

Federal Court Rules Invasion of Privacy

Employer viewing employee’s Facebook page without permission is sued by employee.

Richard R. Hammar, Attorney, CPA
Bio

Key point 4-04. Many states recognize "invasion of privacy" as a basis for liability. Invasion of privacy may consist of any one or more of the following: (1) public disclosure of private facts; (2) use of another person's name or likeness; (3) placing someone in a "false light" in the public eye; or (4) intruding upon another's seclusion.

A federal court in New Jersey ruled that an employer may have invaded the privacy of an employee by accessing her Facebook account without permission.

A registered nurse and paramedic (the "plaintiff") worked for an emergency response company. She alleged that her employer retaliated against her as a result of her union activities. She maintained an account on Facebook, a social networking website. If someone was not invited to be her Facebook "friend," he or she could not access and view postings on her Facebook "wall." Many of her coworkers were invited to be her Facebook friends. She did not invite any members of her employer's management team as friends.

The plaintiff alleged that her employer "gained access to her Facebook account by having a supervisor summon an employee, who was also one of the plaintiff's Facebook friends, into an office" and "coercing and threatening the employee into accessing his Facebook account on the work computer in the supervisor's presence." The plaintiff claimed that the supervisor viewed and copied her Facebook postings accessed through the coworker's account. One such posting contained a highly offensive and derogatory comment that the supervisor forwarded to the state board of nursing. The supervisor alleged that the company was concerned that the plaintiff's Facebook posting showed a disregard for patient safety.

The plaintiff sued her former employer on the basis of several grounds, including a violation of a state wiretapping law, and invasion of privacy.

State wiretapping law

The plaintiff claimed that the employer violated the New Jersey Wiretapping and Electronic Surveillance Control Act ("NJ Wiretap Act") "by accessing without permission and improperly monitoring the electronic communications being stored on the plaintiff's Facebook account."

The NJ Wiretap Act provides that: "A person is guilty of a crime of the fourth degree if he (1) knowingly accesses without authorization a facility through which an electronic communication service is provided or exceeds an authorization to access that facility, and (2) thereby obtains, alters, or prevents authorized access to a wire or electronic communication while that communication is in electronic storage." "Electronic storage," as used in the NJ Wiretap Act, is defined as: "(1) Any temporary, intermediate storage of a wire or electronic communication incidental to the electronic transmission thereof; and (2) Any storage of such communication by an electronic communication service for purpose of backup protection of the communication."

Based on the definition of "electronic storage," New Jersey courts have held that the NJ Wiretap Act "protects only those electronic communications, which are in the course of transmission" and does not apply to electronic communications received by the recipient, placed in post-transmission storage, and then accessed by another without authorization because "the strong expectation of privacy with respect to communication in the course of transmission significantly diminishes once transmission is complete."

This is consistent with federal courts' interpretation of similar provisions of the federal Wiretap Act.

The court concluded: "In this case, plaintiff clearly failed to state a claim under the NJ Wiretap Act. She does not allege that her Facebook posting was in the course of transmission when the supervisor viewed it. To the contrary, her complaint clearly states that the posting was live on the Facebook website for all of plaintiff's Facebook friends to "access and view." Because the posting was in post-transmission storage when the supervisor accessed it, "this communication does not fall under the purview of the NJ Wiretap Act."

Invasion of privacy

The plaintiff also claimed that her employer's unauthorized "accessing of her private Facebook postings" amounted to an invasion of her privacy. The court rejected the employer's request to dismiss the claim. The court noted that "to state a claim for intrusion upon one's seclusion or private affairs, a plaintiff must allege sufficient facts to demonstrate that (1) her solitude, seclusion, or private affairs were intentionally infringed upon, and that (2) this infringement would highly offend a reasonable person." The court continued:

Privacy in social networking is an emerging, but underdeveloped, area of law. There appears to be some consistency in the case law on the two ends of the privacy spectrum. On one end of the spectrum, there are cases holding that there is no reasonable expectation of privacy for material posted to an unprotected website that anyone can view …. On the other end of the spectrum, there are cases holding that there is a reasonable expectation of privacy for individual, password-protected online communications …. Courts, however, have not yet developed a coherent approach to communications falling between these two extremes. Although most courts hold that a communication is not necessarily public just because it is accessible to a number of people, courts differ dramatically in how far they think this theory extends …. Most courts have adopted the concept of "limited privacy," which is "the idea that when an individual reveals private information about herself to one or more persons, she may retain a reasonable expectation that the recipients of the information will not disseminate it further."

In this case, plaintiff argued that she had a reasonable expectation of privacy in her Facebook posting because her comment was disclosed to a limited number of people who she had individually invited to view a restricted access webpage. The employer claimed that plaintiff cannot have a reasonable expectation of privacy because the comment was disclosed to dozens, if not hundreds, of people.

