Print Shop Violates Copyright Law

Be sure to understand the “fair use” law before copying materials.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Copyright

Church Law and Tax 1991-11-01 Recent Developments

Copyright Law

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

• A federal court in New York ruled that a company violated the copyright law by duplicating excerpts from several copyrighted books and compiling them into packets that it sold to college students. Kinko’s is a company specializing in copying. Many of its franchises are located in communities containing one or more colleges or universities. Kinko’s representatives contact college professors and offer to duplicate and compile reading materials the professors plan to use in their courses. Kinko’s then copies the excerpts, some quite large, and sells them in bound form to the students. In this case, several book publishers claimed that Kinko’s made copies of excerpts (ranging from 14 to 110 pages each) from 12 copyrighted books, and complied them into 5 separate packets that it sold to college students. It neither sought nor obtained permission from the copyright owners to make the copies. Kinko’s defended its actions on the basis of “fair use,” and the fact that it had made similar packets for 20 years without objection from the copyright owners. Both defenses were rejected by the court, which ordered Kinko’s to refrain from further copyright infringements, and awarded $500,000 in damages. Kinko’s main defense was “fair use.” The Copyright Act specifies that “the fair use of a copyrighted work … is not an infringement of copyright.” Unfortunately, the Act does not define “fair use.” It does suggest several examples of fair use, including copies made “for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research.” However, the Copyright Act states that in deciding whether or not a particular act of copying constitutes fair use, 4 “factors” must be considered. Those 4 factors are (1) the purpose and character of the use, including whether such use is of a commercial nature, (2) the nature of the copyrighted work, (3) the “amount and substantiality of the portion used in relation to the copyrighted work as a whole,” and (4) the effect of the use upon the potential market for the copyrighted work. Does the copying of materials for use by college students constitute fair use under these factors? The court said no. The court evaluated each of the 4 “fair use factors” and concluded that they did not support a finding of fair use. With regard to the first “fair use factor,” the court concluded that the purpose and character of the copying was commercial, and not strictly educational. The court observed that “the crux of the profit/nonprofit distinction is not whether the sole motive of the use is monetary gain but whether the user stands to profit from exploitation of the copyrighted material without paying the customary price.” Further, the court noted that “a quotation of copyrighted material that merely repackages or republishes the original is unlikely to pass the test.” As to the second factor, the court noted that “the scope of fair use is greater with respect to factual than non-factual works.” The materials copied in this case were primarily factual, which supported a conclusion of fair use. The third fair use factor asks how much of the copyrighted work is quoted—both in terms of quantity and quality. The court concluded that “the portions copied were critical parts of the books copied.” It further observed that “courts have found relatively small quantitative uses to be fair use.” Kinko’s argued that several of the books were out-of-print, and this supported a finding of fair use. The court disagreed, noting that “damage to out-of-print works may in fact be greater since permission fees may be the only income for authors and copyright owners.” Finally, the court concluded that the fourth factor (market effect) did not support a finding of fair use. It noted that the Supreme Court has ruled that “to negate fair use one need only show that if the challenged use should become widespread, it would adversely affect the potential market for the copyrighted work.” This test clearly was met.

Finally, the court concluded that the so-called “fair use guidelines” for classroom copying in a nonprofit educational institution did not support a finding of fair use. The guidelines were adopted in 1976 by a committee of educational institutions, authors, and publishers. The court emphasized that the fair use guidelines only authorize multiple copying by or for a teacher (for classroom use) if the copied materials do not exceed the lesser of 1,000 words or 10% of the work. This test clearly was not satisfied by the lengthy reproductions involved in this case. Further, the guidelines specify that “copying shall not substitute for the purchase of books, publishers’ reprints, or periodicals.”

What is the relevance of this case to church leaders? Simply this—churches commonly reproduce materials for use by members in educational and musical programs. Church leaders must understand that unauthorized copying of copyrighted materials constitutes copyright infringement. While “fair use” is a defense, cases such as this illustrate how limited a defense it is. Church workers wishing to duplicate copyrighted materials should obtain advance permission from the copyright owner if the applicability of the fair use defense is at all questionable. Basic Books, Inc. v. Kinko’s Graphics Corporation, 758 F. Supp. 1522 (S.D.N.Y. 1991).

© Copyright 1991, 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: m36 c0691

Legal Developments

Display of Religious Student Artwork

Does this violate the First Amendment?

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Freedom of Religion, Schools

A federal district court in New York ruled that a public school's display of a student's painting depicting a religious theme violated the first amendment's "nonestablishment of religion" clause.

The artwork consisted of a large mural painted in a corner of the school's auditorium by a student in 1965 as part of the school's plan to decorate the arena with original artwork of students. This program was discontinued shortly after this painting was completed. Only two other paintings are located in the auditorium—a picture of an audience, and one of George Washington.

The mural consisted of 21 human figures, including the crucified Christ, two other crucifixion victims, John the Baptist, Mary Magdalene, the Apostle Peter, Moses, and some gladiators and other unidentifiable figures. The mural also contained a depiction of the 10 Commandments. A family (the father was Baptist and the mother Jewish) sued the school, protesting what they felt was "an inappropriate display of a religious painting in a public high school."

The school defended the mural, claiming that the artist intended it to be a depiction of "man's inhumanity to man," rather than religious art. It also argued that "the presence of unidentifiable secular characters and the context in which the school displays the painting [i.e., a dark corner of the school auditorium] negate any message of government endorsement of Christianity and neutralize the effect of the Crucifixion."

The court rejected the school's claims, and concluded that the mural constituted an impermissible "establishment of religion." It noted that "despite the possible neutralizing effect of—or negation of endorsement by—the unidentifiable figures in the painting, this court remains wary of sectarian messages displayed in public schools as they transmit basic and fundamental values to our youth."

It quoted from an earlier decision of the United States Supreme Court: "To an impressionable student, even the mere appearance of secular involvement in religious activities might indicate that the state has placed its imprimatur on a particular religious creed. This symbolic inference is too dangerous to permit." The court also pointed out that in 1980 the Supreme Court outlawed the posting of the 10 Commandments in public school classrooms. The court concluded:

Taking into account the significant message behind the Crucifixion and the skeptical way in which the [Supreme] Court views sectarian messages in public schools, this court concludes as a matter of law that the painting has the primary effect of endorsing Christianity. First, the school displays the painting permanently and not part of any holiday setting. Further, the school's display contains no placards to explain the painting's meaning or the reason for being there. Moreover, this is not a case where the school displays the painting as part of a student art exhibit. Finally, the presence of the non-religious figures, rather than neutralizing the religious effect of the painting, blend into the scene of the Crucifixion and complete the picture as an average observer would perceive it to be …. The court concludes that the display of [the mural] in the auditorium violates the [nonestablishment of religion clause of the first amendment].

Joki v. Board of Education, 745 F. Supp. 823 (N.D.N.Y. 1990)

Legal Developments

Avoiding Lottery Taxes

Taxes cannot be avoided by donating lottery winnings to a church.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

Can a church member avoid being taxed on lottery winnings by assigning them to his church?

A recent IRS ruling clearly indicates that the answer is no. A husband and wife won a large lottery jackpot. They then decided to transfer a substantial portion of their winnings to three other individuals.

The arrangement was to be reflected in an irrevocable written agreement requiring the husband and wife to collect the lottery proceeds and then promptly pay the "gift" portion to the three other individuals. The IRS ruled that the husband and wife would be taxed on the full amount of the lottery winnings, even the portion that they attempted to give away.

