Federal

Legal Developments

School Dismisses Unmarried, Pregnant Teacher

Court rules that it did not violate federal law.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-03-01

Employment Practices

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

• Key point. Under federal law, and the corresponding laws of some states, religious organizations have the right to discriminate in employment decisions on the basis of the religious affiliation of applicants.

• Key point. Churches and religious schools can discriminate against employees on the basis of religion, but they must be able to demonstrate that religion is not a pretext of discriminating against a protected group of workers. If the school only dismissed female workers who engaged in sex outside of marriage, the religious exemption would not apply.

A federal appeals court ruled that a church—operated preschool did not violate federal law when it dismissed an unmarried, pregnant preschool teacher. The school, which was affiliated with the Church of Christ, expects that its teachers will adhere to its religious tenets. All teachers are required to be Christians, and preference is given to those who are Church of Christ members. The school uses as its religious tenets the teachings of the New Testament, including the prohibition against sex outside of marriage. The dismissed worker knew that the school was a church—related school and indicated on her employment application that she had a Christian background and believed in God. The worker insisted that she was never told that she would be terminated if she engaged in sex outside of marriage. However, the school’s faculty handbook (given to worker after she was hired) reads: “Christian character, as well as professional ability, is the basis for hiring teachers at [the school]. Each teacher . . . is expected in all actions to be a Christian example for the students.” When school administrators learned that the unmarried worker was pregnant, a decision was made to terminate her employment. However, the woman was informed that she would be eligible for re—employment if she married the father of the child. The school’s president claimed that the woman was dismissed not because of pregnancy, but because the facts indicated that she engaged in sex outside of marriage. The woman filed a complaint with the Equal Employment Opportunity Commission (EEOC) alleging sex discrimination based on pregnancy. The EEOC investigated the claim and issued a “right to sue letter” to the woman, indicating that it felt she had a viable claim. The woman then filed a lawsuit in federal court, claiming that the school committed unlawful sex discrimination when it fired her. A federal district court rejected the woman’s claim, and she appealed.

A federal appeals court agreed with the district court that the school had not violated federal law by dismissing the pregnant worker. It noted that Title VII of the Civil Rights Act of 1964 prohibits certain employers (those with at least 15 employees that are engaged in interstate commerce) from discriminating against any employee on the basis of race, color, national origin, religion, or sex. While sex discrimination includes discriminating against employees on the basis of pregnancy, Title VII specifically permits religious organizations to discriminate in employment decisions on the basis of religion. The court concluded that the school dismissed the woman solely on account of her violation of its religious teachings against premarital sex and not because she was pregnant. The court rejected the woman’s claim that the school applied its policy against premarital sex in a discriminatory way that was more strict when women were involved. The court observed that “although Title VII requires that [the school’s] code of conduct be applied equally to both sexes, [the school] presented uncontroverted evidence . . . that [the administrator] had terminated at least four individuals, both male and female, who had engaged in extramarital sexual relationships that did not result in pregnancy.”

Finally, the court acknowledged that the school’s policy occasionally may have been violated because the administrator was unaware of every instance of premarital sex by his staff, but it insisted that “isolated inconsistent application” of the policy “was not sufficient to show that [the school’s] articulated nondiscriminatory reason was not the real reason for [the woman’s] termination.”

There a number of points to note about this decision:

1. Who is covered by Title VII? The court never addressed the question of why the school was subject to Title VII. While it probably had at least 15 employees, was it engaged in interstate commerce? If not, then Title VII would not apply.

2. Religious discrimination is permissible. The case illustrates that religious organizations and schools that are subject to Title VII can discriminate in employment decisions on the basis of religion. However, there are a few very important qualifications here that were mentioned by the court:

The discrimination must in fact be based no religion. Religion cannot be a “pretext” to discriminate on the basis of sex, pregnancy, or some other protected category.

The dismissed worker’s supervisor informed her that the reason she was being terminated was because she was “pregnant and unwed.” While this appeared to make pregnancy the basis for the school’s decision, the court noted that the supervisor used the phrase “pregnant and unwed” to mean that the dismissed worker engaged in sex outside of marriage in violation of the school’s religious principles. Further, the court pointed out that the supervisor lacked the authority to dismiss the worker. Only the school’s president could do so. Accordingly, the supervisor’s statements regarding the basis for termination were not relevant.

While a religious school can discriminate on the basis of religion, it must do so in a way that does not adversely impact a protected group of employees. The dismissed worker insisted that the school dismissed only females who were pregnant and unwed as opposed to persons generally engaging in sex outside of marriage. The court stressed that the evidence in this case demonstrated that the school had consistently discharged both male and female employees who engaged in sex outside of marriage.

3. Information known to subordinate workers. The dismissed worker claimed that her supervisor was aware that she had suffered a miscarriage in the past. She insisted that this knowledge proved that the school did not uniformly follow its policy of condemning sex outside of marriage, and that “religion” was merely a “pretext” to disguise sex discrimination. The court disagreed. It pointed out that knowledge by the supervisor of the worker’s prior miscarriage was never communicated to the president who alone could make a decision to dismiss an employee. Boyd v. Harding Academy of Memphis, Inc., 88 F.3d 410 (6th Cir. 1996). [Title VII of the Civil Rights Act of 1964]

© 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: m43 c0297

Legal Developments

Professor Sues College for Discrimination

Equal Employment Opportunity Commission rejects claim.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-03-01

Employment Practices

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

• Key point. Some church—operated schools are subject to federal laws banning discrimination on the basis of age, gender, and race. While most courts have refused to apply these laws to teachers who are members of the clergy, a few courts have done so when the school fails to adequately demonstrate the religious function and mission of the teacher.

In a surprise development, the Equal Employment Opportunity Commission (EEOC) concluded that a religious organization had not engaged in unlawful discrimination. In recent years, the EEOC has routinely accepted, with little if any substantiation, the claims of church employees that they were discriminated against by their employer on the basis of their religion or sex. In some of these cases, the EEOC has gone so far as to rule that a church engages in unlawful “sex discrimination” when it dismisses an employee for engaging in premarital sex contrary to the church’s biblical and moral teachings. A recent case is a refreshing though rare exception to the treatment of churches by the EEOC. A Catholic college denied a priest’s application for a one—year sabbatical, while at the same time approving the applications of two female professors. The priest filed a charge of discrimination with the EEOC, claiming that the college’s denial of his application amounted to unlawful discrimination based on age, gender, and race (the priest was Asian). The EEOC investigated the complaint and ruled that the evidence did not support the priest’s charge of discrimination! The priest then filed suit in federal court. A federal district court dismissed the case, and the priest appealed. A federal appeals court affirmed the district court’s ruling in favor of the school. The court agreed that federal law banning discrimination based on age, race, and gender can be applied to a college’s policies regarding sabbatical leave. However, it concluded that the college had demonstrated a “legitimate, nondiscriminatory reason” for denying the priest’s application for a sabbatical. In particular, it noted that the college was in the process of upgrading its two—year nursing program into an accredited four—year program, and that it granted the two female professors’ requests for sabbaticals since they were involved with the nursing program and needed advanced degrees in order for the nursing program to be upgraded.

Unfortunately, the college failed to claim that the priest’s discrimination claims were barred by the first amendment guaranty of religious freedom. The courts have consistently refused to apply civil rights laws to the relationship between clergy and churches (or church—operated schools). Incredibly, the college never raised this defense. The appeals court took the extraordinary step of asking the college to address this issue in a supplemental brief. The college eventually did so, but the court ruled that the first amendment did not bar the priest’s claims in this case since the college “failed to convince us that our consideration of [the priest’s] claims would risk excessive entanglement” between church and state. The lesson is clear-churches and church schools should vigorously and at the earliest opportunity challenge any discrimination claims brought by a member of the clergy, emphasizing the religious role and functions of the minister. As this case illustrates, failure to do so may cause a civil court to reject such a defense. Roxas v. Presentation College, 90 F.3d 310 (8th Cir. 1996). [ Termination of Employees, Title VII of the Civil Rights Act of 1964, Discharge and Discipline of Teachers]

© 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: m43 c0297

Legal Developments

Former Teacher Sues School for Breach of Contract

Court rules that teacher may sue former employer.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-03-01

Employment Practices

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

• Key Point. In some states, a religious organization’s decision to dismiss an employee may be subject to civil court review if the employee performed no “ministerial functions.”

• Key Point. Employee handbooks can limit an employer’s legal right to dismiss “at will” an employee hired for an indefinite term.

• Key Point. Federal age discrimination law prohibits discrimination in employment decisions on the basis of the age of an applicant or employee who is 40 years of age or older. This law applies to some religious organizations.

A federal appeals court ruled that a church school could be sued on the basis of breach of contract by a teacher who was dismissed. The facts of the case are simple. A second grade teacher was informed, after 23 years of teaching at a parochial school, that her school was being closed and that she was not going to be offered a teaching position in another parochial school. The teacher sued the school and diocese, claiming that her dismissal amounted to age discrimination in violation of federal law. She also asserted that the school and diocese had breached her contract of employment. A jury rejected the teacher’s age discrimination claim, but agreed with the teacher that the school and diocese had breached her employment contract and awarded her $83,000 in damages. Specifically, the jury found that the school’s “teachers’ handbook” was part of the teacher’s employment contract and that the school breached this contract by failing to follow a provision requiring it to objectively evaluate each teacher according to specified criteria. The school and diocese appealed. Their main argument was that the court’s resolution of the breach of contract claim was prohibited by the first amendment’s nonestablishment of religion clause, which prohibits entanglement between church and state. The court disagreed, noting that “[r]eligious groups … are generally not immune from all governmental regulation of their employment relationships, or from court enforcement of those laws.” The court concluded:

[T]he judicial enforcement of state employment contract law generally requires little intrusion into the functioning of religious institutions. Furthermore, the only reference to religion made by the diocese is its conclusory allegation that [the teacher] was not hired at [another school] because she “did not adequately prepare children for the sacraments.” We believe that this allegation … did not put into issue the validity or truthfulness of Catholic religious teaching. The diocese’s entanglement argument must be rejected.

The court conceded that there may be cases of age discrimination where “the relationship between employee and employee is so pervasively religious that it is impossible to engage in an age—discrimination inquiry without serious risk of offending the [nonestablishment of religion] clause.”

This case illustrates two important points. First, churches and church schools will be less vulnerable to discrimination and breach of contract claims if they create job descriptions emphasizing the spiritual aspects of each position. Many courts have ruled that teachers parochial schools are performing a vital religious function. Unfortunately, this was not adequately documented or argued in this case. Second, the case illustrates the importance of following those procedures (such as periodic employee evaluations) mandated by an employee manual or handbook. If these policies are clearly set forth, but then ignored, a church or school risks being sued for breach of contract. Gargano v. Diocese of Rockville Centre, 80 F.3d 87 (2nd Cir. 1996). [Discharge and Discipline of Teachers, 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: m43 m65 c0297

Legal Developments

Church Use of Public School Auditoriums

Court rules that schools must be consistent in allowing religious groups to use their property.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-03-01

Freedom of Religion

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

• Key point. A public school that makes it auditorium available to community groups, including at least one religious group, cannot deny access to another religious group.

