Recent Developments in Federal Appeals Court Regarding Personal Injuries on Church Premises and During Church Activities

A federal appeals court addressed the dangers of bungee jumping and personal liability of corporate officers in an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax1998-05-01

Personal Injuries on Church Premises and During Church Activities

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

• Key point. Churches should refrain from allowing minors to participate in inherently dangerous activities. The risk of an accident may be small, but if one does occur the consequences can be catastrophic. These include death or personal injury, an astronomical jury verdict far in excess of the church’s insurance coverage, and personal liability of church officers and directors.

A federal appeals court addressed the dangers of bungee jumping and personal liability of corporate officers in an important ruling. In 1993 an adolescent boy was killed while “bungee” jumping. The victim’s parents attempted to perform artificial respiration but were unable to revive their battered and bleeding son. Both parents were profoundly shaken by the event. Later investigations revealed that the bungee jumping system was defective and not properly licensed. Former employees of the bungee jumping company testified that they had warned the company’s two officers that the equipment was defective and that a professional engineer should be hired to perform an inspection. The officers complained that hiring a professional engineer would take up to two months, and would cause them to miss the “peak tourist season.” One of the officers hired a shrimp boat repairman to help inspect the equipment because he could “get the job done quickly” at a “bargain price.” This person not only was not a professional engineer, he had no licenses or certifications and had no experience in designing or installing amusement devices.

The victim’s parents sued the bungee jumping company along with its two officers for their grief, shock, sorrow, wounded feelings, and loss of companionship. The officers insisted that they could not be personally liable since their company was a corporation which shielded them from liability. A jury found the officers personally liable, despite the company’s incorporation, because they had participated personally in decisions leading to the victim’s death. The jury awarded $12 million in damages, and the company and its two officers appealed.

A federal appeals court conceded that there is a strong presumption that “an officer or a director of a corporation is not, merely as a result of his standing as such, personally liable” for the obligations of the corporation. However, if a corporate director has “in some way participated in or directed the [wrongful] act,” personal liability may result. The court concluded that the two officers had personally participated in the victim’s death in a number of ways, including (1) use of obviously unsafe equipment, (2) hiring an unqualified person to inspect the equipment, and (3) using the equipment without a valid license. The court concluded:

A corporation is created to limit personal liability. We emphasize that the finding of personal liability for a corporate officer or director is an unusual and extraordinary event. But this case is not … an instance in which corporate directors reasonably relied on the competency of an employee to do a task. The facts tell a far different story. The [officers] personally directed the use of a system they knew to be dangerous, and chose to have the device installed on the cheap by an unqualified shrimp boat mechanic so that they would not lose money during the busy summer tourist season. Their every action flew in the face of warnings that the lives of others would be endangered. This reckless conduct led directly to the death of [the victim]. The jury’s finding of individual liability against the officers, and the further finding of recklessness, were fully justified.

Application. Church leaders can learn a few important lessons from this tragic case:

(1) Do not permit minors to participate in inherently dangerous activities as part of an organized church activity. This is sometimes easier said than done. Minors, especially adolescents, crave excitement-and what provides more excitement than bungee jumping? Some church leaders insist that the risk of death or injury is so small in such cases that the activity should be allowed. The risk of an accident may be small, but consider the consequences if one does occur. In this case, they were catastrophic. And, the amount awarded by the jury was astronomical-far in excess of the typical church insurance policy. Also note that parental consent does not necessarily prevent church liability for injuries occurring during an inherently dangerous activity. Remember that the parents in this case consented to their son’s participation in the bungee jumping, and were even watching him at the time of the accident.

(2) This case illustrates another reason why church leaders should carefully consider whether they want children to participate in inherently dangerous activities-two corporate officers were themselves found personally liable for the minor’s death. Why were the officers sued directly? Probably because the bungee company’s liability insurance was insufficient to cover the parents’ claims. The lesson is clear. Church leaders who allow children to participate in inherently dangerous activities face personal liability in the event of an injury, at least if a jury finds that their actions amounted to gross negligence. Steinke v. Beach Bungee, Inc., 105 F.3d 192 (4th Cir. 1997). [Church Officers, Directors, and Trustees]

© Copyright 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided 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. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m58 m56 c0398

Legal Developments

Clergy Malpractice and Sexual Harassment

A federal appeals court addresses both issues in an important ruling-Sanders v. Casa View Baptist Church, 1998 WL 27291 (5th Cir. 1998)

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Sexual Harassment

Background

A federal appeals court addressed the complex legal issues surrounding the sexual seduction of church employees by a minister. The court concluded that two female church employees could sue the minister who had seduced them since he had "held himself out" as a qualified marital counselor. However, the court dismissed all of the employees' claims against the church. These included sex discrimination; sexual harassment based on a "hostile work environment"; "quid pro quo" sexual harassment; respondeat superior; ratification; and negligent retention. The court was persuaded that the church was unaware of the pastor's actions, and therefore could not be legally responsible for them.

When a minister engages in a sexual relationship with a church employee, several legal consequences may result affecting the minister, church, and employee. Many of these consequences were illustrated in a recent federal appeals court ruling. The court's ruling will be instructive to all church leaders. This article will summarize the facts of the case, explain the court's ruling, and evaluate the importance of the case to other churches and church staff members.

A church hired a minister of education. The new minister's duties did not include counseling, and he knew that he was not responsible for providing spiritual counseling to church members. He also knew that the church had a written policy of referring church members in need of non—pastoral counseling to a licensed professional counselor. Nevertheless, the minister began counseling with two women after assuring them that he was qualified by both education and experience to provide marital counseling. The women assumed that he was authorized by the church to provide counseling. The minister entered into a sexual relationship with both women, and hired both of them as church employees. After several months, each of the women quit seeing the minister.

The two women worked next to each other in the church office. Eventually, one of them informed the other of her affair with the minister and was shocked to learn of the other's similar experience. The women promptly informed a church deacon of the affairs and the minister was confronted immediately. He confessed to the church's senior minister that he had committed adultery with both women, and accepted the church's request to resign. The two women were placed on administrative leave with pay pending an investigation, and a few months later they were dismissed on the basis of the church's teachings against adultery.

The women later sued the former minister on the basis of both clergy malpractice and breach of fiduciary duties. Although the minister testified that he sometimes discussed scripture in his counseling sessions with the women, the jury found that the counseling he provided was "essentially secular" in nature. At trial, the women presented evidence that the minister committed malpractice by breaching his duties as a marriage counselor-not only by expressing love and affection for each of them and encouraging them to express these feelings for him, but also by engaging in sexual intercourse with them on a number of occasions. They also presented evidence that the minister breached his fiduciary duties, not only by having sexual intercourse with them, but also by disclosing their confidences, including intimate details of their marriages and sexual histories.

The women also sued the church, claiming that it was guilty of unlawful sex discrimination and sexual harassment, and that it was legally responsible for the former minister's actions on the basis of respondeat superior, ratification, and negligent retention.

A jury concluded that the former pastor had committed malpractice and breached his fiduciary duties, and it awarded both regular and punitive damages. However, the jury dismissed all of the women's claims against the church. The case was appealed.

The claims against the former minister

The civil courts can resolve some church disputes

The women claimed that the dismissed minister's conduct constituted "malpractice in pastoral counseling." The minister claimed that pastoral counseling is rooted in religion and cannot be the basis for civil liability. He acknowledged that "purely secular" counseling provided by a minister may be subject to civil liability, but not when the counseling incorporates some religious instruction. He stressed that he occasionally discussed scripture in his counseling sessions with the women, and this demonstrated that the counseling he provided was not purely secular and therefore he could not be sued for his actions. The appeals court rejected the minister's arguments. The court observed:

The first amendment does not categorically insulate religious relationships from judicial scrutiny, for to do so would necessarily extend constitutional protection to the secular components of these relationships …. [T]he constitutional guarantee of religious freedom cannot be construed to protect secular beliefs and behavior, even when they comprise part of an otherwise religious relationship between a minister and a member of his or her congregation. To hold otherwise would impermissibly place a religious leader in a preferred position in our society.

Some church disputes cannot be resolved by the courts

The court acknowledged that there are some internal church disputes that civil courts cannot resolve:

[The first amendment] protects religious relationships, including the counseling relationship between a minister and his or her parishioner, primarily by preventing the judicial resolution of ecclesiastical disputes turning on matters of "religious doctrine or practice." The sanctity of these relationships is further protected by other religious freedoms, including the limited right to engage in conduct that is rooted in religious belief. Under the evidence produced at trial, however, neither of these constitutional protections prevents [the former minister] from being held liable for his misconduct as a marriage counselor and a fiduciary who occasionally discussed scripture within the context of two otherwise secular counseling relationships with members of his congregation.

No liability based on clergy malpractice

The court agreed with the former minister that he could not be liable for the women's injuries on the basis of "clergy malpractice." It observed:

Because the [civil courts] must abstain from ecclesiastical disputes involving questions of doctrine or practice, state courts have rejected uniformly claims for clergy malpractice. This is because such a claim requires definition of the relevant standard of care. Defining that standard could embroil courts in establishing the training, skill, and standards applicable for members of the clergy in a diversity of religions with widely varying beliefs. Furthermore, defining such a standard would require courts to identify the beliefs and practices of the relevant religion and then to determine whether the clergyman had acted in accordance with them. Thus, as these courts have correctly concluded, to recognize a claim for clergy malpractice would require courts to identify and apply the teachings of a particular faith, thereby making the judiciary responsible for determining what conduct and beliefs are part of a particular religion.

Key point. The courts have consistently refused to find clergy liable on the basis of "malpractice" for their pastoral counseling. However, this case illustrates that this rule only applies to the content of counseling that is religious in nature, and not to inappropriate behavior that is engaged in during the counseling relationship. The court concluded that ministers who engage in sexual contact with counselees in the course of marriage counseling may be sued on the basis of malpractice-as marriage counselors rather than as clergy.

Liability based on counseling that is wholly or partly secular

The former minister insisted that he could not be guilty of malpractice as a marriage counselor unless his counseling was purely secular in nature. And, since he occasionally discussed scripture in his counseling sessions with the two women, his counseling was not purely secular. The court disagreed, noting that the minister's marriage counseling was "essentially secular" in nature and that this was enough for him to be guilty of malpractice as a marriage counselor.

The court concluded that the first amendment did not prevent the former minister from being sued for malpractice as a marriage counselor or for breach of fiduciary duties "not derived from religious doctrine." It explained its reasoning as follows:

[B]ecause the jury found that [the former minister] held himself out as possessing the education and experience of a professional marriage counselor, his counseling activities with the [two women] were judged, not by a standard of care defined by religious teachings, but by a professional standard of care developed through expert testimony describing what a reasonably prudent counselor would have done under the same or similar circumstances.

The court based this conclusion in part upon another federal appeals court ruling allowing a church member to claim that her minister had a "duty to possess and apply the skill and knowledge of a reasonably well qualified person providing psychological counseling" because the minister "held himself out to be providing the services of a psychological counselor". Dausch v. Rykse, 52 F.3d 1425 (7th Cir.1994).

