Federal

Legal Developments

Inspection of Church Membership Lists

When is a church required to turn over its membership list for inspection?

Richard R. Hammar, Attorney, CPA
Bio

Key point 6-03.4. Church donor and membership lists are subject to government inspection, so long as the government has a compelling interest in obtaining this information.

A federal bankruptcy court ruled that a creditor was not entitled to obtain the names of the members of a church that was in bankruptcy. A financial institution (the "creditor") loaned money to a church that later filed for bankruptcy. The creditor asked the court to compel the church to disclose the identities and residential addresses of all of its members. A court declined to order the church to turn over its membership list, for two reasons.

Relevancy

The court concluded that the church's membership list was irrelevant to the creditor's desire to assess the church's ability to pay its debts:

At the core, discovery must focus on relevant information. The court fails to see how a membership list is relevant to [the creditor's] purposes. There may be members included on the list who have not stepped foot in the door in a decade, while there may be faithful attendees who are not members. While the court would not challenge that numbers relating to the congregants may be material, including the number of members on the roll, the number of people attending services, the number of those people who are financially supporting the church, the court cannot conclude that the actual membership list is relevant.

First Amendment

The court also ruled that the First Amendment guaranty of religious freedom prevented the creditor from obtaining personally identifiable information about church members:

Fear of the consequences of the disclosure of one's religious affiliation may be palpable and real at a certain point in history. There is, therefore, in my view, implicit in the First Amendment's guarantee of religious freedom, the right to choose whether or not to disclose one's religious affiliation lest forced disclosure inhibit the free exercise of one's faith. I have to believe that, when a person provides her name and address to a church that has asked her to become a member, she reasonably expects that her name and address will be disclosed to other church members, used by the church to invite her to church functions, and used to solicit her contributions to the church's financial welfare. There is nothing I know of in the American experience that suggests to me that by giving one's name and address to a church one thereby agrees to the publication of one's religious affiliation to the whole world.

What this means for churches

This case will serve as a useful precedent to any church that is asked, in the course of litigation, to turn over information about its members. Doing so impinges not only on a church's constitutional right to the free exercise of religion, but also on church members' constitutional right to free association. As the court noted, "membership lists are generally subject to heightened protection by courts because of the potential chilling effect on the First Amendment right to freedom of association." In re Deliverance Church, 2011 WL 6019359 (N.D. Ohio 2012).

Legal Developments

15-Employee Requirement for Churches

Church affiliates do not have to combine overall number of employees to meet Title VII rule.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

15-Employee Requirement for Churches

Church affiliates do not have to combine overall number of employees to meet Title VII rule.

Richard R. Hammar, J.D., LL.M., CPA

A federal appeals court ruled that the 15-employee requirement under Title VII of the Civil Rights Act of 1964 could not be met by combining the employees of a church and affiliated entity, since they were not sufficiently related organizationally. A maintenance worker (the “plaintiff”) at a church-affiliated apartment building (the “Manor”) sued the Manor as a result of his supervisor’s acts of sexual harassment in violation of Title VII of the Civil Rights Act of 1964. Title VII prohibits any employer, including a church, that is engaged in commerce and that has 15 or more employees from discriminating in any employment decision as a result of a person’s race, color, national origin, sex (including sexual harassment), or religion.

The Manor is a not-for-profit corporation formally governed by its members, all of whom are also members of the church. The members select an 11-member board of directors, which in turn elects four officers. Under the Manor’s articles of incorporation, the church’s pastor serves as a director, and all other officers and directors must be members of the church. At the time of the alleged harassment, two of the directors were church ministers. None of the officers or directors are paid for their services, and most either have full-time jobs elsewhere or are retired. The board meets on an as-needed basis, which tends to be every three to five months.

The Manor asked the court to dismiss the plaintiff’s Title VII claims against it on the ground that it was not subject to Title VII since it had fewer than 15 employees.

The court noted that employers are subject to Title VII only if they have at least 15 employees on each working day for 20 or more calendar weeks in either the year in which the alleged discrimination occurred or the preceding year. Entities that do not have 15 employees may still face liability through the single-employer or joint-employer doctrines. Under these doctrines, the employees of two related entities are combined in applying the 15-employee requirement.

Under the single-employer doctrine, “two nominally independent entities are so interrelated” that all of the employees of one are attributed to the other. Swallows v. Barnes & Noble Book Stores, Inc., 128 F.3d 990 (6th Cir.1997). The joint-employer doctrine involves a business that maintains sufficient control over some or all of the formal employees of another business as to qualify as those employees’ employer. But unlike in the single-employer context, the two businesses are in fact independent. With a single employer, all employees are aggregated to determine whether the 15-employee requirement has been met. With joint employers, only the employees over whom the first employer maintains sufficient control are aggregated with its own formal employees. The plaintiff relied on both doctrines to meet the 15-employee requirement since the Manor, by itself, had fewer than 15 employees.

The court concluded that the Manor and church could not be combined to meet the 15-employee requirement of Title VII:

The employees of two or more entities can be aggregated for [purposes of the 15-employee requirement] if the entities effectively operate as a single employer. In making this determination, courts consider factors such as interrelation of operations, common management, centralized control over labor relations and personnel, and common ownership or financial control. The presence or absence of any of these factors is not conclusive, but “control over labor relations is a central concern.”

None of the elements of interrelatedness identified in Swallows—common offices, common record keeping, shared bank accounts and equipment—are present here …. The plaintiff has shown some evidence of common management, as the church’s pastor serves as the Manor’s chairman of the board and another minister serves as board president. This type of arrangement is not always enough by itself to meet the second factor, however. Each director has an equal vote in Manor business and nine of the eleven board members have no employment or pecuniary relationship with the church.

The plaintiff has failed to show that the church has any role in the Manor’s personnel matters, the “central concern” of the single-employer doctrine. The church has no authority to hire or fire Manor employees and does not pay their wages and benefits. The plaintiff points out that his supervisor’s termination notice is on church letterhead, but it is signed by the pastor, who is chairman of the Manor’s board, and by the Manor’s board.

Finally, the church has no ownership interest in the Manor and the two entities do not share finances. Neither is a sham corporation, and without evidence of a sham, the fourth factor is not met.

At most, the plaintiff has presented some evidence of one of the four factors. Accordingly, he has not met his burden under the single-employer doctrine and we will not aggregate church employees with the Manor’s employees to determine if the Manor satisfies the [15 employee] requirement.

What This Means For Churches:

This case is yet another repudiation of the “single employer” or “single enterprise” theory in the context of churches and their affiliated ministries. In many cases it is very difficult for plaintiffs to meet the 15-employee requirement under Title VII by combining employees of a church and affiliated ministries, based on the four factors enumerated by the court in this case. These same factors have been applied by many courts, and represent a tool church leaders can employ in determining whether Title VII’s 15-employee requirement can be met by aggregating employees of a church and one or more affiliates. Sanford v. Main Street Baptist Church Manor, Inc., 449 Fed.Appx. 488 (6th Cir. 2012).

Legal Developments

The IRS Addresses the “Neighborhood Land Rule”

What a church must know about income from unused property.

Richard R. Hammar, Attorney, CPA
Bio

IRS Letter Ruling 201206018

Background. Many churches rent some or all of their property. For example, a church purchases several homes adjacent to its property to facilitate future expansion. The church has no immediate plans to expand its facilities, so it rents the homes. One issue that arises in such cases is the application of the federal unrelated business income tax, which is a tax on the net income generated by a church or other public charity from an unrelated trade or business.

In general, rental income received by a church is exempt from the unrelated business income tax, but an exception applies with debt-financed property. Section 514 of the tax code states that income from dividends, interest, annuities, royalties, rents, and capital gains and losses must be included in the definition of unrelated business taxable income to the extent it derives from debt-financed property. The amount of income included is proportional to the debt on the property. Debt-financed property is any property held to produce income and that is subject to an "acquisition indebtedness," such as a mortgage, at any time during the tax year.

The "neighborhood land rule." The tax code specifies that if an exempt organization acquires real property mainly to use for exempt purposes within ten years, it will not be treated as debt-financed property if it is in the neighborhood of other property that the organization uses for exempt purposes and if the intent to use the property for exempt purposes within ten years is not abandoned. This exception to the definition of debt-financed property is referred to as the "neighborhood land rule."

The neighborhood land rule does not apply to property ten years after its acquisition. Further, the rule applies after the first five years only if the organization satisfies the IRS that the use of the land for exempt purposes is reasonably certain before the ten-year period expires. The organization need not show binding contracts to satisfy this requirement; but it must have a definite plan detailing a specific improvement and a completion date, and it must show some affirmative action toward the fulfillment of the plan. This information should be forwarded to the following address for a ruling at least ninety days before the end of the fifth year after acquisition of the land:

Internal Revenue Service
Commissioner, TE/GE
Attention: T:EO:RA
P .O. Box 120, Ben Franklin Station
Washington, DC 20044

The income tax regulations authorize the IRS to grant a reasonable extension of time for requesting the ruling if the organization can show good cause. If the neighborhood land rule does not apply because the acquired land is not in the neighborhood of other land used for an organization's exempt purposes, or because the organization fails to establish after the first five years of the ten-year period that the property will be used for exempt purposes, but the land is used eventually by the organization for its exempt purposes within the ten-year period, the property is not treated as debt-financed property for any period before the conversion.

The neighborhood land rule—application to churches. The neighborhood land rule applies to churches, but with two important differences:

  • the period during which the church must demonstrate the intent to use the acquired property for exempt purposes is increased from ten to fifteen years, and
  • the land need not be in the same "neighborhood" as the church.

As a result, if a church acquires land, and plans to use it for exempt purposes within fifteen years after the time of acquisition, the property is not treated as debt-financed property—so long as the church does not abandon its intent to use the land in this manner within those fifteen years.

This exception for churches does not apply to any property after the fifteen-year period expires. Further, this rule will apply after the first five years of the fifteen-year period only if the church establishes, to the satisfaction of the IRS, that the use of the acquired land in furtherance of its exempt purposes is reasonably certain before the fifteen-year period expires. Relevant information should be sent to the IRS at the above-referenced address.

If a church (for the period after the first five years of the fifteen-year period) cannot establish, to the satisfaction of the IRS, that the use of acquired property for its exempt purpose is reasonably certain within the fifteen-year period, but the land is, in fact, converted to an exempt use within the fifteen-year period, the land is not treated as debt-financed property for any period before the conversion.

The same rule for demolition or removal of structures (discussed below) applies to a church.

A recent case. A church purchased land through the use of debt financing in the neighborhood of its existing facility in order to build a larger facility. The land consists of several acres of undeveloped land with the exception of two small buildings. The church borrowed funds to buy the land. It rented a portion of the property for cattle grazing, and also received royalty payments from a lease of mineral rights to an oil company.

The church asked the IRS for a ruling that the neighborhood land rule applied, and therefore the rental and royalty income the church received from its debt- financed property was not subject to the unrelated business income tax.

The IRS began its ruling by noting: "You purchased land on which to build a new, larger church campus. You acquired the land subject to acquisition indebtedness. You did not immediately use substantially all of the property for an exempt purpose related to your exempt function. Thus, the land is considered to be debt-financed property."