The IRS noted that the income tax regulations require income to be taxed that is either actually or constructively received. The income tax regulations specify that "income, although not actually reduced to the taxpayer's possession, is constructively received in the taxable year during which it is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time, or so that the taxpayer could have drawn upon it during the taxable year if notice of intention to withdraw had been given."

According to this language, a taxpayer who receives a lottery prize is taxable on it even if he or she attempts to assign it or give it away to another person or to a charity. This is the conclusion reached by the IRS. Since lottery winners have the right to receive the full amount of the prize at their request, they cannot avoid taxes on the prize by an attempt to transfer some or all of their prize to another person or to a charity.

Private Letter Ruling 9022015.

Legal Developments

Medical Insurance Premiums as Taxable Compensation

The IRS recently ruled on this issue.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Compensation and Benefits

The IRS ruled that workers receive taxable compensation if they can choose to have their employer pay their medical insurance premiums or receive an equivalent amount in cash.

An employer adopted a group health program for its employees and paid employee medical insurance premiums directly to the insurance company. Employees who chose not to participate in the program were given cash in the amount of the premiums that the employer would have paid.

The IRS noted that section 106 of the Internal Revenue Code permits employees to exclude from their income taxes the amount of health insurance premiums paid by their employer. The IRS further acknowledged that it ruled in 1961 that employees who pay their own health insurance premiums directly to an insurance company and are reimbursed by their employer for the amount of the premiums do not have to report this amount as income for tax purposes so long as the employer requires proof that the insurance coverage exists and that the employee in fact paid the premium.

However, the IRS ruled in 1975 that monies paid by an employer to an employee to purchase health insurance were includable in the employee's taxable income since the employer did not verify that the employee in fact used the monies to pay health insurance premiums.

The 1975 ruling was based on the "constructive receipt" doctrine, under which a taxpayer will be taxed on income that is "constructively" received. The income tax regulations specify that "income, although not actually reduced to the taxpayer's possession, is constructively received in the taxable year during which it is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time, or so that the taxpayer could have drawn upon it during the taxable year if notice of intention to withdraw had been given."

The IRS concluded that the constructive receipt principle requires an employee to report as taxable income amounts paid by an employer that the employee can receive as a cash benefit or as a medical insurance premium reimbursement, at the employee's option.

It does not matter that employees in fact use the money to pay health insurance premiums, since they have the right to treat it as a cash benefit. This is all that is required to create taxable income under the constructive receipt rule.

The IRS further noted that "if health insurance is purchased [with the employer payments], the premium amount is considered an employee contribution out of salary rather than a contribution by the employer within the scope of section 106." Private Letter Ruling 9022060.

Legal Developments

Churches and “Landmark” Laws

Designation of a church as a historical landmark may violate the church’s rights.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Church Property

Church Law and Tax 1991-07-01 Recent Developments

Church Property

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

• A federal appeals court ruled that the constitutional rights of a church were not violated by a state “landmark” law that prevented the church from demolishing one of its buildings. St. Bartholomew’s Church is a Protestant Episcopal Church organized in 1835 under the laws of New York as a nonprofit religious corporation. Construction of the current sanctuary began in 1917. The church is a notable example of Byzantine style, built on a Latin cross plan. Significant features include its stone exterior, soaring octagonal dome, and large rose window. Perhaps most significantly, the church incorporates the Romanesque porch of the former church building. The porch is composed of a high arched central portal flanked by two lower arched doorways, all supported by columns. The doors themselves are richly decorated bronze, depicting Biblical themes. Next to the church sanctuary is a terraced, 7-story building known as the “community house.” The community house was built by the church in 1928, and complements the sanctuary in style and decoration. The community house is used for a variety of social and religious activities. It contains a preschool, theater, meeting rooms and offices, and facilities for providing food and shelter to the poor. In 1967, finding that “St. Bartholomew’s Church and community house have a special character, special historical and aesthetic interest and value as part of the development, heritage and cultural aspects of New York City,” the Landmarks Preservation Commission of the City of New York designated both buildings as “landmarks.” This designation prohibits the demolition or alteration of the buildings without approval of the Commission. The church did not object to the landmarking of its property. In 1983, the church applied to the commission for permission to replace the community house with a 59-story office tower. This request was denied as an inappropriate “alteration.” A year later, the church filed a second application, scaling down the proposed office building to 47-stories. This application also was denied, as was a third application. In 1986, the church asked a federal court to declare that the Commission’s actions violated the church’s constitutional right to religious freedom. It alleged that the landmarks law “excessively burdened” the church’s practice of religion, and “entangled” the government in religious affairs. Specifically, the church alleged that the Commission’s actions impaired its ability to carry on and expand the various activities that are central to its religious mission. It argued that the community house no longer is a sufficient facility for its activities, and that the church’s financial base has eroded. Construction of an office building would enable it to provide adequate space for its programs while at the same time generating needed income to support and expand those programs. The church also alleged that the Commission’s actions amounted to a “taking” of the church’s property without just compensation, in violation of the federal constitution. A federal district court rejected the church’s claims, and the church appealed. A federal appeals court also rejected the church’s claims. It quoted from a recent decision of the United States Supreme Court: “The right of free exercise [of religion] 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 religions prescribes.” The court observed that the landmarks law was a “neutral regulation of general applicability,” and accordingly it was valid even though it happened to interfere with a church’s building plans. The court acknowledged that the landmarks law had “drastically restricted the church’s ability to raise revenues to carry out its various charitable and ministerial programs.” Nevertheless, “neutral regulations that diminish the income of a religious organization do not implicate” the constitutional guaranty of religious freedom. What government practices would violate this constitutional guaranty? The court observed: “The central question in identifying an unconstitutional burden is whether the claimant has been denied the ability to practice his religion or coerced in the nature of those practices.” It quoted again from a decision of the United States Supreme Court: “[I]ncidental effects of government programs, which have no tendency to coerce individuals into acting contrary to their religious beliefs, require government to bring forward a compelling justification for its otherwise lawful actions. The crucial word in the constitutional context is ‘prohibit.'” The appeals court concluded, on the basis of this language, that no constitutional violation occurs “absent a showing of discriminatory motive, coercion in religious practice, or the church’s inability to carry outs its religious mission in its existing facilities.” The Commission’s actions simply did not amount to a constitutional violation under this standard. The court concluded that the community house could be modified to accommodate the church’s programs, and that the church possessed sufficient resources to finance such structural modifications. It observed that the church had a total endowment of more than $14 million, much of which was unrestricted. And, the church could conduct a capital fund-raising campaign or even borrow money. The court suggested that if the structural modifications ever proved inadequate to accommodate the church’s programs, then an application by the church to construct an office building might well receive a different reception. But at this point, the court was unwilling to conclude that the church was incapable of carrying out its programs in its existing facilities (with appropriate modifications). Accordingly, the Commission’s denial of the church’s application for permission to construct the 47-story office building did not violate the church’s constitutional rights. St. Bartholomew’s Church v. City of New York, 914 F.2d 348 (2nd Cir. 1990).

Landmarking

Legal Developments

Performance-Based Employee Bonuses

Can this type of bonus jeopardize an organization’s tax-exempt status?

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Compensation and Benefits

Private Letter Ruling 9112006

Does a tax-exempt organization jeopardize its exempt status by paying employees a "bonus" that is based on performance?

That was the issue addressed by the IRS in a recent ruling. Churches and other organizations exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code may not pay "unreasonable compensation" to their workers. If they do, they risk losing their tax-exempt status.