Breach of fiduciary duties

The court concluded that the first amendment did not bar the former minister from being sued for breaching the fiduciary duties he owed to the two women as a marital counselor. This is an important ruling. It indicates that marital counselors may be deemed fiduciaries, and as such they are held to a very high standard of ethical behavior with regard to those they counsel. This duty is breached when a counselor engages in sexual relations with a counselee. The court also ruled that it may be breached by "betraying confidences" obtained in a "relation of trust" (such as a counseling relationship). In other words, apart from the sexual misconduct, the former minister was liable to the two women for disclosing confidences he obtained during counseling sessions with them. This aspect of the ruling illustrates the importance of maintaining the confidentiality of information shared during counseling sessions. Disclosing such information without permission may lead to legal liability based on a breach of the counselor's fiduciary duties.

Conclusion

The court concluded that for the former minister to "invoke the protection of the first amendment for conduct taking place within his counseling relationships" with the two women, he "must assert that the specific conduct allegedly constituting a breach of his professional and fiduciary duties was rooted in religious belief." The court then referred to the "obvious truth" that "the activities complained of by the [two women] were not part of his religious beliefs and practices and he is not so brazen as to now contend otherwise."

The claims against the church

The two women not only sued the former minister, they also sued the church. They claimed that the church not only engaged in unlawful sex discrimination and sexual harassment, but also was legally responsible for the former minister's behavior on the basis of respondeat superior, ratification, and negligent hiring. The court rejected all of these claims, and dismissed the women's lawsuit against the church. Its conclusions are summarized below.

Sex discrimination

The women claimed that the church committed unlawful "sex discrimination" in violation of Title VII of the Civil Rights Act of 1964 by dismissing them from employment. To win a sex discrimination case under Title VII, a plaintiff must first prove by a "preponderance of the evidence" a "prima facie case" of discrimination. A plaintiff establishes a prima facie case of sex discrimination by proving: (1) she was discharged; (2) she was qualified for the position; (3) she was within the protected class at the time of discharge; and (4) she was replaced by someone outside the protected class, or otherwise discharged because of her sex. If a plaintiff is successful in establishing a prima facie case of discrimination, the burden shifts to the employer to show a legitimate, nondiscriminatory reason for the adverse employment decision. If the employer demonstrates a nondiscriminatory reason for its adverse employment action, then the presumption is rebutted and the plaintiff must prove that the nondiscriminatory reason was a pretext for discrimination.

The court concluded that the women had failed to demonstrate that the church committed sex discrimination, noting that:

The [women] did not … produce any evidence suggesting that they were fired because of their gender. In fact, the record shows that [the former minister], who also committed adultery, was forced to resign, and that [the church's] position against adultery was neutral with respect to sex, longstanding, and understood by both [women] at the time they engaged in sexual conduct with [the minister].

Key point. Churches are free to dismiss employees for violation of religious standards, so long as such dismissals are not a pretext for unlawful discrimination and "similar cases are treated similarly." In this case, the church avoided liability for sex discrimination since it treated similarly a male and two females guilty of adultery. Further, the church's policy of neutrality in enforcing its moral teachings was "longstanding" and was "understood" by the two women when they engaged in sexual relations with the former minister.

Hostile environment" sexual harassment

Sexual harassment is a form of "sex discrimination" prohibited by Title VII of the Civil Rights Act of 1964. Note that Title VII only applies to employers that (1) have 15 or more employees, and (2) are engaged in interstate commerce. The court in this case assumed that Title VII applied to the church, without any explanation.

Key point. Title VII does not apply to most churches-since most churches have fewer than 15 employees. However, most states have enacted their own civil rights laws that often ban sex discrimination and sexual harassment, and it is much more likely that these state laws will apply to churches. As a result, sexual harassment is a theory of liability that all churches should take seriously.

Key point. Churches with 15 or more employees (full—time or part—time) on their payroll will be subject to Title VII if they are engaged in interstate commerce. Many churches will be deemed by the EEOC and the courts to be engaged in commerce. The United States Supreme Court issued a ruling in 1997 containing a very broad definition of the term "commerce' in the context of a nonprofit religious organization. This case, and the commerce requirement, are discussed in a feature article in the March—April 1998 issue of this newsletter.

A current EEOC regulation entitled "EEOC Guidelines on Discrimination Because of Sex" specifies, in part:

(a) Harassment on the basis of sex is a violation of Sec. 703 of Title VII. Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when (1) submission to such conduct is made either explicitly or implicitly a term or condition of an individual's employment, (2) submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual, or (3) such conduct has the purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile, or offensive working environment.

This regulation demonstrates that sexual harassment includes at least two separate types of conduct: (1) "Quid pro quo" harassment, which refers to conditioning employment opportunities on submission to a sexual or social relationship, or (2) "hostile environment" harassment, which refers to the creation of an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature.

The court concluded that the church was not guilty of "hostile environment" sexual harassment. It noted that in order for the two women to establish "hostile environment" sexual harassment they needed to "produce evidence showing, among other things, that [the church] knew or should have known of the harassment in question and failed to take prompt remedial action." However, since it was established that the church "took prompt remedial action upon learning of [the minister's] misconduct," the two women had to prove that the church should have known of the minister's behavior before it was disclosed. The court concluded that the women failed to do so. The women claimed that the former minister had offended a few other women by complimenting them on their appearances and hugging them. This evidence, even if true, was not enough to demonstrate that the church "knew or should have known" of a "hostile environment."

"Quid pro quo" sexual harassment

As noted above, sexual harassment also includes unwelcome sexual advances or requests for sexual favors if submission to such conduct "is made either explicitly or implicitly a term or condition of an individual's employment" and "submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual." This type of sexual harassment is called "quid pro quo" sexual harassment. The court rejected the two women's claim that the church had engaged in this form of sexual harassment. It noted that for the women to establish quid pro quo sexual harassment they

were required to produce evidence showing, among other things, that the harassment complained of affected tangible aspects of their compensation, terms, conditions, or privileges of employment. In addition, they were required to develop evidence demonstrating that their acceptance or rejection of the harassment was an express or implied condition to the receipt of a job benefit or the cause of a tangible job detriment. [But the women's] own testimony-that they were subjected to mild criticism of their work and told that they would not be promoted to positions they knew did not exist-indicates that their jobs were not tangibly and detrimentally affected by their decisions to end their sexual relationships with [the minister] …. Further, there is no objective evidence in the record supporting the [women's] claims that they engaged in sex with [the minister] under an implied threat of discharge if they did not.

Respondeat superior

Under the doctrine of respondeat superior, an employer is legally responsible for the behavior of an employee that occurs within the scope of his or her employment. The court rejected the women's claim that the church was responsible for the former minister's behavior on this basis since there was no evidence that the church had authorized him to engage in marital counseling. The court pointed out that the former minister's "job description and responsibilities as [minister of education] indicate that he was not hired to provide counseling, that he knew that counseling was not part of his job description, that the [minister of education] was not responsible for providing spiritual counseling, and that [the church] had a policy of referring non—pastoral counseling to a licensed professional counselor.

Ratification

The two women asserted that the church was legally responsible for the former minister's behavior on the basis of ratification. That is, the church had "ratified" the minister's actions and therefore was legally responsible for them. The court acknowledged that the doctrine of ratification "imposes liability on an employer when that employer adopts, confirms, or fails to repudiate the unlawful acts of an employee of which the employer is aware." However, the church could not have ratified the former minister's misconduct since it was not aware that he was engaging in counseling.

Negligent retention

Finally, the court rejected the women's claim that the church was legally responsible for their injuries on the basis of negligent retention. The court acknowledged that "an employer that negligently retains in his employ an individual who is incompetent or unfit for the job may be liable to a third party whose injury was proximately caused by the employer's negligence." However, to prove negligent retention, the two women had to show that the church "knew or should have known that [the former minister's] conduct as a supervisor or counselor presented an unreasonable risk of harm to others." The court concluded that there was no evidence that the church "knew or should have known" that the former minister was engaging in marital counseling or that he was likely to engage in sexual misconduct or disclose confidences as a marriage counselor.

Significance of the case to other churches

The court's decision is binding only on other federal courts in the fifth federal circuit (which includes the states of Louisiana, Mississippi and Texas). Nevertheless, decisions by federal appeals courts often are viewed as highly persuasive in other states, and so the case deserves serious attention by all church leaders. The court's discussion of a wide range of liability issues for both ministers and churches reinforces the relevance of this case.

What this means for churches

1. Pastoral liability for sexual misconduct during a counseling relationship. The court reached the following conclusions:

a. Clergy malpractice

The court concluded that ministers who engage in sexual misconduct during a counseling relationship cannot be sued on the basis of "clergy malpractice" since the first amendment bars the civil courts from resolving such claims.

b. Malpractice by a marriage counselor

The first amendment does not bar ministers who engage in marriage counseling that is wholly or partly "secular" in nature from being sued for malpractice as a result of sexual misconduct with a counselee. The court concluded:

[B]ecause the jury found that [the former minister] held himself out as possessing the education and experience of a professional marriage counselor, his counseling activities with the [two women] were judged, not by a standard of care defined by religious teachings, but by a professional standard of care developed through expert testimony describing what a reasonably prudent counselor would have done under the same or similar circumstances.

The court suggested that a minister who engages in marriage counseling that is purely religious in nature may be insulated from liability based on malpractice. However, it concluded that "the first amendment's respect for religious relationships does not require a minister's counseling relationship with a parishioner to be purely secular in order for a court to review the propriety of the conduct occurring within that relationship." In other words, the fact that the former minister occasionally referred to the Bible in counseling sessions that otherwise could be characterized as "essentially secular" did not insulate him from liability based on malpractice.

c. Licensed psychologists

The court suggested that ministers who are licensed psychologists or counselors will be held to a higher standard, and that the first amendment may not bar claims against them for sexual misconduct during a counseling relationship.

d. Breach of fiduciary duty

Ministers who engage in sexual misconduct during a counseling relationship may be sued on the basis of a breach of a fiduciary duty. The court concluded that a fiduciary duty arose in this case because the two women sought out the minister as a marriage counselor. While the court suggested that a purely pastoral counseling relationship may not be "fiduciary" in nature, this was not the case when a pastor holds himself out as a marriage counselor and is sought out in that capacity by church members and others.

Key point. Ministers who engage in sexual contact with a counselee may be guilty of a number of "intentional wrongs" including battery, breach of a fiduciary duty, and intentional infliction of emotional distress. Generally, intentional wrongs are not covered under a church's liability insurance policy, and so a minister who commits such acts may find that he must pay for his own attorney and any portion of a judgment or settlement attributable to his conduct. Further, such acts constitute a criminal offense in several states.

Example. Rev. K is senior pastor at his church. He is not a licensed psychologist or counselor, but he does counsel with church members and occasionally with non—members. He is often sought out for marriage counseling. All of his counseling is based on scriptural rather than secular principles. Rev. K is sued for engaging in sexual misconduct with a counselee. Based on the case addressed in this article: (1) Rev. K would not be liable on the basis of clergy malpractice. (2) He would not be liable for malpractice as a marriage counselor since he did not hold himself out as a marriage counselor. (3) He would not be liable as a secular counselor since he never held himself out as a practitioner of secular counseling. (4) He would not be liable for a breach of his fiduciary duties since no such duty arises in the context of pastoral counseling based solely on scriptural principles. (5) He may be liable for a number of "intentional wrongs" including battery and intentional infliction of emotional distress.

Example. Same facts as the previous example, except that Rev. K represents himself to be a marriage counselor based on both training and experience. Based on the case addressed in this article: (1) Rev. K would not be liable on the basis of clergy malpractice. (2) He may be liable for malpractice by a marriage counselor since he held himself out as a marriage counselor. (3) He would not be liable as a secular counselor since he never held himself out as a practitioner of secular counseling. (4) He may be liable for a breach of his fiduciary duties. (5) He may be liable for a number of "intentional wrongs" including battery and intentional infliction of emotional distress.