In general, the IRS continued, "any income derived from rents or royalties from debt-financed property … would be treated as unrelated business taxable income." However, the IRS noted that there are exceptions to the general rule. For example, "when land is acquired for exempt use within 10 years (extended to 15 years for churches), it is not treated as unrelated business taxable income. This exception is commonly referred to as the neighborhood land rule."

Under the neighborhood land rule, "an organization may acquire land adjacent to or within one mile of the organization's present location and convert the land to exempt purpose use within 10 years of acquisition. Any structure on the land when acquired by the organization must be demolished or removed. For churches [the tax code] provides special rules. The land must be converted to exempt use within 15 years of acquisition and the neighborhood test of proximity to an existing location is not applied."

To use the neighborhood land rule, "an organization must apply after the first five years and establish to the satisfaction of the [IRS] that it is reasonably certain that the land will be used [for exempt purposes] within the required time period."

The IRS noted that the church had submitted its ruling request in a timely manner, at least ninety days prior to five years after the date of acquisition of the land at issue. It further noted that "within the required period, you have taken steps to convert the land to your exempt use. You have demolished structures that existed on the land at the time of acquisition. You have constructed a new church campus of buildings and put it into use for your congregation. You have put your former location up for sale. While the property allows room for future growth, your church campus is substantially complete and converted to exempt use within 15 years of the land acquisition. Thus, your property will not be treated as debt-financed land … because you qualify for the exception under the neighborhood land special rule for churches …."

Since the church's property is not treated as debt-financed land for fifteen years from the date of acquisition, "any rents or royalties received during that time period will not be treated as unrelated business taxable income" and it is "not subject to imposition of tax on unrelated business income for such rents or royalties for the stated period."

The IRS concluded: "Based on the information you have submitted, it is reasonably certain that the debt-financed land will be used for an exempt church purpose within 15 years of its acquisition. Therefore, the property is exempt from the debt-financed property unrelated business taxable income provisions of [the tax code] as a result of the neighborhood land rule exception … for 15 years beginning on the date the land was acquired."

Relevance to church leaders. Before renting property, or negotiating for mineral royalties, church leaders should be familiar with:

  • the debt-financed property exception to the exemption of rental income from the unrelated business income tax;
  • the eligibility requirements for application of the neighborhood land rule; and
  • the demolition rule. The services of a tax attorney will be invaluable to ensure full compliance with the law.

Applying the Neighborhood Land Rule to Churches

Section 514 of the tax code contains a special "neighborhood land rule" that exempts rents from debt-financed church property from the unrelated business income tax so long as a church:

  • has a definite plan to use the land for exempt purposes within fifteen years, including a "specific improvement and a completion date, and some affirmative action toward the fulfillment of such a plan";
  • informs the IRS of its plan at least ninety days before the end of the fifth year after acquiring the land, and requests a ruling;
  • does not abandon its intent during the fifteen years following acquisition; and
  • demolishes any structures on the property as part of its plans to use the property for exempt purposes.

The Demolition Rule

The neighborhood land rule applies to any structure on the land when acquired, only so long as the intended future use of the land in furtherance of the organization's exempt purpose requires that the structure be demolished or removed in order to use the land in this manner. As a result, during the first five years after acquisition (and for later years if there is a favorable ruling), improved property is not debt-financed so long as the organization does not abandon its intent to demolish the existing structures and use the land in furtherance of its exempt purpose. If an actual demolition of these structures occurs, the use made of the land need not be the one originally intended as long as its use furthers the organization's exempt purpose.

The neighborhood land rule does not apply to structures erected on land after its acquisition. When the neighborhood land rule does not initially apply, but the land is used eventually for exempt purposes, a refund or credit of any overpaid taxes will be allowed for a prior tax year. A claim must be filed within one year after the close of the tax year in which the property is actually used for exempt purposes.

Legal Developments

Beware of Fundraising Schemes

A warning to trusting churches.

Richard R. Hammar, Attorney, CPA
Bio

A married couple, both asylum refugees from Kenya, engaged in a four-year fraud scheme that targeted several Midwest churches. The couple represented themselves as siblings and told their victims that they were homeless illegal immigrants suffering from serious medical conditions, including malaria and tuberculosis, and that they had significant legal bills attendant to their immigration status. During the four-year period covered by the indictment, the couple netted more than $1.1 million in proceeds, including $815,000 from one church. Though the couple said they needed the funds for legal and medical bills and tuition, they used the money to maintain two apartments and gambled away nearly $1 million.

The couple was apprehended, and pleaded guilty to mail fraud. The husband was sentenced to 39 months' imprisonment.

There is little chance that any of the churches will recover their contributions to this couple, since most of the funds they received were lost through gambling.

What this means for churches

This case should serve as a warning to church leaders to be wary of any appeals for donations from persons who are unfamiliar to you. Before responding to seemingly urgent appeals for funds, confirm the identity of the person seeking a donation as well as the legitimacy of the appeal. If in doubt, do not contribute. Remember, church leaders have a fiduciary duty to take reasonable steps to safeguard church assets, and this duty may be breached by responding to unsubstantiated appeals for funds. U.S. v. Bosire, 407 Fed.Appx. 951 (7th Cir. 2010).

Legal Developments

Sex Offender Sentenced to Life Term of Supervised Release

A federal appeals court ruled that sentence did not amount to “cruel and unusual” punishment.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax Report

Sex Offender Sentenced to Life Term of Supervised Release

A federal appeals court ruled that sentence did not amount to “cruel and unusual” punishment.

Richard R. Hammar

Key point. A lifetime of supervised release following a 15-year prison sentence did not violate a child sex offender’s legal rights.

* A federal appeals court ruled that sentencing a sex offender to a life term of supervised release did not amount to “cruel and unusual” punishment prohibited by the Eighth Amendment. After having his computer seized by his probation officers, a convicted child molester (the “defendant”) admitted that it contained child pornography. He later pled guilty to felony possession of child pornography.

This was not the first time that the defendant got into trouble for sexual misconduct. A few years earlier he was convicted of two counts of sexual assault for an incident involving two girls, ages nine and thirteen. The victims were playing outside their home when the defendant approached them and asked for hugs. They said “no” and ran away, but the defendant followed them into their home and cornered them in a bedroom. He received a 10-year sentence for these crimes, but obtained supervised release. His supervised release was revoked in 2002, however, because he skipped sex offender treatment sessions and obtained employment at a fair frequented by children.

A federal district court sentenced the defendant to the mandatory sentence of 15 years, but added a lifetime of supervised release following the end of his prison sentence in order to protect the community. In making this determination, the court relied on the defendant’s prior sexual assault conviction and his apparent obsession with child rape, as indicated by the pornography he possessed and his own statements.

The defendant filed a lawsuit claiming that the lifetime of supervised release following his 15-year prison sentence violated the Eighth Amendment’s prohibition against “cruel and unusual punishments.”

A federal appeals court rejected the defendant’s claim. It noted that the Eighth Amendment forbids “extreme sentences that are grossly disproportionate to the crime,” and that “it is exceptionally difficult for a criminal to show that his sentence is unconstitutionally disproportionate.” The court noted that for the defendant to succeed he would have to prove that his sentence was grossly disproportionate to his crime. It concluded that he “does not come close” to passing this test:

The defendant committed very serious crimes: sexually assaulting a nine-year-old girl, sexually assaulting a thirteen-year-old girl, and numerous instances of receiving child pornography. Moreover, although supervised release limits a criminal’s liberty and privacy, it is a punishment far less severe than prison. A lifetime of supervised release is not inappropriate for, much less grossly disproportionate to, the grave infractions which he committed …. A life term of supervised release is particularly appropriate for sex offenders given their high rate of recidivism. See H.R. Conf. Rep. No. 107-527, at 2 (noting that “sex offenders are four times more likely than other violent criminals to recommit their crimes,” and that their “recidivism rate does not appreciably decline as offenders age”). The defendant is himself a recidivist and has admitted to having rape fantasies, a factor which the district court correctly found to be indicative of future dangerousness. It is therefore not at all excessive to require the defendant to comply with such supervised release conditions as attending sex offender treatment, avoiding the company of children, and meeting regularly with a probation officer. Accordingly, we conclude that a life term of supervised release is not unconstitutionally disproportionate given the circumstances of this case.

Application. This case illustrates an important point. Convicted child molesters often are subject to a parole or probation agreement that imposes strict limitations on their activities. In many cases these include restricted access to places where minors congregate, including churches. When church leaders are deciding how to respond to the presence of a convicted sex offender in their midst, one important consideration is the terms of an applicable parole or probationary agreement. In some cases, the offender will not be permitted to attend church, or may attend under strict conditions. It is imperative for church leaders to be familiar with all such conditions. U.S. v. Williams, 2011 WL 768082 (9th Cir. 2011).

Church Law & Tax Report is published six times a year by Christianity Today International, 465 Gundersen Dr. Carol Stream, IL 60188. (800) 222-1840.© 2011 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

Avoiding Defamation Lawsuits

In some cases, even a true statement may be considered defamatory.

Richard R. Hammar, Attorney, CPA
Bio

Parnigoni, 681 F.Supp.2d 1 (D.D.C. 2010).009)


Key point 4-02. Defamation consists of (1) oral or written statements about another person; (2) that are false; (3) that are "published" (that is, communicated to other persons); and (4) that injure the other person's reputation.


Key point 4-02.03. A number of defenses are available to one accused of defamation. These include truth, statements made in the course of judicial proceedings, consent, and self-defense. In addition, statements made to church members about a matter of common interest to members are protected by a "qualified privilege," meaning that they cannot be defamatory unless they are made with malice. In this context, malice means that the person making the statements knew that they were false or made them with a reckless disregard as to their truth or falsity. This privilege will not apply if the statements are made to nonmembers.


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 the District of Columbia ruled that a former church employee could sue the church for defamation and invasion of privacy as a result of the church's disclosure to its members that the employee had married a registered sex offender.

The facts of the case, as alleged by the employee in her lawsuit, are as follows. A woman was employed as a teacher at a church preschool for seven years. During her employment her fiancé was charged with, and ultimately convicted of, indecently exposing himself to a minor. The teacher informed the preschool director of her fiancé's conviction, and the director informed the church board. The church took no action at that time, and the teacher continued her employment without any further discussion of the matter. In time, the teacher and her fiancé were married. At no time did anyone associated with the church or preschool indicate that the teacher's marriage would be cause for concern or place her job in jeopardy.

A few years later the couple enrolled their son at the preschool. At this time the preschool director met with the teacher and inquired into the details of her husband's prior conviction.

The director stated that the teacher was required to disclose the details of her husband's conviction so that the director would be able to explain the circumstances to any parent who might inquire about the situation. The director later informed the teacher that the church board was "nervous" about her husband because "he might now have reason to be on the school property to pick up his son." The teacher explained that she planned to walk her son a block away from the school to rendezvous with her husband on days that he was responsible for driving him home.