The "PTL" organization lost its tax-exempt status retroactively to 1984 on the basis of unreasonable compensation paid to three of its top employees. What about employer bonuses that reward employees for outstanding achievement? Do they jeopardize an exempt organization's tax-exempt status?

The case before the IRS involved a nonprofit hospital that proposed to pay bonuses to its employees. The hospital created a "funding pool" out of which the bonuses were paid. This pool did not ordinarily exceed 2-3% of the hospital's payroll. Half of the pool was distributed to all employees based on the hospital's overall performance, and the other half was distributed to the employees of individual departments that exceeded specific goals. These limitations ensured that the bonus available to any one employee ordinarily was modest.

Further, the hospital had its independent auditors (a CPA firm) review compensation of the higher-paid employees (physicians and executives) to ensure that no one received more than reasonable compensation. The independent auditors surveyed 18 of the largest hospitals in the country to determine the reasonableness of compensation paid to physicians and executives. The auditors also used their own experience as a national accounting firm to make this decision.

In evaluating the reasonableness of compensation, the auditors took into account the performance bonuses, as well as all other forms of compensation. If a bonus would increase a particular employee's total compensation to a level that the auditors deem to be unreasonable, then the bonus is not paid.

In concluding that this arrangement did not jeopardize the hospital's tax-exempt status, the IRS observed:

The information submitted indicates the participation of all employees, the development of multi-level standards for increased productivity and cost efficiency, as well as for the quality of health care provided, the various levels of independent review, the operation of a quality assurance program, the relatedness of the plan's employee distribution to the services performed, the review of the total compensation paid by independent auditors of incentive payments, and the limitations established to safeguard against possible abuses, all as described above and in the case file, should not produce distributions to your employees that are in excess of reasonable compensation for the services performed …. Accordingly, based on the information submitted, we conclude that your proposed incentive compensation plan will not adversely affect your tax-exempt status under section 501(c)(3) of the Code. However, this ruling is based on the understanding that all payments under your incentive pay plan remain within the range of reasonable compensation for employees covered.

This ruling is of interest to churches and religious organizations that pay above-average compensation to clergy and church executives. It is our position that any church or religious organization paying total annual compensation of $100,000 or more to any individual should obtain a written opinion from a tax attorney or CPA that the amount of compensation is not unreasonable. Compensation includes not only salary, but also housing allowances, business expense reimbursements under a nonaccountable plan, taxable fringe benefits, personal use of an employer-owned vehicle, and various other items.

The recent IRS ruling indicates that a charity can reduce the risk of jeopardizing its tax-exempt status by having an annual review of compensation by a tax attorney or CPA firm. An evaluation of the reasonableness of compensation will involve several considerations, including a comparison of what other similarly situated clergy and executives are earning in related organizations.

Churches and religious organizations should bear in mind that an IRS finding of unreasonable compensation may result in loss of tax-exempt status. This would have a variety of negative consequences, including the following: (1) the church's net income would be subject to federal (and possibly state) income taxation; (2) donors no longer could deduct contributions to the church; (3) ineligibility to establish "403(b)" tax-sheltered annuities; (4) possible loss of property and sales tax exemptions; (5) loss of preferential mailing rates; (6) possible loss of a housing allowance exclusion for ministers serving the church; (7) possible inapplicability of a minister's exemption from social security taxes to compensation received from the church; and (8) clergy compensation might not be exempt from federal income tax withholding.

Clearly, any activity that jeopardizes a church's exemption from federal income taxation, and correspondingly the benefits summarized above, is a matter that must be taken very seriously.

Legal Developments

Supreme Court Rules on Tax Evasion

The Supreme Court recently issued a surprise ruling.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Income Taxes - Clergy

Church Law and Tax 1991-05-01 Recent Developments

Clergy – Income Tax

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

• In a ruling that no doubt will breathe new life into the “tax protestor” movement, the United States Supreme Court ruled that taxpayers cannot be guilty of a criminal violation of the tax law for taking positions based on ignorance or a misunderstanding of the law, or a sincere belief that they are not violating the law.

The tax law imposes criminal penalties upon a taxpayer “who willfully attempts in any manner to evade or defeat” the federal income tax. A commercial airline pilot who failed to pay taxes or file returns for several years was prosecuted on several counts of willfully violating the law. He maintained that he could not be convicted of willfully violating the law since he had a good faith belief that he was not a taxpayer and that wages are not taxable. The taxpayer’s beliefs arose from his own study of the constitution and federal tax law, and from information he received while attending several seminars sponsored by a tax protestor group. The trial court convicted the taxpayer on several counts of criminal tax evasion. It concluded that only “objectively reasonable” misunderstandings of the law negate the “willfulness” requirement, and that the taxpayer’s belief that wages are not taxable was not objectively reasonable. A federal appeals court upheld the convictions, and the taxpayer appealed to the United States Supreme Court. In a surprise ruling, the Supreme Court agreed with the taxpayer that he could not be convicted of willfully violating the law if he sincerely believed that wages are not taxable, even if this belief was not “objectively reasonable.” The Court made three very important qualifications. First, it emphasized that a jury may evaluate the sincerity of a taxpayer’s professed beliefs. But, if a jury concludes that a taxpayer sincerely and in good faith did not understand the law or believed that he was not violating it, then he cannot be guilty of criminal conduct. Second, the Court noted that “the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties.” This would not negate willfulness. And third, the Court noted that federal tax law imposes various civil penalties even in the event of a good faith mistake as to the law. Two Justices dissented, noting that “it is incomprehensible to [us] in this day, more than 70 years after the institution of our present federal income tax system … [that] any taxpayer of competent mentality can assert as his defense to charges of statutory willfulness the proposition that the wage he receives for his labor is not income, irrespective of a cult that says otherwise and advises the gullible to resist income tax collections.” The dissenters predicted that the Court’s decision “will encourage taxpayers to cling to frivolous views of the law in the hope of convincing a jury of their sincerity. If that ensues, I suspect we have gone beyond the limits of common sense.” Cheek v. United States, S. Ct. (1991).

Legal Developments

Benefits Received for Contributions

Donations made in exchange for benefits are not tax-deductible.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

Church Law and Tax 1991-05-01 Recent Developments

Charitable Contributions

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

• A federal district court rejected the claim of a member of the Church of Scientology that “contributions” to his church were tax-deductible. The member conceded that the United States Supreme Court ruled in 1989 that contributions to the church were not tax-deductible, since they consist of specified payments in exchange for specified benefits. The member claimed that the IRS routinely permits members of conventional churches to deduct their contributions though benefits are received in exchange. As a result, the member insisted that the government was discriminating against him. In rejecting this claim, the court observed that “it is well-established that a taxpayer has no right to insist upon the same erroneous treatment afforded a similarly situated taxpayer in the past.” Powell v. United States, 91-1 U.S.T.C. ¶ 50,117 (S.D. Fla. 1990).

Legal Developments

Pension Funds and Bankruptcy

Can a bankrupt minister protect his pension funds?

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Compensation and Benefits, Retirement Plans

Can a minister who files for bankruptcy protect his pension funds from bankruptcy creditors?

That was the issue before a federal bankruptcy court in an important ruling. A 56-year-old minister declared bankruptcy, and both he and his denominational pension board sought to protect his pension funds from the reach of creditors in the bankruptcy proceeding.

The pension plan is funded by a combination of member and congregation contributions. The plan provides that the minister shall contribute 3% of his salary and the congregation which employs him shall contribute 8% of the member's salary.