Example. Same facts as the first example, except that Rev. K uses mostly secular principles in his counseling, though he occasionally refers to the Bible. Based on the case addressed in this article: (1) Rev. K would not be liable on the basis of clergy malpractice. (2) He may be liable for malpractice as a marriage counselor since his counseling is "essentially secular" despite occasional references to the Bible. (3) He would not be liable as a secular counselor, since he never held himself out as a practitioner of secular counseling. (4) He may be liable for a breach of his fiduciary duties. (5) He may be liable for a number of "intentional wrongs" including battery and intentional infliction of emotional distress.

Example. N is a licensed counselor who is hired by a church to provide counseling to members. He is not a minister. While he occasionally refers to the Bible, his counseling is almost entirely based on secular principles. He engages in inappropriate sexual contact with a female counselee. N can be sued for malpractice as a secular counselor. He also may be liable for a breach of his fiduciary duties and a number of "intentional wrongs" including battery and intentional infliction of emotional distress.

2. Betraying confidences. Church leaders should pay special attention to the court's conclusion that "betraying confidences" obtained in a "relation of trust" (such as a counseling relationship) is a violation of the counselor's fiduciary duties. It is common for ministers to receive confidential information in the course of counseling. This case illustrates the liability that may be incurred in disclosing such information without authorization.

Example. A church employee confesses to her minister that she embezzled church funds. The minister shares this information with the church board without the woman's permission. The minister may be legally responsible for this unauthorized disclosure on the basis of a breach of his fiduciary duties. This assumes that he was in a fiduciary relationship with the woman when he counseled with her. Note that some courts have ruled that the relationship between a minister and counselee is fiduciary in nature, but others have disagreed. In the case addressed in this article, the court ruled that the relationship between a minister and two counselees was fiduciary in nature because he engaged in marital counseling that was essentially secular in nature.

Some courts have concluded that the relationship between a minister and counselee is fiduciary in nature. An example is a 1993 ruling by the Colorado Supreme Court. Moses v. Diocese of Colorado, 863 P.2d 310 (Colo. 1993). In the Moses case, the court acknowledged that the clergy—parishioner relationship "is not necessarily a fiduciary relationship." However, the clergy—parishioner relationship often involves "the type of interaction that creates trust and reliance" and in some cases will constitute a fiduciary relationship.

In summary, ministers who obtain confidential information during counseling sessions need to recognize that they may be deemed to be in a fiduciary relationship with their counselees, and that they may be liable for any unauthorized disclosure of this information on the basis of a breach of their fiduciary duties.

3. Sex discrimination. One of the most important aspects of this case was the court's conclusion that the church did not commit unlawful sex discrimination when it fired the two female employees since it did not treat them any less favorably than it treated the male minister who was sexually involved with them. The court concluded:

The [women] did not … produce any evidence suggesting that they were fired because of their gender. In fact, the record shows that [the former minister], who also committed adultery, was forced to resign, and that [the church's] position against adultery was neutral with respect to sex, longstanding, and understood by both [women] at the time they engaged in sexual conduct with [the minister].

Note that the court mentioned 3 reasons why the church was not guilty of sex discrimination: (1) its policy against adultery was neutral with respect to sex; (2) the policy was longstanding; and (3) the two women understood the policy at the time they engaged in sexual relations with the minister. What about your church? Do you have a policy against extramarital sexual relations by employees? If so, does it meet these conditions? Is it neutral with respect to sex, meaning that it treats men and women equally? Is it a longstanding policy? This is not necessarily a requirement, but it does tend to support the legitimacy of a policy. And, are all employees aware of your policy? If so, how was it communicated to them and could you prove this?

Key point. Churches can discriminate against employees on the basis of religion, but they must be able to demonstrate that religion is not a pretext for discriminating against a protected group of workers. If the church had dismissed the women but not the minister, the religious exemption would not apply.

Example. Rev. B is an associate minister at a church. He has an affair with a female church employee, and the church decides to dismiss the female for her violation of the church's teachings against extramarital sexual relations. The church board decides to retain Rev. B, but warns him that any recurrence of such behavior in the future could result in his dismissal. Assuming that the church is subject to Title VII of the Civil Rights Act of 1964 (15 or more employees, and engaged in interstate commerce), it has committed unlawful sex discrimination by treating a female employee less favorably than a male employee who were both guilty of the same misconduct.

Example. In 1995 a church dismisses a female employee because she was pregnant but unmarried. It based this action on its doctrinal opposition to extramarital sexual relations. In 1998, the church board learns that a married male employee has had a sexual relationship with another woman. It warns him to discontinue the relationship, but does not dismiss him. Assuming that the church is subject to Title VII of the Civil Rights Act of 1964 (15 or more employees, and engaged in interstate commerce), it has committed unlawful sex discrimination by treating a female employee less favorably than a male employee who were both guilty of the same misconduct.

Example. Over the past 20 years, a church has dismissed 3 employees for extramarital sexual relations-two female and one male. The church board was not aware of any other cases of extramarital sexual relations by employees. In 1998 the church dismisses a female employee for extramarital sexual relations. She claims that the church has committed unlawful sex discrimination because it has dismissed 3 women but only 1 man. She will lose-so long as the church can demonstrate that it was aware of only these 4 cases. If the church treats all cases in the same manner, it cannot be guilty of sex discrimination-even if more women are dismissed than men.

Example. Same facts as the previous example, except that the female employee claims she was never informed about the church's policy against extramarital sexual relations. Church leaders acknowledge that the "policy" was never put in writing. They insist that it was so "obvious" that the church would not tolerate such behavior that they did not think that it was necessary to address it in writing. The church may be liable for sex discrimination. In the case addressed in this article the court emphasized the importance of communicating such a policy to employees. If they are not aware of it, how can they be bound by it? It is risky to make assumptions that employees will be aware of the church's unwritten policies and expectations. Churches should reduce such policies to writing, and communicate them with all employees. Ideally, all employees should sign a written form acknowledging their awareness of the policy and their agreement to be bound by it.

4. Sexual harassment in employment. The court's decision provides an excellent overview of the law of sexual harassment. Here are the key points to remember:

• Title VII. Sexual harassment is a form of sex discrimination prohibited by Title VII of the Civil Rights Act of 1964. Only churches with 15 or more employees, and that are engaged in interstate commerce, are subject to Title VII.

• State law. Sexual harassment is a form of sex discrimination prohibited by many state civil rights laws. It is much more likely that such laws will apply to churches, since they often apply to employers with fewer than 15 employees. In addition, there is no interstate commerce requirement.

• Two kinds of sexual harassment. There are two kinds of sexual harassment-"hostile environment" and "quid pro quo." Quid pro quo harassment refers to conditioning employment opportunities on submission to a sexual or social relationship. Hostile environment sexual harassment refers to the creation of an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature.

• Intimidating, hostile, or offensive behavior required. Hostile environment sexual harassment requires more than inappropriate behavior. The behavior must be "intimidating, hostile, or offensive." The court concluded that this test was not met, despite the women's claim that the former minister had offended a few other women by complimenting them on their appearances and hugging them.

• Employer liability. Guidelines published by the EEOC specify:

[A]n employer … is responsible for its acts and those of its agents and supervisory employees with respect to sexual harassment regardless of whether the specific acts complained of were authorized or even forbidden by the employer and regardless of whether the employer knew or should have known of their occurrence. The [EEOC] will examine the circumstances of the particular employment relationship and the job functions performed by the individual in determining whether an individual acts in either a supervisory or agency capacity.

With respect to conduct between fellow employees, an employer is responsible for acts of sexual harassment in the workplace where the employer (or its agents or supervisory employees) knows or should have known of the conduct, unless it can show that it took immediate and appropriate corrective action.

If the former minister was the church's agent or was a "supervisory employee," the church could have been responsible for his acts of sexual harassment whether or not it knew or should have known they were occurring-even if they were strictly forbidden by the church's policies. It is possible if not likely that a minister of education would be deemed an agent or supervisory employee.

Surprisingly, the federal appeals court was not aware of this rule, and mistakenly assumed that the church could not be liable for the former minister's sexual harassment unless it "knew or should have known" of his behavior.

• Mild criticism not enough. Quid pro quo sexual harassment requires an employee to prove that the harassment affected the compensation, terms, conditions, or privileges of employment, and that acceptance or rejection of the harassment was a condition to the receipt of a job benefit or the cause of a tangible job detriment. The court concluded that the two women failed to meet this requirement: "[But the women's] own testimony-that they were subjected to mild criticism of their work and told that they would not be promoted to positions they knew did not exist-indicates that their jobs were not tangibly and detrimentally affected by their decisions to end their sexual relationships with [the minister] …. Further, there is no objective evidence in the record supporting the [women's] claims that they engaged in sex with [the minister] under an implied threat of discharge if they did not."

5. Ratification. The court acknowledged that the doctrine of ratification "imposes liability on an employer when that employer adopts, confirms, or fails to repudiate the unlawful acts of an employee of which the employer is aware." This is an important observation, for it illustrates that churches can be legally responsible for injuries resulting from their failure to repudiate the unlawful or harmful acts of an employee or volunteer. The court concluded that the church could not be responsible for the former minister's actions on the basis of ratification since it was not aware that he was engaging in counseling and had no evidence of wrongful behavior. On the other hand, the result would have been different had church leaders been aware of the counseling and of wrongful behavior.

Example. Several parents complain to church board members that a youth pastor is engaging in inappropriate contact with minors. The board members do nothing. Over the next few months, the youth pastor molests another minor. The church can be liable for the youth pastor's wrongdoing on the basis of ratification since church leaders were made aware of the pastor's actions but did not respond.

6. Negligent retention. Churches can be legally responsible for retaining a volunteer or employee after receiving information indicating that this person poses a risk of harm to others. However, the two women failed to prove that the church was guilty of negligent retention since they did not establish that the church "knew or should have known that [the former minister's] conduct as a supervisor or counselor presented an unreasonable risk of harm to others." In addition, the court reached the perfectly logical conclusion that a church cannot be liable for negligently retaining a minister who commits adultery with two female employees if the employees themselves, who worked next to each other in the church office, were not aware of the other's relations with the minister. This will be a useful precedent to other churches that are accused, in hindsight, of negligently retaining a minister.

7. The church's lack of knowledge. The court concluded that the church was not aware that the minister of education was engaging in unauthorized marital counseling, despite the fact that (1) on one occasion an associate minister of the church walked into his office and found him alone with one of the two female employees who later filed the lawsuit; (2) the two female employees provided several examples of other women who "felt uncomfortable" around the dismissed minister; and (3) the senior pastor told the minister of education that his car was seen parked outside the home of one of the two female employees.

Key point. Had the church known that the minister was violating church policy by engaging in unauthorized counseling, the court would have found it liable for the minister's wrongful acts on several grounds. This illustrates a critical point-churches that have adopted policies must be sure those policies are being followed. A failure to abide by stated policies can expose a church to significant legal risks. Church leaders should periodically review policies, and assess whether or not they are being followed. If they are not, efforts should be made to immediately begin enforcing them. If this is no longer possible with respect to a particular policy, it should be abandoned.