A few weeks later, the teacher met with the church's senior pastor, who announced her decision to make a full public disclosure of the husband's prior conviction "to all parents of students attending the preschool and the entire parish." The pastor also indicated that the church planned to announce the fact that she, a teacher at the school, was married to a convicted sex offender.

The teacher insisted that the church had not indicated any concerns regarding her husband, and so she surmised that the new concern was related to her son's enrollment in the school. As a result, she offered to withdraw her son from the school to avoid any "embarrassment to her and her family." She eventually did so after the church's attorney informed her that this would be helpful. She also offered to terminate her employment "in order to avert public disclosure" of her husband's conviction, but the school rejected her offer.

A few days later the pastor met with the school staff and informed them of the prior conviction. She insisted that the sole reason for making the disclosure was the teacher's "poor judgment" in marrying a sex offender and not the enrollment of her son in the preschool. Following this meeting the pastor sent a letter to all members of the church informing them of the husband's registration with the state sex offender registry as a result of his prior conviction for indecent exposure to a minor. The letter went on to state that it had been sent to "enable parents to make informed decisions as to whom they should entrust the care and supervision of their children." It further stated that because the church lacked the ability "to anticipate every possible future scenario [the church's leadership] believed their best course of action was to give the parents the information they needed to protect their children."

The teacher and her husband (the "plaintiffs") sued the church, preschool, pastor, and preschool director (the "defendants") alleging several theories of liability, including defamation and invasion of privacy. The court declined the defendants' request to dismiss all of the plaintiffs' claims.

A Viable Claim

The court noted that a viable defamation claim requires (1) a false and defamatory statement concerning another; (2) publication or dissemination of the statement without privilege to a third party; (3) the defendant's fault in publishing the statement amounted to at least negligence; and (4) the statement was defamatory as a matter of law or its publication caused the victim special harm. The court concluded that the teacher's defamation claim met these requirements, but not her husband's.

Remarkably, the court concluded that the statements in the pastor's letter to church members could be defamatory even though they were true. While this seems to contradict the first element of defamation (a false statement), the court reasoned that the contents of the letter amounted to "defamation by implication" since a reasonable person reading the letter could "draw a defamatory inference." The court explained: "If a communication, by the particular manner or language in which true facts are conveyed, supplies additional, affirmative evidence suggesting that the defendant intends or endorses the defamatory inference, the communication will be deemed capable of bearing that meaning."

The court rejected the defendants' argument that the pastor's letter was privileged since her objective was to protect children from a registered sex offender. It observed:

Assuming for the sake of argument that the defendants acted solely for the purpose of protecting the children at the school … the defendants should have sent the letters only to the parents of the school's children …. However, the defendants did not limit the scope of their dissemination to that audience, but also sent the letters to all members of the parish …. The dissemination was therefore much more extensive than necessary. And the fact that the defendants delayed the disclosure of the information for approximately three years after [the teacher] advised them of her husband's conviction, coupled with the decision to make the disclosure only after she married [him] undermines the defendants' stated reason for making the disclosure and supports the plaintiffs' position that the disclosure was made to chastise [the teacher] for exercising what the defendants consider to be her poor judgment in marrying [a sex offender] …. In addition, the defendants also ignored [the teacher's] several attempts to avoid the release of this information, including removal of her child from the school and her offer to resign as an alternative to the disclosures. The defendants' actions, coupled with their disapproval of [the teacher's] marriage … support the plaintiffs' contentions that it was the defendants' desire to condemn [the teacher] for her marital decision, thus rendering their publication of the information not only negligent, but malicious.

First Amendment defense

The court, in rejecting the defendants' argument that the plaintiffs' claims were barred by the First Amendment guaranty of free speech, observed: "The defendants contend that their statements qualify as opinions that are protected by the First Amendment. This Court does not agree. An opinion which asserts provably false and defamatory facts is not deserving of the protections of the Constitution."

Invasion of privacy—false light

"Invasion of privacy" comprises several separate wrongful acts, including placing someone in a "false light" and the public disclosure of private facts. The plaintiffs asserted that the defendants were liable for both of these kinds of invasion of privacy as a result of the letter the pastor sent to members of the church which mentioned the husband's registered sex offender status and insinuated that both spouses were potential child molesters.

The court noted the following four requirements of a false light-invasion of privacy claim: "(1) publicity; (2) about a false statement; (3) understood to be of and concerning the plaintiff; and (4) which places the plaintiff in a false light that would be offensive to a reasonable person." The court concluded that the teacher had a viable false light claim, and so it rejected the defendants' request that it dismiss this claim. It observed: "The defendants' release of information about [the husband's] conviction as a sex offender and statements about whom parents should trust with the care of their children reasonably created the false impression that [his wife] was a threat to the students simply because of her association with [him] and placed her in a highly offensive light …. In fact, the defendants received letters expressing outrage at their actions and their implication that she presented a risk to the safety of the students at the school."

Invasion of privacy—publication of private facts

Invasion of privacy also includes the publication of private facts about another in a manner that would be highly offensive to a reasonable person. The defendants insisted that the pastor's letter to church members did not involve the publication of private facts since, though embarrassing, this information was a matter of public knowledge. The court agreed, and dismissed this claim.

Application. This case is significant for the following reasons:

1. It is one of a few cases to hold that a statement need not be false to be defamatory.

2. The pastor's letter, sent to all church members, was not privileged since not all members had a legitimate need to know that the husband was a registered sex offender. In most states, statements shared with church members on matters of common interest are privileged, meaning that they cannot be defamatory or an invasion of privacy unless made maliciously (i.e., with a knowledge the statement was false, or with a reckless disregard as to its truthfulness). However, this court cautioned that statements may not be privileged if disseminated to members not having a legitimate need to know.

The court observed: "Assuming for the sake of argument that the defendants acted solely for the purpose of protecting the children at the school … the defendants should have sent the letters only to the parents of the school's children …. However, the defendants did not limit the scope of their dissemination to that audience, but also sent the letters to all members of the parish …. The dissemination was therefore much more extensive than necessary." This principle is often implicated when church leaders seek to inform the congregation about the dismissal of a staff member for misconduct.

Church leaders should understand that statements made to nonmembers, or even to members not having a legitimate "need to know," are not privileged and therefore expose the church to potential liability for defamation or invasion of privacy. This risk can be mitigated by limiting the disclosure to those members having a need to know.

3. This case illustrates that a church may be liable on the basis of "false light" invasion of privacy for disseminating statements that place someone in a false light. However, the false light in which the person was placed must be highly offensive to a reasonable person, and it must have been publicized either with a knowledge that it was false or with a reckless disregard concerning its truthfulness.

Legal Developments

Substantiating a Charitable Contribution

The IRS requires that donors provide specific documentation in order to claim a deduction.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Substantiating a Charitable Contribution

The IRS requires that donors provide specific documentation in order to claim a deduction.

Richard R. Hammar, J.D., LL.M., CPA

Charitable Contributions

Key point. Charitable contributions are subject to a number of substantiation requirements. A failure to comply with these requirements may lead to a denial of a charitable contribution deduction.

The United States Tax Court ruled that a married couple could not claim a $217,500 charitable contribution deduction on their tax return due to their failure to comply with the substantiation requirements. A married couple (the “donors”) claimed noncash charitable contribution deductions of $217,500 on their tax return. To substantiate the donations the donors attached to their return three Forms 8283 (qualified appraisal summary).

Two of these forms were prepared by appraisers who appraised various items of donated property, and the third form summarized the other two. The IRS audited the donors’ return and denied a charitable contribution deduction due to a lack of substantiation. The donors appealed.

The Tax Court affirmed the disallowance of any charitable contribution deduction for the donated property. It noted that for any noncash contribution exceeding $5,000 the income tax regulations require the donor to: (1) obtain a qualified appraisal for the contributed property, (2) attach a fully completed appraisal summary (Form 8283) to the tax return on which the deduction is claimed, and (3) maintain records pertaining to the claimed deduction.

A qualified appraisal must include, among other things, a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed, a description of the property’s physical condition, the valuation method used to determine the fair market value, and the specific basis for the valuation. A qualified appraisal must be made no earlier than 60 days before the date of the contribution and no later than the due date of the return, including extensions.

The appraisal summary must include, among other things, a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed, a brief summary of the property’s physical condition, the manner of acquisition, and the cost or other basis of the property.

In addition to the substantiation requirements a taxpayer must obtain a contemporaneous written acknowledgment from the donee organization for any contribution of $250 or more. The contemporaneous written acknowledgment must include a description of any property contributed, a statement as to whether the donee provided any goods or services in exchange, and a description and good faith estimate of the value of such goods or services.

The donors conceded that they had not strictly complied with the appraisal and appraisal summary requirements, and had not received receipts indicating whether they had received any goods or services in exchange for their contributions. But, they insisted that they were nonetheless entitled to deduct their contributions since they had “substantially complied” with the substantiation requirements. The Tax Court concluded that even if the contributions were allowable based on substantial compliance with the law, the donors had not satisfied this test since their compliance with the law was far from substantial:

The donors’ documents fail to provide an adequate description of or the condition of the donated items. The Forms 8283 and the appraisal reports provide very generic descriptions, stating the items were in “good working condition” or “operational, clean and in good saleable condition.” An adequate description is necessary because “without a more detailed description the appraiser’s approach and methodology cannot be evaluated.” In fact, their documents fail to even indicate the valuation method used or the basis for the appraised values. We have previously held such information to be essential because “without any reasoned analysis, … [the appraiser’s] report is useless.”

The court also concluded that in addition to their failure to substantially comply with the regulations, the donors failed to demonstrate that they obtained adequate written acknowledgments for their contributions as required by the tax code.

The donors argue that the Forms 8283 can also serve as written acknowledgments because they were signed by the donee. However, neither the Forms 8283 nor the receipts from [the donee charity] contain a statement that no goods or services were provided by the donee in exchange, as required by [the tax code]. We have previously held that statement necessary for a charitable contribution deduction under section 170(f)(8) (B)(ii) of the tax code. The donors argue that section 170(f)(8)(B)(ii) can be read to require the statement only when the donee actually furnishes goods or services to the donor. We disagree. “[C]ourts must presume that a legislature says in a statute what it means and means in a statute what it says there.” In the absence of a clearly expressed legislative intent to the contrary, unambiguous statutory language ordinarily must be regarded as conclusive.

Section 170(f)(8)(B)(ii) plainly states that the written acknowledgment is sufficient if it includes information as to “whether the donee organization provided any goods or services in consideration, in whole or in part, for any property” donated by the taxpayer. The language used is clear and unconditional. There is no reason to read into section 170(f)(8)(B)(ii) the limitation suggested by petitioners. Friedman v. Commissioner, 99 T.C.M. 1175 (2010).

This Recent Development first appeared in Church Law & Tax Report, January/February 2011.

Legal Developments

Don’t Take Mileage Logs Lightly

Tax case shows employees must closely track miles.

Richard R. Hammar, Attorney, CPA
Bio

It is important for church leaders to recognize that the tax code imposes strict limitations on the use of the standard mileage rate.