A federal court in New York ruled that a church could not be denied use of public school property that was made available to other community groups including at least one other religious organization. A Methodist church asked permission to conduct a magic show on public school property. The church’s application to the school indicated that the show would to be performed by a Christian illusionist, and would include a religious service. The school board denied this request on the basis of a state law banning use of public school property by religious organizations for religious purposes. The church sued the school board, claiming that its actions violated the constitutional guarantees of speech and religion. The church acknowledged that state law banned the use of public school property for religious purposes, but it noted that the school board had permitted a Pentecostal church to conduct a “Holy Ghost filled concert” on the same public school property that included singing, a sermon by a pastor, and an “altar call.” The court concluded that the school board’s denial of the church’s application to use the school property violated the constitutional guaranty of free speech. The court noted that the guaranty of free speech does not guarantee “unlimited access to government—owned property for purposes of expression” and that “depending on the nature of the property, the government may regulate access.” The court noted that speech may occur in four different kinds of “fora,” and that the government’s right to regulate speech differs depending on the forum involved. The application of the first amendment to the four fora are summarized below:

1. Public forum . A tradition public forum includes streets and parks “which have immemorially been held in trust for the use of the public, and, time out of mind, have been used for purposes of assembly, communicating thoughts between citizens, and discussing public questions.” For the government to regulate or restrict speech in such a place “it must show that its regulation is necessary to serve a compelling state interest and that it is narrowly drawn to achieve that end.”

2. Designated public forum. A “designated public forum” is government—owned property that has been opened to the public for “expressive activity.” Examples include university meeting facilities and municipal theaters. The court noted that the government is not forever bound to maintain the open character of the property, but so long as it does so it cannot regulate or limit free speech without a compelling state interest that is narrowly drawn to achieve that end.

3. Limited public forum. The court noted that this category is actually a variation of the designated public forum, and noted that it is created when government “opens a nonpublic forum but limits the expressive activity to certain kinds of speakers or to the discussion of certain subjects.” The idea here is a designated public forum that has been created for a specific purpose-such as use by certain groups or the discussion of certain issues. The test to be applied to government attempts to regulate speech in such a forum is the same that applies to public fora the limitation must be necessary to serve a compelling state interest and must be narrowly drawn to achieve that end. The court emphasized that “in a limited public forum, government is free to impose a blanket exclusion on certain types of speech, but once it allows expressive activities of a certain genre, it may not selectively deny access for other activities of that genre.”

4. Non—public fora. This category of forum includes public property that is not by tradition or designation a forum for public communication. Examples include prisons or school mail boxes. The government can regulate speech in such places as long as the regulation “is reasonable and not an effort to suppress expression merely because public officials oppose the speaker’s view.”

The school board claimed that state law had created a limited public forum that was available only to nonreligious groups. The court concluded that even if the school board had created a limited open forum, religious services were a permitted use since the board had previously allowed a church choir to use school property for a concert and religious service. As a result, it could not deny access by any group wanting to use the property for religious purposes.

The court rejected the school board’s argument that allowing the church to use school property for a religious service would violate the first amendment’s nonestablishment of religion clause. It observed: “[The performance] would not have occurred during school hours, would not have been sponsored by the school, and would have been open to the public, not just to church members. In addition, the school facilities have repeatedly been used by a variety of private organizations. [The Supreme Court has ruled] that where a forum is available to a broad class of speakers, allowing religious speech does not confer any imprimatur of state approval on religious sects or practices.”

The court concluded that “[t]he gospel concert occurred and it created at least a limited public forum for entertainment events including prayer, religious instruction, music and religious testimony. This means that the school board cannot selectively deny access for activities of the same genre ….” Trinity United Methodist Parish v, Board of Education, 907 F. Supp. 707 (S.D.N.Y. 1995). [Use of Public Property for Religious Purposes]

© 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: m47 m88 c0297

Legal Developments

Use of “In God We Trust” on Coins and Currency

Court rules that use of the national motto does not violate the First Amendment.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-03-01

Freedom of Religion

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

• Key point. The first amendment’s prohibition of the establishment of religion does not invalidate all references to religion in our public life.

A federal appeals court ruled that use of the national motto “in God we trust” on coins and currency did not violate the first amendment’s nonestablishment of religion clause. The court applied the United States Supreme Court’s three—part Lemon test for determining whether or not the practice constituted an impermissible establishment of religion. Under this test, first announced in a 1971 decision (Lemon v. Kurtzman), a law or government practice challenged as an establishment of religion will be valid only if it satisfies the following three conditions-a secular purpose, a primary effect that neither advances nor inhibits religion, and no excessive entanglement between church and state. The court concluded that all of these tests were met. First, the practice of printing the national motto on coins and currency has a “clearly secular purpose,” since “the motto symbolizes the historical role of religion in our society, formalizes our medium of exchange, fosters patriotism, and expresses confidence in the future.” Second, the motto’s primary effect is not to advance religion but rather “is a form of ceremonial deism which through historical usage and ubiquity cannot be reasonably understood to convey government approval of religious belief.” Finally, the court concluded that the motto “does not create an intimate relationship of the type that suggests unconstitutional entanglement of church and state.” Gaylor v. United States, 74 F.3d 214 (10th Cir. 1996). [The Establishment Clause, Display of Religious Symbols on Public Property]

© 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: m47 m88 c0297

Legal Developments

Religious Organization Owes Taxes from Publishing Business

IRS determines revenue is unrelated business income

Richard R. Hammar, Attorney, CPA
Bio

Key point. Federal law imposes a tax on the unrelated business income of churches and other tax—exempt organizations. There are some exceptions to this tax, including the sale of books that directly promote a church's tenets. But if the activity is primarily commercial, the tax on unrelated business income may be due.

The IRS concluded that a religious organization had to pay unrelated business income tax on net earnings from its publishing activities. The organization was established to conduct an institution of learning for the general education of students. The charter further provides that the organization is authorized to engage in all matters incidental to these purposes, including the publishing and dissemination of textbooks, curriculum, and other materials related to schools of Christian training. The organization has no affiliation with a particular church or religion, and describes its materials as promoting a Christian—based philosophy. Books published by the organization are instructional in nature with a Christian perspective. The organization began publishing textbooks for a school it established, but in time many other private Christian schools expressed an interest in these materials and wanted to buy them. By 1973, the organization had set up a separate publishing division which began to write and publish Christian textbooks for its students. These materials were also sold to other Christian schools. The market for these materials has increased significantly over the years. Today, the publications are sold in all 50 states as well as in a number of foreign countries. As of 1989, the organization sold its textbooks to over 17,000 Christian schools throughout the world. The organization estimates that 600,000 elementary and secondary school students are educated using its materials. It now offers video instructional materials for home or classroom use and also operates a correspondence school. As a result of the profits generated by its publishing division, the organization has been able to expand its operations in a number of other areas.

The publishing division markets its textbooks throughout the world. It advertises its textbooks and curricula in Christian magazines, in Christian newspapers, at Christian trade shows and, most importantly, through a program of direct mailing of catalogs and brochures. It maintains a sales force of 40 people, who receive a base salary plus bonuses and commissions based on sales volume. It also employs from 24 to 59 individuals to handle its toll—free phone bank.

The IRS audited the organization, and while it determined that the publishing activities did not affect the organization's tax—exempt status, it concluded that these activities did generate unrelated business taxable income. The IRS noted that section 512(a)(1) of the Code defines the term "unrelated business taxable income" as the gross income derived by any organization from any unrelated trade or business regularly carried on by it, less allowable deductions. Section 513(a) of the Code defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function forming the basis for its exemption. Section 513(c) of the Code provides that the term "trade or business" includes any activity which is carried on for the production of income from the sale of goods or the performance of services. Section 1.513—1(d)(2) of the regulations provides that a trade or business is "related" to exempt purposes only where the conduct of the business activities has a direct relationship to the achievement of exempt purposes (other than through the production of income) and is "substantially related" only where the direct relationship is a substantial one. In other words, the production of goods or the performance of services from which gross income is derived must contribute importantly to the accomplishment of the organization's exempt purposes. Section 1.513—1(d)(3) of the regulations provides that in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function which they purport to serve. Where income is realized by an exempt organization from activities which are in part related to the performance of its exempt functions, but which are conducted on a larger scale than is reasonably necessary for the performance of such functions, the gross income attributable to that portion of the activities in excess of the needs of exempt functions constitutes gross income from the conduct of unrelated trade or business.

The IRS concluded that the publishing activity did not result in the loss of the organization's exempt status since "there is no evidence that any of the funds generated by M were not properly used to further the organization's educational purposes in some manner." However, the IRS concluded that the net earnings from the publishing activity were subject to the unrelated business income tax. It observed

It has been noted that [the publishing division] customarily has profits as high as 75% of gross receipts. The organization acknowledges that its pricing of materials is probably comparable to ordinary commercial prices, but states that it has never done a comparison study on this point ….

In this case, the organization's sales activity … constitutes an activity carried on for the production of income from the sale of goods. All of the relevant information indisputably establishes that the sales of textbooks, curricula and other materials are carried on in a manner consistent with a profit motive …. The subject organization's sales activities are carried on with the dominant hope and intent of realizing a profit and otherwise possess the characteristics of a trade or business. In viewing the overall operation, we can only conclude that [the organization's] activities are indistinguishable from those of a commercial religious publisher. Therefore, it is our conclusion that the organization's operation of [the publishing division] constitutes a trade or business within the meaning of section 513 of the Code.

The methods used in selling the textbooks are indistinguishable from ordinary commercial sales practices. The commission method of remuneration of sales personnel, the use of extensive direct mail and magazine and newspaper advertising, and the toll free telephone order operation would bear this out. Remuneration paid to key individuals within the organization, while in earlier years quite modest, is now comparable to remuneration that might be found in the for—profit sector. Although such compensation appears to be reasonable for purposes of section 501(c)(3) of the Code, it is obvious that amounts of compensation have increased and parallel increasing profits in recent years.

The IRS further concluded that "in general the organization's educational purposes are furthered by [its] sales only through the provision of income to support the other activities of the organization. Thus, it cannot be said that the production and sale of the items in question contribute importantly to the organization's exempt purposes. Accordingly, the substantial causal relationship required by section 1.513—1(d)(2) of the regulations is not present."

The IRS reviewed a number of previous cases and rulings addressing the tax consequences of religious publishing:

Presbyterian and Reformed Publishing Company v. Commissioner, 743 F.2d 148 (3rd Cir. 1984). A federal appeals court held that the accumulation of capital for physical expansion and the increased profit due to unexpected increases in popularity of one of the publisher's authors did not show a substantial non—exempt purpose. That organization was affiliated with a branch of the Presbyterian Church and generally espoused tenets of that branch. The court concluded that the organization met the requirements for exemption under section 501(c)(3) of the Code.

Incorporated Trustees of the Gospel Worker Society v. United States, 510 F. Supp. 374 (D.D.C. 1981). A federal court determined that an organization that published religious literature of a non—denominational nature as its exclusive activity did not qualify for exemption under section 501(c)(3) of the Code. The organization paid its top personnel large salaries, accumulated substantial profits, and was in direct competition with a number of commercial publishers.

Pulpit Resource v. Commissioner, 70 T.C. 594 (1979). The Tax Court held that where an organization published religious literature to promote its beliefs, the activity may be religious in character even though that activity produces an operating profit. The organization's purpose was to assist ministers of all persuasions in improving their sermon writing abilities. The court noted that the activity was unique, and so not in competition with commercial entities.

Fides Publishers Association v. United States, 263 F. Supp. 924 (N.D. Ind. 1967). A federal court determined that a religious publishing house operated in a commercial manner which was independent of any religious body or organization and carried on no other activities, was not qualified for exemption under section 501(c)(3). The court acknowledged that its operations furthered the exempt purpose of educating individuals in a given area, but concluded that there was a substantial non—exempt purpose present-the publication and sale of religious literature at a profit. The organization in question generated consistent operating profits and employed a commercial pricing pattern.