8. The "what if's?" The church in this case handled matters very well. Consider the following: (1) it thoroughly screened the minister of education before hiring him; (2) church policy prohibited the minister from engaging in counseling; (3) church leaders had no knowledge that the minister of education was engaging in unauthorized counseling or in wrongful conduct; (4) when confronted by the two women with allegations of wrongdoing, the church immediately launched an investigation resulting in a paid leave of absence for the women and a forced resignation of the minister; and (5) the church offered comparable "severance packages" to the two women and the minister, thereby avoiding liability for sex discrimination.

What if any of these factors had not been present? What if the church had not screened the minister when he was hired? What if the church was aware of unauthorized counseling by the minister of education? What if the church was aware of the minister's wrongful acts but took no action against him, or treated the women less favorably than the minister? In any of these situations, the church would have faced potentially significant liability for the minister's wrongful acts.

This case illustrates how a church can meaningfully reduce its exposure to legal risk by how it handles employment decisions. Church leaders should ask themselves this question-if a woman in our church made similar allegations against our minister, would we be as successful in avoiding liability? Or, would we be vulnerable? This case will provide church leaders with helpful guidance in reducing exposure to legal risk.

Sanders v. Casa View Baptist Church, 1998 WL 27291 (5[th] Cir. 1998)

Legal Developments

Recent Developments in Federal Appeals Court Regarding Freedom of Religion

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax1998-05-01

Freedom of Religion

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

A federal appeals court ruled that a public high school that allowed several student groups to meet on school premises during the lunch period could not deny the same opportunity to a student group that wanted to meet for religious purposes. All students at the school had the same lunch period each day, and so no classes were conducted during the lunch period. School officials permitted several student groups to meet during the lunch period, including a surfing club, conservation club, and various ethnic organizations. A student asked a school official for permission to organize a religious club that would meet during the lunch period in an empty classroom. When permission was denied, the student sued the school. A federal district court dismissed the lawsuit, and the student appealed the case to a federal appeals court. The appeals court ruled in favor of the student. It began its opinion quoting the federal Equal Access Act:

It shall be unlawful for any public secondary school which receives federal financial assistance and which has a limited open forum to deny equal access or a fair opportunity to, or discriminate against, any students who wish to conduct a meeting within that limited open forum on the basis of the religious, political, philosophical, or other content of the speech at such meetings.

The Act states that a “limited open forum” exists “whenever a school grants an … opportunity for one or more noncurriculum related student groups to meet on school premises during noninstructional time.” The Act defines “noninstructional time” as “time set aside by the school before actual classroom instruction begins or after classroom instruction ends.” The school insisted that the lunch period was not “noninstructional time” since it was in the middle of the school day rather than before classes began or after they ended. The court disagreed, pointing out that the school had “set aside” the lunch period as noninstructional time after morning classes ended and before afternoon classes began. The court noted that in 1990 the United States Supreme Court ruled that the Equal Access Act reflected a “broad legislative purpose” and must be given a “broad meaning.”

The court cautioned that the religious club’s right to meet “is defined by the extent to which other groups were permitted to meet.” It continued:

Our decision today does not necessarily preclude school districts from disallowing religious groups from using school premises for meetings during lunch periods. The Act is about equal access. If a school district wanted to prohibit religious groups from meeting during lunch, the school need only make its prohibition neutral, so that all noncurriculum—related groups are barred from meeting at lunch.

The court summarily rejected the school’s claim that the first amendment’s nonestablishment of religion clause prohibited public school property from being used for religious purposes. It noted that the Supreme Court rejected this argument in a 1990 ruling. Ceniceros v. Board of Trustees, 106 F.3d 878 (9th Cir. 1997). [Use of Public Property for Religious Purposes]

Legal Developments

Recent Developments in the Supreme Court Regarding Employment Practices

The United States Supreme Court ruled that a church-operated camp was engaged in “commerce.”

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax1998-03-01

Employment Practices

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

• Key point. Many federal employment and civil rights laws apply to employers that are engaged in interstate commerce. Churches and other religious organizations may satisfy this test in some situations.

The United States Supreme Court ruled that a church—operated camp was engaged in “commerce.” A Maine law exempted church camps from property taxes so long as most of their visitors were from within the state. A church camp that attracted most of its visitors from out—of—state was assessed property taxes. The camp challenged the tax, claiming that it violated the “commerce clause” of the federal constitution by discriminating against camps solely on the basis of interstate travel. The Supreme Court agreed. The Court ruled that a religious camp is engaged in interstate commerce:

Even though [the camp] does not make a profit, it is unquestionably engaged in commerce, not only as a purchaser … but also as a provider of goods and services. It markets those services, together with an opportunity to enjoy the natural beauty of an inland lake in Maine, to campers who are attracted to its facility from all parts of the Nation. The record reflects that [the camp] “advertises for campers in [out—of—state] periodicals … and sends its executive director annually on camper recruiting trips across the country.” [The camp’s] efforts are quite successful; 95 percent of its campers come from out of state. The attendance of these campers necessarily generates the transportation of persons across state lines that has long been recognized as a form of “commerce.” Summer camps are comparable to hotels that offer their guests goods and services that are consumed locally.

The Court also ruled that the “commerce clause” applies to nonprofit organizations:

Our cases have frequently applied laws regulating commerce to not—for—profit institutions …. The nonprofit character of an enterprise does not place it beyond the purview of federal laws regulating commerce. We have already held that the Commerce Clause is applicable to activities undertaken without the intention of earning a profit …. We see no reason why the nonprofit character of an enterprise should exclude it from the coverage of either the affirmative or the negative aspect of the Commerce Clause. There are a number of lines of commerce in which both for—profit and nonprofit entities participate. Some educational institutions, some hospitals, some child—care facilities, some research organizations, and some museums generate significant earnings; and some are operated by not—for—profit corporations. A nonprofit entity is ordinarily understood to differ from a for—profit corporation principally because it “is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees.” Nothing intrinsic to the nature of nonprofit entities prevents them from engaging in interstate commerce. Summer camps may be operated as for—profit or nonprofit entities; nonprofits may depend-as here-in substantial part on fees charged for their services. Whether operated on a for—profit or nonprofit basis, they purchase goods and services in competitive markets, offer their facilities to a variety of patrons, and derive revenues from a variety of sources, some of which are local and some out of State.

For purposes of Commerce Clause analysis, any categorical distinction between the activities of profit—making enterprises and not—for—profit entities is therefore wholly illusory. Entities in both categories are major participants in interstate markets. And, although the summer camp involved in this case may have a relatively insignificant impact on the commerce of the entire Nation, the interstate commercial activities of nonprofit entities as a class are unquestionably significant …. We are informed … that “the nonprofit sector spends over $389 billion each year in operating expenses-approximately seven percent of the gross national product.” In recent years, nonprofits have employed approximately seven percent of the Nation’s paid workers, roughly 9.3 million people in 1990 …. Nonprofit participation in these sectors [nursing homes and child care] is substantial. Nationally, nonprofit nursing homes had estimated revenues of $18 billion in 1994. These entities compete with a sizeable for—profit nursing home sector, which had revenues of approximately $40 billion in 1994. Similarly, the $5 billion nonprofit market in child day care services competes with an $11 billion for—profit industry. Nonprofit hospitals and health maintenance organizations also receive an exemption from Maine’s property tax. While operating as nonprofit entities, their activities are serious business …. Nonprofit hospitals had national revenues of roughly $305 billion in 1994, considerably more than the $34 billion in revenues collected by hospitals operated on a for—profit basis …. If there is need for a special exception for nonprofits, Congress not only has the power to create it, but also is in a far better position than we to determine its dimensions …. The states are, of course, free to provide generally applicable nondiscriminatory tax exemptions without running afoul of the Commerce Clause.

Application. The importance of this case is the Court’s broad definition of “commerce” in the context of nonprofit organizations. As a result of this decision, it is more likely that churches and other religious organizations will be deemed to be engaged in “commerce.” The significance of such a conclusion is that many federal employment and civil rights laws apply to organizations that are engaged in commerce. Some of these laws were summarized in a table in a feature article in this newsletter. It is now more likely that churches and other religious organizations will be deemed to be subject to such laws. Camps Newfound/Owatonna v. Town of Harrison, 117 S. Ct. 1590 (1997). [Labor Laws, The Civil Rights Act of 1964, Americans with Disabilities Act]

Legal Developments

Recent Developments in Tax Court Regarding Income Taxes for Clergy

The United States Tax Court ruled that a Methodist minister was an employee for federal income tax reporting purposes.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Radde v. Commissioner, T.C. Memo. 1997—490 (1997)

Key point. Some ministers are employees for federal income tax reporting purposes.

The United States Tax Court ruled that a Methodist minister was an employee for federal income tax reporting purposes. An ordained minister of the United Methodist Church reported his income taxes as a self—employed worker rather than as an employee. The IRS audited him and reclassified him as an employee. The minister appealed to the Tax Court, which relied on a 1994 case finding that a Methodist minister was an employee. Weber v. Commissioner, 103 T.C. 378 (1994), affirmed 60 F.3d 1104 (4th Cir. 1995). The Court concluded that the minister had failed to distinguish his case from the Weber case. The Tax Court made the following additional observations:

(1) Some ministers are self—employed. The Court conceded that "for federal income tax purposes, an ordained minister of a church may be treated as an employee or as a self—employed individual."

(2) Business expenses. Whether a minister is an employee or self—employed for income tax reporting purposes "affects the manner and extent to which related expenses may be deducted on a minister's income tax return. If a minister is treated as an employee of the church, the minister's expenses will be deductible only on Schedule A of the income tax return subject to a 2—percent floor. If a minister is treated as a self—employed individual, the minister's expenses will be fully deductible as business expenses on Schedule C of the income tax return."

(3) Self—employment tax. "Whether a minister, for federal income tax purposes, is treated as an employee or as a self—employed individual has no effect upon a minister's self—employment tax liability because … a minister's income is treated as self—employment income."

(4) Pre—Weber audit years. The Court rejected the minister's argument that the Weber case should not apply because it was decided after the tax years for which he was being audited.

(5) Parsonage expenses reimbursed by the church. During one year under examination, the minister lived in a church—owned parsonage. In addition, his church designated $2,167 of his compensation for utilities and other household expenses of the parsonage. The Court noted that the fair rental value of the parsonage represented taxable income for self—employment (social security) tax purposes. The Court also ruled that the minister had to pay self—employment tax on $2,167 that he received for utilities and household expenses. It rejected the minister's argument that such expenses were already "incorporated" into the parsonage's fair rental value, and so they had to be "deducted" from his taxable income in computing the self—employment tax. The Court noted that the minister "has not proven that the stipulated fair rental value of the parsonage already includes amounts [he] received in cash relating to the utility and other household expenses of the parsonages." The lesson is clear-ministers who live in a church—owned parsonage pay self—employment tax on the fair rental value of the parsonage and any amounts paid to them for utilities or other household expenses.

Application. The issue of whether ministers are employees or self—employed for income tax reporting purposes is addressed in chapter 2 of Richard Hammar's Church and Clergy Tax Guide.

Legal Developments

Good Intentions No Defense to Embezzlement

So says the Tax Court.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Howard v. Commissioner, T.C. Memo. 1997-473 (1997)

Background. Sometimes a person who embezzles funds will issue a promissory note in an attempt to "excuse" the misdeed. After all, since a promissory note represents a legal obligation to repay the funds, how can embezzlement have occurred? The United States Tax Court addressed this question in a recent ruling.