Both the member and the congregation may make additional optional contributions, which are to be allocated as member or congregation contributions, respectively. When a member attains the age of 60 years or completes 40 years of service, the combined accumulation of the member and congregation contributions is applied to purchase a retirement annuity for the member.

The plan provides that if a member becomes ineligible under the plan before the age of retirement or 40 years of service, he may elect to withdraw part or all of the accumulated member contributions. The amount remaining in the member's account will be fully vested in the member and will continue to draw interest until it can be applied toward an annuity or death benefit as provided in the plan.

The member accumulation that may be withdrawn consists solely of member contributions and does not include interest on those amounts. The pension board conceded that the debtor could become eligible to withdraw the accumulated member contributions under the plan by the act of resigning his ordination as a minister.

The current balance in the pension fund is $51,273.35, and the total member contribution, which is the amount the debtor actually contributed to the plan, is $6,848.10. The pension board argued that the entire pension was beyond the reach of the bankruptcy court, or, if this argument lost, that only those funds contributed by the minister himself (and not the congregations) could be reached by the court.

The pension board noted that, under a clause prohibiting alienation or assignment of an interest in the plan, the plan assets could neither be levied upon by creditors nor transferred by the debtor. The board did not dispute the court's characterization of the minister's personal contributions as "voluntary," but asserted that since the minister has no present right to withdraw the member accumulation portion of the plan, neither should the court be able to reach the minister's interest for the benefit of creditors.

The court concluded that the minister's own contributions to the plan were reachable by the bankruptcy creditors, but not the contributions made by congregations to the plan. It emphasized that "the scope of the bankruptcy estate under the Bankruptcy Code is quite broad and consists of 'all legal or equitable interests of the debtor in property as of the commencement of the case.'

In general, property becomes part of the debtor's estate regardless of any restrictions which may have been placed on its transfer." However, there is an important exception to this rule—a minister's pension account is not reachable by bankruptcy creditors if the plan prohibits transfers to creditors (or anyone else) in a way that satisfies the definition of a "spendthrift trust" under state law. A spendthrift trust is a trust that is created for the benefit of a particular beneficiary by a person who does not want the beneficiary to have any control or access to the trust funds. It ordinarily is designed to protect a beneficiary "from his own improvidence or incapacity."

The court noted that "traditionally, there are three requirements for a spendthrift trust: (1) the settlor [i.e., the person who creates the trust] may not be a beneficiary of the trust plan, (2) the trust must contain a clause barring any beneficiary from voluntarily or involuntarily transferring his interest in the trust, and (3) the debtor-beneficiary must have no present dominion or control over the trust corpus." The court emphasized that "the beneficiary's inability to gain access to or demand distribution from the trust corpus is the primary element of a spendthrift trust."

The court concluded that the minister, at the time of filing bankruptcy,

"had the ability to withdraw the member accumulation portion of his pension assets by the act of resigning his ordination as a minister …. In a true spendthrift trust, a beneficiary can take no action to initiate an early termination of the trust or invasion of the trust corpus. A right to control distribution from trust funds is inimical to the purpose of a spendthrift trust, which is to provide for the maintenance of another while protecting the beneficiary from his own improvidence or incapacity. Because the [minister] could access the entire amount of his member contributions by the voluntary act of resigning his ordination as a minister, he has effective dominion and control over these assets sufficient to disqualify this portion of the plan as a spendthrift trust."

The court concluded that "the plan fails as a spendthrift trust to the extent that the [minister] can compel a premature distribution of plan assets, as this is contrary to the purpose and requirements of a spendthrift trust."

However, the court concluded that the congregational contributions to the minister's pension fund were not accessible to the bankruptcy creditors, since this aspect of the plan satisfied the requirements of a spendthrift trust.

The court observed:

"Under the terms of the plan, the [minister] could withdraw only the member contribution portion resigning his ordination at this time. The amount remaining the pension plan is shielded from his dominion and control thus retains its character as a spendthrift trust. Disqualification of a portion of a plan as a spendthrift does not bring the [minister's] entire interest, including funds to which he has no rights of withdrawal, into property the estate. The funds to which the [minister] has no right of withdrawal satisfy traditional spendthrift requirements [and are excluded from the reach of bankruptcy creditors]."

The court stressed that as to the congregational contributions to the pension fund, the plan "contains an absolute restriction on alienation or assignment of plan benefits, and there is no question … regarding the sufficiency of the plan's anti-alienation clause." This case provides important insight into the ability of creditors to access clergy pension funds. It should be reviewed carefully by both ministers and denominational pension boards. Tomer v. Board of Pensions of the Church of God, 117 B.R. 391 (S.D. Ill. 1990).

Legal Developments

“Fair Use” and Copyright Infringement

What constitutes fair use of copyrighted materials?

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Copyright

Church Law and Tax 1991-05-01 Recent Developments

Copyright Law

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

• How much of a copyrighted book can a church or pastor quote from without committing copyright infringement? A federal appeals court decision provides some helpful guidance. An author wrote an uncomplimentary biography of a deceased religious leader. As the book was in the process of being published, a lawsuit was filed seeking to prevent the book from being publicly distributed on the ground that it contained sufficient verbatim quotations from the religious leader’s published writings to constitute copyright infringement. The author claimed that the verbatim quotations constituted legitimate “fair use.” The Copyright Act specifies that “the fair use of a copyrighted work … is not an infringement of copyright.” Unfortunately, the Act does not define “fair use,” but it does list 4 “factors” to consider in deciding whether or not a particular use of a copyrighted work constitutes fair use. Those 4 factors are (1) the purpose and character of the use, including whether such use is of a commercial nature, (2) the nature of the copyrighted work, (3) the “amount and substantiality of the portion used in relation to the copyrighted work as a whole,” and (4) the effect of the use upon the potential market for the copyrighted work. A federal district court concluded that the biography contained too many verbatim quotations from the religious leader’s own writings to constitute fair use, and the case was appealed. A federal appeals court ruled that the biography was a fair use of the copyrighted materials, and therefore did not constitute infringement. The court evaluated each of the 4 “fair use factors” and concluded that all of them supported the finding of fair use. With regard to the first factor, the court concluded that biographies, and particularly critical biographies, generally constitute fair use. The proposed book used quotations from the religious leader’s published writings “for the entirely legitimate purpose of making his point that [the leader] was a charlatan and his church a dangerous cult.” While the author no doubt expected to make a profit, this was a secondary purpose. As to the second factor, the court again emphasized that the proposed book was a biography, and that biographies generally constitute fair use. The court observed that “biographies, of course, are fundamentally personal histories and it is both reasonable and customary for biographers to refer to and utilize earlier works dealing with the subject of the work and occasionally to quote directly from such works.” The third fair use factor asks how much of the copyrighted work is quoted—both in terms of quantity and quality. The court concluded that only small portions of several works were quoted, rather than larger selections of any one work. Further, the portions quoted were not “key portions” of any of the books. Finally, the court concluded that the fourth factor led to a finding of fair use, since the biography would have little if any impact on the sale of the copyrighted works. In conclusion, the court observed: “The book is a critical biography, designed to educate the public about [the deceased religious leader], a public figure who sought public attention, albeit on his own terms; the book quotes from merely a small portion of [his] works and from only those that have been published; and, it will cause no adverse impact protected by the copyright law on the market for [the copyrighted] writings. In these circumstances, we conclude that the book’s use of passages from [the copyrighted] works is protected fair use.” This case contains a helpful summary of the 4 factors that the courts apply in deciding whether or not a particular use of a copyrighted work constitutes fair use. Churches often quote from copyrighted materials. Before doing so, they should consider the likelihood of their conduct being justified on the basis of fair use. For example, making a transparency of a copyrighted song will never constitute fair use, since it will fail the third factor (most if not all of the work is reproduced), and perhaps one or more of the other three factors as well. On the other hand, quoting a sentence or two out of a copyrighted book ordinarily will constitute fair use. For a complete discussion of the subject of fair use, and its application to a variety of church practices, see Richard Hammar’s Church Guide to Copyright Law, which is available form the publisher of this newsletter. New Era Publications International v. Carol Publishing Group, 904 F.2d 152 (2nd Cir. 1990).