Scripture Press Foundation v. United States, 285 F.2d 800 (Ct. Cl. 1961). A man and his wife, deeply interested in religion, formed a corporation devoted to the publication and sale of religious literature designed to upgrade the quality of existing teaching materials for Bible instruction and Sunday schools. The publications enjoyed increasing sales and returned rising profits. The government argued that the organization was not exclusively organized and operated for religious purposes because the sale of religious literature was not an activity qualified for tax exemption. The government asserted, and the court agreed, that large profits by an organization claiming exemption are some evidence indicative of a commercial character. The court phrased the proper test as follows: "was the sale of religious literature by the plaintiff in this case incidental to the plaintiff's religious purposes or were plaintiff's religious objectives incidental to the sale of religious literature?" Although Scripture Press asserted that its religious instructional activities were more important to it than its selling activities, that the people in charge of its activities were devout and of intense religious conviction, and that the evidence supported such assertions, the court stated:

the intensity of the religious convictions of the plaintiff's members and officers cannot operate to exempt them from the tax laws if the activities of the plaintiff cannot in themselves satisfy such an exemption. Piety is no defense to the assessment of the tax collector.

The court concluded, on the basis of a comparison of the funds accumulated by the Scripture Press as the result of its sale of religious literature and the funds expended for religious instructional activities, that the sale of religious literature was its primary activity to which the instructional phase of Scripture Press was incidental and that, consequently, the organization did not qualify for exemption under section 501(c)(3) of the Code. IRS Letter Ruling 9636001. [ Federal Taxation of Unrelated Business Income of Churches]

Legal Developments

Sales of Church Property

The IRS issues an important ruling.

Richard R. Hammar, Attorney, CPA
Bio

Letter Ruling 9651014

Background. Many churches have received gifts of land that they later would like to sell. Does the sale of such property jeopardize the church's tax-exempt status? Must the church pay the federal "unrelated business income tax" on the sales proceeds? These are important questions that were addressed by the IRS in a recent ruling.

The IRS ruling. A school was given 7 acres of land by a donor with the understanding that the school would use the land for school purposes and not sell it unless absolutely necessary. The school attempted to lease the property for many years, but the school's trustees eventually decided that the land had to be sold. The school asked the IRS if its tax-exempt status would be affected by the sale, and if the sales proceeds would be subject to the unrelated business income tax.

The IRS ruled that the school's exempt status would not be affected by the sale, since: (1) the sale would be an "insubstantial part" of the school's overall activities, and (2) the school would continue to be operated exclusively for exempt purposes.

The IRS also ruled that the sale of the land would not trigger the tax on unrelated business income. This tax is imposed on earnings generated by exempt organizations from an "unrelated trade or business" that is regularly carried on. There are a number of exceptions. For example, the tax code specifically exempts from this tax "all gains from the sale of property" other than "property held primarily for sale to customers in the ordinary course of the trade or business." The IRS referred to a Supreme Court ruling addressing the question of when property is held "primarily" for sale to customers in the ordinary course of business. The Court interpreted the word "primarily" to mean "of first importance" or "principally." The IRS concluded that "by this standard, ordinary income would not result unless a sales purpose is dominant." The IRS concluded that this standard had not been met in this case because of the following factors:

• the land was held for "a significant period of time" before it was sold (contrary to the "short turn around period experienced by a typical buyer and seller of property")

• the school did not "regularly sell real estate"

• the school's "management activities with respect to the property have been minimal," and have consisted of collecting rents and providing routine maintenance and repairs

• the school had not been "involved in any way with improving the land or providing services to tenants"

The IRS concluded that "these facts distinguish [this sale] from the sale of property held primarily for sale to customers in the ordinary course of business." Therefore "income from the sale of this property is excluded from the computation of unrelated business taxable income."

Relevance to church treasurers. Church treasurers often wonder if gains realized from the sale of church property are taxable. This ruling illustrates an important point—any gain realized by a tax-exempt organization from the sale of property is not taxable as unrelated business income unless the gain is from the sale of property "held primarily for sale to customers in the ordinary course of the trade or business."

Churches that realize gain from an occasional sale of donated property, or from the sale of current property as part of a relocation, ordinarily will not be subject to the tax on unrelated business income since the property in such cases is not "held primarily for sale to customers in the ordinary course of the trade or business."


Key point. The factors identified by the IRS in this ruling will be a helpful yardstick that church treasurers can use to evaluate whether a sale of property may be subject to the unrelated business income tax.

There are situations in which a church could be subject to the tax on unrelated business income as a result of gains realized from the sale of property. For example, assume that a church receives a large tract of donated property and subdivides it into individual lots that it attempts to market as a revenue-making project. It is likely that any gains realized from the sale of the lots would be taxable since the property in such a case could be viewed as "held primarily for sale to customers in the ordinary course of the [church's] trade or business."


Recommendation. If you have any question regarding the application of the unrelated business income tax to a particular transaction, consult with a tax attorney or CPA.

Legal Developments

Age Discrimination

Employers cannot avoid an age discrimination claim by replacing a worker with a similarly aged worker.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-01-01

Employment Practices

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

• Key point. Employers cannot necessarily avoid liability for age discrimination by replacing an employee who is at least 40 years of age with another employee at least 40 years of age.

The United States Supreme Court ruled that an employer cannot necessarily avoid an age discrimination claim by replacing one protected worker with another. A long—term employee of a business corporation was dismissed at the age of 56, and replaced by a worker who was 40 years old. He sued his employer, claiming that it had committed unlawful age discrimination in violation of the federal Age Discrimination in Employment Act (ADEA). The ADEA prohibits covered employers from discriminating in employment decision on the basis of the age of an employee who is 40 years of age or older. The employer insisted that it could not be guilty of violating ADEA if it replaced a worker at least 40 years of age with another worker who also was 40 years of age or older-since both employees are in the protected group of workers under the Act. The Supreme Court rejected this argument:

The discrimination prohibited by the ADEA is discrimination “because of [an] individual’s age,” though the prohibition is “limited to individuals who are at least 40 years of age.” This language does not ban discrimination against employees because they are aged 40 or older; it bans discrimination against employees because of their age, but limits the protected class to those who are 40 or older. The fact that one person in the protected class has lost out to another person in the protected class is thus irrelevant, so long as he has lost out because of his age. Or to put the point more concretely, there can be no greater inference of age discrimination (as opposed to “40 or over” discrimination) when a 40 year—old is replaced by a 39 year—old than when a 56 year—old is replaced by a 40 year—old.

The Court cautioned that “in the age—discrimination context … an inference [of discrimination] cannot be drawn from the replacement of one worker with another worker insignificantly younger.” However, “the fact that a replacement is substantially younger than the plaintiff is a far more reliable indicator of age discrimination than is the fact that the plaintiff was replaced by someone outside the protected class.” O’Connor v. Consolidated Coin Caterers Corporation, 116 S. Ct. 1307 (1996). [ Age Discrimination in Employment Act]

© 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: m43 c0197

Legal Developments

Sex Discrimination in Universities

Court dismisses nun’s lawsuit against her former employer.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-01-01

Employment Practices

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

• Key point. The civil courts ordinarily will not interfere with the decisions of religious organizations to dismiss clergy or other church employees who perform ministerial functions.

A federal appeals court dismissed a lawsuit by a nun claiming that her employer, the Catholic University of America, discriminated against her on the basis of her gender in violation of Title VII of the Civil Rights Act of 1964. A nun with a doctoral degree in canon law was employed as a professor of canon law at the Catholic University of America. She applied for academic tenure after 6 years of teaching, and her application was denied on the basis of “marginal performance in teaching and scholarly publications.” She later filed a complaint with the Equal Employment Opportunity Commission (EEOC), claiming that the university’s decision to deny her tenure on the basis of marginal performance was a mere “pretext” for what in fact amounted to sex discrimination in violation of Title VII of the Civil Rights Act of 1964. The EEOC launched a 2—year investigation of the university in an attempt to substantiate the nun’s claim of discrimination. After attempts to conciliate the dispute failed, the EEOC joined the nun in suing the university. A federal district court dismissed the lawsuit, concluding that it was barred by the first amendment guarantees of religious freedom and nonestablishment of religion. The nun appealed, and a federal appeals court upheld the lower court’s ruling.

The appeals court observed that “[t]his case presents a collision between two interests of the highest order: the government’s interest in eradicating discrimination in employment and the constitutional right of a church to manage its own affairs free from governmental interference.” The court concluded that the nun’s claim was barred by the first amendment guaranty of religious freedom. It noted that federal courts consistently have ruled that they have no authority to resolve discrimination disputes brought by clergy against religious employers:

The Supreme Court has shown a particular reluctance to interfere with a church’s selection of its own clergy …. Relying on these and other cases [a number of federal courts] have long held that the free exercise [of religion] clause exempts the selection of clergy from Title VII and similar statutes and, as a consequence, precludes civil courts from adjudicating employment discrimination suits by ministers against the church or religious institution employing them.

The court pointed out that the so—called “ministerial exemption” has not been limited to members of the clergy, but “has also been applied to lay employees of religious institutions whose `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, 1169 (4th Cir. 1985) . Employees whose positions are “important to the spiritual and pastoral mission of the church should be considered clergy.” The court concluded that “the ministerial exception encompasses all employees of a religious institution, whether ordained or not, whose primary functions serve its spiritual and pastoral mission,” and this included a nun who taught in the canon law department of the Catholic University. The court noted that the canon law department performs “the vital function of instructing those who will in turn interpret, implement, and teach the law governing the Roman Catholic Church and the administration of its sacraments.”

The court rejected the nun’s claim that the ministerial exemption was abolished by the Supreme Court’s decision in Employment Division v. Smith, 494 U.S. 872 (1990). In the Smith case, the Supreme Court ruled that “the right of free exercise does not relieve an individual of the obligation to comply with a valid and neutral law of general applicability on the ground that the law proscribes … conduct that his religion prescribes.” On the basis of this language, the nun alleged that clergy are not immune from Title VII discrimination claims. The appeals court disagreed, noting that

it does not follow, however, that Smith stands for the proposition that a church may never be relieved from such an obligation …. The ministerial exception is not invoked to protect the freedom of an individual to observe a particular command or practice of his church. Rather, it is designed to protect the freedom of the church to select those who will carry out its religious mission ….

We conclude from our review of the Supreme Court’s first amendment jurisprudence that whereas the free exercise clause guarantees a church’s freedom to decide how it will govern itself, what it will teach, and to whom it will entrust its ministerial responsibilities, it does not guarantee the right of its members to practice what their church may preach if that practice is forbidden by a neutral law of general application.

The appeals court further ruled that the first amendment’s nonestablishment of religion clause, which prohibits “excessive entanglement” between church and state, was violated by the 2—year investigation by the EEOC:

An excessive entanglement may occur where there is a sufficiently intrusive investigation by a government entity into a church’s employment of its clergy …. In this case, the EEOC’s 2—year investigation of [the nun’s] claim, together with the extensive pre—trial inquiries and the trial itself, constituted an impermissible entanglement with judgments that fell within the exclusive province of the Department of Canon Law as a pontifical institution …. This suit and the extended investigation that preceded it has caused a significant diversion of the Department’s time and resources. Moreover, we think it fair to say that the prospect of future investigations and litigation would inevitably affect to some degree the criteria by which future vacancies in the ecclesiastical faculties would be filled. Having once been deposed, interrogated, and haled into court, members of the Department of Canon Law and of the faculty review committees who are responsible for recommending candidates for tenure would do so “with an eye to avoiding litigation or bureaucratic entanglement rather than upon the basis of their own personal and doctrinal assessments of who would best serve the … needs” of the Department. Rayburn v. General Conference of Seventh—day Adventists, 772 F.2d 1164, 1169 (4th Cir. 1985) .

Finally, the court squarely upheld the constitutionality of the Religious Freedom Restoration Act. It noted that it was only the second federal appeals court to directly review the constitutionality of the Act, and both upheld the Act’s constitutionality.

