Taxation – Part 3

Church Property

Church Law and Tax 1990-01-01 Recent Developments

Taxation – Church Property

A Florida appeals court ruled that a nursing home operated by the Archdiocese of Miami is exempt from state property taxes. Since one-third of the residents at the facility are private paying patients (the remaining two-thirds are Medicare or Medicaid patients), a local tax appraiser argued that only two-thirds of the facility was entitled to exemption. In concluding that the entire property was entitled to exemption, the court cited the following considerations: (1) most of the residents are over sixty-five years of age (a majority are in their eighties); charges owed by private paying patients are routinely written off; patients are admitted on a first-come, first-serve basis, with no preference given to private paying patients; all patients (whether private paying, Medicare or Medicaid) receive the same quality facilities and services; private paying patients who become unable to pay may become Medicaid patients in which case they occupy the same bed and receive the same services; Medicaid and Medicare reimbursements were below the cost of caring for these patients; the home does not make a profit on its private paying patients. These factors, concluded the court, demonstrated the exempt status of the entire facility. The court rejected the tax appraiser’s position that “if there is any patient who somehow has enough income to pay for his or her bed at the home” then that bed must be removed from the exemption, since such an ‘income test’ has reference more to the personal economics of a resident or residents of an apartment or room in a home for the aged than to the overall purpose or use of a home as a religious or charitable institution.” In other words, the focus should be on the charitable object of the facility as a whole rather than on the ability of some patients to pay for their services. This certainly is a sensible conclusion, and one that will be helpful to church-operated nursing homes in Florida and in other states with similar exemption provisions. Markham v. Broward County Nursing Home, Inc., 540 So.2d 940 (Fla. App. 1989).


Church Law and Tax 1989-11-01 Recent Developments Bankruptcy Richard R. Hammar, J.D., LL.M., CPA •

Church Law and Tax 1989-11-01 Recent Developments


Can a debtor who files a “Chapter 13” bankruptcy plan continue to make monthly contributions to his church? No, concluded a federal district court in Florida. The debtor filed a plan under which he proposed to pay only $50 per month for three years (a total of $1,800) against $90,000 in unsecured debts. The plan reflected monthly take-home pay of $1,150 out of which the debtor donated $160 to his church. Under federal law, a bankruptcy court need not confirm a Chapter 13 plan over the objection of the bankruptcy trustee unless the plan provides that all of the debtor’s “projected disposable income” over the next three years “will be applied to make payments under the plan.” The bankruptcy trustee objected to the debtor’s plan, arguing that by making the monthly contributions of $160 to his church the debtor was not applying all of his “disposable income” toward the payment of his debts. The issue, as stated by the court, was whether “the court, over the objection of the trustee, can confirm a plan which pays only a minimal dividend to unsecured creditors while the debtor continues to devote substantial amounts of his income to the support of his church.” The court concluded that the trustee was correct in objecting to the plan, and accordingly it denied the debtor’s bankruptcy petition. The court observed: “[We] reject the proposition … that the constitutional separation of church and state protects debtors who with the ability to make payments to their creditors choose instead to donate those funds to their church. While church donations may be a source of inner strength and comfort to those who feel compelled to make them, they are not necessary for the maintenance or support of the debtor or a dependent of the debtor” and accordingly the debtor failed to meet the “disposable income test required for confirmation of the plan.” In re Miles, 20 Collier Bankruptcy Cases 912 (N.D. Fl. 1989).


Can a church-established health insurance plan that suffers huge losses sue its CPA firm for malpractice?

Can a church-established health insurance plan that suffers huge losses sue its CPA firm for malpractice? That was the question before a Florida state appeals court in a recent case. In 1968, the Catholic Archdiocese of Miami established a health insurance plan for the clergy and lay employees of the archdiocese.

A board of trustees was created to oversee the plan, and an administrator was appointed. Each year, the trustees and administrator determined the level of premiums that had to be made to the plan in order to cover anticipated medical expenses. In 1969, the trustees purchased a "stop-loss" insurance policy from Lloyd's of London which would insure against the risk that in any year the amount of claims paid by the plan would exceed the premiums received.

Each year before issuing the stop-loss policy, Lloyd's required the trustees to submit detailed information about the types and amounts of benefits to be provided by the plan, the number of workers covered, and the amount of premiums charged. The plan was audited by a large CPA firm each year from 1969 through 1981.

The CPA firm's "audit program" required it to obtain a copy of the current stop-loss policy each year to ensure that such coverage was available. However, after 1971, the CPA firm neither obtained a copy of the stop-loss policy nor verified the existence of such insurance. Nevertheless, it repeatedly informed the trustees that the Lloyd's stop-loss policy remained in effect.

In reality, Lloyd's cancelled the policy in 1980 due to the administrator's failure to pay premiums in a timely manner. In 1980, the trustees—unaware of the loss of coverage—significantly increased benefits to the plan members. As a result, claims exceeded premiums by $320,000 for the year. When the trustees discovered that the Lloyd's policy was no longer in effect, they sued the CPA firm (that had assured the trustees of the availability of the stop-loss policy).

A jury ordered the CPA firm to pay the whole $320,000 deficit, and the firm appealed. The state appeals court agreed that the CPA firm had been negligent in advising the trustees that the stop-loss policy was still in effect for 1980, but it concluded that the firm could not be liable for the entire $320,000 deficit for the year.