The court concluded: "Plaintiff has stated a plausible claim for invasion of privacy, especially given the open-ended nature of the case law. Plaintiff may have had a reasonable expectation that her Facebook posting would remain private, considering that she actively took steps to protect her Facebook page from public viewing."

What this means for churches

Church leaders should assume that employees' Facebook accounts are private, and that any unauthorized access may constitute an invasion of privacy for which monetary damages may be available. Such inspections or access should never be undertaken without legal advice. Ehling v. Monmouth-Ocean Hosp. Service Corporation, 872 F.Supp.2d 369 (D.N.J. 2012).

Legal Developments

“Off-campus” Religious Instruction Doesn’t Violate First Amendment

Federal court rules religious program giving academic credit not a violation of the prohibition of an establishment of religion.

Church Law and Tax

“Off-campus” Religious Instruction Doesn’t Violate First Amendment

Federal court rules religious program giving academic credit not a violation of the prohibition of an establishment of religion.

Key point. Released time programs, which allow public school students to receive religious instruction off campus during school hours, do not violate the First Amendment’s prohibition of any establishment of religion.

A federal appeals court ruled that a “released time” program that granted limited academic credit to public high school students for receiving religious instruction off campus during school hours did not violate the First Amendment’s prohibition of an establishment of religion. Since 1992, a number of school districts in South Carolina have allowed students to be released for part of the school day in order to receive off-campus religious instruction. Initially, the students who availed themselves of this opportunity did not receive grades or academic credit, which made enrollment difficult for some students. In 2006, the South Carolina General Assembly found that “the absence of an ability to award academic credit had essentially eliminated the school districts’ ability to accommodate parents’ and students’ desires to participate in released time programs,” and it responded by enacting the Released Time Credit Act. The Released Time Credit Act allows students to receive up to two hours of academic credit for participating in a released time program, subject to various conditions.

The Freedom from Religion Foundation and other plaintiffs filed a lawsuit in federal court claiming that this released time program constituted an “establishment of religion” barred by the First Amendment. The plaintiffs conceded that the United States Supreme Court had previously ruled that released time programs were constitutionally permissible, but they insisted that the South Carolina program was different because it granted academic credit. A federal district court ruled that this was a distinction without a difference, and it found the program constitutional. A federal appeals court agreed:

Important to our conclusion is the governing principle that private religious education is an integral part of the American school system. Indeed, States are constitutionally obligated to allow children and parents to choose whether to fulfill their compulsory education obligations by attending a secular public school or a religious private school. It would be strange and unfair to penalize such students when they attempt to transfer into the public school system by refusing to honor the grades they earned in their religious courses, potentially preventing them from graduating on schedule with their public school peers. Far from establishing a state religion, the acceptance of transfer credits (including religious credits) by public schools sensibly accommodates the “genuine choice among options public and private, secular and religious.”

The court concluded: “At bottom, because the … released time policy relies exclusively on the provision of off-campus religious instruction by nongovernmental educators and passively accommodates the genuine and independent choices of parents and students to pursue such instruction, we affirm the district court’s judgment …. We see no evidence that the program has had the effect of establishing religion or that it has entangled the school district in religion …. The program properly accommodates religion without establishing it, in accordance with the First Amendment.” Moss v. Spartanburg County School District, 683 F.3d 599 (4th Cir. 2012).

Editor’s Note: The May/June 2013 edition of Church Law & Tax Report includes “Churches and Released Time Programs for Public Schools,” an article that goes deeper into the steps for developing and maintaining a constitutionally sound effort.

Church Law & Tax Report is published six times a year by Christianity Today International, 465 Gundersen Dr. Carol Stream, IL 60188. (800) 222-1840. © 2013 Christianity Today International. editor@churchlawandtax.com All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. “From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.” Annual subscription: $69. Subscription correspondence: Church Law & Tax Report, PO Box 37012, Boone, IA 50037-0012.

Legal Developments

Federal Court Barred from Resolving Dismissed Member’s Lawsuit

Ex-member unable to sue church leaders for misappropriation of church funds.

Richard R. Hammar, Attorney, CPA
Bio

Key point 6-10.1. According to the majority view, the civil courts will not resolve disputes challenging a church's discipline of a member since the First Amendment guaranty of religious freedom prevents them from deciding who are members in good standing of a church.

A federal appeals court ruled that it was barred by the First Amendment guaranty of religious freedom from resolving a dismissed church member's lawsuit accusing church leaders of financial improprieties and breach of their fiduciary duties. An individual (the "plaintiff"), on behalf of himself and all members of his church, filed a lawsuit in which he alleged that the pastor and board of trustees (the "defendants") were guilty of a misappropriation of church funds and a breach of their fiduciary duties. A federal district court dismissed the lawsuit on the ground that the pastor had dismissed the plaintiff's church membership, thereby depriving him of "standing" to sue the pastor or board. The plaintiff appealed.