In summary, the court reached the following important conclusions: (1) Churches and other religious institutions have a constitutional right to make employment decisions involving ministers free from civil law claims. (2) This “ministerial exemption” extends to lay employees who primary duties include teaching, spreading the faith, church governance, supervision of a religious order, or supervision or participation in religious ritual and worship, or whose positions are important to the spiritual and pastoral mission of the church; (3) The ministerial exemption is not affected by the Supreme Court’s Smith decision. (4) Government investigations into the employment decisions of churches regarding ministers violate the first amendment’s nonestablishment of religion clause. (5) The Religious Freedom Restoration Act is constitutional. E.E.O.C. v. Catholic University of America, 83 F.3rd 455 (D.C. Cir. 1996). [ Title VII of The Civil Rights Act of 1964]

© 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: m43 m65 c0197

Legal Developments

Sexual Harassment as Sex Discrimination

Female minister sues denominational agency for sexual harassment.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-01-01

Sexual Harassment

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

• Key point. Sexual harassment is a form of “sex discrimination” prohibited by Title VII of the Civil Rights Act of 1964, and by several state laws. It occurs when (1) an employee’s job or other privileges of employment are conditioned upon submitting to sexual demands, or (2) an employee is exposed to a “hostile work environment” involving unwelcome verbal or physical conduct of a sexual nature that is sufficiently severe or pervasive to alter the conditions of the victim’s employment and create an abusive working environment.

• Key point. Title VII only applies to employers that (1) have 15 or more employees, and (2) are engaged in interstate commerce. Accordingly, it does not apply to most churches (it does apply to many denominational agencies engaged in interstate sales).

• Key point. Title VII does not apply to most churches. 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. Employers who dismiss employees for sexual harassment may face wrongful dismissal lawsuits.

A federal court in California ruled that a female minister failed to prove that her denominational agency had engaged in sexual harassment. A woman (the victim) was employed as national director of a department of a denominational agency (the Buddhist Churches of America or BCA). She is ordained as a Buddhist minister. She alleged that in 1991 she began receiving a series of heavy breathing telephone calls at her residence. She says that her phone number was not listed in the local telephone directory, but was published in the BCA directory. She claims that the heavy breathing calls continued for the next few years, even though she changed her unlisted phone number several times. In 1993, she went to an annual meeting of Buddhist minister at a hotel in California. On the first evening of the meeting, after midnight, she was awakened by a telephone call very similar in character and nature to the harassing telephone calls she had been receiving at her home since 1991. The caller spent several seconds breathing heavily and then whispered, “I want you” over and over. The victim asked, “Who is it?” and, when she received no response, hung up the phone. After hanging up the phone, she immediately called the management of the hotel, reported the call and asked if the hotel could identify the caller. The next morning, the hotel management called the victim and told her they had traced the call to another room in the hotel and said they would put the party in that room on the line. A Buddhist minister then came on the line. The minister claimed that he did not place the call and asserted that several people had been in his room. The victim reported the entire incident to her bishop.

After the incident was reported, several meetings were held between the bishop and the victim, the accused minister and other BCA staff members in an attempt to get a complete story and to take responsive action. An investigative report of the incident was rendered by members of a specially designated committee of the BCA. The committee found that the accused minister had attempted “to obscure the truth in a serious investigation while performing as a minister of the BCA.” The report concluded that “sufficient facts supported a finding of misconduct to warrant certain specific sanctions” against the accused minister. A short time later, the victim filed a complaint with the Equal Employment Opportunity Commission (EEOC) regarding the harassing call she had received at the hotel. She was issued a “right to sue letter” by the EEOC, indicating that the EEOC felt she had a viable claim. She later filed a lawsuit in federal court, claiming that (1) BCA engaged in unlawful sex discrimination by paying her less than comparable male employees; (2) she had been a victim of sexual harassment by the actions of the minister and BCA, and (3) BCA had engaged in unlawful “retaliation” against her by cutting off all funding of her department following the filing of her EEOC claim.

Wage discrimination

The court began its opinion by ruling that BCA was an “employer” subject to Title VII of the Civil Rights Act of 1964. Title VII prohibits employers from discriminating against employees on the basis of several factors, including sex. Sexual discrimination includes wage discrimination, sexual harassment, and employer retaliation against employees who exercise their right to be free from unlawful discrimination.

The victim alleged that her position was budgeted at an annual salary of $24,700, but that the bishop told her she would not be paid this amount because a comparable male employee’s “feelings would be hurt.” The court concluded that “a comparison between plaintiff’s salary and the salary of male ministers with the BCA would be improper, as infringing on the church’s autonomy in an area of prime ecclesiastical concern.”

Quid pro quo sexual harassment

The court pointed out that there are two types of sexual harassment-quid pro quo and hostile environment. To prove quid pro quo sexual harassment a plaintiff must show by a preponderance of the evidence that she was forced to choose between an economic loss or an economic benefit by submitting to the sexual demands of a person within the employer’s organization who is in a position to affect her employment. The victim claimed that BCA engaged in quid pro quo harassment by “the defunding of her department because of her refusal to quietly allow [the accused minister] to talk dirty to her.” She claimed that her employment was conditional upon allowing this “sexual favor.” BCA insists that the victim could not have suffered quid pro quo harassment because the accused minister did not hold any position where he had the power to affect the terms of her employment with BCA. BCA also argues that even if the minister held such a position, the contents of the harassing telephone call made at the hotel could not be construed as conditioning job benefits upon the victim’s submission to the minister’s sexual demands. The court agreed with BCA.

[The victim] fails to submit any evidence of a causal connection between the defunding of her department and the allegedly harassing phone call by [the minister]. She does not submit any evidence that [the minister] was involved in the decision to defund her department, or had any influence over the decision at all. Instead, she argues that the action was taken by other members of the BCA organization in retaliation for her filing this suit. A quid pro quo action, however, is premised upon coercive sexual conduct. Without evidence that BCA’s retaliation in defunding [the victim’s] department was somehow influenced by [the minister], [she] cannot present a … case of quid pro quo harassment.

Hostile environment sexual harassment

The court noted that to support a “hostile work environment” claim of sexual harassment, a plaintiff must show that: (1) she was subject to verbal or physical conduct of a sexual nature, (2) this conduct was unwelcome, and (3) the conduct was sufficiently severe or pervasive to alter the conditions of the victim’s employment and create an abusive working environment. Further,

[w]hether the conduct complained of by a plaintiff was sufficiently pervasive to create a hostile work environment is determined by the totality of the circumstances. Factors which the court may consider in evaluating the totality of the circumstances include (1) the frequency of the offensive encounters; (2) the severity of the offensive conduct; (3) whether the conduct was physically threatening or humiliating, or a mere offensive utterance; and (4) whether it unreasonably interfered with the employee’s work performance.

The court acknowledged that the United States Supreme Court has taken a “middle path” approach to hostile environment claims by noting that “coworkers’ occasional annoying or merely offensive comments do not create a hostile environment.” The court noted that most of the harassing telephone calls occurred at the victim’s home, and not at work. However, the one call she received at the hotel arguably could be construed as “work related” since she was attending a convention. The court pointed out that this one work—related call

was not physically threatening or humiliating. It was not repeated at plaintiff’s place of employment and was not accompanied by any other sexual conduct in the workplace. Moreover, the alleged co—employee who made the phone call was not a person who plaintiff was forced to work with on a daily basis …. This single isolated incident does not rise to the level of seriousness required to establish an abusive working environment.

The victim also claimed that her employer (BCA) created a hostile environment by (1) failing to follow up on an earlier charge of sexual harassment made by another employee; (2) failing to require the accused minister to follow through with the imposed sanctions; (3) failing to conclude that the accused minister’s misconduct constituted sexual harassment; (4) defunding her department after she filed a complaint with the EEOC. The court disagreed that these allegations proved that BCA had committed hostile environment sexual harassment.

Although [the victim’s] evidence suggests that BCA’s response to [the accused minister’s] conduct was dilatory at best, this evidence, standing alone, does not create a hostile environment claim. Although employers are liable for failing to remedy or prevent a hostile or offensive work environment of which management—level employees knew, or in the exercise of reasonable care should have known, an employer’s lack of remedial action is not itself evidence of the hostile work environment. A hostile environment claim requires wrongful verbal or physical conduct of a “sexual nature.” Thus, although the action or inaction of an employer in response to an allegation of sexual harassment may be probative on the issue of the employer’s liability, this evidence is relevant only if the plaintiff first establishes that that incident created a hostile work environment. Because [the victim] has failed to make this … showing [a dismissal] of this claim is proper.

Retaliation

Finally, the victim claimed that the decision by BCA to cut off funding of her department amounted to unlawful retaliation for filing a sex discrimination claim in violation of Title VII. The court noted that to prove a “prima facie case” of unlawful retaliation, a plaintiff must establish that she acted to protect her Title VII rights, that an adverse employment action was thereafter taken against her, and that a connection exists between these two events. At that point, the burden of production then shifts to the employer to advance legitimate, non—retaliatory reasons for any adverse actions taken against the plaintiff.

The court concluded that it could not resolve the victim’s retaliation claim, since

[i]f plaintiff makes out a prima facie case of retaliation, the court would be placed in the position of evaluating whether BCA had any legitimate, non—retaliatory reasons for the defunding of [her] department …. Although the financial decisions of a church are not, strictly speaking, part of the church’s “spiritual function,” these decisions remain vital to a religious organization’s ministerial and religious planning. Determining whether the decision to eliminate funding from [the victim’s] department-a religious education department-was “legitimate” seems likely to draw this court into judgments on matters of faith and doctrine, as well as matters of general church governance. Because it appears that plaintiff’s retaliation claim would result in “an intolerably close relationship between church and state both on a substantive and procedural level,” plaintiff’s retaliation claim is dismissed without leave to amend, on first amendment grounds. Himaka v. Buddhist Churches of America, 917 F.Supp. 698 (N.D. Cal. 1995). [ Title VII of the Civil Rights Act of 1964]

© 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 m40 m43 c0197

Legal Developments

Returning Donations to Bankruptcy Trustees

Federal court rules in favor of church in bankruptcy dispute.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1996-11-01

Bankruptcy

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

• Key point. Some courts have ruled that bankruptcy trustees do have the legal authority to require churches to return contributions made by bankrupt debtors during the year prior to filing a bankruptcy petition.

A federal appeals court ruled that a bankruptcy trustee could not require a church to return $13,000 in contributions that had been made by a member during the year prior to filing a bankruptcy petition. The church and the member both believed in tithing, and the member faithfully tithed up until the time he filed for bankruptcy. The trustee demanded that the church return the $13,000 in contributions made during the previous year. It relied on a provision in the bankruptcy code giving trustees the authority to “avoid” transfers made by debtors within a year of filing for bankruptcy unless they receive property or services of “reasonably equivalent value” in exchange. The church insisted that the member received valuable benefits in exchange for his contributions, but a bankruptcy court disagreed. The case was appealed. A federal appeals court acknowledged that the debtor received valuable benefits in exchange for his contributions to the church, including preaching, teaching, and counseling. But, it concluded that these benefits were provided to members whether or not they tithed, and as a result they were not provided “in exchange” for the debtor’s contributions. Therefore, under the bankruptcy law the trustee had the authority to recover the debtor’s contributions from the church. However, the court further concluded that allowing the trustee to do so would violate the rights of the church and debtor under the Religious Freedom Restoration Act. This Act specifies that the government may not “substantially burden” a person’s religious practices unless a compelling governmental interest exists. The court concluded that the practice of tithing was a religious practice that would be substantially burdened if the trustee could recover the debtor’s tithes since it would discourage persons from tithing to their church if they suspected that they might file for bankruptcy within the next year. Further, the court concluded that there was no compelling governmental interest that would justify the substantial burden on the practice of tithing. This issue is now resolved in the eighth federal circuit, which includes the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota-at least with respect to those churches for which tithing is an important religious practice. The trustee has indicated that he will appeal this decision to the United States Supreme Court. In re Young, 82 F.3d 1407 (8th Cir. 1996). [ Limitations on Charitable Giving]

© Copyright 1996, 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: m05 c0696

Legal Developments

Tax Court Addresses Ministers’ Exemption from Social Security

Eligibility for exemption and other issues addressed.