Facts. An attorney befriended a woman and her three daughters who lived in his neighborhood. The girls called the attorney "Uncle Bill." The attorney drafted the mother's will, which left her estate to her daughters and named the attorney as executor of the estate. A few years later, the mother died in a house fire, leaving an estate valued at $518,000. The attorney was appointed executor and opened a "trust account" at a local bank. He deposited into this account the proceeds of the sale of estate assets. He was the sole authorized signatory on this account. The attorney told the daughters that the estate would be processed in about six months to a year, but that in the meantime they could get cash advances as necessary for important expenses. During the next year, the daughters occasionally requested and received cash advances from the attorney. But about a year after the mother's death, the attorney informed the daughters that the probate judge had "frozen" the assets of the estate, and that they could not get any more money until the estate was settled.

In fact, the attorney was writing large checks from the trust account for his personal benefit, spending the bulk of the daughters' inheritance. Among other things, he used $132,000 to pay down the mortgage loan on his personal residence, $47,000 to pay his personal tax obligations, and $25,000 to settle a lawsuit. He also withdrew funds for the construction of a boathouse and jacuzzi, and for the payment of the salaries for himself and his secretaries. All these expenditures were made without the knowledge or consent of the daughters.

The attorney did execute 28 unsecured promissory notes in which he agreed to pay back to the trust account all of the funds he had withdrawn for his personal purposes, at a rate of 10 percent, when the estate was closed. The daughters were unaware of these notes.

The attorney's scheme was finally uncovered, and he was convicted of grand theft and sentenced to prison. He was also ordered to pay restitution to the daughters in the amount of $516,000 with interest. The attorney was able to pay back only $230 per month in restitution—which was not enough to pay back any of the principal. The attorney also was sued in a civil lawsuit and was ordered to pay the daughters far more than he had embezzled. He was later disbarred.

The IRS became interested in the case and claimed that the attorney owed a substantial amount of back taxes plus penalties as a result of his failure to report the embezzled funds as taxable income. The attorney appealed to the Tax Court, insisting that his issuance of the promissory notes proved that he had received nontaxable loans rather than taxable income.

The court's ruling. The Tax Court ruled that the attorney had embezzled the funds and was liable for back taxes on the unreported income. The Court began its opinion by noting that "it is well established that [taxable income] includes income earned from illegal activity, such as the proceeds of embezzlement." The Court noted that whether the withdrawals were loans "depends ultimately on whether the beneficiaries of the estate were aware of and consented to the distributions at the times they were made," since in order for a distribution of estate funds to be a loan there must be evidence of the beneficiaries' consent. In other words, for the withdrawals to be treated as nontaxable loans, the attorney had to prove "that the beneficiaries of the estate not only were aware of his withdrawals of estate funds, but also consented to them." Since the daughters were unaware of these transactions, the withdrawals could not be treated as loans and had to be regarded as taxable income.

The Court concluded: "[The attorney's] engaging in the solitary activity of writing up promissory notes did not create loans between him and the estate. The promissory notes evidence no more than an intention to repay the amounts [he] withdrew from the estate. Such an intention, even if there was one, cannot transform misappropriations into loans."

What this means for churches

The following two lessons should be understood by any church employee or volunteer who handles church funds:

1. Intent to repay is no defense. Liability for embezzling church funds cannot be avoided by a well-intentioned desire to pay back the funds in the future—even if that intention was reflected in a promissory note that was never disclosed to church leaders. Sometimes church workers having access to church funds are tempted to "temporarily" borrow some of those funds. Because of their conviction that they will return every penny to the church, they often do not view their behavior as improper. Some go so far as to secretly sign a promissory note agreeing to pay back all that they have "borrowed." Good intentions, even if backed up with an undisclosed promissory note, are no defense to embezzlement.

2. Criminal, civil, and tax liability. This case illustrates the three different kinds of liability faced by embezzlers. First, they face criminal liability, which may include prison sentences and court-ordered restitution. Second, they face the threat of a civil lawsuit seeking monetary damages. The damages awarded to the daughters in this case were far more than the amount actually embezzled. Third, they face tax liability, since the IRS will claim that the embezzled funds represent taxable income that was not reported on a tax return.

Legal Developments

Recent Developments in Federal Court Regarding Ascending Liability

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax1998-01-01

Ascending Liability

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

• Key point. Denominational agencies and churches are not automatically responsible for the acts and obligations of “subsidiary” or affiliated organizations. There must be a legal basis for imputing liability to the “parent” organization, and this is a very difficult task.

A federal appeals court has provided a useful list of factors to consider in determining whether or not a “parent” corporation is legally responsible for the liabilities and obligations of a “subsidiary” or affiliate. While this case involved a parent and subsidiary business corporations, the court’s conclusion will be directly relevant to churches and denominational agencies that are sued as a result of liabilities of subsidiary or affiliated corporations. Here is the list of 12 factors to be considered:

(1) the parent corporation owns all or a majority of the stock of the subsidiary;

(2) the corporations have common directors or officers;

(3) the parent and the subsidiary have common business departments;

(4) the parent and the subsidiary file consolidated financial statements and tax returns;

(5) the parent corporation finances the subsidiary;

(6) the parent corporation caused the incorporation of the subsidiary;

(7) the subsidiary has grossly inadequate capital;

(8) the parent corporation pays the salaries or expenses or losses of the subsidiary;

(9) the subsidiary has substantially no business except with the parent corporation;

(10) the parent uses the subsidiary’s property as its own;

(11) The daily operations of the two corporations are not kept separate;

(12) the subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings.

Application. Churches and denominational agencies are routinely sued as a result of the actions or obligations of affiliated organizations. For example, a denomination is sued as a result of the misconduct of an employee of an affiliated church. Or, a church is sued as a result of the actions of a teacher employed by an affiliated school. It is important to recognize that “ascending liability” in such cases is not automatic. The person bringing the lawsuit must establish a legal basis for imposing liability on the “parent” organization. The 12 factors mentioned in this case demonstrate that finding a “parent” organization legally responsible for the acts or liabilities of a “subsidiary” can be very difficult. This will be a useful precedent for denominational agencies and churches to cite when they are sued as a result of the liabilities of an affiliated organization. Gundle Lining Construction Corp. v. Adams County Asphalt, Inc., 85 F.3d 201 (5th Cir. 1996). [ Denominational Liability]

Legal Developments

Recent Developments in Federal Court Regarding Clergy Removal

A federal appeals court ruled that it had no authority to resolve a “wrongful termination” claim brought by a minister against a religious employer.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax1998-01-01

Clergy-Removal

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

• Key point. The dismissal of a minister is an ecclesiastical decision, and therefore the civil courts are barred by the first amendment from resolving claims by dismissed ministers that their dismissals were wrongful.

A federal appeals court ruled that it had no authority to resolve a “wrongful termination” claim brought by a minister against a religious employer. In 1991 an outreach program supported by several denominations “called” an ordained United Church of Christ minister to be its executive director. The new director was informed that his position would be an extension of his ministry with the United Church of Christ, and a portion of his compensation was designated as a housing allowance. Within a few years the program began to experience serious financial difficulties. In 1995, the Presbyterian Church, one of the program’s main financial supporters, decided that because of the financial crisis it would not allocate further funds to the program for 1996. It also conditioned fulfillment of its 1995 commitment on the program conducting a “reduction in force” and relocating to other facilities. In response to the Presbyterian Church’s withdrawal of support, the program’s board of directors promptly initiated a reduction in force, intending to continue the program’s ministry with a volunteer staff. In its letter of termination to its director the board stated, in part:

Your termination is based solely upon the financial condition of [the program] which has led the board of directors to enact a complete reduction in force. In this termination, there is absolutely no reflection on the quality of your work …. I would again express to you my admiration and appreciation of your work, my regret for the situation that makes this reduction necessary, and my gratitude for the helpfulness which you are continuing to give to [the program].

Several months later, the former director sued the board of directors and four contributing religious organizations, challenging their expressed reason for ending the program and terminating his employment. He complained that the defendants (1) interfered with his contract; (2) intentionally inflicted on him emotional distress; (3) breached a covenant of good faith and fair dealing; (4) interfered with his prospective advantage; (5) wrongfully terminated him; and (6) that the religious organizations breached their pledge to contribute to the program on a yearly basis. The trial court dismissed the lawsuit on the ground that “by reason of the first amendment, a civil court has no jurisdiction over ecclesiastical decisions by churches as to how they are going to expend their funds.” The former director appealed.

A federal appeals court affirmed the trial court’s ruling. It began its opinion by noting that the “civil courts have long taken care not to intermeddle in internal ecclesiastical disputes” and that “it has thus become established that the decisions of religious entities about the appointment and removal of ministers and persons in other positions of similar theological significance are beyond the [ability] of civil courts.” It quoted from a 1976 Supreme Court decision holding that the civil courts must defer to the decisions of religious organizations “on matters of discipline, faith, internal organization, or ecclesiastical rule, custom or law.” Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976). Was the dispute between the former director and the four national churches an ecclesiastical one about “discipline, faith, internal organization, or ecclesiastical rule, custom or law”? If so, the civil courts are without authority to resolve it. Or, was it a case in which religious organizations could be found liable in civil court for a “purely secular dispute”? The court concluded that this dispute was ecclesiastical. It observed:

At bottom, however, [the former director’s] challenge focuses on how the constituent churches spend their religious outreach funds. While it is possible that the Presbyterian Church may have harbored hostility against [the director] personally, it is also possible that the church may have been acting in good faith to fulfill its discernment of the divine will for its ministry. Resolution of such an accusation would interpose the judiciary into the Presbyterian Church’s decisions, as well as the decisions of the other constituent churches, relating to how and by whom they spread their message and specifically their decision to select their outreach ministry through the granting or withholding of funds ….

[The program] is not a secular organization with which the national constituent churches had a secular relationship. On the contrary, [it] constituted a ministry of those constituent churches, and this was understood by all persons involved. The national churches maintain that they were engaging in ministry as directed by scripture, relying on Deuteronomy 15:11; Proverbs 21:3; Isaiah 49:6, Isaiah 58:10; Amos 5:22-24; and Matthew 5:14-16, which they read to describe spreading light in the world and pursuing social justice as core Judeo—Christian values. Their claim is borne out by the charter of [the program] which provides that it is organized “to advance the jointly shared religious purposes of its members, namely, to carry out their theological imperative to increase the possibilities for peace, economic and social justice.” [The program’s] religious purpose is also borne out by [its] engagement of [the director] in its “ministry.” Indeed, their engagement letter to [him] concluded, “We hope this will be a rewarding ministry for you.” Finally, [the director] himself treated his position as a ministry. He obtained approval from his church to engage as director … as part of his ministry, and he agreed to the designation of part of his salary as a parsonage allowance for tax purposes. In summary, in carrying out his duties, [the director] worked to spread the shared religious beliefs of [the program’s] constituent members and to promote their Judeo—Christian values.

As this court has previously noted, a person is a member of a religion’s clergy “if the employee’s primary duties consist of teaching, spreading the faith, church governance, supervision of a religious order, or supervision or participation in religious ritual and worship.” Rayburn v. General Conference of Seventh—Day Adventists, 772 F.2d 1164 (4th Cir.1985) …. In light of this precedent, it follows that [the director] was serving in a religious ministry while acting as executive director of [the program].