A taxpayer kept a log of his travel. Each day, he noted the beginning and ending mileage but did not note each place he stopped or the business purpose of the stop. For three years he claimed deductions for 67,910 miles, 62,456 miles, and 58,616 miles for the business use of his cars. The IRS audited his returns for these years, and denied a deduction for any of these miles on the ground that they were not adequately substantiated. The taxpayer appealed to the Tax Court.

The court noted that a deduction is not allowed for the business use of a car unless the taxpayer substantiates: (1) The amount of such expense, (2) the time and place of the travel, and (3) the business purpose.

In the absence of adequate records, a taxpayer "may alternatively establish an element by his own statement, whether written or oral, containing specific information in detail as to such element" and by "other corroborative evidence sufficient to establish such element." However, the tax code specifically precludes the deduction of automobile expenses on the basis of an approximation or a taxpayer's uncorroborated testimony.

The court ruled that the taxpayer was not entitled to any deduction for his business miles, based on the following considerations:

  • For one of the years in question, the taxpayer offered a random sampling of invoices to corroborate his mileage. The court noted that the tax code "requires a specific showing of time, place of travel, and business purpose."
  • For one of the years in question, the miles reported in the taxpayer's log differed from the miles upon which he based a business expense deduction.
  • The taxpayer's logs "contain entries for only the beginning and ending odometer reading of the vehicle for each day. The logs do not contain any entries regarding the business purpose of the trips or the destination of each trip as required by [the tax code]."
  • The logs also indicate that the taxpayer drove multiple vehicles, but did not indicate which vehicle was being driven at the time entries were made.
  • The taxpayer offered only a sampling of total invoices.
  • The taxpayer's testimony regarding his business miles "was vague, unspecific, and unpersuasive as to the business purpose of the respective trips. Moreover [the tax code] specifically precludes the allowance of automobile expenses on the basis of an approximation or a taxpayer's uncorroborated testimony."

The court ruled that the taxpayer was liable for "accuracy-related penalties" pursuant to section 6662 of the tax code. This section imposes a 20-percent penalty for any underpayment of tax attributable to negligence or disregard of rules or regulations.

The IRS insisted that the taxpayer was liable for an accuracy-related penalty on account of negligence or disregard of rules or regulations. The court agreed: "The taxpayer has failed to meet his burden of proving that he was not negligent or that he acted with reasonable cause and in good faith. His mileage logs are not adequate records for his car expenses claimed on Schedules C. Furthermore, he was not able to provide sufficient additional evidence to meet the strict substantiation requirements of section 274(d). Accordingly, we hold that he is liable for the accuracy-related penalties."

What this means for churches

The standard mileage rate is a convenient way for taxpayers to compute a tax deduction for the business use of their car. Employers, including churches, can use the mileage rate to compute the amount of a reimbursement to be paid to employees for the business use of their cars. In either case, it is essential for the taxpayer to be able to prove the following:

  • The miles for each business use of the car;
  • Total miles driven during the year;
  • Date of each trip;
  • Business destination;
  • Business purpose.

As this case illustrates, a failure to maintain a logbook or other documents that substantiate these items may result in the denial of a tax deduction, or in the treatment of an employer reimbursement as nonaccountable (and therefore reportable as taxable income).

Royster v. Commissioner, TC Memo. 2010-16 (2010)

Legal Developments

Legal Enforceability of Release Forms

Injured skier sues resort.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Legal Enforceability of Release Forms

Injured skier sues resort.

Richard R. Hammar, J.D., LL.M., CPA

A federal appeals court ruled that a release form signed by a skier barred him from suing a ski resort for injuries he sustained while skiing. An adult male (the “plaintiff”) and two friends drove to a ski resort and purchased tickets. They were required to sign a release form, which stated in part:

PLEASE READ CAREFULLY BEFORE SIGNING. THIS IS A RELEASE OF LIABILITY AND WAIVER OF CERTAIN LEGAL RIGHTS.

I understand that skiing in its various forms, including snowboarding, involves risks, dangers and hazards that may cause serious personal injury or death and that injuries are a common and ordinary occurrence. Risks include, but are not limited to, changes in terrain, weather and snow surfaces, ice, moguls, bare spots, debris, fences, posts, trees, lift equipment and towers, rope tows, light poles, signs, buildings, roads and walkways, ramps, half-pipes, padded and non-padded barriers, jumps and other terrain features, grooming equipment, snowmobiles, collisions with other persons and other natural and man-made hazards. I acknowledge that the risks in the sport of Alpine skiing can be greatly reduced by taking lessons, abiding by the Skier Responsibility Code, (known as Your Responsibility Code), and using common sense.

In consideration of the purchase of a lift ticket … I RELEASE AND FULLY DISCHARGE [the ski resort], its owners, officers, shareholders, agents and employees from any liability resulting from any personal injury to myself, including death, or damage to my property which is caused by the BREACH OF ANY EXPRESS OR IMPLIED WARRANTY or the NEGLIGENT ACT OR OMISSION of [said resort], its owners, officers, shareholders, agents or employees in the design, location, construction, inspection, maintenance and repair of the conditions on or about the premises or ski area or the operations of the ski area ….

I accept full responsibility for any injuries or damages which may result from the participation in the sport, and it is my intent to HOLD HARMLESS [the resort], its owners, officers, shareholders, agents or employees for any injury sustained by me, including death, while participating in the sport. I agree not to bring any action or suit against [the resort], its owners, officers, shareholders, agents or employees for any injury or damage.

In accordance with Minnesota law, nothing in this Release of Liability should be construed as releasing, discharging or waiving any claims I may have for reckless or intentional acts on the part of [the resort], or its owners, officers, shareholders, agents or employees.

I HAVE CAREFULLY READ THIS RELEASE OF LIABILITY AND UNDERSTAND ITS CONTENTS. I AM AWARE THAT BY SIGNING THIS RELEASE OF LIABILITY, I AM WAIVING CERTAIN LEGAL RIGHTS, INCLUDING THE RIGHT TO SUE [THE RESORT], ITS OWNERS, OFFICERS, SHAREHOLDERS, AGENTS OR EMPLOYEES FOR CERTAIN CLAIMS. CAUTION: READ BEFORE SIGNING! THIS DOCUMENT AFFECTS YOUR LEGAL RIGHTS AND WILL BAR YOUR RIGHT TO SUE!

At the bottom of the release, the plaintiff printed his name and signed the document. After several hours of skiing, the plaintiff, a self-described expert skier, skied over an edge of the course into an area of small trees and rocks, and sustained various injuries. He sued the resort, claiming that its negligence was the cause of his injuries. A federal district court ruled that the release the plaintiff signed was valid under Minnesota law, and dismissed the lawsuit. The plaintiff appealed.

A federal appeals court noted that release clauses are enforceable in Minnesota “as long as the clause (1) is not ambiguous, (2) does not release intentional, willful, or wanton acts, and (3) does not violate public policy.” The plaintiff claimed that all three of these conditions were violated. The court disagreed.

(1) Not ambiguous
The plaintiff insisted that the release form was ambiguous because it could be interpreted as waiving the resort’s liability for all types of claims and not just negligence. The court disagreed: “The language of the release expressly and unambiguously excludes from its coverage claims arising from reckless or intentional acts, and the district court correctly found the release is not ambiguous.”

(2) No release of intentional or willful acts
The release form expressly stated that it was not releasing the resort from liability for intentional or willful acts.

(3) No violation of public policy
The plaintiff claimed that the release violated public policy because he had no bargaining power in the sense that he had to sign the release or not ski at the resort. The court noted that Minnesota courts consider two factors in determining whether “exculpatory” or release agreements violate public policy: (1) whether there was a disparity of bargaining power between the parties (a compulsion to sign the contract with an unacceptable provision and a lack of ability to negotiate the elimination of that provision), and (2) the type of service being offered or provided through the contract (one who provides a public or essential service is less likely to be exempted from liability for harm caused by negligently providing that service).

The court concluded that neither of these two factors was present in this case. First, there was no disparity of bargaining power because the service provided by the ski resort was not necessary, and the plaintiff could have gone elsewhere to ski. And second, a ski resort is not providing a necessary or public service. Myers v. Lutsen Mountains Corportation, 587 F.3d 891 (8th Cir. 2009).

This Recent Development first appeared in Church Law & Tax Report, July/August 2010.

Legal Developments

Embezzlement: Zero Tolerance

Embezzler’s extended sentence puts churches on notice.

Richard R. Hammar, Attorney, CPA
Bio

U.S. v. Reasor, 541 F.3d 366 (5th Cir. 2009)

Background. A woman (the "defendant") was employed as a church's office manager from 1993 until 2000. During that period, she misused church funds for her personal gain, using checks from the church's general fund account and the pastor's discretionary account on which she was a signatory. The defendant forged signatures and falsified endorsements on checks. She also made out checks to herself, and various individuals and entities, which she cashed. Many of the checks were cashed at a supermarket next door to the church. The defendant also misused the church's funds and the pastor's name in other ways for her financial benefit. Her activities enabled her to misappropriate $450,000 of church funds.

The defendant's misconduct was eventually discovered, and she was charged with several crimes. She pled guilty to 28 counts of forgery; three counts of mail fraud; one count of bank fraud; and one count of making a false statement on a credit application. She received a sentence of 15 years, which included an upward adjustment (pursuant to federal sentencing guidelines) for misrepresenting that she was acting on behalf of her church.

Federal sentencing guidelines allow for an upward adjustment in a sentence if the offense "involved … a misrepresentation that the defendant was acting on behalf of a charitable, educational, religious, or political organization, or a government agency." The official explanation for this adjustment notes: "Use of false pretenses involving charitable causes … enhances the sentences of defendants who take advantage of victims' … generosity and charitable motives …. Defendants who exploit victims' charitable impulses or trust in government create particular social harm."

The defendant appealed, claiming that the upward adjustment in her sentence was inappropriate since there was no evidence that she misrepresented her authority when cashing checks or that she represented that she was acting to obtain a benefit for the church. A federal appeals court disagreed, and affirmed her sentence.

The court's ruling. In affirming the defendant's enhanced sentence the appeals court noted:

[The defendant] does not dispute that she was employed as the church's bookkeeper or that she used the supermarket and her bank to cash checks drawn on the church's accounts. Although she did not misrepresent her authority to act on behalf of the church, she did misrepresent that she was acting wholly on behalf of the church in her fraudulent conduct, which is all that is required to be subject to [sentencing] enhancement. That she did not exploit the charitable impulses of the victims or misrepresent her authority is of no moment. We hold, therefore, that the district court did not err by adjusting her offense level for misrepresenting that she was acting on behalf of the church. U.S. v. Reasor, 541 F.3d 366 (5th Cir. 2009)

Relevance to church leaders. This case is instructive for church leaders for several reasons, including the following.

1. It illustrates the seriousness of the crime of embezzlement. The trial court handed down a sentence of 15 years for the embezzlement of $450,000 in church funds.

2. The case illustrates that under federal sentencing guidelines church employees who misappropriate church funds by misrepresenting that they are acting on behalf of the church are subject to an upward adjustment in their sentence.