Richard R. Hammar, Attorney, CPA
Bio

Hairston v. Commissioner, T.C. Memo. Dec. 51,025(M) (1995)


Article summary. A number of unique tax rules apply to ministers. One of these rules is the eligibility of ministers for exemption from self—employment (social security) taxes if various conditions are met. A recent Tax Court ruling addresses the requirements for this exemption, and the possible consequences to ministers who apply for the exemption without meeting the eligibility requirements. The Court also addressed a number of other tax issues of interest to ministers, including home offices and telephone expenses. The Court's ruling is addressed fully in this feature article.

It is common for younger ministers to file for exemption from self—employment (social security) taxes without fully understanding the eligibility requirements. Many of these ministers later realize that they were not eligible for the exemption, and they wonder what they should do about it. This is a very difficult question, for which there is no satisfactory answer. A recent Tax Court decision sheds some light on this dilemma. This feature article will address the Court's decision, and assess its significance to ministers. The article also considers other tax issues addressed in the Court's decision.

Facts

A minister received his bachelor's degree in psychology and a graduate degree in Christian counseling from a church—affiliated university. He also completed undergraduate religion courses and graduate theology courses. The minister was ordained by a religious organization (the Body of Christ) in 1987, and was later "licensed" as a minister by the Assemblies of God. The minister is qualified to perform sacraments, to baptize, and to officiate at marriage ceremonies and burials. The minister opened a pastoral counseling practice in a rented office, and also established a new church. He purchased a home in the name of the church, but made the mortgage payments on the residence and deducted the mortgage interest on Schedule C of his individual income tax returns.

Sometime in 1987 the minister rented an office (the "downtown office") for the counseling business. The downtown office consists of a counseling office, waiting room, reception area, and a bathroom for the clients. The minister believes that any item that makes a counseling setting look like a business office is detrimental to the counseling session. As a result, the minister uses the downtown office to meet with and counsel clients, but does not research or attend to office work at the downtown location. Instead, he uses two rooms in his personal residence to store his books and office equipment and to prepare for counseling sessions. He claimed that approximately 20 percent of his home was used as a home office.

The minister started operating the Christian counseling center sometime in 1988. In addition to counseling, the minister occasionally preaches on Sundays, teaches in church settings, and administers sacraments. However, the only service for which he accepts remuneration is counseling. His federal income tax returns for taxable years 1988, 1989 and 1990 were audited by the Internal Revenue Service. The IRS focused on the minister's exemption from self—employment (social security) taxes and insisted that the exemption was invalid since he was not eligible for it. As a result, the IRS assessed self—employment taxes (at the full 15.3 percent rate) against the minister's net self—employment income for the three years under examination. The IRS also ruled that the minister had improperly deducted home office expenses. The minister appealed to the Tax Court.

The Court's ruling

exemption from social security

All ministers are self—employed for purposes of social security with respect to services they perform in the exercise of their ministry. This means they pay the "self—employment" tax (currently 15.3 percent of net earnings) rather than FICA taxes. However, federal law permits ministers to exempt themselves from self—employment taxes with respect to their ministerial income if they meet several conditions. These include the following two:

1. The minister must file an exemption application (Form 4361) in triplicate with the IRS. A minister certifies on Form 4361 that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance (for services I performed as a minister … ) of any public insurance that makes payments in the event of death, disability, old age, or retirement, or that makes payments toward the cost of, or provides services for, medical care. The form states that public insurance includes insurance systems established by the Social Security Act. There are three important factors to note.

a. Conscientious opposition based on religious belief. The income tax regulations clarify that ministers … requesting exemption from social security coverage must meet either of two alternative tests: (1) A religious principles test which refers to the institutional principles and discipline of the particular religious denomination to which he belongs, or (2) a conscientious opposition test which refers to the opposition because of religious considerations of individual ministers … (rather than opposition based upon the general conscience of any such individual or individuals). Under both the religious principles and conscientious opposition tests, a minister must have religion—based opposition to accepting social security benefits. The income tax regulations clearly reject the view that ministers can be eligible for exemption from social security coverage on the basis of conscientious opposition alone. The conscientious opposition must be rooted in religious belief. Further, economic or any other non—religious considerations are not a valid basis for the exemption. Regrettably, many ministers have been induced to exempt themselves from social security participation because of the recommendation of a financial counselor that they would be better off financially.

b. Opposition to the acceptance of public insurance benefits. The exemption is available only if a minister is opposed on the basis of religious considerations to the acceptance of social security benefitsrather than to payment of the tax. A minister may have religious opposition to payment of the tax, but this alone will not suffice. The individual must have religious opposition to accepting social security benefits upon his or her retirement or disability. This is an extraordinary claim that few ministers in good faith will be able to make.

c. Participation in private insurance programs permitted. The applicant's opposition must be to accepting benefits under the social security program (or any other public insurance system that provides retirement and other specified benefits). As a result, a minister who files the exemption application may still purchase life insurance or participate in retirement programs administered by non—governmental institutions (such as a life insurance company). The income tax regulations specify that the term public insurance refers to governmental, as distinguished from private, insurance and does not include insurance carried with a commercial insurance carrier. The regulation goes on to clarify that to qualify for the exemption a minister need not be opposed to the acceptance of all public insurance but he must be opposed on religious grounds to the acceptance of any such payment which, in whole or in part, is based on, or measured by earnings from, services performed by him in his capacity as a minister.

2. The exemption application (Form 4361) must be filed on time. The deadline is the due date of the federal tax return for the second year in which a minister has net earnings from self—employment of $400 or more, any part of which derives from the performance of services in the exercise of ministry.

The Tax Court addressed two important issues—whether or not the minister filed his exemption application on time, and whether he was eligible for exemption. These issues are addressed below:

was the exemption application filed on time?

The minister filed a Form 4361 ("Application for Exemption from Self Employment Tax"), which was received by the IRS on April 17, 1989. Box 3 and line 4 of the Form 4361 identified the minister as having been ordained by the Assemblies of God on August 31, 1984. Further, line 5 states that 1985 and 1986 were the first 2 years in which the minister had self—employment earnings of at least $400 from services as a minister. The application deadline, based on the information provided, would be April 15, 1987, 2 years prior to the date that the minister actually filed the application. The IRS marked the application "Disapproved for exemption" on May 2, 1989.

The Tax Court disagreed that the Form 4361 was filed too late. It observed:

In fact, [the minister] was ordained by the Body of Christ Church … on May 17, 1987. Based upon [his] testimony at trial and on returns [he] filed … it appears that 1988 was the first year in which [he] had self—employment income of $400 or more earned from services as a minister. Accordingly, the filing deadline for the exemption application would have been on April 15, 1990, one year after [he] filed the application.

The Court was wrong in reaching this conclusion. It focused on the date the minister was ordained (1987), ignoring the significance of the fact that he had been licensed as a minister in 1984. It is true that the minister's Form 4361 incorrectly stated that he had been ordained rather than licensed in 1984. But this error has absolutely no significance, since the time limit for filing the form ordinarily begins to run when a minister is either "ordained, licensed, or commissioned."

was the minister eligible for exemption?

The minister had not yet been informed by the IRS that his exemption application had been denied when he filed his 1988 tax return. Assuming that the application would be granted, he did not pay self—employment taxes and wrote "Exempt Form 4361" on the line relating to self—employment tax. He followed this same practice on his 1989 tax return, even though he had by then been informed by the IRS that his exemption application had been rejected. He again paid no self—employment tax on his 1990 tax return, but provided no explanation. The IRS determined that the minister had to pay self—employment taxes for all three years, since his exemption application had been rejected. The Tax Court agreed. In explaining why the minister was not eligible for exemption the Court observed:

[The minister] cannot prove that he is opposed to public insurance as a conscientious or religious principle, as is required by [the tax code] in order to qualify for exemption from self—employment tax. [His] testimony at trial reveals that he is not opposed to public insurance as a "religious issue." The following exchange illustrates [his] beliefs regarding public insurance:

The Court: Okay. And just to go back a couple questions, are you, as an ordained minister, opposed to public insurance?

[The minister]: Public—I am sorry?

The Court: Public insurance? Was that the reason that you had filed your application for exemption from the self—employment tax?

[The minister]: No. I am not opposed to the—to that, as a religious issue, no. We were advised to—by our accountant, to file for an exemption with the state, providing the state would allow it. And we asked the state to allow it, which they did.

Although [the minister] signed an exemption application stating that he is opposed to public insurance because of his religious principles, the Court finds [his] trial testimony to be more compelling. The application for exemption contained numerous significant mistakes, including the date that [he] was ordained and the religious body that ordained [him]. It is obvious that [he] did not carefully review the application. In view of the significant mistakes made on the application, it is possible that [he] did not even read the application, including the statement certifying that the applicant is opposed to public insurance, prior to signing the Form 4361.

We hold that [the minister] has failed to prove that he is opposed to public insurance as is required by [law] in order to qualify for exemption from the self—employment tax. [He] is therefore liable for self—employment taxes for the taxable years 1988, 1989, and 1990.

Notice what happened here. After conceding (incorrectly) that the minister's exemption application was filed on time, the Court concluded that the minister was not eligible for exemption because of comments he made during his trial. This is an extraordinary ruling that is of the utmost importance to younger ministers who are trying to decide whether or not to file a Form 4361. The ruling indicates that filing a timely Form 4361—which contains a certification by the applicant that he or she meets all of the eligibility requirements—may not be enough. The IRS or the courts may later question whether or not the minister in fact was eligible for the exemption when the Form 4361 was filed. The Court struggled with this conclusion. It acknowledged that the minister signed an exemption application stating that he was opposed to public insurance because of his religious principles. However, it found the minister's trial testimony to be more compelling. This conclusion was reinforced by the mistakes that appeared on the Form 4361, which suggested to the Court that the minister had not read the form and was not aware that he was ineligible for exemption.

Key point. Many ministers have filed a Form 4361 without being eligible for the exemption from self—employment taxes. These ministers must recognize that the validity of their exemption may be questioned in an audit.

other tax issues

The Court addressed a few other tax issues that will be of interest to ministers. They are summarized below:

home office

The minister claimed that he used 20 percent of his home as a "home office" associated with his counseling ministry. Recall that the minister did all of his counseling in his downtown office, and used the office in his home (consisting of two rooms) to store his books and office equipment and to prepare for counseling sessions. He did not meet with or counsel clients at his home office but rather used the downtown office for that purpose. He claimed that he maintained his counseling books and accounting materials at the home office because the presence of these items in the downtown office would have "intimidated the clients."

The Tax Court concluded that the minister could not claim a business expense deduction for any portion of the expenses associated with his home office. It should be noted that a minister must meet the following requirements before qualifying for a business expense deduction for a home office:

(1) Exclusive use. The home office must be exclusively used in the minister's "trade or business." This means that the home office must not be used by other family members (for example, to watch television or do homework). The use of a part of your home for both personal and business purposes does not meet the exclusive use test.

(2) Regular basis. The home office must be used on a regular basis in the minister's "trade or business." This means that the home office must be used on a continuous basis by the minister for professional purposes (e.g., preparing sermons, conducting counseling, doing research, contacting members, writing correspondence, preparing for board meetings). Occasional or incidental use of the office for such purposes is not enough, even if the office is used for no other purposes.

(3) Convenience of the employer. If the minister is an employee, the home office must be for the convenience of the employer. This means that the home office must do more than make the employee's job more easy or efficient—it must be essential to the performance of the employee's job. The Court did not address this requirement, but assumed that it did not apply since the minister reported his income taxes as a self—employed individual.