When the Presbyterian Church decided to withhold its funds from [the program], causing the end of [the director’s] work, the Presbyterian Church, as well as the other churches, made a decision on how it would expend funds raised by the church for religious purposes, which directly related to its outreach ministry and [the director’s] status as a minister. Such a decision about the nature, extent, administration, and termination of a religious ministry falls within the ecclesiastical sphere that the first amendment protects from civil court intervention.

Application. This case illustrates the difficulty that ministers face in challenging the decisions by churches and other religious organization to dismiss them. The court’s ruling provides helpful guidance in evaluating the “ministerial status” of those ministers employed by parachurch ministries. Bell v. Presbyterian Church, ___ F.3d ___ (4th Cir. 1997). [ Termination, Judicial Resolution of Church Disputes, The Establishment Clause]

Legal Developments

Recent Developments in Federal Court Regarding Employment Practices

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax1998-01-01

Employment Practices

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

• Key point. Employment decisions having an adverse effect upon a member of a protected class are not necessarily discriminatory.

A federal court dismissed a race and sex discrimination claim brought by a former employee against a church agency on the ground that he failed to demonstrate that his dismissal was discriminatory or that the church treated white employees more favorably. A black male (the “plaintiff”) was employed by the women’s division of a denominational agency. He had received outstanding work evaluations during his employment. On one occasion he alleged that he was told to answer the phone and to tell anyone calling for the executive assistant that she was “unavailable” or in a meeting. Because the executive assistant was actually not at work on that date, the plaintiff said he did not want to lie, especially to the executive assistant’s husband who was calling repeatedly. The plaintiff claimed that he was then told to tell the husband that his wife was “not at her desk,” since that was not a lie. The plaintiff felt that this, too, was a lie and refused to answer the phone. He was then told not to answer the phone. The following day, he was not answering the phones, though he was the only support staff in the department. When asked why he was not answering the phone, he responded that he had been instructed, as a result of the prior day’s incident, not to answer the phone. Following these incidents the plaintiff wrote two memos to the human resources director (“director”) alleging that he was being sexually harassed based on these two incidents and other allegations. The director referred the matter to an attorney, who conducted an investigation. The investigation consisted of interviewing plaintiff and several of his co—employees. The attorney concluded that plaintiff’s complaints were unfounded. The attorney also recommended that the plaintiff be terminated for insubordination for refusing to answer the phone. This recommendation also was based on the interviews the attorney conducted with plaintiff’s co—workers in which he was told that the plaintiff made sexually suggestive remarks to co—workers, was loud, and that some people thought he might be violent. No documentation supporting these allegations was collected by the attorney. The plaintiff was dismissed, and he sued his employer.

The court began its opinion by noting that the plaintiff “bears the burden of establishing a prima facie case of discrimination,” meaning that he must establish that (1) he is in a protected group; (2) he satisfactorily performed the duties of his position; (3) he was subject to an adverse employment action; and (4) the adverse action occurred in circumstances giving rise to an inference of discrimination. Failure to provide some factual support for each of these elements of a “prima facie” discrimination case requires that a court dismiss it. The church argued that the plaintiff failed to establish a prima facie case of discrimination because he was not qualified for his job, and his termination did not raise an inference of discrimination. The court agreed. It observed that the plaintiff’s termination for refusing to answer the phone “was unfortunate-indeed, it may easily be characterized as unfair-[but] that alone does not suffice to raise an inference of discrimination.”

The only facts cited by the plaintiff in support of his discrimination claim were (1) the more lenient treatment of another employee who, like plaintiff, was accused of harassing female employees, and (2) that two other black employees had been fired for alleged “insubordination”. With regard to the first allegation, the court pointed out that the other employee was also a black male, “thus negating any inference of discrimination that could possibly be drawn from his disparate treatment.” With regard to the second allegation, the court noted that “the fact that two other black employees had been fired by defendants for insubordination does not raise an inference of discrimination absent some showing-however minimal-that white employees were treated differently.” The court noted that the plaintiff “failed to allege, let alone identify, any such incidents of disparate treatment that might give rise to an inference of discrimination in this case.” The court concluded, “simply put, the facts that plaintiff was male and black, without more, do not suffice to make out a prima facie case of [sex or race] discrimination ….” Jones v. General Board of Global Ministries, 1997 WL 458790 (S.D.N.Y. 1997). [ Title VII of the Civil Rights Act of 1964]

Legal Developments

School Liable for Principal’s Sexual Harassment of School Employees

Don’t ignore accusations of sexual misconduct.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Schools, Sexual Harassment

Church Law and Tax 1997-11-01

Sexual Harassment

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

• Key point. Churches may be liable for sexual harassment if they do not respond promptly and effectively to employee allegations of sexual harassment.

! A federal appeals court ruled that a church—operated school was guilty of sexual harassment as a result of its failure to address its principal’s offensive behavior with several female employees. A denominational agency operated a residential school for emotionally and physically impaired children. Over the course of several years, the principal of the school was accused on many occasions of sexual harassment by female employees. There was substantial evidence that school officials were aware of many of these complaints. In 1993, school officials launched an investigation into the sexual harassment charges. They found that there was a significant basis to the harassment complaints. The school suspended the principal for five days without pay, ordered him to submit to a psychological assessment and placed him on three months’ probation. It also invited an outside consultant to conduct several days of seminars on sexual harassment. Even after this corrective action, there were several instances of inappropriate behavior involving the principal. During this same year, the principal was given a satisfactory performance evaluation and a raise. Several female employees who had been harassed by the principal sued the denominational agency on the ground that it was legally responsible for the principal’s acts because of its failure to respond adequately to the accusations against him. The women claimed that school officials “moved slowly” in dealing with the principal because he was African—American, and they were concerned about being sued for racial discrimination. In fact, the principal threatened on numerous occasions to file a discrimination complaint with the Equal Employment Opportunity Commission. A trial court ruled in favor of the women, and awarded them $300,000 in damages.

A federal appeals court upheld this ruling. It referred to the “long—term, ostrich—like failure” by denominational and school officials to “deal forthrightly with [the principal’s] treatment of female employees.” The court observed that “the jury was entitled to conclude that [the agency] not only looked the other way for many years but that its corrective action was woefully inadequate, as demonstrated by [the principal’s] later conduct.”

Application. This case illustrates the importance dealing promptly with complaints of sexual harassment. Letting years pass without addressing complaints of harassment will only increase significantly a church’s risk of liability. The agency finally acted in 1993-by suspending the principal for five days, ordering a psychological assessment, imposing a three—month probationary period, and inviting consultants to conduct sexual harassment training. These acts may seem thorough and adequate, but the court concluded that they were not sufficient to avoid liability for sexual harassment, because (1) the complaints against the principal had occurred over so many years; (2) the principal’s acts of harassment were so pervasive; (3) the agency waited years before acting; (4) the agency’s response was insufficient, since the principal continued to engage in harassment even after he was disciplined; and (5) the principal received a satisfactory employee evaluation and a raise during the same year that he was disciplined for harassment. These are “warning signals” that church leaders should heed. Also, note that the court acknowledged that the agency had “moved slowly” in responding to the complaints against the principal out of a fear of being sued for racial discrimination. However, the court not only rejected the relevance of such a concern, but suggested that it helped prove the victims’ claims of harassment. The lesson is clear-employers should not delay responding to allegations of sexual harassment on the ground that the alleged offender is a member of a protected group. Jonasson v. Lutheran Child and Family Services, 115 F.3d 436 (7th Cir. 1997). [Title VII of the Civil Rights Act of 1964, Application of Federal Labor and Discrimination Laws to Private Schools]

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided 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. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m66 m43 m65 c0697

Legal Developments

Distribution of Copyrighted Materials

Check before distributing materials to ensure you’re not in violation of copyright law.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Copyright

Church Law and Tax 1997-11-01

Copyright

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

• Key point. One of a copyright owner’s exclusive rights is the right to publicly distribute copies of the work. A church violates this right when it distributes or makes available unauthorized copies to the public.

! A federal appeals court ruled that a church violates the copyright law when it publicly distributes an unauthorized copy of copyrighted materials. The Church of Jesus Christ of Latter—Day Saints (the “Church”) acquired a single copy of a copyrighted genealogical text and made several unauthorized copies which were distributed to the Church’s “branch libraries.” When the copyright owner learned of the Church’s actions, it demanded that further distribution be stopped immediately. The Church recalled and destroyed many of the copies that it had made. It was concerned that nine libraries continued to possess unauthorized copies, and it wrote them each a letter asking them to locate and return any offending copies. The copyright owner visited a number of libraries, and found unauthorized copies at two locations. The owner sued the Church for copyright infringement. A federal appeals court ruled that the Church might be liable for copyright infringement. It observed:

A copyright infringement is a violation of “any of the exclusive rights of the copyright owner.” One of those exclusive rights is the right “to distribute copies … of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” Generally, as permitted by what is known as the first—sale doctrine, the copyright owner’s right to distribute a copyrighted work does not prevent the owner of a lawful copy of the work from selling, renting, lending, or otherwise disposing of the lawful copy. For example, a library may lend an authorized copy of a book that it lawfully owns without violating the copyright laws. However, distributing unlawful copies of a copyrighted work does violate the copyright owner’s distribution right and, as a result, constitutes copyright infringement. In order to establish “distribution” of a copyrighted work, a party must show that an unlawful copy was disseminated “to the public.”

The court agreed with the copyright owner in this case that when a library “adds a work to its collection, lists the work in its index or catalog system, and makes the work available to the borrowing or browsing public, it has completed all the steps necessary for distribution to the public.”

Application. This case illustrates an important point-“public distribution” is one of the exclusive rights of a copyright owner. This means that no other person or organization, including a church, can publicly distribute unauthorized copies of a copyrighted work. To illustrate, a Sunday School teacher who makes unauthorized copies of a copyrighted article and distributes them to each member of her class has committed copyright infringement by violating the copyright owner’s exclusive right of public distribution. Of course, as this court noted, churches that acquire a lawful copy of a copyrighted work are free to sell, rent, or otherwise dispose of that copy. For example, a church could sell used books in its library without violating the copyright owners’ exclusive right of public distribution, because it is distributing lawfully acquired copies. This is known as the “first sale” doctrine. Hotaling v. Church of Jesus Christ of Latter—Day Saints, 118 F.3d 199 (4th Cir. 1997). [ Infringement of Copyright Law]

Legal Developments

Vocational Training Programs and the Unrelated Business Income Tax

IRS rules that this income is not subject to the UBIT.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

IRS Letter Ruling 9718034

Key point. Income generated from the sale of goods produced by a charity's vocational training program are not necessarily subject to the unrelated business income tax.

The IRS ruled that income generated by a charity from various "vocational training" programs was not subject to the unrelated business income tax (UBIT).

A charity operates a residential program for troubled boys ages 12 through 18. Children are referred to the charity by government agencies and school districts. The charity provides both academic and limited vocational training, both of which it considers essential to its goals of developing improved social skills, more meaningful interpersonal relationships, and the development of self control, honesty, and self—esteem. Staff members provide individual, group, and vocational therapy for the residents.

The charity is located on a farm which serves as a training ground for residents. It also provides residents with opportunities to learn the basics of various trades and crafts, including automotive and heavy equipment repair, printing, and upholstery. Vocational training is secondary to the primary goal of social reintegration into the community. Most residents have never been employed.