Exceptions to Copyright Infringement

Legal Developments

Religious Organizations Must Pay Taxes

Court rules that organizations must pay, even if doing so violates their religious tenets.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax 1991-05-01 Recent Developments

Freedom of Religion

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

• A federal district court in Pennsylvania ruled that the IRS has the authority to compel a religious organization to collect and pay over to the government the unpaid federal taxes of an employee even if doing so violates the religious tenets of the organization and its employees. The “Yearly Meeting of the Society of Friends” was established in 1681 by William Penn. It presently includes some 13,000 members and 100 congregations in Pennsylvania, New Jersey, Delaware, and Maryland. The Yearly Meeting has about 45 full-time employees. In 1985 and 1986, the IRS served the Yearly Meeting with “notices of levy” against the salary of two employees who had not paid all of their federal taxes. A “levy” is an order directed at an employer that requires it to satisfy an employee’s unpaid taxes by withholding funds from his or her salary. The Yearly Meeting refused to honor the two levies, informing the IRS that the two employees were “deeply religious and conscientiously motivated individuals who feel they cannot pay the military portion of their taxes without violating the central tenets of their religious faith.” The Yearly Meeting further informed the IRS that it was its policy “not to coerce or violate the consciences of such persons, or to act as agents for those who do. We therefore advise you that we cannot honor the levy you have served.” The IRS sought a court order compelling the Yearly Meeting to collect the unpaid taxes out of the employees’ wages. It also asked the court to assess a penalty (in the amount of 50% of the uncollected taxes) against the Yearly Meeting on the basis of section 6332(c)(2) of the Internal Revenue Code. The Yearly Meeting defended its actions on the basis of the first amendment’s guaranty of religious freedom. It asserted that enforcement of the levy would deny the Yearly Meeting’s free exercise of religion because it is a fundamental tenet of the Yearly Meeting to respect the conscientious actions of its members. The Yearly Meeting further asserted that the government is constitutionally required to accommodate the religious principles of the Society of Friends by finding another way to collect delinquent taxes from Yearly Meeting employees who are “religious pacifists.” The court rejected the Yearly Meeting’s arguments, claiming that a 1990 decision of the United States Supreme Court (Employment Division v. Smith—discussed in the September-October 1990 issue of this newsletter) left it no choice. The court pointed out that prior to the Smith case, persons whose religious beliefs were burdened by a government practice were entitled to an exemption from that practice unless the exemption frustrated a “compelling state interest.” The Supreme Court in the Smith case repudiated this approach to resolving first amendment claims. It observed 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 (or prescribes) conduct that his religion prescribes (or proscribes).” The Supreme Court concluded that claims for religious exemption from criminal prohibitions should not be evaluated under any “balancing test” requiring an inquiry into the existence of a compelling state interest, since “the government’s ability to enforce generally applicable prohibitions of socially harmful conduct … cannot depend on measuring the effects of a governmental action on a religious objector’s spiritual development.” On the basis of this language, the federal district court concluded that it had no option but to reject the Yearly Meeting’s claim of first amendment protection. However, the court refused to assess the 50% penalty against the Yearly Meeting, as the IRS had insisted. The court pointed out that the Yearly Meeting’s refusal to honor the initial IRS demand occurred prior to the Smith case. At that time, the refusal to honor the IRS demand was based upon a reasonable interpretation of the first amendment, and so no penalty could be assessed. The court cautioned that the penalty would apply to any future (post-Smith) refusals to comply with IRS demands. The court clearly was frustrated by its inability to assist the Yearly Meeting. It concluded: “It is ironic that here in Pennsylvania, the woods to which Penn led the Religious Freedom Society of Friends to enjoy the blessings of religious liberty, neither the Constitution nor its Bill of Rights protects the policy of that Society not to coerce or violate the consciences of its employees and members with respect to their religious principles, or to act as an agent for our government in doing so.” But, “unless we wish anarchy to prevail within the federal judicial system, a precedent of the Supreme Court must be followed by lower federal courts no matter how misguided the judges of those courts think it to be.” There is no doubt that the Smith case was a serious blow to religious freedom. It has generated considerable opposition, and attempts are underway in Congress and in some state legislatures, to limit its effect. Hopefully, these activities will persuade the Supreme Court to re-evaluate and repudiate its Smith decision. United States v. Philadelphia Yearly Meeting of the Religious Society of Friends, 91-1 U.S.T.C. ¶ 50,042 (E.D. Pa. 1990).

The Free Exercise Clause

Legal Developments

Zoning Ordianance Ruled Unconstitutional

A court recently made an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

State: Alabama
Categories: Church Property, Zoning

Church Law and Tax 1991-03-01 Recent Developments

Zoning

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

• Does a county’s practice of prohibiting churches from building new facilities if neighboring residents object violate the churches’ constitutional right of religious freedom? Yes, concluded a federal district court in Alabama in an important ruling. A county adopted a new zoning ordinance that limited churches to “institutional districts.” The ordinance purposely failed to recognize any land as an institutional district, so that churches would be forced to seek a zoning variance before purchasing property for church use. This procedure was designed to give the county “better site development controls over institutional construction.” A Mormon congregation that had outgrown its existing facility attempted to purchase land on which it proposed to construct a new sanctuary. It filed an application to have the property rezoned as an “institutional district,” but its application was denied by the county following a hearing in which several neighboring residents expressed “vociferous opposition.” The residents lived in an affluent residential district adjacent to the church’s proposed building site, and they were horrified by the impact the church would have on the “aesthetics” of the community and the value of existing homes. The county commission based its denial of the church’s application on the basis of the “will of the people.” One commissioner stated that churches should not locate anywhere that they are not wanted. The court noted that the church had outgrown its present facility, and that the church had “as a central tenet of its faith the need to assemble together and strengthen the faith of each other and to partake of communion.” The court concluded that the church’s constitutional right to exercise its religion was violated by the county’s procedure: “It is undisputed that the primary, if not the sole, policy reason for establishing the [county’s institutional district] system was to give it ‘site control’ …. The court recognizes that the [county is] allowed to consider … neighborhood aesthetics. On the other hand, it is too great a burden on religious interests to allow this to be determined [in each case] based upon neighborhood opposition …. Allowing churches to go only where they are welcome smacks of an unreasonable burden, even if the opposition is not related to the denomination of the church …. The court’s primary conclusion is that the burden here on religion is that the ability of a church to locate or not is dependent on the acceptability of that church, or any church, to the surrounding community, without there having been any predetermination that churches are allowed to go in any area.” This case will lend support to the right of churches to acquire land for church use if (1) no land is zoned for church use, and churches are required to apply for a zoning variance for any land that they purchase for church use, and (2) the decision whether or not to grant the zoning variance depends on opposition or support by neighboring residents. Church of Jesus Christ of Latter-Day Saints v. Jefferson County, 741 F. Supp. 1522 (N.D. Ala. 1990).