(4) Principal place of business. The home office must be the minister's principal place of business. In 1993 the United States Supreme Court ruled (in the Soliman case) that "there are two primary considerations in deciding whether a home office is a taxpayer's principal place of business: the relative importance of the activities performed at each business location and the time spent at each place." The Supreme Court stated that "the point where goods and services are delivered must be given great weight in determining the place where the most important functions are performed." It continued:

Though not conclusive, the point where services are rendered or goods delivered is a principal consideration in most cases. If the nature of the business requires that its services are rendered or its goods are delivered at a facility with unique or special characteristics, this is a further and weighty consideration in finding that it is the delivery point or facility, not the taxpayer's residence, where the most important functions of the business are undertaken.

In addition to measuring the relative importance of the activities undertaken at each business location, the Supreme Court suggested that one should also compare the amount of time spent at home with the time spent at other places where business activities occur. Further, "this factor assumes particular significance when comparison of the importance of the functions performed at various places yields no definitive answer to the principal place of business inquiry."

The Tax Court applied the Supreme Court's Soliman decision in concluding that the minister did not qualify for a home office deduction. It observed:

In analyzing the first factor set forth in Soliman, the relative importance of the activities undertaken at each business location, we should consider whether the functions performed in the home office are necessary to the business. [The minister] maintained all of his records and books in his home office. Further [he] prepared for and reviewed his counseling sessions in his home office. Although [his] activities in his home office were important to his business [he] did not introduce any testimony showing that the functions which he performed at his home office were more important than the functions which he performed at his downtown office. On the contrary [he] actually met with and counseled his clients at the downtown office. Like the taxpayer in Soliman, the actual treatment (counseling) was the essence of [his] professional service and was the most significant event in the professional transaction. Because we find that the services performed in the downtown office were more significant than the activities undertaken in [the minister's] home office, this factor weighs heavily in favor of [the IRS].

We now turn to the second factor set forth in Soliman, the amount of time spent at each location. [The minister] testified that he spent almost as much time in the home office as the downtown office and that sometimes he spent more time in the home office than in the downtown office. As approximately equal time was spent at each location, this factor is not helpful in identifying [his] principal place of business.

Based upon the evidence presented, we find that [the minister's] home office is not his principal place of business for the counseling ministry.

Key point. The new IRS audit guidelines for ministers instruct agents to "question closely" the necessity of a home office. This is a business expense that invites scrutiny. It should not be claimed unless there is a reasonable basis for it.

telephone expenses

The minister deducted telephone expenses which included expenses for the office phone in the downtown office, Yellow Pages advertising, charges for call forwarding from the business location to the personal residence, and business related long distance calls made from his home. The IRS disallowed the portion of the telephone expenses attributable to the minister's home office. It also insisted that the minister had failed to prove the expenses he incurred in the business use of his telephone. The Tax Court disagreed with this conclusion, noting that the minister clearly incurred some telephone expenses at home in the course of conducting his trade or business as a counselor, and that the deductibility of telephone expenses is not governed by the home office rules. It also observed that as a general rule, if the record provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled, the Court may estimate the amount of such expense and allow the deduction to that extent. The Court estimated a modest amount of deductible telephone expenses for the years under examination. Note that the estimation of business expenses is not permitted for many business expenses, including automobile expenses, travel expenses, and entertainment expenses.

The Court further noted that section 262(b) of the Internal Revenue Code, effective for 1989 and later years, disallows a deduction for basic local telephone service with respect to the first telephone line to any residence of the taxpayer, regardless of any business use of the telephone. The Court added that this section, however, does not apply in this case since [the minister has] not claimed local telephone service expenses.

Significance of the court's decision

The most important aspect of the Court's decision was its treatment of the minister's application for exemption from self—employment taxes (Form 4361). Consider the following points:

1. Be familiar with the requirements for exemption. Ministers who are trying to decide whether or not to file a Form 4361 should review the form carefully to determine whether or not they meet all of the eligibility requirements. Two of those requirements are summarized earlier in this article. Unfortunately, most ministers who file Form 4361 do not qualify for exemption because they are not opposed on the basis of religious convictions to the acceptanceof public insurance benefits (including social security). Many of these ministers assume that they qualify for the exemption because they are opposed to the social security system as a whole, or do not believe it is financially viable. Many others have no understanding whatever of the basis for the exemption, and are persuaded by a financial adviser to file Form 4361.

Key point. Before submitting a Form 4361 to the IRS, be sure you read the form carefully and that you meet all of the requirements for exemption.

Key point. Before submitting a Form 4361 to the IRS, ask yourself the following question: If I am audited, and the validity of my exemption is questioned, will I be able to defend my position?

Key point. All of the eligibility requirements for exemption from self—employment taxes are discussed fully in chapter 9 of the 1996 edition of Richard Hammar's Church and Clergy Tax Guide.

2. If you already are exempt. Perhaps you already are exempt from self—employment taxes. You submitted a Form 4361 a number of years ago that was approved by the IRS. This case illustrates that the validity of an exemption may be questioned in an audit. As noted above, are you familiar enough with the requirements for exemption that you can defend your exemption?

Key point. Surveys conducted by Church Law & Tax Report reveal that a substantial number of ministers have applied for (and received) recognition of exemption from self—employment taxes. These ministers should review their Form 4361 to be sure that they are familiar with the basis for exemption and that they are able to defend their exemption in the event of an audit.

3. Can ministers revoke an exemption? Many ministers who are exempt from self—employment taxes will recognize that they are not eligible for the exemption if they take the time to review the eligibility requirements explained on their Form 4361. What should these ministers do? Many of them want to get back into the social security program. Can they? Does this case provide an "open door"? Unfortunately, the Tax Court's ruling does not respond directly to most of these questions. Federal law specifies that the exemption from self—employment taxes is irrevocable, and there have been no reported cases allowing a minister to voluntarily rejoin the program after filing a timely Form 4361.

Key point. There were two brief "windows" in the past when ministers were allowed by law to rejoin the social security system (the most recent expired in 1988). But Congress has not reopened these windows, and there is no indication that it will in the future.

This case does indicate that an exemption may be challenged by the IRS (or the courts) and may be revoked if it determined that the minister did not qualify. In other words, a minister may not affirmatively revoke an exemption, but the IRS or the courts may.

4. How far back can taxes be assessed? What if the IRS successfully revokes a minister's exemption on the ground the minister did not qualify? Can the IRS assess back taxes all the way to the year the Form 4361 was filed? In 1982 the IRS ruled that a taxpayer who fails to pay self—employment tax cannot be liable for more than three years of back taxes so long as he or she filed a Form 1040 for each year reporting federal income taxes. The IRS noted that federal tax law specifies that taxes must be assessed within three years after a return is filed, though taxes may be assessed at any time in the case of failure to file a return. In other words, the IRS generally can assess back taxes only for the three years preceding a return, but there is no limit on how far back the IRS can assess taxes if no return is filed.

Legal Developments

Religious Student Group Wins Discrimination Suit

Court rules school district discriminated between groups with similar goals.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-11-01 Recent Developments

Freedom of Religion

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

• Key point: A public school cannot prohibit a religious group concerned about the moral development of youth from using school facilities after school hours when secular organizations having the same concerns are granted access.

• A federal appeals court ruled that a public school could not prevent a religious student group from meeting on school premises after hours when the Boy Scouts were permitted to meet. The court concluded that by allowing the Boy Scouts to meet, the school had created a “limited open forum,” and that it could not lawfully prevent other groups from using the facilities that shared a similar purpose. The court noted that the Boy Scouts’ own publications described its purposes to include the moral development of youth. This was the same purpose of the religious group, except that it addressed the moral development of youth from a religious perspective. The court noted that the United States Supreme Court ruled in 1993 that the denial of access to a religious group to show films on public school property regarding child-rearing and family values from a religious perspective constituted impermissible “viewpoint discrimination” when the school’s property was open to other groups addressing similar issues from a non-religious perspective. Lamb’s Chapel v, Center Moriches Union Free School District, 113 S. Ct. 2141 (1993). As a result, the court concluded that the school’s attempt to ban the religious group from addressing the moral development of youth from a religious perspective amounted to “viewpoint discrimination” in violation of the first amendment guaranty of free speech. Good News/Good Sports Club v. School District, 28 F.3d 1501 (8th Cir. 1994).

See Also: Use of Public Property for Religious Purposes

© Copyright 1995, 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: m47 c0695

Legal Developments

Arbitration Rulings in Church Disputes May Be Reviewed by Courts

But only if interpretation of religious doctrine is not involved, court rules.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1995-09-01Recent Developments

Arbitration

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

• Key point: Arbitration rulings involving churches may be subject to civil court review insome situations, but not if any interpretation of religious doctrine is involved.

• Maryland’s highest court ruled that an arbitration award addressing the composition of a church’s board of trustees was not reviewable by the civil courts since any review would require an interpretation of religious doctrine. A dispute arose within a Primitive Baptist Church regarding control of church property. A faction of the church board (the “dissident faction”), headed by the board’s president, claimed that the church had become extinct because its minister had died and there were no living members. This group did not recognize the current congregation to be “members.” Another faction of the board opposed the dissidents, and called a special business meeting to elect a new board. The dissident faction claimed that this election was invalid because the meeting had not been properly called by the president as required by the church’s bylaws. The dissident group later authorized the merger of the church with another congregation, and the resulting church elected new trustees including the dissident members and president. As a result, there were two boards of trustees claiming control of the church and its property. In order to resolve this impasse the parties submitted the dispute to arbitration pursuant to a provision in the Maryland nonprofit corporation law. This provision specifies that “if any contest arises over the voting rights or the fair conduct of an election,” then the matter shall be submitted to arbitration and the arbitrators’ judgment will be “final.” The arbitrators ruled in favor of the board elected at the special business meeting, and the dissident board members immediately appealed to a civil court. A trial court and appellate court affirmed the arbitration award on the ground that the award was final and not subject to judicial review. The dissidents appealed to the Maryland Court of Appeals (the highest court in the state), which reversed the lower courts’ rulings. The fact that the nonprofit corporation law stated that arbitration awards in cases involving disputed church elections were “final” did not mean they were not reviewable by the courts. The court pointed out that arbitration awards entered under the Uniform Arbitration Act are “final” and yet reviewable by the civil courts in some situations. It saw no reason why “final” should be treated differently under the nonprofit corporation statute. The court did concede that the Act did not apply to this case since it applies only when agreed upon by both sides of a dispute. Here neither side agreed to be bound by the Act, but rather submitted their dispute to arbitration pursuant to a requirement in the state’s nonprofit corporation law. The court concluded that arbitration awards not governed by the Act are subject to judicial review under limited circumstances, including “palpable mistake of law or fact … apparent on the face of the award or a mistake so gross as to work manifest unjustice.”

The court refused to adopt a rule preventing civil court review of all arbitration awards involving church elections. While conceding that the civil courts could not review such awards if they involve religious doctrine or polity, it noted that not all disputes fall into this category: “It is not difficult to envision, for example, a disputed church election that concerns allegations of voter fraud, ballot-box stuffing, incorrectly printed ballots, or other misdeeds that are quite secular in nature.” The court saw no reason why arbitration awards involving church elections could not be reviewed by the courts in these situations. To rule otherwise would be to deprive the courts of their secular jurisdiction and to deny citizens their right to resolve their disputes in the civil courts. On the other hand, the court pointed out that “in many instances, issues of church polity will be inextricably intertwined with secular issues in contested church elections.” and that the civil courts may not “wander into the theological thicket in order to render a decision.” In such a situation, “courts may indeed be prohibited from reviewing arbitration awards … because such review would require an impermissible entangling of church and state.”

The court concluded that this dispute did involve religious doctrine and polity, making any judicial review of the arbitration award impermissible:

The root question, then, is whether the [church] was extinct …. The church would be deemed extinct if it had no members; the existence of members, conversely, would keep the church alive. It is well-settled in this state that the determination of a membership in a church is a question well embedded in the theological thicket and one that will not be entertained by the civil courts ….