In order to give residents retail sales experience and other work—related experiences, the organization proposes to erect a shed alongside a highway which crosses its property, and to conduct in that facility the following three activities using residents who would be paid minimal wages and who voluntarily agree to participate: (1) sales of produce from farming activities; (2) sales of furniture built by students; and (3) operation of a golf driving range. Each activity will charge prices competitive with for—profit businesses in the area, although anticipated profits will be minimal. The primary goal of these sales operations is to give residents the experience of operating a business, to learn general business principles and judgment, and to enhance their social skills in a public environment. The charity will employ no special personnel for this program.

The charity asked the IRS if the earnings from these activities would be subject to the unrelated business income tax (UBIT). The IRS said no. It noted that an "unrelated trade or business" is any trade or business of an exempt organization that is not substantially related (aside from the need of such organization for income) to the organization's exempt functions. The IRS noted that the income tax regulations specify that a trade or business is related to exempt purposes when the conduct of the business activity has a direct and substantial relationship to the achievement of an exempt purpose, and contributes importantly to the accomplishment of those purposes.

The IRS concluded that the charity's proposed activities "are being undertaken to further the goals of the existing programs for residents, and not for the production of income. The proposed activities are a natural extension of existing programs for residents. The scale of the operations is no larger than is necessary for the organization to accomplish its charitable purposes. This is evidenced by the fact that the individuals providing labor for these facilities are residents who are employed as part of your rehabilitation program, and your staff. Supervision will be provided by members of your staff who will not receive additional pay for performing this duty." Therefore, income generated from the sale of products is not subject to UBIT.

Legal Developments

Freedom of Religion at Work

Restrictions of employees’ religious speech may violate the First Amendment.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Freedom of Religion

Church Law and Tax 1997-09-01

Freedom of Religion

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

• Key point. Broad restrictions on employees’ religious speech may violate the first amendment guaranty of religious freedom.

A federal appeals court ruled that a government agency violated the constitutional rights of employees when it adopted broad bans on religious speech and displays in the workplace. An employee of the State of California began using the acronym “SOTLJ” after his name on documents he prepared in the course of his work. The acronym stood for “Servant of the Lord Jesus Christ,” and was used because the employee felt it was important to give credit to God for the work he performed. The state suspended the employee, and then issued orders prohibiting him from (1) using any religious “names, acronyms, or symbols” in the workplace; (2) initiating any religious discussions during the work day; and (3) displaying any religious books or pictures outside of his immediate work space. A few days later these restrictions were imposed on all employees. The employee challenged these restrictions, and a federal appeals court ruled that the state’s policy was unconstitutional. The state defended its ban on religious discussions by claiming it was necessary to avoid an establishment of religion. The court disagreed: “Certainly nothing [the employee] says about religion in his office discourse is likely to cause a reasonable person to believe that the state is speaking or supports his views. Allowing employees … to discuss whatever subject they choose at work, be it religion or football, may incidentally benefit religion (or football), but it would not give the appearance of a state endorsement.” The court also struck down the policy forbidding the display of religious materials outside of an employee’s cubicle:

We conclude that it is not reasonable to allow employees to post materials around the office on all sorts of subjects, and forbid only the posting of religious information and materials. The challenged ban not only prevents employees from posting non—controversial information that might interest some or all employees-such as bulletins announcing the time and location of church services, invitations to children of employees to join a church youth group, and newspaper clippings praising Billy Graham, Mother Theresa or Cardinal Bernadin-it would also ban religious messages on controversial subjects such as abortion, abstinence of various types, family values, and the v—chip. Material that addresses controversial topics from a non—religious viewpoint would, however, be permissible, as would signs inviting employees to motorcycle rallies, swap meets, x—rated movies, beer busts, burlesque shows, massage parlors or meetings of the local militia. The prohibition is unreasonable not only because it bans a vast amount of material without legitimate justification but also because its sole target is religious speech.

The state decided, on the basis of these rulings, to revoke its policy banning the use of religious names and acronyms in the workplace. Tucker v. State of California, 97 F.3d 1204 (9th Cir. 1996). [Display of Religious Symbols on Public Property]

Legal Developments

Helping a Church Member Pay Back Embezzled Funds

Lending a hand can lead to significant tax issues.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

United States v. Hairston, 96 F.3d 102 (4th Cir. 1996)

Assume that a member of your church is accused of embezzling money from her secular job, and that your church assists her in paying back the embezzled funds. Such assistance is generous and understandable. However, it may have unforeseen legal and tax consequences, as illustrated by a recent federal appeals court ruling.

Reduction in sentencing. A church member embezzled more than $600,000 from a bank where she was employed as a branch manager. She spent all the embezzled funds on personal items and church-related activities. She was indicted for embezzlement, and pled guilty. Through the assistance of friends and her church, she was able to pay back $250,000 of embezzled funds. The trial court gave her a reduced sentence because of this restitution, but a federal appeals court ruled that this was improper. The court agreed that restitution can result in a reduced sentence if it "indicates an extraordinary acceptance of responsibility." Such was not the case here, however, since: (1) less than half of the embezzled funds were returned; (2) most of the returned funds came from the woman's friend's and from her church; and (3) the woman did not make any restitution until after she had been criminally indicted, in the hope of receiving a reduced sentence.

Tax issues. There are a number of tax issues associated with the church's assistance in paying back some of the embezzled funds. These include: (1) Did individual members contribute funds for this purpose to their church? If so, such contributions would not be deductible since they were earmarked for the benefit of a private individual and did not further the church's exempt purposes. (2) Since the church's participation in paying back funds embezzled by a church member did not further its exempt purposes, the church's tax-exempt status was jeopardized. (3) The church's payments may have resulted in taxable income to the embezzler, since the church was relieving her of a legal obligation. Of course, friends could make tax-free gifts directly to the embezzler to assist her in paying back the embezzled funds, but such gifts would not be deductible by the donors.

Legal Developments

Government Officials and Religious Oaths

Officials may not coerce citizens into engaging in religious exercises.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Child Abuse

Church Law and Tax 1997-05-01

Evidence

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

• Key point. Government officials are prohibited by the first amendment “nonestablishment of religion” clause to coerce citizens into making religious oaths or engaging in religious exercises.

A federal appeals court ruled that a federal prosecutor may have violated the constitutional rights of a child abuse suspect by agreeing to dismiss all charges against her if she swore to her innocence in a church with her hand on a Bible. The facts of this case are very unusual, but compelling. Prosecutors, as well as church officials, often agonize over child abuse allegations because of a lack of proof. The accused may offer a convincing denial of the charges, though some evidence of guilt exists. A prosecutor in New York came up with a novel idea-dismissing child abuse charges against a woman if she swore to her innocence in her church with her hand on a Bible. The woman’s attorney agreed to this unusual arrangement, and on the appointed day the woman, her attorney, and the prosecutor met in the woman’s Roman Catholic church for the ceremony. The prosecutor assured the woman that she did not have to go through with the ceremony, but that if she did, all charges against her would be dropped. The woman agreed to proceed, placed her hand on a Bible, and stated: “I swear on this Bible that I did not have any form of sexual contact with my son on any occasion, so help me God.” All charges against the woman were dropped later that day. A few months later, the woman sued the prosecutor, claiming that his offer constituted a “coerced religious practice” in violation of the first amendment’s nonestablishment of religion clause. A federal court appeals court refused to dismiss the case and allowed it to proceed to trial. In conclusion, while such a ceremony would be a permissible (though not foolproof) method for a church to use in determining guilt, it is not appropriate for government officials to do so. Doe v. Phillips, 81 F.3d 1204 (2nd Cir. 1996). [The Establishment Clause]

Legal Developments

Copyshop Violates Copyright Law

Copying and selling sections of textbooks constitutes copyright infringement.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Copyright

Church Law and Tax 1997-05-01

Copyright

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

• Key point. Unauthorized duplication of copyrighted materials may violate the copyright law.

A federal appeals court ruled that a copyshop violated the copyright law by making “coursepacks” for sale to university students. The copyshop copied substantial sections of copyrighted texts, bound them into coursepacks, and sold them to students who needed them to fulfill reading assignments. A number of publishers of academic texts sued the copyshop for copyright infringement. The copyshop claimed that its copying amounted to permissible “fair use.” A federal appeals court ruled that the copyshop had committed copyright infringement. The court noted that “fair use” is a defense to copyright infringement, but it insisted that this is a narrow exception that did not apply in this case. The copyright law does not define fair use, but it does list four “fair use factors” that may be applied in deciding whether or not the fair use defense is available. Those factors are: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the amount and “substantiality” of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the unauthorized use upon the market or value of the copyrighted work. The court concluded that none of these factors supported a finding of fair use. The purpose and character of the unauthorized use was commercial exploitation. The nature of the copyrighted works was “creative” and “expressive.” The amount of material copied from copyrighted texts ranged from 5 percent to 30 percent of the entire texts. Such percentages “are not insubstantial,” the court concluded. Finally, the market for the copyrighted texts would be significantly affected if copyshops routinely made unauthorized copies of copyrighted texts. The court noted that the Supreme Court has ruled that “one need only show that if the challenged use should become widespread, it would adversely affect the potential market for the copyrighted work.” It concluded that “if copyshops across the nation were to start doing what the [copyshop has] been doing here … the potential value of the copyrighted works of scholarship … would be diminished accordingly.”

The court acknowledged that fair use “guidelines” were adopted by a coalition of authors, publishers, and educators in 1976 to assist in defining fair use in the academic context. And, these guidelines were accepted by congressional committees as part of their understanding of fair use. However, the court concluded that the copyshop’s activities were “light years away from the safe harbor of the guidelines.” The guidelines allow multiple copies for classroom use provided that the following 6 conditions are satisfied: (1) less than 1,000 words are copied; (2) the decision to use the work and the timing of its use for maximum teaching effectiveness are “so close in time that it would be unreasonable to expect a timely reply to a request for permission” to copy; (3) no more than 9 incidents of multiple copying occur during the same academic term; (4) each copy contains a copyright notice; (5) the copying “does not substitute for the purchase” of books or periodicals; and (6) the student is not charged more than the actual cost of copying.

The court concluded that the copyshop was not liable for “willful” damages. Under the copyright law, a person who “willfully” infringes upon the copyright of another may be assessed damages of up to $100,000 per incident. The court concluded that the copyshop had not acted willfully. It concluded that “willfulness” means more than an intent to copy—it means making copies knowing that it constitutes copyright infringement. In this case the copyshop insisted that its actions constituted permissible fair use, and therefore it could not have acted willfully.

Application. This case is relevant to church leaders for the following reasons: First, the case illustrates that the fair use exception to copyright infringement, as well as the so-called “classroom guidelines” defining fair use in the academic context, are narrow. This is especially relevant to churches that operate schools. But it also is relevant in the context of any church’s adult and children’s educational program. Note that the court concluded that copying 5 percent of a copyrighted work is substantial enough to bar the fair use defense. Second, the court’s narrow definition of “willful” will be helpful to any church that is sued for damages based on “willful” copyright infringement. While the damages for willful infringement can be astronomical, they will only apply (according to this court) to persons or organizations that knowingly violate the copyright law. Princeton University Press v. Michigan Document Services, Inc., 99 F.3d 1381 (6th Cir. 1996). [Copyright Law]

Legal Developments

Church Property Dispute

Court rules that local congregation, not national church, has right to property.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Church Property

Key point. The property of a local church affiliated with a hierarchical denomination may revert to the denomination if the church votes to disaffiliate.