3. This case demonstrates that in some cases church leaders decide to turn cases of embezzlement over to the civil authorities for investigation and prosecution rather than resolving the matter internally. Such decisions are often difficult, since church leaders often believe that involving the civil authorities is somehow incompatible with the virtues of mercy and grace. These are questions that each church will have to answer for itself, depending on the circumstances. Before forgiving an embezzler and dropping the matter, however, church leaders should consider the following points:

(1) A serious crime has been committed, and the embezzler has breached a sacred trust. It is worth noting that the federal sentencing guidelines provide for enhanced prison sentences for persons who misappropriate church funds. The civil government's recognition of the severity of this crime is a sobering reality that should be duly considered by church leaders in deciding how to respond.

TIP. Closely scrutinize and question the amount of funds the embezzler claims to have taken. Remember, you are relying on the word of an admitted thief. Is it a realistic amount? Is it consistent with the irregularities or discrepancies that caused church leaders to suspect embezzlement in the first place? If in doubt, consider hiring a local CPA, or a certified fraud examiner, to review the amount the embezzler claims to have stolen.

(2) In many cases the embezzler will insist that he or she is not able to pay back the embezzled funds. The embezzled funds already have been spent. This presents church leaders with a difficult decision, since the embezzler has received unreported taxable income from the church. If the full amount of the embezzlement is not known with certainty (which is usually the case) then church leaders have the option of filing a Form 3949-A ("Information Referral") with the IRS. Form 3949-A is a form that allows employers to report suspected illegal activity, including embezzlement, to the IRS. The IRS will launch an investigation based on the information provided on the Form 3949-A. If the employee in fact has embezzled funds and not reported them as taxable income, the IRS may assess criminal sanctions for failure to report taxable income. In some cases, filing Form 3949-A with the IRS is a church's best option when embezzlement is suspected.

(3) Recharacterizing embezzled funds as a loan. In some cases, church leaders will try to resolve a case of embezzlement by characterizing the embezzled funds as a loan. There are several problems with this approach, including the following:

  • If the church enters into a loan agreement with the embezzler, this may require congregational approval. Many church bylaws require congregational authorization of any indebtedness, and this would include an attempt to reclassify embezzled funds as a loan. Of course, this would have the collateral consequence of apprising the congregation of what has happened.
  • Any "below market interest rate" loan of $10,000 or more triggers taxable income in the amount of the interest that would have accrued at the "applicable federal rate" of interest. In addition, if the imputed income is not reported as taxable income, and the recipient of the "loan" is an officer of director of the church (or a relative of such a person) it may constitute an "automatic excess benefit" under section 4958 of the tax code that will expose the recipient to an excise tax of up to 225 percent of the amount of the unreported income. Board members who approved the arrangement will be exposed to an excise tax of up to 20 percent of the amount of the unreported income (up to a maximum, collectively, of $20,000).
  • One of the requirements for tax-exempt status under section 501(c)(3) of the Internal Revenue Code is that none of a church's assets can "inure" to the benefit of a private individual other than as reasonable compensation for services rendered. The IRS, and the courts, have ruled in a number of cases that low or no interest loans constitute prohibited inurement which results in the loss of a charity's tax-exempt status.
  • State nonprofit corporation laws generally prohibit the making of loans, even at commercially reasonable rates of interest, to an officer or director.

(4) Church leaders must also remember that they owe a fiduciary obligation to the church and that they are stewards of the church's resources. Viewing the offender with mercy does not necessarily mean that the debt must be forgiven and a criminal act ignored. Churches are public charities that exist to serve religious purposes, and they are funded entirely out of charitable contributions from persons who justifiably assume that their contributions will be used to further the church's mission. These purposes may not be served when a church forgives and ignores cases of embezzlement.

TIP. The federal Employee Polygraph Protection Act prohibits most employers from requiring or even suggesting that an employee submit to a polygraph exam. Employers also are prevented from dismissing or disciplining an employee for refusing to take a polygraph exam. There is an exception that may apply in some cases-an employer may require that an employee take a polygraph exam if the employee is suspected of a specific act of theft or other economic loss and the employer has reported the matter to the police. However, the employer must follow very strict requirements to avoid liability. A church should never suggest or require that an employee submit to a polygraph exam, even in cases of suspected embezzlement, without first contacting an attorney for legal advice.

4. It seems inconceivable that the defendant in this case could have misappropriated nearly a half a million dollars in church funds. While this may seem unbelievable, it is entirely possible in any church that lacks an adequate system of internal control.

Additional Assistance with Embezzlement Issues

For a full consideration of the topic of embezzlement, see chapter 7 in Richard Hammar's Pastor, Church & Law. Chapter 7 addresses the following topics:

  • Definition of embezzlement
  • Why churches are vulnerable
  • How embezzlement occurs
  • Reducing the risk of embezzlement
  • Responding to allegations of embezzlement
  • The consequences of embezzlement
  • Confidentiality and privileged communications
  • Informing the congregation
  • Avoiding false accusations
  • The Employee Polygraph Protection Act

Legal Developments

Job Applicant Sues Church-Operated School for Age Discrimination

Avoid discriminatory hiring practices.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Job Applicant Sues Church-Operated School for Age Discrimination

Avoid discriminatory hiring practices.

Richard R. Hammar, J.D., LL.M., CPA

Key Point 8-11. Employees and applicants for employment who believe that an employer has violated a federal civil rights law must pursue their claim according to a specific procedure. Failure to do so will result in the dismissal of their claim.

Key Point 8-13. The federal Age Discrimination in Employment Act prohibits employers with 20 or more employees, and engaged in interstate commerce, from discriminating in any employment decision on the basis of the age of an employee or applicant for employment who is 40 years of age or older. The Act does not exempt religious organizations. Many states have similar laws that often apply to employers having fewer than 20 employees.

Resource. For more information on this topic, purchase the download, “Understanding Wage and Hour Laws” on ChurchLawAndTaxStore.com.

A federal court ruled that a 56-year-old woman failed to establish that a church-operated school committed unlawful age discrimination when it rejected her application for employment as a teacher and instead hired a 21-year-old woman for the position. To fill a vacancy for a third-grade teacher position the school placed an advertisement in an online job bank. It received six applications for the position, one of which was from a 56-year-old woman (the “plaintiff”). All six applicants were interviewed, and school officials and church leaders chose a 21-year-old female applicant. This prompted the plaintiff to sue the school, and church, for age discrimination in violation of the federal Age Discrimination in Employment Act (ADEA). The ADEA prohibits employers with 20 or more employees, and engaged in interstate commerce, from discriminating in any employment decision on account of the age of an employee or applicant for employment who is at least 40 years of age.

The court noted that a “burden shifting analysis” must be used in evaluating age discrimination claims. This analysis involves the following four steps:

  • First, the plaintiff must prove a “pri-ma facie case,” which consists of the following elements: (1) the plaintiff is at least 40 years of age; (2) she applied for a position for which she was qualified; (3) she was subject to an adverse employment decision, such as termination or not being hired; and (4) the adverse employment decision was made under circumstances giving rise to an inference of unlawful discrimination.
  • Second, if the plaintiff establishes a pri-ma facie case, the burden shifts to the defendant to produce evidence of a legitimate, nondiscriminatory reason for its decision not to hire the plaintiff that rebuts the presumption of discrimination created by the plaintiff’s pri-ma facie case.
  • Third, should the defendant produce such evidence, the burden shifts back to the plaintiff to show both that the employer’s purported reason is mere pretext for discrimination and that the plaintiff’s age was the actual motivating factor behind the defendant’s hiring decision.

The court noted that “a plaintiff’s burden in proving a pri-ma facie case is minimal,” and that the plaintiff had done so. This meant that the burden shifted to the church defendants to produce evidence of a legitimate, non-discriminatory reason for not hiring the plaintiff. The court concluded that the church defendants met this burden by establishing that the plaintiff’s interviewers were dissatisfied with her interview performance, and in particular her responses to questions concerning lesson plans and classroom discipline.

The court stressed that “an employer may use subjective criteria, such as the employer’s impressions of job applicants during an interview, to make hiring decisions,” and that a court “must respect an employer’s unfettered discretion to choose among qualified candidates” and “not act as a super personnel department that second guesses employers’ business judgments.”

Since the church defendants met their burden of proving a legitimate, nondiscriminatory basis for the decision not to hire the plaintiff, the burden shifted back to her to prove that this purported basis was a “pretext” for discrimination and that her age was the real reason she was not hired. The court concluded that the plaintiff failed to meet this burden, and it dismissed the lawsuit. It noted that her only evidence of discrimination was the age difference between her and the 21-year-old applicant who was hired. But this evidence, without more, “does not contradict the evidence of plaintiff’s poor interview performance or show that this lawful excuse concealed a hiring decision motivated by unlawful discrimination.” A plaintiff in an age discrimination case “may not rely on conclusory allegations or unsubstantiated speculation.”

Application. This case illustrates an important point—churches subject to the ADEA (or a state counterpart) do not necessarily commit age discrimination by failing to hire the oldest applicant for a position. They will avoid liability if they can prove a legitimate, nondiscriminatory reason for their decision that is not a “pretext” to conceal an actual discriminatory intent. Donahue v. Norwich Roman Catholic Diocesan Corporation, 2008 WL 821890 (D. Conn. 2008).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.

Legal Developments

Church Employee Sues for Overtime Wages

Have an attorney who is familiar with FLSA review your policy manual.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Church Employee Sues for Overtime Wages

Have an attorney who is familiar with FLSA review your policy manual.

Richard R. Hammar, J.D., LL.M., CPA

Key Point 8-08.6. The Fair Labor Standards Act exempts employees employed in an executive, administrative, or professional capacity from the minimum wage and overtime pay provisions. To be covered by one of these exemptions, an employee must perform specified duties, and be paid a salary in excess of a specified amount.

A federal appeals court rejected a church employee’s claim that her employing church violated the federal Fair Labor Standards Act by failing to pay her overtime compensation for hours worked in excess of 40 per week. The former principal (the “plaintiff”) of a church school sued the church, claiming that it failed to (1) pay overtime wages pursuant to the FLSA; (2) notify her of her right to continuing health coverage under the Consolidated Omnibus Reconciliation Act (“COBRA”); and (3) adhere to the requirements of the Employment Retirement Income Security Act (“ERISA”) in administering the church’s pension plan. A federal district court concluded that the plaintiff was an “administrative employee” exempt from entitlement to overtime pay under the FLSA and that COBRA and ERISA requirements did not apply to “church plans” like the one the church had established. A federal appeals court affirmed the district court’s ruling.

FLSA—in general

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bonafide executive, administrative, or professional employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status.

To qualify for the administrative employee exemption, all of the following tests must be met:

  • The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  • The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The administrative exemption is also available to employees compensated on a salary or fee basis at a rate not less than $455 a week, or on a salary basis which is at least equal to the entrance salary for teachers in the same educational establishment, and whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment. Academic administrative functions include operations directly in the field of education, and do not include jobs relating to areas outside the educational field.