Legal Developments

Jim Bakker’s Fraud Convictions Upheld

His prison sentence, however, was vacated.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax 1991-03-01 Recent Developments

Televangelists

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

• A federal appeals court upheld the criminal fraud convictions of televangelist Jim Bakker, but vacated his 45-year prison sentence. In 1989, Bakker was convicted on 8 counts of mail fraud, 15 counts of wire fraud, and 1 count of conspiracy. In addition to his prison sentence, Bakker was fined $500,000. These convictions were based on mail and television appeals to raise funds for “lifetime partnerships.” These partnerships promised lodging privileges for various amounts of time in facilities at “PTL.” Many of these “partners” drew on meager incomes to purchase their lodging benefits. Bakker raised at least $158 million through the sale of approximately 153,000 partnerships with lodging benefits. He promised television viewers that he would limit the sale of partnerships to ensure that each partner would be able to use the facilities annually. However, Bakker oversold the partnerships. For example, he promised to limit the sale of Grand Hotel partnerships to 25,000 but actually sold 66,683. In addition, Bakker used relatively few of the funds solicited from the partners to construct promised facilities. In fact, of 8 proposed lodging facilities only the Grand Hotel and one bunkhouse were actually completed. Instead, Bakker used partnership funds to pay operating expenses of PTL and to support a lavish lifestyle. This combination of overselling partnerships and diverting partnership proceeds meant that the overwhelming majority of the partners never received the lodging benefits Bakker promised them. Bakker challenged his criminal conviction on several grounds, including biased media coverage. The court rejected all of Bakker’s challenges, and upheld his criminal convictions on all 24 counts. However, the court concluded that the trial judge acted improperly in sentencing Bakker, and it accordingly vacated the 45-year sentence and ordered another federal judge to determine the appropriate sentence. The court noted that during sentencing the trial judge said of Bakker: “He had no thought whatever about his victims and those of us who do have a religion are ridiculed as being saps for money-grubbing preachers or priests.” In concluding that these remarks were sufficiently inappropriate to dictate a re-sentencing of Bakker, the court observed:

“We recognize that a sentencing court can consider the impact a defendant’s crimes have had on a community and can vindicate that community’s interests in justice. To a considerable extent a sentencing judge is the embodiment of public condemnation and social outrage. As the community’s spokesperson, a judge can lecture a defendant as a lesson to that defendant and as a deterrent to others. If that were all that occurred here, the court would have been properly exercising its discretion, and we would be loathe to disturb what surely is an integral part of the sentencing process. Sentencing discretion, however, must be exercised within the boundaries of due process. In this case, the trial judge exceeded those boundaries. Courts have held that sentences imposed on the basis of impermissible considerations, such as a defendant’s race or national origin, violate due process. While these cases focused on a defendant’s characteristics, we believe that similar principles apply when a judge impermissibly takes his own religious characteristics into account in sentencing. Our Constitution, of course, does not require a person to surrender his or her religious beliefs upon the assumption of judicial office. Courts, however, cannot sanction sentencing procedures that create the perception of the bench as a pulpit from which judges announce their personal sense of religiosity and simultaneously punish defendants for offending it. Whether or not the trial judge has a religion is irrelevant for purposes of sentencing. Regrettably, we are left with the apprehension that the imposition of a lengthy prison term here may have reflected the fact that the court’s own sense of religious propriety had somehow been betrayed. In this way, we believe that the trial court abused its discretion in sentencing Bakker. Consequently, the sentence is vacated and the case is remanded for resentencing. This resentencing will be carried out by a different district judge to ensure that the ends of due process are achieved. We remand this case with genuine reluctance because Bakker’s assignments of error at the trial phase only underscore a proceeding which was fairly conducted in the face of trying circumstances …. We recognize that a trial judge on occasion will misspeak during sentencing and that every ill-advised word will not be the basis for reversible error. In this case, however, our review of the sentencing transcript reveals comments that are, in the end, too intemperate to be ignored. Because an impermissible consideration was injected into the sentencing process, we must remand the case. United States v. Bakker, F.2d (4th Cir. Feb. 11, 1991).

Legal Developments

Churches and Zoning Law

A court ruled that a law prohibiting churches from meeting in commercial zones does not violate the Constitution.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Church Property, Zoning

Church Law and Tax 1991-03-01 Recent Developments

Zoning

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

• A federal district court in Minnesota ruled that a city’s refusal to allow a church to operate in a commercial zone did not violate the church’s constitutional rights. A city zoning ordinance permitted churches in residential zones, but not in commercial or industrial zones. A new church congregation began meeting in a pastor’s home. As the congregation grew, it began meeting in a public school building, and then in a commercial building. Eventually, the city notified the church that use of the commercial building violated city zoning law. The church unsuccessfully sought to amend the zoning ordinance to permit churches in commercial zones, and then it sought to locate other sites for church services. The church was not able to find suitable accommodations in a residential zone, and continued to meet in the commercial building. When the city ordered the church to vacate the building, the church filed a lawsuit alleging that the city’s actions violated the constitutional guaranty of religious freedom. The court rejected the church’s position. It noted the constitutional guaranty of religious freedom is not violated unless “something is prohibited because of its religious affiliation or its display of religious belief.” This was not the case here, the court concluded, since the city had not barred churches from commercial zones because of their religious character: “The zoning ordinance neither excludes only churches from the commercial and industrial zones nor reveals an anti-religious intent.” The court also rejected the church’s claim that the city’s actions violated the constitutional guaranty of the “equal protection of the laws.” This guaranty ensures that “all persons similarly situated should be treated alike.” The church pointed out that a number of other charitable organizations (including Alcoholics Anonymous and the Masonic Lodge) were permitted to operate in commercial zones, and thus the exclusion of churches was unconstitutional. The court observed that “what the church cannot deny, however, is that the church describes itself precisely as a ‘church’ while Alcoholics Anonymous and the Masonic Lodge cannot be so defined.” This ruling is clearly erroneous, and hopefully will be reversed on appeal. The court’s rejection of the church’s “equal protection” argument on the ground that Alcoholics Anonymous and the Masonic Lodge are not “churches” defies belief. Such an interpretation would virtually write this protection out of the constitution. The court’s cavalier treatment of religious liberty is equally disturbing. What would violate the constitutional guaranty of religious liberty according to this court? It gave two examples—a state law “banning the casting of statues that are to be used for worship purposes,” or “prohibiting bowing down before a golden calf.” Any further developments will be reported in future issues of this newsletter. Cornerstone Bible Church v. City of Hastings, 740 F. Supp. 654 (D. Minn. 1990).