A South Carolina court ruled that a national church retained title to the property of a local congregation that voted to disaffiliate from the parent organization. The local church conceded that the national church was hierarchical in nature, but it asserted that it never became a part of this structure but rather operated as an independent congregation. The court disagreed:

Since its inception as a missions church, the local congregation consistently sent delegates to the national church's annual convention and submitted annual reports to the national church. The national church contributed $5,000 to the local congregation to help construct the church building. The current minister of the local church was appointed by the bishop of the national body at its annual convention. Finally, by letter … the entire local congregation submitted its resignation from the national church, evidencing that the members of the local congregation considered themselves members of the national church.

The court concluded:

The law is well settled that when a church splits, the courts will not undertake to inquire into the ecclesiastical acts of the several parties, but will determine the property rights in favor of the party or division maintaining the church organization as it previously existed. When the entire congregation withdraws from the hierarchical church, the title to the church property remains in the church and does not follow the congregation. In this case, the title to the property at issue remained with the national church, and title is in the trustees, who are under a duty of loyalty to act solely in the best interest of the national church.

What this means for churches

This case illustrates an important point—while no court would dispute the authority of a local congregation to disaffiliate from a national church, many courts have ruled that such a congregation does not necessarily have the right to retain ownership of the church property. This is a complex legal question that should be thoroughly researched before any decision is made to withdraw from a national church organization. Fire Baptized Holiness Church of God of the Americas v. Greater Fuller Tabernacle Fire Baptized Holiness Church, 475 S.E.2d 767 (S.C. App. 1996).

Legal Developments

Worship Music and Copyright Law

Are song lyrics copyrighted?

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Copyright

Church Law and Tax 1997-05-01

Copyright

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

• Key point. Copyright infringement can occur when either the music or lyrics of a copyrighted song are copied without permission.

A federal appeals court ruled that copyright infringement had occurred even though only lyrics were copied. The court observed:

Song lyrics enjoy independent copyright protection as “literary works” … and the right to print a song’s lyrics is exclusively that of the copyright holder …. A time-honored method of facilitating singing along with music has been to furnish the singer with a printed copy of the lyrics. Copyright holders have always enjoyed exclusive rights over such copies. While projecting lyrics on a screen and producing printed copies of the lyrics, of course, have their differences, there is no reason to treat them differently for purposes of the Copyright Act.

Application. Many churches make unauthorized copies of song lyrics. Sometimes the lyrics are printed in a church bulletin. In other cases they are duplicated onto a transparency. In either case, or in any other case when lyrics are copied without authorization, copyright infringement has occurred. Church leaders need to understand that lyrics are entitled to copyright protection independently from the musical score. ABKCO v. Stellar Records, 96 F.3d 60 (2nd Cir. 1996). [Copyright Law]

Legal Developments

Public Prayers at High School Graduations

Prayers may violate the First Amendment.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Schools

Church Law and Tax 1997-05-01

Freedom of Religion

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

• Key point. Student-initiated and led prayers at public high school graduation ceremonies may violate the first amendment’s nonestablishment of religion clause, even if the senior class votes in favor of a prayer and a notice is placed in graduation programs informing attendees that the prayer is not endorsed by the school.

A federal appeals court ruled that a graduating senior could not recite a prayer at a public high school graduation ceremony, even though the senior class voted to include the prayer. A public high school adopted a policy allowing the senior class to conduct a poll of the graduating class to determine whether it wanted “a prayer, a moment of silence, or nothing at all” to be included in the graduation ceremony. The senior class elected to include a prayer, and a graduating senior was selected to give the prayer. School policy mandated that a disclaimer be printed in the official graduation program explaining that the prayer did not reflect the views of the school. A few weeks before the graduation ceremony, a student asked school officials for permission to have a representative of the ACLU address “safe sex” and condom distribution at the ceremony. When this request was denied, the student and ACLU sued the school arguing that the proposed student-led prayer violated the first amendment’s nonestablishment of religion clause. A federal district court ruled that the prayer would violate the first amendment, and the school appealed. A federal appeals court upheld the lower court’s ruling. The court based its decision on a 1992 Supreme Court ruling holding that a prayer offered by a minister at a public high school graduation ceremony was unconstitutional. Lee v. Weisman, 505 U.S. 577 (1992). In the Lee case the Supreme Court stressed the following two factors: (1) state officials directed the performance of a formal religious exercise at a public high school graduation, and (2) students who objected to the prayer had no real choice but to attend, since they could not be expected to miss their own graduation ceremony. The appeals court concluded that both factors were present in this case as well. First, the school exercised a “high degree of control” over the contents of the graduation ceremony, despite the fact that the senior class was allowed the option of including prayer: “Delegation of one aspect of the ceremony to a plurality of students does not constitute the absence of school officials’ control over the graduation. Students decided the question of prayer at graduation only because school officials agreed to let them decide that one question.” Second, the court concluded that students’ participation in the prayer was “coerced,” since they had no real alternative but to be present for the prayer. The court quoted with approval from the Lee case:

What to most believers may seem nothing more than a reasonable request that the nonbeliever respect their religious practices, in a school context may appear to the nonbeliever or dissenter to be an attempt to employ the machinery of the state to enforce a religious orthodoxy …. The undeniable fact is that the school district’s supervision and control of a high school graduation ceremony places public pressure, as well as peer pressure on attending students to stand as a group or, at least, maintain respectful silence during the invocation and benediction. This pressure, though subtle and indirect, can be as real as any overt compulsion …. For the dissenter of high school age, who has a reasonable perception that she is being forced by the state to pray in a manner her conscience will not allow, the injury is … real.

The court concluded: “References to, and images of, religion are to be found throughout this society. Yet, the prevalence of religious beliefs and imagery cannot erode the state’s obligation to protect the entire spectrum of religious preferences from the most pious worshipper to the most committed atheist. Those preferences are the business of the individual, not the state nor the public schools it maintains. The first amendment does not allow the state to erect a policy that only respects religious views that are popular because the largest majority cannot be licensed to impose its religious preferences upon the smallest minority.”

Four judges dissented from the court’s opinion, noting that another federal appeals court had ruled that student-led and initiated prayers at public high school graduation ceremonies do not violate the nonestablishment of religion clause.

Application. The legal validity of prayers at public high school graduation ceremonies remains unresolved. The Supreme Court ruled in 1992 that local clergy cannot offer prayers at such events. The court in this case extended this ruling to student-initiated and led prayers. However, as the dissenting judges pointed out, another federal appeals court has ruled that student-initiated and led prayers are permissible. The court’s decision is binding only in the third appellate circuit, which covers the states of Delaware, New Jersey, and Pennsylvania. The opposite view applies in the fifth appellate circuit, which covers the states of Louisiana, Mississippi, and Texas. Jones v. Clear Creek Independent School District, 977 F.2d 963 (5th Cir. 1992). ACLU v. Black Horse Pike Regional Board of Education, 84 F.3d 1471 (3rd Cir. 1996). [Wallace v. Jaffree, The Establishment Clause, Prayer on Public Property]

Legal Developments

The Sabbath and Employment Discrimination

Employers must make efforts to accommodate employees’ religious beliefs

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax 1997-05-01

Employment Practices

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

• Key point. Employers cannot dismiss or otherwise discriminate against employees who refuse to work on their Sabbath unless accommodating the employee’s beliefs would cause an “undue hardship” to the employer.

• A federal appeals court ruled that an employer violated an employee’s religious beliefs by refusing to make scheduling adjustments to accommodate the employee’s refusal to work on the Sabbath. A member of the Seventh Day Adventist Church applied for a full-time job as a food inspector with the State of California. The Church teaches its members to observe the Sabbath from sundown Friday to sundown Saturday and to refrain from engaging in secular work during that period. It further teaches that repeated violations of the Sabbath observance imperil one’s salvation. The applicant had never worked on the Sabbath. Shortly after applying for the job, the applicant informed a supervisor that he would not be able to work on Saturdays. For several days the applicant and his pastor met with supervisors in an effort to find a solution. The applicant volunteered to work undesirable non-Sabbath shifts (Sundays, nights, holidays) in lieu of Sabbath assignments. The state ultimately decided not to hire the applicant solely on the basis of his refusal to work on Saturdays. The employee sued the state in federal district court, but the court ruled in favor of the state. The employee appealed, and a federal appeals court ruled that the state had violated the employee’s rights under Title VII. The court began its opinion by noting that Title VII prohibits a covered employer from discriminating on the basis of religion in any employment decision. Title VII defines “religion” to include “all aspects of religious observance and practice, as well as belief,” and imposes a duty on employers to engage in “reasonable accommodation” of employees’ religion. The court noted that “it is therefore unlawful for an employer not to make unreasonable accommodations, short of undue hardship, for the religious practices of [its] employees and prospective employees.” The court rejected the state’s claim that an accommodation of the applicant’s religious practices would create an “undue hardship.” The state argued that allowing the applicant to take off every Saturday would have unfairly discriminated against other employees who would have had to work “more than their fair share of Friday night and Saturday day and evening shifts.” This arrangement in turn would have led to “substantial morale problems,” the state insisted. The state also claimed that permitting “voluntary shift trades” with other employees was not feasible, since other employees were unwilling to trade shifts with the applicant on a regular basis.

The court disagreed that accommodating the applicant’s religious beliefs would create an undue hardship. In rejecting the state’s claim that adjusting schedules of other employees to accommodate the applicant’s religious beliefs would impose an undue hardship, the court observed:

All employees … were required to work an equal number of undesirable weekend, holiday, and night shifts. So long as [the applicant] worked that equal number of undesirable shifts, being assigned a holiday, Sunday, or night shift for every shift he missed to observe the Sabbath, he would not have been granted any preferential treatment, nor would any cognizable burden have been imposed on other employees who simply were assigned one undesirable shift instead of another. No evidence was offered that the shift assignments could not have been arranged in a manner that would have ensured that [the applicant] and the other employees all received an equal number of undesirable shifts. Therefore, the state failed to [demonstrate] that [the applicant’s] practice of observing the Sabbath could not have been accommodated through scheduling arrangements without affording him preferential treatment.

The court also rejected the state’s claim that the applicant’s religious beliefs could not be accommodated through voluntary shift trades with other employees:

[T]he state could have prepared a six-month or year-long schedule in advance, determined how many Sabbath shifts [the applicant] would ordinarily be assigned, and then determined how many of those shifts his coworkers would be willing to accept in exchange for undesirable Sunday, holiday, or night shifts that they would otherwise have had to work. It is not unreasonable to assume that other employees would have been willing to trade for many, if not all, of [the applicant’s] Sabbath shifts in exchange for shifts that they were assigned and might have found even more undesirable. By preparing a tentative schedule, the state might well have determined that voluntary shift trades would completely eliminate the hypothetical difficulty resulting from the need to accommodate [the applicant’s] religious beliefs.

With regard to the state’s concern about “morale problems” among its employees if the applicant’s religious beliefs were accommodated, the court noted that “hypothetical morale problems are clearly insufficient to establish undue hardship.”

Application. Many churches have members who are opposed on the basis of religious beliefs from working on their Sabbath. They often are placed in the difficult position of accepting Sabbath work assignments or facing dismissal. This case will be very helpful to such individuals. It illustrates that employers must make serious efforts to accommodate the religious beliefs of such employees. Such efforts may include scheduling arrangements and shift trades. Opuku-Boateng v. State of California, 95 F.3d 1461 (9th Cir. 1996). [The Civil Rights Act of 1964]