A federal appeals court affirmed the district court's dismissal of the case. It began its opinion by noting:

The First Amendment "severely circumscribes" the role that civil courts may play in resolving disputes touching on matters of faith. Civil courts encroach on the autonomy of religious institutions when they inquire into ecclesiastical law and governance. The non-entanglement principle, anchored in First Amendment values, thus "requires that civil courts defer to the resolution of issues of religious doctrine or polity by the highest court of a hierarchical church organization" (quoting the Supreme Court's decision in Jones v. Wolf, 443 U.S. 595 (1979). In so doing, civil courts accept decisions of the highest religious decision-maker as binding fact, so long as those decisions are not tainted by fraud or collusion.

When a church dispute "turns on a question devoid of doctrinal implications, civil courts may employ neutral principles of law to adjudicate the controversy." The court concluded that the present controversy over the plaintiff's membership in the church and his standing to pursue his claims in court could not be resolved solely with reference to neutral principles of law involving no consideration of church doctrine and therefore were not capable of civil court review. In particular the court noted that among the qualifications of membership recited in the church's bylaws was "a life being consistent with the doctrine of the [church]." This requirement "makes membership in the church an ecclesiastical matter, for it conditions an individual's membership on living in conformity with the doctrine of the church. We know of no neutral principle of law that could assist in evaluating whether a member lives his or her life in a manner consistent with church doctrine."

The church's bylaws confer upon the pastor the power to determine membership status, and to excommunicate members "for the good of the church." The court concluded that the pastor's authority to excommunicate members

falls squarely within the realm of matters insulated from civil court review. As codified in its central governance document, the church entrusts the [pastor] with power to decide when it is in the best interest of the congregation to terminate an individual's membership. Determining when excommunication is "necessary for the good of the church" undoubtedly involves a complex balancing of spiritual and pragmatic considerations, all properly left to the highest church authority, not civil courts. We are not competent to upset judgments made by the pastor in this doctrinally sensitive area, for there are no neutral principles of law that shed light on the membership composition necessary for the good of the church.

Lastly, the court rejected the plaintiff's claim that the pastor's attempt to terminate his membership was invalid because he failed to follow the church's bylaws. The court noted that "the Supreme Court held in 1976 that the First Amendment does not permit civil court review of the arbitrariness of ecclesiastical actions." Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976).

What this means for churches

This case illustrates the view of most courts: The First Amendment bars civil court review of church membership determinations that cannot be resolved with reference to "neutral principles of law" that do not implicate church doctrine or polity. Askew v. Trustees, 684 F.3d 413 (3rd Cir. 2012).

Legal Developments

Donor Denied $25,000 Charitable Deduction

Why specific substantiation requirements must be followed to claim a charitable contribution deduction on tax returns.

Richard R. Hammar, Attorney, CPA
Bio

Donors must comply with specific substantiation requirements in order to claim a charitable contribution deduction on their tax return. Special rules apply to any contribution of cash or property valued by the donor at $250 or more. Failure to comply with these requirements may result in a loss of a tax deduction. It is important for church treasurers to be familiar with these requirements, since they generally are responsible for the issuance of contribution statements and receipts. A recent Tax Court case illustrates the importance of compliance with these rules.

A donor made a cash contribution of $25,000 to a religious organization. The IRS audited the donor's tax return and denied the charitable contribution deduction on the ground that it was not properly substantiated. The donor appealed to the United States Tax Court.

The Tax Court's ruling

The Tax Court agreed with the IRS that the charitable contribution was not tax-deductible:

Because the amount of the alleged contribution exceeds $250, it must be evidenced by a contemporary written acknowledgment in order to be deductible. As evidence of his alleged contribution [the donor] provided a self-generated letter signed by himself. The letter states that the amount of cash contributed was $25,000, but it does not include any of the other required information. In particular, the letter is silent as to whether the donor received any goods or services in exchange for the cash. Both the Code and the regulations provide that such information is a necessary element of the contemporary written acknowledgment. Because he failed to provide a contemporary written acknowledgment of his contribution, we find that he is not entitled to deduct any amount for contribution.

What this means for churches

This case illustrates the consequences that can result from a church's failure to comply with the substantiation requirements for charitable contributions. Those requirements are stricter for contributions of $250 or more, and, as this case demonstrates, require the written acknowledgment (receipt) provided by a charity to donors to be contemporaneous and include a statement indicating whether the charity provided goods or services to the donor in consideration of the contribution. If goods or services were provided, the church's written acknowledgment must provide a description and good faith estimate of the value of those goods or services, or, if only intangible religious benefits were provided, a statement to that effect.

Churches that fail to provide donors with a proper acknowledgment are jeopardizing the deductibility of donors' contributions.

Both the IRS and the Tax Court stressed that whether or not the donor actually made the donation was irrelevant. Even assuming that he did make the $25,000 contribution, he was not entitled to a charitable contribution deduction because he was unable to meet the strict substantiation requirements that apply to contributions of $250 or more. When it comes to the substantiation of charitable contributions, it is form over substance.

Longino v. C.I.R., T.C. Memo. 2013-80 (2013)

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