Legal Developments

Church Schools and the Minimum Wage

Court rules that church-run schools must pay the minimum wage.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Employment Practices, Schools

Church Law and Tax 1991-01-01 Recent Developments

Employee Relations

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

• Does a church school have to pay its employees the “minimum wage”? Yes, concluded a federal appeals court in a significant ruling. A fundamentalist Baptist church in Virginia opened a private school in 1973 with a full-time curriculum that included instruction in the Bible and traditional academic subjects taught from a Christian perspective. For the first few years of the school’s operation, teacher salaries were very low. To attract and retain teachers, the church began paying “salary supplements” to each teacher who was a “head of household.” Between 1976 and 1986, all married male teachers received a salary supplement, but married women were not eligible to receive the supplement, since “the Bible clearly teaches that the husband is the head of the house, head of the wife, head of the family.” Also, between 1976 and 1982, 91 persons who worked at the school as support personnel were paid less than the hourly minimum wage. These workers included bus drivers, custodians, kitchen workers, bookkeepers, and secretaries. In 1978, the United States Department of Labor asserted that the school violated the “Fair Labor Standards Act” by paying women less than men and by not paying the minimum wage. The church agreed that it paid women less than men, and that it did not pay some workers the minimum wage. However, it asserted that (1) the school was not covered by the Fair Labor Standards Act, (2) school employees were “ministers” and therefore excluded from coverage under the Act, and (3) that applying the Act to the church’s school would violate the constitutional guaranty of religious freedom. A trial court rejected the church’s arguments, and ordered it to distribute $177,680 among those female teachers who had been paid less than men, and $16,818 among those workers who had not received the minimum wage. The church appealed, and a federal appeals court upheld the trial court’s decision in favor of the government. In rejecting the church’s claim that the Fair Labor Standards Act did not apply to a church-operated school, the court noted that the Act was amended in 1966 to specifically cover nonprofit, private schools. The church also claimed that school employees were really church employees and therefore exempt from the Act. It pointed out that the school was “inextricably intertwined” with the church, that the church and school shared a common building and a common payroll account, and that school employees must subscribe to the church’s statement of faith. The court rejected this reasoning without explanation. The court also rejected the church’s claim that its school employees were exempt from the Act because they were “ministers” who considered teaching at the school “their personal ministry.” It noted that they “perform no sacerdotal functions, neither do they serve as church governors. They belong to no clearly delineated religious order.” Further, “the exemption of these teachers would create an exception capable of swallowing up the rule”—since it would mean that all teachers at church-operated schools would be exempt (contrary to the intent of the 1966 amendment to the Act that was designed include them). Finally, the court rejected the church’s claim that its constitutional right of religious freedom would be violated by subjecting its school employees to the minimum wage and “equal pay” provisions of the Act. The church claimed that its “head of household” salary supplements (paid to males) “was based on a sincerely-held belief derived from the Bible,” and that employee wages should be fixed by the church acting under divine guidance rather than by the government. The court acknowledged that the church might suffer a burden on the practice of its religion, but it insisted that any burden would be limited. It observed that although the church’s head of household salary supplement (for males) “was grounded on a biblical passage, church members testified that the Bible does not mandate a pay differential based on sex. They also testified that no [church] doctrine prevents [the school] from paying women as much as men or from paying the minimum wage. Indeed, the school now complies with the Fair Labor Standards Act ….” This limited burden on the church’s religious beliefs was outweighed by the government’s compelling interest in ensuring that workers receive the minimum wage. The court observed that school employees whose religious convictions were violated by the school’s coverage under the Act could simply return a portion of their compensation back to the church. Or, they could volunteer their services to the school. This ruling indicates that church-operated primary and elementary schools in the fourth federal circuit (which includes the states of Maryland, North Carolina, South Carolina, Virginia, and West Virginia) must comply with the Fair Labor Standards Act’s “equal pay” and minimum wage provisions. Note that this ruling only applies to church-operated primary and secondary schools. It does not apply to churches themselves. The Act has never been construed to apply to churches that are not engaged in commercial activities. However, the court’s rather cavalier rejection of the church’s religious beliefs suggests that any attempt by Congress to include church employees under the coverage of the Act would be deemed permissible. Coverage of church employees (not engaged in commercial activities) has not yet been contemplated by Congress. Note further that clergy are specifically exempt from the provisions of the Act. Dole v. Shenandoah Baptist Church, 899 F.2d 1389 (4th Cir. 1990).

Legal Developments

Freedom of Religion

Church Law and Tax 1990-09-01 Recent Developments Freedom of Religion Richard R. Hammar, J.D., LL.M.,

Richard R. Hammar, Attorney, CPA

Bio

State: Alabama
Categories: Freedom of Religion, Schools

Church Law and Tax 1990-09-01 Recent Developments

Freedom of Religion

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

• To what extent can a university professor share his religious beliefs during class? That was the issue before a federal district court in Alabama. A state university professor occasionally referred to his religious beliefs during class lectures, and organized voluntary, after-class meetings to discuss the religious implications of the course material. When a few students complained of the classroom comments and after-class meetings, the university investigated the matter and issued a memorandum prohibiting the professor from injecting his religious beliefs and preferences during instructional time, and banning his after-class meetings. When the professor’s attempts to have the university rescind the memorandum proved unsuccessful, he filed a lawsuit in federal court alleging that the school was interfering with his constitutional right to freely exercise his religion. The court agreed with the professor. The court began its opinion by emphasizing that “university professors are entitled to freedom of speech in their jobs,” and that the “classroom is peculiarly the marketplace of ideas.” It observed that the university did not prohibit faculty members from engaging in non-religious classroom speech involving personal views, and did not prohibit faculty members from organizing after-class meetings for discussing ideas from a non-religious perspective. Accordingly, the university has “created a forum for students and their professors to engage in a free interchange of ideas” and “it may not exclude unfavored religious speech unless the exclusion is necessary to further a compelling governmental interest ….” The university countered that its policy was necessary in order to avoid “establishing a religion.” The court summarily rejected this defense, concluding that “the university has no interest sufficient to justify restricting a professor’s freedom to make occasional classroom comments about personal religious beliefs or to restrict him from holding after-class meetings with students on state university property to discuss a Christian perspective on academic topics.” Bishop v. Aronov, 732 F. Supp. 1562 (N.D. Ala. 1990).

© Copyright 1990, 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 c0690

Legal Developments

Zoning – Part 2

Church Law and Tax 1990-09-01 Recent Developments Zoning Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: California
Categories: Church Property

Church Law and Tax 1990-09-01 Recent Developments

Zoning

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

• A New Jersey state appeals court rejected an effort by concerned citizens to prevent a Jewish congregation from constructing a synagogue in their residential neighborhood. The congregation proposed to construct a 2,000 square-foot sanctuary with 120 seats and a parking lot with room for 20 vehicles. The congregation claimed that it had to construct its building in a residential area, since most of its members were Orthodox Jews who had to walk to services on the Sabbath. The 20 parking spaces satisfied the local zoning law which required 1 parking space for every 6 sanctuary seats. The neighboring residents conceded that the planned synagogue met the technical requirements of the zoning ordinance, but they argued that the ordinance was invalid since it did not require adequate parking for houses of religious worship. A state appeals court rejected the neighbors’ position, and allowed the congregation to proceed with construction. The court acknowledged that zoning laws must advance the “public morals and the general welfare,” but it noted that “the courts have held that religious activity itself is in furtherance of public morals and the general welfare, and that religious institutions enjoy a highly-favored and protected status, which severely curtails the permissible extent of governmental regulation.” For a zoning law to be invalid, it must be arbitrary or not reasonably designed to advance public morals or the general welfare. The court concluded that the neighboring residents had failed to satisfy this test. While the court agreed that more parking spaces might be desirable, it could not agree that the zoning ordinance was “arbitrary.” It noted that the congregation’s members were forbidden to drive to religious services on the Sabbath, and that off-street parking was available to accommodate vehicles during occasional social events occurring during the week. The court also quoted with approval from rulings of the United States Supreme Court that have found that “the Constitution affirmatively mandates accommodation, not merely tolerance, of all religions, and forbids hostility toward any,” and that “[w]e are a religious people whose institutions presuppose a Supreme Being.” It concluded that “our branches of government have a right, indeed an obligation, to recognize the freedom of all to worship and to do that which is reasonable to respect this essential freedom.” The court acknowledged that “it was probably impossible” for a growing congregation to build a sanctuary in a residential neighborhood “without offending some residents.” However, “the law cannot expect the impossible.” Lakewood Residents Association v. Congregation Zichron Schneur, 570 A.2d 1032 (N.J. Super. 1989).