Department of Labor regulations clarify that employees engaged in academic administrative functions include:

  • the superintendent or other head of an elementary or secondary school system, and any assistants responsible for administration of such matters as curriculum, quality and methods of instructing, measuring and testing the learning potential and achievement of students, establishing and maintaining academic and grading standards, and other aspects of the teaching program;
  • the principal and any vice-principals responsible for the operation of an elementary or secondary school;
  • department heads in institutions of higher education responsible for the various subject matter departments;
  • academic counselors and other employees with similar responsibilities.

Having a primary duty of performing administrative functions directly related to academic instruction or training in an educational establishment includes, by its very nature, exercising discretion and independent judgment with respect to matters of significance.

The duties requirement

The court agreed with the church that the plaintiff’s employment responsibilities met the “duties” requirement of an exempt academic administrative employee:

She exercised the discretion of a principal on a daily basis and made important decisions related to instruction. She spent a significant amount of time supervising the school’s teaching staff and providing teaching evaluations. She also called staff development meetings, chose to implement a different standardized testing system than had previously been used in the school, interviewed candidates for teaching positions and made hiring recommendations to the Senior Pastor, recruited new students, prepared proposed budgets, taught classes in the core subjects, and made decisions related to student discipline. That [the church’s senior pastor] possessed general supervisory authority over the school does not mean [that she] lacked discretion to make decisions in her own right and is instead consistent with the regulations’ recognition that decisions of exempt employees may be “reviewed at a higher level.”

The “salary” requirement

The plaintiff insisted that she was not exempt, and therefore entitled to overtime pay, because she did not satisfy the salary requirement. Her weekly pay exceeded $455, but she insisted that she nonetheless failed the salary test because her pay was “subject to reduction because of variations in the quality or quantity of the work performed.” She cited the following Department of Labor regulation:

An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. (emphasis added)

The regulations clarify that a salary deduction of one or more full days in response to an employee’s absence for personal reasons will not affect his or her status as an exempt employee.

The plaintiff claimed that her pay was subject to reduction because of variations in the quality or quantity of the work she performed, and cited (1) an incident in which the church imposed a pay deduction after she missed a day of work for personal reasons; and (2) the pastor’s threat to dock school employees’ pay based on uniform infractions. The court ruled that neither of these incidents resulted in a violation of the salary test. With regard to the first incident, the court noted that this did not demonstrate an actual practice of compensating her on a non-salary-basis, especially since the FLSA regulations provide that a salary deduction of one or more full days in response to an employee’s absence for personal reasons will not affect his or her status as an exempt employee. Nor does a single deduction amount to a clear policy.

In rejecting the plaintiff’s second argument, the court noted that “there was no evidence that any salary deductions actually occurred on that ground, and [the pastor’s] isolated statements fall well short of establishing a clear and particularized policy” as required by the regulations.

COBRA and ERISA

The court rejected the plaintiff’s COBRA and ERISA claims: “It is not in dispute that [the church] established its health and pension plans and that it is a church that possesses 501(c)(3) tax exempt status. The plans are therefore church plans that are not subject to COBRA and ERISA requirements.”

Application. Many churches have adopted policies that permit employee salaries to be reduced based on variations in the quality or quantity of the work performed. Church leaders should recognize that such policies may result in the loss of exemption of church employees from the FLSA’s overtime pay requirements, and this leads to unexpected and unbudgeted liability for unpaid overtime compensation. This risk is especially acute if a church’s employee or policy manual was not reviewed by an attorney familiar with the FLSA.

Department of Labor regulations list several situations in which reductions in pay will not affect the exempt status of employees. One of these (deductions from pay when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability) was referred to by the court in this case. Other exemptions include

  • deductions from pay may be made for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bonafide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability;
  • while an employer cannot make deductions from pay for absences of an exempt employee occasioned by jury duty, attendance as a witness or temporary military leave, the employer can offset any amounts received by an employee as jury fees, witness fees or military pay for a particular week against the salary due for that particular week without loss of the exemption.
  • deductions from pay of exempt employees may be made for penalties imposed in good faith for infractions of safety rules of major significance.
  • deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees.
  • an employer is not required to pay the full salary in the initial or terminal week of employment;
  • an employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.

This case illustrates the importance of having your employee or policy manual reviewed by an attorney who is familiar with the FLSA. 2009 WL 1298525 (2nd Cir. 2009).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.

Legal Developments

Minister’s Racial Discrimination Claim Dismissed

Court rules that the First Amendment bars it from resolving the claim.

Richard R. Hammar, Attorney, CPA
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Church Law & Tax Report

Minister’s Racial Discrimination Claim Dismissed

Court rules that the First Amendment bars it from resolving the claim.

Richard R. Hammar, J.D., LL.M., CPA

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 racial discrimination claim brought by a minister against his church. An ordained priest (the “plaintiff”) claimed that his supervising bishop misapplied canon law in denying him a promotion and, ultimately, in terminating him. The plaintiff, who is African-American, also claimed his termination was racially discriminatory in violation of Title VII of the Civil Rights Act of 1964. The court concluded that the lawsuit was clearly barred by the ministerial exception, since:

  • It could not “imagine an area of inquiry less suited to a temporal court for decision [than] evaluation of the ‘gifts and graces’ of a minister.” Minker v. Baltimore Annual Conference of the United Methodist Church, 894 F.2d 1354, 1357 (D.C.Cir.1990).
  • The inquiry which [the plaintiff] would have us undertake into the circumstances of his discharge would plunge an inquisitor into a maelstrom of Church policy, administration, and governance.” Natal v. Christian & Missionary Alliance, 878 F.2d 1575 (1st Cir. 1989).

The court concluded that “the presumptively appropriate remedy in a Title VII action is reinstatement, but it would surely be unconstitutional under the First Amendment to order the Catholic Church to reinstate, for example, a priest whose employment the Church had terminated …” Rweyemamu v. Cote, 520 F.3d 198 (2nd Cir. 2008).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.

Legal Developments

Pastor Sentenced to Prison for Tax Fraud

Learn to properly identify and report taxable income.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Pastor Sentenced to Prison for Tax Fraud

Learn to properly identify and report taxable income.

Richard R. Hammar, J.D., LL.M., CPA

Key Point. Failure to report taxable fringe benefits as taxable income can expose a pastor or lay church employee to significant criminal penalties.

A federal appeals court ruled that a pastor was properly convicted and sentenced to prison for filing a fraudulent tax return as a result of his failure to report several items of taxable income. A pastor (Pastor Phil) served as both senior pastor of his church and superintendent of a school operated by the church. The IRS began investigating Pastor Phil after receiving an anonymous letter. As part of its investigation, the IRS traced payments made by the church and the school to various sources on Pastor Phil’s behalf or for his benefit and determined that he failed to report a substantial amount of taxable income on his tax returns in violation of section 7206 of the tax code which imposes criminal penalties for willfully filing a fraudulent tax return.

At trial, the individuals who prepared Pastor Phil’s tax returns testified that his returns were based solely on the W-2’s and 1099’s he presented to them and that he did not declare any additional income from other sources. Pastor Phil reviewed the returns before they were filed with the IRS and never indicated that they were inaccurate or that they otherwise misstated his tax liability.

At his trial, the prosecution documented $110,000 of unreported taxable income, including the following:

  • The school paid disability insurance premiums on Pastor Phil’s behalf directly to a life insurance company.
  • The school made monthly payments on a loan Pastor Phil had taken out to purchase a car for his daughter.
  • Several persons paid Pastor Phil fees for speaking engagements, “bird-dog” fees for referring customers to a local car dealership, referral fees for sending loans to a mortgage company, and a $6,600 “finder’s fee” for bringing in investors to fund a real estate development project.
  • The church paid Pastor Phil’s life insurance premiums, totaling over $6000.
  • The church paid Pastor Phil a salary of $750 every two weeks ($15,000 per year) for serving as interim manager of a church-operated credit union.
  • The church or school made various other miscellaneous payments on Pastor Phil’s behalf, including a time-share property that he owned; his water bill; and a homeowner’s insurance policy. The water bill and homeowner’s insurance premium payment were treated as unreported income because the church made these payments over and above Pastor Phil’s $36,000 housing allowance.
  • Pastor Phil received $60,000 from the church for his work at a satellite location. This amount was designated by the church for “pastor’s housing expenses” and listed under the heading “salaries.” The church did not give this money directly to Pastor Phil, but deposited it into the church’s savings account at the credit union. Pastor Phil gave a church officer his bills as they became due and the officer paid them until the amounts disbursed totaled $60,000. Out of this $60,000, the church paid off Pastor Phil’s personal credit card debt and the loan on his home, and also wrote checks to cover his cosmetic dentistry and repairs to his home, including repainting and gutter work. The total amount paid out on Pastor Phil’s behalf was less than $60,000, and the remaining money was transferred into his housing allowance account.

The prosecution noted that Pastor Phil’s annual salary was $115,000, but that he had acquired numerous “luxury items” that seemed excessive in light of his salary, including two time-shares, a 2.73-carat diamond ring, a projection television, a camcorder, a DVD player, and custom-made clothes. According to the prosecution, the excessiveness of his lifestyle relative to his reported income was indicative of fraud. Pastor Phil presented several witnesses who testified that the $60,000 payment from the church was a “gift” and not compensation for services rendered. These witnesses conceded, however, that there was no written evidence that the $60,000 payment was intended as a gift. The jury convicted Pastor Phil on all counts, and sentenced him to 21 months in prison.

Pastor Phil appealed his conviction on the ground that he had not acted willfully, as required under section 7206. The court disagreed: “His argument is without merit. The government presented ample evidence that he knew his income exceeded the amounts he reported on his tax returns and that he had the opportunity to review and correct his returns before fi ling them with the IRS. We have no difficulty finding that it was sufficient for a reasonable jury to conclude beyond a reasonable doubt that he willfully filed tax returns in which he knowingly and significantly under-reported his income and that he was aware of their falsity when he signed and subscribed them under penalties of perjury.”

The appeals court also rejected Pastor Phil’s claim that the trial court erred in “enhancing” his prison sentence based on his use of “sophisticated means.” Federal sentencing guidelines permit a prison sentence to be increased (“enhanced”) if an offense involved “sophisticated means.” The concluded that the following evidence warranted an increase in Pastor Phil’s sentence based on sophistical means: (1) depositing his salary from the church and the credit union into accounts that were not registered in his own name; (2) instructing the church to make payments out of these accounts directly to his personal creditors; and (3) having the school and the church pay his life and disability insurance premiums directly to the insurance carriers. The court concluded that Pastor Phil’s schemes to conceal income through the use of third-party accounts over a three-year period required intricate planning and therefore involved the use of sophisticated means.

Application. This case illustrates the importance of being familiar with the definition of taxable income. Pastor Phil failed to report various items of taxable income on his tax return, and these items totaled $110,000. It is not always easy to know whether various benefits are taxable or not. Chapter 4 of Richard Hammar’s 2009 Church & Clergy Tax Guide lists 22 categories of taxable income that are often made available to clergy and church staff. This information is designed to assist church leaders in properly identifying and reporting taxable income. 2009 WL 723206 (C.A.11 2009).