Moreover, even if we were somehow to assume that the church was in fact extinct, we cannot say that control of the church and its property would pass automatically to [the dissidents and the church resulting from the merger]. [The church with which the dissidents merged] allegedly obtained its authority over [the “extinct” church] pursuant to the “recognized practice of the denomination of Primitive Baptists.” Again, in order to decide this matter, we would be required to resolve the property disposition based on our interpretation of religious custom and polity. This we cannot do …. The constitution will not permit such inquiries, and we will therefore not review the award of the arbitrators in the instant case.

In summary, this case illustrates that arbitration awards resolving church disputes are reviewable by the civil courts even if not governed by the Uniform Arbitration Act—but only if judicial review would not involve any inquiry into religious doctrine or polity. American Union of Baptists v. Trustees of the Particular Primitive Baptist Church, 644 A.2d 1063 (Md. 1994). 8F2, 9C8, 11J, 12A4h

See Also: Election or Appointment | Internal Dispute Resolution Procedures – Arbitration | Judicial Resolution of Church Disputes | Arbitration

© Copyright 1995, 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: m03 m56 c0595

Legal Developments

Housing Allowances for Parachurch Leaders

Court rules in favor of a minister working as leader of parachurch ministry.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1995-05-01Recent Developments

Clergy – Income Taxes

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

• Key point: Some ministers employed by parachurch organizations will qualify for a housing allowance.

• The Tax Court ruled that an ordained minister who served as president of a parachurch ministry was eligible for a housing allowance. Two ordained Baptist ministers (a father and son) served as the senior and associate pastors of a Baptist church in Ohio. In 1977, the two pastors traveled to Africa. They videotaped the work and stories of several missionaries. Those videotapes were to be used to launch a missionary television program. The Ohio church provided the equipment to communicate the missionary story through television. The church’s efforts were undertaken as part of a project entitled “Priority One International.” The church viewed Priority One International as its missionary arm. The senior pastor believed that God had given him a vision of a ministry to bring national attention to the cause of world missions. In 1980, the two pastors separated their activities concerning foreign missions from their church. They did not want to be restricted in their activities to one particular Christian denomination. They believed that their message needed to be shared across denominational lines. Priority One was incorporated as a nonprofit corporation. Priority One continued the television-related activities previously sponsored by the local church, and eventually it was moved to Texas. Besides producing videotapes and television programs addressing world missions, Priority One began producing videotapes addressing issues of Christian living (parenting, teenage crises, burnout, etc.), although the emphasis of these tapes was on missionary families.

The duties of the father and son vary somewhat, but both are responsible for the “message” conveyed by the tapes. The father conducts daily worship services for employees engaged in Priority One’s marketing efforts. The services provide an opportunity for the father to challenge those employees and emphasize to them the importance of what they are doing and their opportunity to change people’s lives. On occasion, communion is administered at those services. The son is primarily responsible for the production of the tapes. Priority One designated a portion of the compensation paid to the father and son as a housing allowance. These allowances were challenged by the IRS in an audit, and the father and son appealed. In an important ruling, the Tax Court concluded that both the father and son were eligible for a housing allowance with respect to services performed on behalf of Priority One. The court rejected the position of the IRS that the father and son were not eligible for a housing allowance since the services they performed were not services that are ordinarily the duties of a minister.

The court began its opinion by noting that to qualify for a housing allowance exclusion “the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.” The court noted that the income tax regulations list 3 definitions for “services which are ordinarily the duties of a minister of the gospel.” These definitions are as follows:

Test 1: If a minister, pursuant to an assignment or designation by a religious body constituting his church, performs service for an organization which is neither a religious organization nor operated as an integral agency of a religious organization, all service performed by him, even though such service may not Involve the conduct of religious worship or the ministration of sacerdotal functions, is in the exercise of his ministry.

Test 2: If a minister is performing service for an organization which is operated as an integral agency of a religious organization under the authority of a religious body constituting a church or church denomination, all service performed by the minister in the conduct of religious worship, in the ministration of sacerdotal functions, or in the control, conduct, and maintenance of such organization is in the exercise of his ministry.

Test 3: If a minister is performing service in the conduct of religious worship or the ministration of sacerdotal functions, such service is in the exercise of his ministry whether or not it is performed for a religious organization.

The father and son claimed that they satisfied all 3 tests. They pointed out that they were “commissioned” by the Ohio church to serve world evangelism through Priority One. This, they argued, “clearly reflects an assignment” within the meaning of the regulations. The court disagreed, noting that:

The activities of Priority One began as a project of [the Ohio church]. They were separated, however, and Priority One was incorporated when [the father and son] came to conclude that their message needed to be shared across denominational lines. Priority One was moved to Texas in 1981. We see an insufficient connection between [the activities of the church and those of the father and son for Priority One] during the years in question to conclude that either … was under “assignment or designation” to Priority One during that period.

The court also ruled that the second test did not apply to the father and son. It noted simply that “we are unable to find that Priority One was organized and operated under the authority of a religious body constituting a church or church denomination.”

However, the court concluded that the third test did apply to the father and son, and accordingly they were eligible for a housing allowance. The third test asks whether or not a minister is conducting religious worship or performing sacerdotal functions. With regard to the performance of worship, the court observed:

Daily worship services are conducted at Priority One. Apparently, they were conducted during the years in question. [The father] conducts those services. They are conducted for employees engaged in Priority One’s marketing efforts. On occasion, the Lord’s Supper is administered at those services. Although [the father] had no contract of employment with Priority One during the years in question, it seems clear that his activity in conducting worship services was known to, and approved by, the board of directors of the corporation. We think that his conduct of those services constitutes the conduct of religious services within the meaning of [the regulations]. As president of Priority One, [the father] also preached at churches’ mission conventions. Clearly, [his] preaching and conduct of religious services constituted only a portion of [his] duties on behalf of Priority One. We need not decide, however, whether those duties are sufficient to justify exclusion of the rental allowances in question. We need not decide that because we believe that … [the] principal duties [of the father and son] as president and vice president, respectively, of Priority One constituted the performance of sacerdotal functions within the tenets and practices of the Baptist denomination.

In reaching its conclusion that the duties performed by the father and son on behalf of Priority One constituted the performance of sacerdotal functions, the court relied heavily on the expert testimony of Dr. Derrel R. Watkins of Southwestern Baptist Theological Seminary. Dr. Watkins’ written report was accepted into evidence by the court. In that report, Dr. Watkins stated the following: Baptist congregations recognize that God may call individuals to serve as itinerant ministers. Such ministers may serve congregations both within the denomination and in other denominations. They carry out their sacerdotal functions independent of a specific congregation. Some ministers, with the blessings of the congregation that ordained them, may broaden their ministry to include radio, television, and writing missions. A majority of Baptist congregations consider any ordained minister who seeks to proclaim the Gospel in any fashion to any person or group of persons, or who provides church-related services to congregations, to be functioning as a minister in accordance with the overall purpose of his ordination. Dr. Watkins was of the opinion that, since both the father and son continue the work undertaken by Priority One when it was a project of the Ohio church, they continue in the ministry begun by them under the authority of the church.

The court concluded:

We find that support of foreign missions is the main thrust of the services rendered by [the father and son]. Priority One … was a project of [the Ohio church]. It grew out of [the father and son’s] travels to Africa. [The father] believed that God had given him a vision of a ministry to bring national attention to the cause of world missions. [The father and son] accomplished that ministry, first, through Priority One …. We have viewed video tapes made by Priority One that deal with the work of foreign missionaries. Those tapes fulfill [the father’s] view of his ministry. Undoubtedly, they bring attention to the cause of world missions and support the work of foreign missionaries. During the years in issue, video series produced by Priority One began to address other issues, in addition to the support of foreign missions. We have sampled those series and find that, still, there was a substantial focus on foreign missions and missionaries. Together [the father and son] constituted the creative and productive force behind the videos produced by Priority One. Those videos served to support the cause of foreign missions. The main thrust of the services rendered by [the father and son] was, thus, in support of foreign missions. On account thereof, and in light of the expert testimony of Dr. Watkins, we find that their services constituted the performance of sacerdotal functions within the tenets and practices of the Baptist faith.

This ruling may be helpful to other ministers employed by parachurch ministries whose housing allowances are challenged by the IRS. Mosley v. Commissioner, T.C. Memo. 1994-457 (1994).

See Also: Services Performed in the Exercise of Ministry | Ministers’ Housing and Parsonage Allowances

© Copyright 1995, 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: m27 m93 c0395

Legal Developments

Church Wins Religious Discrimination Case

Court rules school can’t prevent religious groups from using school property if other groups meeting there have same goals.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-05-01 Recent Developments

Freedom of Religion

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

• Key point: A public school cannot prohibit a religious group concerned about the moral development of youth from using school facilities after school hours when secular organizations having the same concerns are granted access.

• A federal appeals court ruled that a public school district violated the constitutional rights of a Christian student group by denying it access to school property after school hours while permitting a secular organization with similar purposes to meet on school property. A public school district adopted a policy prohibiting any group to meet on school premises between 3:00 and 6:00 PM other than Scouts and athletic groups. A Christian student group sued the school district claiming that this policy violated the first amendment guaranty of free speech. The Christian group was organized to foster the moral development of school students from a Christian perspective. Its activities include singing, skits, Bible reading, prayer, and speeches by community role models. The Christian group claimed that both it and the Scouts had the same purpose of fostering the moral development of youth, and that the school district could not deny it access to school property solely on the basis of the religious content of its speech. A federal district court dismissed the Christian group’s lawsuit, and the case was appealed. A federal appeals court reversed the district court and ruled in favor of the Christian group. The court began its opinion by referring to a Supreme Court decision holding that a public school district could not deny a Christian group access to school property to show a family film series solely on the basis of the religious perspective of the films, when the same property was available to secular groups to address similar issues from a secular perspective. The Supreme Court concluded that

the government violates the first amendment when it denies access to a speaker solely to suppress the point of view he espouses on an otherwise includable subject. The film involved here no doubt dealt with a subject otherwise permissible under [the school district’s regulations], and its exhibition was denied solely because the film dealt with the subject from a religious standpoint. The principle that has emerged from our cases “is that the first amendment forbids the government to regulate speech in ways that favor some viewpoints or ideas at the expense of others.” Lamb’s Chapel v. Center Moriches Union Free School District, 113 S. Ct. 2141 (1993).

The appeals court concluded that this principle required the school district in this case to permit the Christian group to meet. It noted that the school made its facilities available to the Scouts to promote the moral development of youth from a secular perspective, and accordingly it could not deny a Christian group the same privilege solely on the basis of the religious content of its speech. Any other result would permit the school district to prefer some viewpoints on the same subject matter over others, and this is precisely what is prohibited by the first amendment’s guaranty of free speech.

In summary, when a public school (or other public entity) creates a “non-public forum” by opening its property to only some groups to address a limited range of issues, it cannot prohibit other groups from using the same property to address similar issues solely on the basis of the religious content of their speech. The court rejected the school district’s argument that banning religious groups served a compelling and legitimate governmental interest of avoiding any violation of the first amendment’s prohibition of the establishment of religion.

There is one other aspect of the court’s ruling that should be noted. The school district permitted any community group, including religious organizations, to use school property after 6:00 PM on school days or after 8:00 AM on weekends. No one questioned the right of religious groups to meet on school premises during these hours. In other words, the school had created an “open forum” during these hours and could not deny access to that forum to any group on the basis of the content of its speech. This case addressed access by religious groups to the “non-public forum” that the school district had created between 3:00 and 6:00 PM each school day. Good News/Good Sports Club v. School District, 28 F.3d 1501 (8th Cir. 1994).

• Key point: The Lamb’s Chapel case, which was the basis for the federal appeals court’s decision, is addressed in a feature article in the September-October 1993 issue of Church Law & Tax Report.