Legal Developments

Audits

Churches

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Church Records

Church Law and Tax 1990-09-01 Recent Developments

Audits – churches

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

• A federal district court in Massachusetts addressed the issue of IRS audits of churches, and ruled that the IRS had exceeded its authority in seeking to subpoena a church’s records. In 1988, an IRS regional commissioner sent a “notice of tax inquiry” to the Church of Scientology of Boston, stating that he had reason to believe that the church might have lost its tax-exempt status because of substantial commercial activities and distribution of funds to private individuals. After receiving written responses from the church to several questions, the IRS determined that an examination of the church’s books, records, and activities was necessary. Accordingly, the IRS sent the church a “notice of church examination.” Following a conference with church officials, the IRS issued a subpoena ordering the church to produce some 200,000 pages of materials. When the church refused to respond to the subpoena, the IRS sought a court order compelling the church to respond. The court began its opinion by noting that “the IRS has broad authority with respect to tax inquiries.” However, this authority is limited in at least three ways. First, Congress “scaled back” this authority when it enacted the Church Audit Procedures Act in 1985. This legislation was enacted “to insure that the IRS does not embark on an impermissibly intrusive inquiry into church affairs.” The Act provides churches with several protections. For example, a “church tax inquiry” can only begin if “a high-level [IRS] official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church may not be exempt, by reason of its status as a church … or may be carrying on an unrelated trade or business … or otherwise is engaged in activities subject to taxation.” Proper notice, including an explanation of the concerns which gave rise to the inquiry, and a statement of the general subject matter of the inquiry, must be given to the subject church. The church also must be apprised of its constitutional and legal protections. Both church records and activities may be examined, but only to the extent necessary to determine either liability for tax or whether the organization in fact qualifies as a church. Examinations must be completed within two years. Second, in addition to the requirements of the Church Audit Procedures Act, several federal court rulings have required that an IRS subpoena of church records must satisfy the following three tests (in addition to satisfying the provisions of the Act): (1) the investigation is being conducted pursuant to a valid purpose, (2) the requested information is necessary to that purpose, and (3) the requested information is not already in the possession of the IRS. Third, federal law provides that if the IRS wants to retroactively revoke the tax-exempt status of a church, then it must show either that the church “omitted or misstated a material fact” in its original exemption application, or that the church has been “operated in a manner materially different from that originally represented.” The court in this case emphasized that the IRS violated both the second and third protections. The second protection was violated since the IRS failed to establish that its massive document request was “necessary” to accomplish its intended purpose. The third protection was violated since the IRS had attempted to retroactively revoke the church’s tax-exempt status without alleging that the church had “omitted or misstated a material fact” in its original exemption application, or that the church has been “operated in a manner materially different from that originally represented.” Accordingly, the court refused to enforce the IRS subpoena. It stressed that “the unique status afforded churches by Congress requires that the IRS strictly adhere to its own procedures when delving into church activities.” The safeguards afforded churches under federal law prevent the IRS from “going on a fishing expedition into church books and records.” United States v. Church of Scientology of Boston, 90-2 U.S.T.C. para. 50,349 (D. Mass. 1990).

Legal Developments

Zoning – Part 4

Church Law and Tax 1990-09-01 Recent Developments Zoning Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Zoning

Church Law and Tax 1990-09-01 Recent Developments

Zoning

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

• A New York state appeals court ruled that a city acted improperly in denying a synagogue’s application for a special use permit without making any attempt to accommodate the proposed religious use. The synagogue applied for a special use permit that would have allowed it to operate in a residential property. The city council rejected the permit application, and the synagogue appealed. An appeals court concluded that the city’s denial of the permit was “arbitrary, capricious, and an abuse of discretion.” The court acknowledged that “there is no exemption from zoning rules for religious uses, nor is there any conclusive presumption that any religious use automatically outweighs its ill effects.” However, “where the applicant is a religious institution, more flexibility is required and efforts must be made to accommodate the religious use, if possible.” In fact, “every effort must be made to accommodate the religious use subject to conditions reasonably related to land use.” The court noted that the city council rejected the synagogue’s permit application “without making any attempt to accommodate the proposed religious use.” Such an act, concluded the court, was improper. The city had “an affirmative duty to suggest measures to accommodate the proposes religious use.” The court found that the synagogue’s proposed religious use could have been accommodated by the city: “For example, we observe that the accommodation of the religious use and maintenance of the public’s safety, health, and welfare could have been achieved by limiting the number of persons who could attend services or meetings at any given time, and by posting ‘no parking’ signs along the street to prevent hazardous road conditions, and by limiting the hours during which meetings or instruction could be held ….” The court ordered the city council “to issue the permit upon such reasonable conditions as will allow the [synagogue] to establish its house of worship, while mitigating any detrimental or adverse effects on the surrounding community.” This case will be helpful to any church or religious congregation that is seeking a zoning permit. Harrison Orthodox Minyan v. Town Board, 552 N.Y.S.2d 434 (N.Y. App. 1990).

Legal Developments

Child Care

Church Law and Tax 1990-05-01 Recent Developments Child Care Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax 1990-05-01 Recent Developments

Child Care

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

• Does a Florida law exempting church-operated child care facilities from state licensing violate the first amendment’s “nonestablishment of religion” clause? No, concluded a federal district court in Florida. A number of years ago, the Florida legislature enacted a law setting forth detailed safety and health standards that Florida child care facilities must meet in order to obtain a license to operate. The standards impose a broad range of requirements relating to personnel, physical facilities, emergency medical care, disease control, nutrition and food preparation, admission and recordkeeping, and transportation. Compliance with the standards imposes substantial costs on child care facilities, and these costs must be passed along to customers. Child care facilities that are an “integral part of a church” are specifically exempted from the licensing requirement. Although church-operated facilities still must comply with minimum local health and safety ordinances and Florida’s personnel screening requirements, they are not subject to the extensive regulations other child care facilities must conform to, and therefore they have lower operating costs. Because of their lower operating costs, church-operated facilities can charge lower rates to their customers than non-exempt facilities, giving them a competitive economic advantage. A non-exempt child care center filed a lawsuit challenging the validity of the church exemption. The court noted that any law challenged on the basis of the first amendment’s “nonestablishment of religion” clause will be upheld only if it (1) has a secular purpose, (2) does not have a primary effect of advancing religion, and (3) does not create an excessive entanglement between church and state. The court concluded that the Florida law’s exemption of church-operated child care facilities was valid under this test. The law had the legitimate “secular purpose” of “refraining from imposing governmental regulation [on churches] and avoiding any interference with the ability of a religious organization to define and carry out its mission.” Further, in concluding that the law’s “primary effect” was not the advancement of religion the court observed: “Simply because religious organizations are afforded an economic advantage over secular child care facilities does not mean that the law has a ‘primary effect’ that advances religion. Florida, rather than advancing religion … is simply allowing for an accommodation of the free exercise of religion by permitting exemption from licensure.” Finally, the Florida law did not create an “excessive entanglement” between church and state. “Rather, it accomplishes a more complete separation of the two. By exempting child care facilities that are an integral part of church or parochial schools from compliance with state licensing requirements the state is removing the potential for burdensome … litigation that would be necessary absent a general exemption.” Forte v. Coler, 725 F. Supp. 488 (M.D. Fl. 1989).