This Recent Development first appeared in Church Law & Tax Report, July/August 2009.

Legal Developments

Segregation of Damages

If this principle applies, exposure to monetary damages in sexual misconduct claims may be reduced.

Richard R. Hammar, Attorney, CPA
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Church Law & Tax Report

Segregation of Damages

If this principle applies, exposure to monetary damages in sexual misconduct claims may be reduced.

Richard R. Hammar, J.D., LL.M., CPA

Key point. Juries generally cannot assess monetary damages against two or more organizations for the same wrong. If a jury determines that a personal injury victim has suffered damages of a specified amount, it cannot assess this amount separately against more than one defendant since doing so would result in duplicate verdicts.

A federal appeals court ruled that juries, in assessing monetary damages in sexual misconduct claims, must “segregate” the church’s damages based on negligence from the perpetrator’s damages based on intentional or criminal acts. A church member sued his church and a staff member who sexually molested him. During the trial, the court instructed the jury to segregate damages caused by the perpetrator’s intentional acts from damages caused by the church’s negligence. The jury returned a verdict finding the church liable for only a small portion of the amount that was assessed against the perpetrator. The victim appealed, asking the appeals court to reverse the trial court’s order segregating damages, thereby allowing the church to be assessed the full amount of the damages. A federal appeals court, applying Washington law, affirmed the trial court’s order.

The court noted that the Washington Supreme Court had previously ruled that under Washington law damages resulting from intentional acts must be segregated from those resulting from negligence, and negligent defendants can be held jointly and severally liable only for the damages resulting from their negligence. Tegman v. Accident & Medical Investigations, Inc., 75 P.3d 497 (2003), citing Washington Revised Code 4.22.070. The Washington Supreme Court stressed that a negligent party “could not be held liable for any damages due to intentional acts.”

Application. Most if not all acts of sexual misconduct involve intentional acts by the perpetrator. When the perpetrator is a church employee or volunteer, the church may be liable on the basis of negligence in selecting, supervising, or retaining the wrongdoer. In many cases, juries assign greater culpability, and monetary damages, to the wrongdoer, and lesser culpability and damages to the negligent church. As this case demonstrates, some states require the segregation of damages, meaning that negligent parties cannot be assessed monetary damages based on the wrongdoer’s intentional acts. This is a significant principle, since in most cases those who commit acts of sexual misconduct lack the means to pay their share of a jury verdict. In many states, churches that are found to have been negligent in selecting, supervising, or retaining the wrongdoer can be forced to pay the full amount of damages assessed by the jury, even that portion that was allocated to the wrongdoer’s intentional acts. Church leaders should be familiar with the principle of segregation. If it applies, it may significantly reduce a church’s exposure to monetary damages in sexual misconduct cases involving intentional acts. Fleming v. Church of Latter Day Saints, 275 Fed.Appx. 626 (9th Cir. 2008).

This Recent Development first appeared in Church Law & Tax Report, March/April 2009.

Legal Developments

FLSA and the Ministerial Exception

A minister’s claims to the minimum wage and overtime wage cannot be resolved by civil courts.

Richard R. Hammar, Attorney, CPA
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Church Law & Tax Report

FLSA and the Ministerial Exception

A minister’s claims to the minimum wage and overtime wage cannot be resolved by civil courts.

Richard R. Hammar, J.D., LL.M., CPA

Key point 8-08.7. Ministers who are employed to perform ministerial services, and who are paid a salary that meets or exceeds the “salary test,” are professional employees exempt from the provisions of the Fair Labor Standards Act. Ministers not compensated on a salary basis, or who earn a salary below the salary test, may not be covered by the Act. Department of Labor regulations suggest that the Act does not apply to any ministers, and a few federal courts have ruled that the so-called ministerial exception prevents the application of the Act to ministers.

A federal appeals court ruled that the so-called “ministerial exception” prevents clergy from suing their employing church for violating the minimum wage or overtime pay requirements of the federal Fair Labor Standards Act. A married couple were ordained ministers of the Salvation Army, with the rank of captain, assigned to be the administrators of the Salvation Army’s Adult Rehabilitation Center in Indianapolis. Ministers of the Salvation Army receive no wages, though they receive “an allowance … sufficient for basic needs.” The allowance that each spouse received was $150 a week. They sued the Salvation Army for violations of the minimum wage and overtime pay provisions of the Fair Labor Standards Act. Their employment was immediately terminated for bringing the lawsuit. A federal district court dismissed the lawsuit on the basis of the ministerial exception. The ministerial exception is a court-made rule, based on the First Amendment’s religion clauses, that bars the courts from resolving discrimination and other employment related disputes between churches and clergy.

On appeal, the couple asserted that the ministerial exception should not apply in this case since requiring churches to obey the Fair Labor Standards Act would not “limit the right of a religious organization to decide who will perform religious functions [or] who will be the ministers.” They referred to a previous case in which the United States Supreme Court ruled that non-minister “associates” of a religious organization engaged in rehabilitating drug addicts were employees entitled to the protections of the Fair Labor Standards Act. Tony & Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290 (1985). Forcing it to pay minimum wages to the associates added to its costs, but “did not require a court to adjudicate religious issues or to order a church to retain a minister whom it considered unfit on religious grounds.”

A federal appeals court noted that it is a much different case when a law like the Fair Labor Standards Act is applied to a minister rather than to a lay employee having no religious functions. It pointed out that the couple themselves had testified that their duties included “preaching,” “leading worship singing,” “overseeing or leading daily devotions,” “overseeing or teaching Bible studies” to the residents, “overseeing or conducting Christian living classes” for them, and teaching classes for prospective Salvation Army ministers.

The court adopted a presumption that clergy are not covered by the Fair Labor Standards Act. The presumption “can be rebutted by proof that the church is a fake, the ‘minister’ a title arbitrarily applied to employees of the church even when they are solely engaged in commercial activities, or, less flagrantly, the minister’s function entirely rather than incidentally commercial …. It would be a case of a bonafide minister who had, however, stepped entirely out of his religious role to manage a commercial enterprise full time.” The court noted that none of these grounds for rebutting the presumption was available in this case.

Application. This case is important because of the court’s conclusion that the “ministerial exception” applies to the FLSA, which means that a minister’s claims to the minimum wage and overtime pay cannot be resolved by the civil courts. A number of other courts have reached this same conclusion. Each of these cases was addressed in prior issues of this newsletter.

Another interesting aspect of this case is the fact that the court’s opinion, on two occasions, expressed bewilderment at the Salvation Army’s failure to raise the defense that the terminated officers were “administrative employees” exempt from coverage under the FLSA. Of course, the reason this defense was not raised was that it was not available. To qualify for this exemption, an employee not only must perform the duties of an administrative employee, but also must be paid on a salary basis of at least $455 per week. Since each of the two officers was paid weekly compensation of only $150, neither was an exempt administrative employee under the FLSA. It is disconcerting for a federal appeals court to be so unfamiliar with the law. Schleicher v. Salvation Army, 518 F.3d 472 (7th Cir. 2008).

Resource. For more information on the legal requirements for performing a valid marriage, and a helpful checklist for ministers to follow, see chapter 3 in Richard Hammar’s book, Pastor, Church & Law Vol. 1 (4th ed. 2008), available by calling 1-800-222-1840. Note that this is the newly-released and fully updated fourth edition.

This Recent Development first appeared in Church Law & Tax Report, January/February 2009.

Legal Developments

Federal Court Denies Work Visa to Foreign Religious Worker

Immigrant ministers must fulfill several requirements to qualify for work visas.

Richard R. Hammar, Attorney, CPA
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Church Law & Tax Report

Federal Court Denies Work Visa to Foreign Religious Worker

Immigrant ministers must fulfill several requirements to qualify for work visas.

Richard R. Hammar, J.D., LL.M., CPA

* A federal appeals court ruled that the U.S. Citizenship and Immigration Services (CIS) can deny a special immigrant religious worker visa to ministers who did not work full time in the ministry for the two years preceding their visa petition, even though federal law does not directly require two years of full-time employment. The U.S. Citizenship and Immigration Services (CIS) denied a Hawaiian Presbyterian church’s petition for a “special immigrant religious worker” visa for its minister. The church appealed, claiming that the CIS erred in requiring it to prove that its pastor had worked full time as a minister during the two years immediately preceding the visa petition.

Federal immigration law specifies that a minister may qualify for a special immigrant religious worker visa only if he or she (1) has been a member of a bona fide religious denomination for at least two years, (2) “seeks to enter the United States solely for the purpose of carrying on the vocation of a minister of that religious denomination,” and (3) “has been carrying on such vocation continuously for at least the [immediately preceding] 2-year period.” The law does not specifically require religious workers to carry on their vocations full time during the two years preceding their petitions for a special immigrant religious worker visa, but neither does it prevent such an interpretation.

The court concluded that the CIS’s adoption of a full-time employment requirement was consistent with previous cases. To illustrate, in Matter of Faith Assembly Church, 19 I. & N. Dec. 391 (BIA 1986), a court held that “part-time ministerial employment” did not qualify a minister for special immigrant classification. The court explained that the law “requires the minister to have been and intend to be engaged solely as a minister of a religious denomination.” Hawaii Saeronam Presbyterian Church v. Ziglar, 243 Fed.Appx. 224 (9th Cir. 2007).

Legal Developments

Church Secretary Sues for Age Discrimination

Federal appeals court rules she has enough evidence to move case forward.

Richard R. Hammar, Attorney, CPA
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Church Law & Tax Report

Church Secretary Sues for Age Discrimination

Federal appeals court rules she has enough evidence to move case forward.

Richard R. Hammar, J.D., LL.M., CPA

KEY POINT 8-07 Employees and applicants for employment who believe that an employer has violated a federal civil rights law must pursue their claim according to a specific procedure. Failure to do so will result in the dismissal of their claim.

KEY POINT 8-09 The federal Age Discrimination in Employment Act prohibits employers with 20 or more employees, and engaged in interstate commerce, from discriminating in any employment decision on the basis of the age of an employee or applicant for employment who is 40 years of age or older. The Act does not exempt religious organizations. Many states have similar laws that often apply to employers having fewer than 20 employees.

* A federal appeals court ruled that a church secretary produced enough evidence of age discrimination to avoid a dismissal of her lawsuit. A woman (the “plaintiff”) worked as the parish secretary from 1983 until May 2003, when her position was terminated. She was 64 years old at the time of her termination, and asserted that the pastor made a specific reference to her age and “retirement” when he informed her that her position was being terminated. The church insisted that the plaintiff’s position was eliminated due to budgetary reasons to allow for the creation of a new position of parish office manager by combining the tasks previously performed by the plaintiff with those of a 47-year-old employee whose part-time bookkeeper position was also being eliminated. The bookkeeper was selected to be the parish office manager, at which point she assumed the duties previously performed by the plaintiff. The plaintiff thereafter sued the church, claiming that it violated the Age Discrimination in Employment Act by terminating her. A federal district court ruled that the plaintiff failed to prove a “prima facie” case of discrimination, and dismissed the lawsuit. The plaintiff appealed.