See Also: Use of Public Property for Religious Purposes

© Copyright 1995, 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: m47 c0395

Legal Developments

Clergy Discrimination and the Courts

Courts will not get involved in discrimination disputes if it leads to “entanglement” of church and state.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-05-01 Recent Developments

Employment Practices

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

• Key point: The civil courts will not review complaints by clergy that their employers violated federal laws prohibiting discrimination on the basis of race, age, or gender.

• A federal court in the District of Columbia dismissed a lawsuit by a nun claiming that her employer, the Catholic University of America, discriminated against her on the basis of her gender in violation of Title VII of the Civil Rights Act of 1964. A nun with a doctoral degree in canon law was employed as a professor of canon law at the Catholic University of America. She applied for academic tenure after 6 years of teaching, and her application was denied. She later sued the University, claiming that its decision to deny her tenure amounted to sex discrimination in violation of Title VII of the Civil Rights Act of 1964. A federal district court dismissed the lawsuit, concluding that it was barred by the first amendment guarantees of religious freedom and nonestablishment of religion. The court began its opinion by observing:

The Supreme Court has held that the free exercise [of religion] clause provides religious institutions with the “power to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine.” It precludes civil interference “with ecclesiastical hierarchies, church administration, and appointment of clergy.” Many hiring decisions within a religious institution determine “whose voice speaks for the church,” and there is no “area of inquiry less suited to a temporal court for decision.” Courts have developed a “ministerial function” test to determine whether a discrimination claim brought by an employee of a church or religious institution can be reviewed by a civil court. An employee whose “primary duties consist of teaching, spreading the faith, church governance, supervision of a religious order, or supervision or participation in religious ritual and worship” must look to elsewhere than to government agencies and courts for relief from race, sex, national origin, or age discrimination.

The nun insisted that the civil courts could resolve her discrimination case because she was not ordained. In rejecting this claim the court observed that “the mere fact of ordination is not determinative … [r]ather, it is the role or function of the employee that is critical.” The court noted that Catholic University is a religious educational institution, that the nun’s duties (teaching canon law) were religious, and that her duties were “the functional equivalent of the task of a minister.” The court observed that canon law “provides guidance for the members of the Catholic Church,” and accordingly “canon law is church doctrine.”

The court also ruled that allowing the nun to pursue her discrimination claim in civil court would violate the first amendment’s prohibition of the establishment of religion. Among other things, this provision prohibits “excessive entanglement” between church and state. Allowing a sex discrimination claim to be litigated against a religious school would lead to the kind of entanglement between church and state prohibited by the first amendment:

Entanglement also has already resulted from the interaction between a government agency, the EEOC, and Catholic University’s Department of Canon Law. In this action, the EEOC’s investigation lasted more than two years and presumably was sufficiently thorough to have inquired deeply into the issues that were later tried here. The first amendment precludes sustained involvement that “would result in an intolerably close relationship between church and state both on a substantive and procedural level” … . If this plaintiff can involve the EEOC and the court in the tenure decision at issue here, the prospect that others will follow portends impermissible “pervasive monitoring” of religious-freighted decisions of an essentially religious body …. “[T]here is the danger that [religious institutions], wary of EEOC or judicial review of their decisions, might make them with an eye to avoiding litigation or bureaucratic entanglement rather than upon the basis of their own … doctrinal assessments.” E.E.O.C. v. Catholic University of America, 856 F. Supp. 1 (D.D.C. 1994).

See Also: The Clergy-Church Relationship

© Copyright 1995, 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: m43 c0395

Legal Developments

Zoning Laws and Homeless Shelters

Zoning laws may prevent churches from having homeless shelters on their property.

Richard R. Hammar, Attorney, CPA
Bio

Key point: Churches may not have a constitutionally protected right to operate homeless shelters on their premises.

A federal appeals court ruled that a county did not violate a church's constitutional right to religious freedom by denying it a zoning variance to operate a homeless shelter on its premises.

A local Assemblies of God church in Naples, Florida, became concerned with the problem of homelessness in its community. Homeless people were living in vacant lots under unsanitary conditions. In response to this community crisis, the church converted a building on its premises into a shelter for the homeless.

The shelter created considerable distress among some residents of the community who were concerned about health and safety problems associated with the shelter. A zoning board later ordered the church to close the shelter on the ground that it was not a permitted use of the church's property under the county zoning ordinance and the church had not been granted a variance. The church sued the county arguing that closing the shelter would violate its first amendment right to freely exercise its religion. Specifically, the church argued that sheltering the homeless is an essential aspect of the Christian faith.

A federal district court rejected the church's argument, and the church appealed. A federal appeals court agreed that no constitutional rights had been violated by the county's action. The court relied almost entirely on a 1993 decision of the United States Supreme Court in which the Court struck down a municipal ordinance that prohibited ritualistic animal sacrifices by the Santeria religion.

The Supreme Court observed: "In addressing the constitutional protection for free exercise of religion, our cases establish the general proposition that a law that is neutral and of general applicability need not be justified by a compelling governmental interest even if the law has the incidental effect of burdening a particular religious practice." Church of the Lukumi Babaluaye, Inc. v. City of Hialeah, 113 S. Ct. 2217 (1993).

The federal appeals court concluded that the county zoning law that prohibited the operation of homeless shelters without a variance was a "neutral law of general applicability," and accordingly it was valid even if it burdened the church's exercise of its religion. The court concluded: "The burden on First Assembly to either conform its shelter to the zoning laws, or to move the shelter to an appropriately zoned area, is less than the burden on the county were it to be forced to allow the zoning violation. Thus … First Assembly's right to free exercise of religion is not violate by the county' zoning ordinances."

What this means for churches

The court did not refer to the Religious Freedom Restoration Act, which was enacted six months before its ruling. The Act requires that any governmental infringement upon the free exercise of religion must be justified by a "compelling governmental interest." This is a very difficult standard to meet, and it is questionable whether the county could have done so in this case. First Assembly of God v. Collier County, 20 F.3d 419 (11th Cir. 1994).

Legal Developments

Dismissal of Church Members

Court says it can’t get involved in dispute involving religious group’s ousted members.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-03-01 Recent Developments

Church Membership

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

• Key point: The civil courts will not resolve lawsuits brought by dismissed church members challenging the validity of their dismissal.

• A federal court in South Dakota ruled that it had no authority to interfere with a decision by a religious organization to oust some of its members. A dispute arose within a communal religious sect (the Hutterian Brethren Church) regarding a Church official. One faction voted to remove the official after he was accused of fraud, while another faction supported the official (claiming that he held his office for life). Those members opposing the official were expelled from the Church and denied any property rights in Church property. The expelled members filed a lawsuit challenging their dismissal. A federal court dismissed the lawsuit on the ground that it lacked jurisdiction to resolve it. The court began its opinion by noting that “the first amendment (guaranty of religious freedom) forbids civil courts from disturbing decisions of hierarchical polity made by the highest ecclesiastical tribunal of a church when such a resolution by civil courts would require extensive inquiry into religious law and polity.” The court quoted with approval from a 1976 decision of the United States Supreme Court:

In short, the first and fourteenth amendments permit hierarchical religious organizations to establish their own rules and regulations for internal discipline and government, and to create tribunals for adjudicating disputes over these matters. When this choice is exercised and ecclesiastical tribunals are created to decide disputes over the government and direction of subordinate bodies, the Constitution requires that civil courts accept their decisions as binding upon them. Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976).

The court concluded that it was

unable to envision any set of facts which would more entangle the court in matters of religious doctrine and practice. The religious communal system present in this case involves more than matters of religious faith, it involves a religious lifestyle. An individual Hutterian colony member’s entire life—essentially from cradle to grave—is governed by the church. Any resolution of a property dispute between a colony and its members would require extensive inquiry into religious doctrine and beliefs. It would be a gross violation of the first amendment and Supreme Court mandates for this court to become involved in this dispute. Wollman v. Poinsett Hutterian Brethren Church, 844 F. Supp. 539 (D.S.D. 1994).

See Also: Discipline and Dismissal

© Copyright 1995, 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: m19 m16 c0295

Legal Developments

Denominational Constitutions and Legal Liability

Court rules denomination rules are for ecclesiastical control, not legal liability.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-03-01 Recent Developments

Denominations – Legal Liability

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

• Key point: Denominations often use terminology in their organizational documents that attorneys point to in attempting to establish sufficient “control” over the activities of affiliated clergy or churches to result in legal liability for their actions. However, some courts recognize that ecclesiastical terminology should not necessarily be used to establish legal control and liability.

• In a significant ruling, the Tax Court vigorously rejected an attempt by the IRS to construe language in a denominational constitution to support a finding of legal control. Many attorneys, in an effort to locate the “deepest pockets,” have sued denominational agencies for the negligence or misconduct of affiliated churches or clergy. These cases generally attempt to demonstrate that the denomination exercised sufficient “control” over the church or minister to make it liable for the negligence or misconduct. The denomination’s own constitution or other organizational document typically becomes “exhibit A,” as the attorneys look for any clause or provision that suggests control. Unfortunately, in many cases they find such language, even though the intent of the document was to create only ecclesiastical rather than legal or temporal control. Fortunately, a number of courts have recognized that some denominations have authority to exercise only ecclesiastical control over affiliated clergy and churches, and that this form of control is not enough to warrant the imposition of legal liability upon the denomination for the activities of clergy and churches. This was the conclusion reached by the Tax Court in a recent case. The case, which was discussed in a feature article in the January-February 1995 issue of this newsletter, addressed the question of whether a Pentecostal Holiness minister was an employee or self-employed for federal income tax reporting purposes. The IRS insisted that the minister was an employee for income tax reporting purposes, and relied in part on a statement in the denomination’s official Manual that described pastors as “amenable to the quadrennial conference and the conference board”. Not so, concluded the Tax Court. In language that will be relevant to any denomination that is sued on the basis of the acts of affiliated clergy or churches, the Court observed:

[The IRS] also contends that the fact that [the minister] was expected to comply with the provisions of the Manual indicates that he was an employee. While the Manual imposed certain requirements on [the minister], they were more in the nature of an outline of his responsibilities than directions on the manner in which he was to perform his duties. We do not find the Manual or its contents to be determinative of an employer-employee relationship. The Manual describes pastors as “amenable to the quadrennial conference and the conference board”. Webster’s Third New International Dictionary (1981) defines “amenable” as “liable to be brought to account or judgment; liable to the legal authority of; answerable, accountable … liable to a claim or charge … capable of submission (as to a judgment or test) … readily brought to yield or submit; responsive, tractable ….” While this language suggests an employee-employer relationship, we are not persuaded that it fully defines the relationships between the parties. The Manual provides little guidance as to how this amenability is exercised so as to give this description significance. In addition, testimony and other evidence indicate that the relationships between the parties are more complicated than the statement suggests. A chart included in the Manual depicts the local church board as amenable or accountable to the pastor. But, similarly, an examination of the record reveals that the relationship between those parties is less hierarchical and more interwoven than the chart indicates. While [the minister] had a place in the structure of the [the denomination], that structure was a looser affiliation than the strict hierarchy suggested by the term “amenable”.

After considering all the facts and circumstances affecting the issue of control, we are persuaded that [the minister] was “subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result”. [The minister’s] primary responsibility was to help the church thrive. The record does not reflect that the church or the Sonshine Conference retained any significant rights to control petitioner’s efforts to accomplish this goal.

Such cases are significant. They recognize that the mere presence of authority to exercise control over some ecclesiastical activities of a minister or church is not enough of a relationship to impose legal liability on the denomination. Unfortunately, the bylaws or other internal rules of many denominations define the relationship with local churches and clergy in a way that suggests far more “control” than actually exists. As the Tax Court recognized, this language cannot be read in isolation, but must be viewed in its ecclesiastical context. This is an extremely important conclusion, that will be a useful precedent in many future cases. Shelley v. Commissioner, T.C. Memo. Dec. 50,090(M) (1994).

See Also: Cases Finding Denominations Not Liable

© Copyright 1995, 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: m40 c0295

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