A federal appeals court began its opinion by noting that in any age discrimination lawsuit the plaintiff has the initial burden of proving, by a preponderance of the evidence, a prima facie case of discrimination. To do so, the plaintiff was required to demonstrate that (1) she was 40 years of age or older at the time of the allegedly discriminatory action; (2) she suffered an adverse employment action; (3) she was qualified for the job from which she was terminated; and (4) she was replaced by a sufficiently younger person, creating an inference of discrimination.

If a plaintiff succeeds in establishing a prima facie case, “the burden shifts to the defendant to articulate a legitimate, nondiscriminatory reason” for the employee’s termination. If it cannot do so, the plaintiff wins. But if the defendant is able to prove a legitimate, nondiscriminatory reason for its action, the burden shifts back to the plaintiff to submit evidence from which a jury could reasonably either “(1) disbelieve the employer’s professed legitimate reasons; or (2) believe that an invidious discriminatory reason was more likely than not a motivating or determinative cause of the employer’s action.”

The court concluded that the district court erred in ruling that the plaintiff failed to prove a prima facie case of age discrimination. It noted that the plaintiff presented evidence that “(1) at age 64, she was a member of the protected class, (2) she was terminated from her position as office secretary and for that reason suffered an adverse action, (3) she was qualified for the job of office secretary, and (4) she was replaced in the performance of her previous duties by [the bookkeeper] who is significantly younger.” The court also ruled that there was sufficient evidence that the church’s professed “non-discriminatory” reason for dismissing the plaintiff (i.e., the elimination of her job, for budgetary reasons) was not worthy of belief. It noted that: “The church argues that its decision to consolidate the two positions was motivated by considerations of economics and efficiency, considerations which may prove to be legitimate in the final analysis, but which are at this point open to reasonable dispute. The plaintiff suggests that the pastor’s statements during their first meeting about her age and his raising the possibility that she might retire provide sufficient evidence of discriminatory animus to undermine the legitimacy of the after-the-fact stated reasons for the job elimination. Indeed, a jury may conclude that these reasons may well only have suggested themselves once the plaintiff’s ‘retirement’ appeared to [the pastor] to be imminent.”

One judge on the three-judge panel dissented, noting that “this case presents unfortunate circumstances in which a dedicated church employee felt that she was unjustly let go because of her advancing age.” However, this judge felt that the district court correctly concluded that the plaintiff failed to prove a prima facie case of age discrimination. Williams v. St. Joan of Arc Church, 2007 WL 979653 (3rd Cir. 2007).

Legal Developments

Discrimination Lawsuit Time Limits

Federal courts will not resolve Title VII discrimination claims unless the aggrieved employee files a claim of discrimination with the EEOC within 180 days of the last discriminatory act.

Richard R. Hammar, Attorney, CPA
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Church Law & Tax Report

Discrimination Lawsuit Time Limits

Federal courts will not resolve Title VII discrimination claims unless the aggrieved employee files a claim of discrimination with the EEOC within 180 days of the last discriminatory act.

Richard R. Hammar, J.D., LL.M., CPA

Key point 8-07. Employees and applicants for employment who believe that an employer has violated a federal civil rights law must pursue their claim according to a specific procedure. Failure to do so will result in the dismissal of their claim.

Key point 8-08.2. 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 non-supervisory employees, and even non-employees.

* A federal appeals court ruled that a female church employee’s lawsuit alleging sexual harassment and retaliation against her employer had to be dismissed because she failed to file a claim of discrimination with the EEOC within 180 days of the last offending act. A female church employee (Beth) alleged that she had been sexually harassed by the church’s senior pastor, who was her supervisor. She claimed that the last discriminatory act occurred on April 30, 2002, when she was terminated from her employment in retaliation for reporting the pastor’s sexual harassment. She filed charges of discrimination with the EEOC and a state agency more than 180 days, but less than 300 days, after the last act of alleged discrimination. On July 2, 2003, the EEOC dismissed the charges. Beth later sued her church, and regional and national denominational agencies (the “church defendants”), in federal court alleging sex discrimination and retaliation under Title VII of the Civil Rights Act of 1964. She claimed that all three church defendants were her “employer” under Title VII, which prohibits covered employers from engaging in sex discrimination (including sexual harassment and retaliation).

A federal district court dismissed all of Beth’s VII claims. It dismissed her Title VII claims on the ground that she failed to file her charge of discrimination with the EEOC within 180 days of the last alleged discriminatory employment practice. The district court held that a longer 300-day filing period available under state law did not apply since “nonprofit religious organizations are exempt from the Washington Law Against Discrimination’s employment discrimination provisions.” Beth appealed.

Title VII time limits for filing charges with the EEOC

Title VII establishes two potential time limitations periods within which a plaintiff must file a claim of discrimination with the EEOC. Generally, a Title VII plaintiff must file a claim with the EEOC within 180 days of the last act of discrimination. However, the limitations period is extended to 300 days if the plaintiff first institutes proceedings with a “state or local agency with authority to grant or seek relief from such practice.” 42 U.S.C. § 2000e-5(e)(1).

EEOC regulations provide that the 180-day time limit applies if the state or local “fair employment practices” agency lacks subject matter jurisdiction over a charge. In other words, a state having a fair employment practices agency having no jurisdiction over a religious employer “is equivalent to a jurisdiction having no fair employment practices agency. Charges over which a fair employment practices agency has no jurisdiction are … timely filed if received by the EEOC within 180 days from the date of the alleged violation.” 29 C.F.R. § 1601.13(a)(2).

The court concluded that the 180-day limit applied since the Washington State employment discrimination law does not apply to religious organizations. And, since Beth filed her claim with the EEOC more than 180 days after the last alleged discriminatory act, her lawsuit had to be dismissed.

Constitutionality of the religious exemption under state law

Beth argued that the exemption of nonprofit religious organizations from employment discrimination claims under the Washington Law Against Discrimination violated the First Amendment’s ban on the establishment of religion; and, since it was unconstitutional, the 300-day filing period applied and her claim was not late.

The court refused to address this claim since it had been raised for the first time on appeal, and not in the trial court.

Conclusion

The court concluded: “We read Washington State case law as exempting nonprofit religious employers, such as the defendants, from sexual harassment and retaliation charges under the Washington Law Against Discrimination. Thus, the Washington fair employment practices agency did not have jurisdiction over Beth’s charges. Accordingly, the 180-day time limit applies … and Beth is not entitled to the longer 300-day filing deadline. We affirm the district court’s dismissal of her Title VII claims.”

Application. This case illustrates two important points:

1. Churches and other religious organizations having at least 15 employees (including part-time employees), and engaged in interstate commerce, are subject to Title VII of the Civil Rights Act of 1964. Title VII prohibits covered employers from discriminating in any employment decisions on the basis of race, color, national origin, sex, or religion. Sex discrimination is defined to include both sexual harassment and retaliation.

Churches may be liable for acts of sexual harassment in various ways. When supervisory employees create an 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. In this case, Beth alleged that her supervisor (the senior pastor) engaged in a tangible employment action against her by terminating her employment.

2. Federal courts will not resolve Title VII discrimination claims unless the aggrieved employee files a claim of discrimination with the EEOC within 180 days of the last discriminatory act. A 300-day time limit applies if the employee first institutes proceedings with a “state or local agency with authority to grant or seek relief from such practice.” However, EEOC regulations specify that the 180-day time limit applies if the state or local fair employment practices agency lacks jurisdiction over the alleged discrimination. This can occur in two ways. First, the type of discrimination an employee alleges is not prohibited under state law. Second, religious employers are exempt from the state nondiscrimination law. This is exactly what happened in this case. Washington law exempts religious employers from employment discrimination claims, and so the 180-day time limit (rather than the 300-day limit) applied to Beth’s claims. Since she failed to file her claim with the EEOC within 180 days, the courts were required to dismiss her claim.

Many state employment discrimination laws exempt religious employers. In such states, aggrieved employees must file a claim of discrimination with the EEOC within 180 days. If they fail to do so, the federal courts will be barred from resolving their Title VII claims. MacDonald v. Grace Church, 457 F.3d 1079 (9th Cir. 2006).

Legal Developments

Selecting Ministers and Negligent Retention

A church may exercise reasonable care in selecting ministers or other church workers but still be responsible for their misconduct.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Selecting Ministers and Negligent Retention

A church may exercise reasonable care in selecting ministers or other church workers but still be responsible for their misconduct.

Richard R. Hammar, J.D., LL.M., CPA

Key point 10-07. A church may exercise reasonable care in selecting ministers or other church workers but still be responsible for their misconduct if it “retained” them after receiving information indicating that they posed a risk of harm to others.

* A federal appeals court affirmed a sentence of 18 years imprisonment without the possibility of parole on an active church member who pleaded guilty to possession and distribution of child pornography. An adult male (Keith) was arrested for using the internet to collect and trade child pornography. He used his computer to download over 15,000 images from a network that trafficked in child pornography, and he allowed others in the network to obtain images from his computer. At sentencing a federal district court considered evidence about Keith’s personal history and characteristics. He submitted letters from friends and family describing his traumatic childhood and his parents’ divorce. Some letters described his regular church attendance and membership in his church’s youth group when he was a child.

Keith requested a 5-year sentence (the statutory minimum) so that he could have access to a treatment program as soon as possible. The court noted its concern about Keith’s recent employment at a carnival, which demonstrated his propensity to work near children, and it concluded that he posed a possible danger to the public “if he were to take the next step of actually acting on his fantasies.” The court noted Keith’s difficult family situation, but concluded that his situation did not excuse his actions. The court recounted several aggravating factors, such as the seriousness of the offense, the need to promote respect for the law and deter future criminal conduct, the need to “provide just punishment for the offense,” and Keith’s history and characteristics.

The district court imposed a sentence of 18 years imprisonment without the possibility of parole. The trial judge noted that he reviewed “all of the letters” and believed that Keith was a “Jekyll and Hyde” with his “family and church and friends.” On appeal, Keith argued that the district court did not adequately consider his personal characteristics and his need for access to psychiatric counseling. A federal appeals court disagreed, and upheld the sentence.

Application. This case illustrates two important points. First, possession and distribution of child pornography is a serious offense. Despite the fact that Keith pleaded guilty, he was sentenced to 18 years in federal prison without the possibility of parole. Church leaders sometimes discover that a staff member, or congregational member, has accessed child pornography. This must not be viewed as a minor infraction that can be safely ignored. Remember that many persons who access child pornography are pedophiles who pose a grave risk of harm to children, and to the church itself. To illustrate, if church leaders learn that a staff member has accessed child pornography, and fail to act decisively to protect children in the congregation from this person, then the church may be liable on the basis of “negligent retention” for his or her future acts of child molestation.

Second, note that Keith regularly attended his church, and that church members wrote several letters of support for him as he was awaiting sentencing. The district court concluded that he was a “Jekyll and Hyde” who completely deceived members of his church about his true character. This illustrates the importance of screening anyone who wants to work with minors in a church, no matter how “well known” the person may be. U.S. v. Phillipe, 212 Fed.Appx. 574 (7th Cir. 2007).

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