The court emphasized that there was no guaranty that Lloyd's would even have renewed the stop-loss policy for 1980—the year in which the trustees greatly expanded benefits under the plan. The court observed: "The trustees presented no evidence that Lloyd's, or any other carrier, would have issued a stop-loss policy that would have covered the deficit in the fund.

It is also uncertain whether the trustees and plan participants would have agreed to increased premiums which Lloyd's was likely to demand in light of the expanded benefits offered by the trustees. [The CPA firm] was negligent [and] the trustees' plan suffered losses. However, because there is no causal link between [the CPA firm's] negligence and the deficit in the plan, the deficit was improperly charged to [the firm].

Where policy coverage is merely speculative, as here, we hold that an accounting firm which negligently fails to discover the lack of insurance cannot be charged with benefit payments which might have been covered had the policy been in force."

Coopers & Lybrand v. Archdiocese of Miami, 536 So.2d 278 (Fla. App. 1989).

Wills, Trusts and Estates – Part 3

Church Law and Tax 1989-05-01 Recent Developments Wills, Trusts, and Estates Richard R. Hammar, J.D.,

Church Law and Tax 1989-05-01 Recent Developments

Wills, Trusts, and Estates

A Florida state appeals court upheld the validity of the state’s “mortmain” law. The mortmain law permits a surviving spouse or child to invalidate a will that leaves a gift to charity if the will was executed within six months of the decedent’s death. The law was enacted primarily to prevent “deathbed gifts” to churches. One court has observed that such laws are designed to “prevent a testator during his last illness from being importuned or otherwise influenced, by hope of reward or fears of punishment in the hereafter, to leave his estate in whole or in part to charity or to the church.” The court emphasized that the Florida law (1) contained a “savings clause” that upheld testamentary gifts to charity even though made within six months of a decedent’s death if a similar gift was contained in a previous will, and (2) invalidated testamentary gifts to charity made within six months of death only if challenged by a surviving spouse or child. These two factors prevented the law from being unconstitutional, the court concluded. Zrillic v. Romans, 535 So.2d 294 (Fl. App. 1988).

Wills, Trusts, and Estates – Part 1

Church Law and Tax 1989-03-01 Recent Developments Wills, Trusts, and Estates Richard R. Hammar, J.D.,

Church Law and Tax 1989-03-01 Recent Developments

Wills, Trusts, and Estates

Several states have adopted “mortmain statutes” that permit heirs to invalidate gifts made to churches and other charities in the will of a donor who dies within a prescribed period of time following the execution of his or her will. To illustrate, a Florida statute makes it possible for a spouse or “lineal descendant” (i.e., a child or grandchild) to avoid charitable gifts made in the will of a decedent less than six months before the decedent’s death. Such gifts cannot be challenged if the decedent’s previous wills (executed more than six months prior to death) left substantially similar gifts to charity. In a recent case, a Florida court was asked to determine whether this law permitted the daughters of a decedent to challenge a gift made by their deceased father 26 days before is death. Here are the facts. The decedent executed a “revocable trust” and a will in 1979. The will distributed the decedent’s personal effects to his wife, and then “poured over” the residue of the estate into the trust, which was specifically referred to in the will. The trust benefited the decedent’s adult daughters. In 1986, just 26 days before his death, the decedent amended his trust to substitute several religious organizations as the ultimate beneficiaries of his trust (rather than his daughters). Following their father’s death, the daughters attempted to invalidate the charitable gifts on the basis of the mortmain law. The charities argued that the mortmain law only permits heirs to challenge gifts made in wills within six months of a donor’s death, and not gifts made in trusts (even if the trust is specifically referred in a will). The daughters maintained that logic requires that a trust referred to in a will, and into which the will “pours over” or distributes assets, must be subject to the mortmain law. The state appeals court agreed with the charities, and upheld the validity of the gifts. It reasoned that the mortmain law, by its own terms, only permitted heirs to challenge charitable gifts made in wills, and therefore it could not apply to charitable gifts made in a trust even though the will distributed a portion of the decedent’s estate into the trust. Churches can assist potential donors avoid the impact of mortmain laws by encouraging members to prepare their estate plans while they are in good health. A future issue of Church Law & Tax Report will summarize the mortmain laws in all 50 states. In re Estate of Katz, 528 So.2d 422 (Fl. App. 1988).

Personal Injuries – Part 2

On Church Property or During Church Activities

Church Law and Tax 1989-01-01 Recent Developments

Personal Injuries – On Church Property or During Church Activities

Does your church or denomination conduct a scouting or camping program for youth? If so, you will be interested in a recent Florida appeals court decision. A boy scout sued a regional organization of the Boy Scouts of America alleging that he had been emotionally and physically damaged by the intentional homosexual acts of a first aid attendant at a camp operated by the regional organization. The victim alleged that the regional organization was liable on the basis of “negligent retention and supervision” and the theory of “respondeat superior.” The court rejected the first theory of liability, since an organization “must have had constructive or actual notice of the employee’s unfitness to work as a first aid attendant at the camp to be liable for negligent retention and supervision,” and there was no evidence that the organization had any notice of the attendant’s unfitness to work with youth. However, the court concluded that the regional organization could be liable on the basis of “respondeat superior.” Respondeat superior is a well-established legal principle that imputes the negligent acts of employees to their employer, if the acts were committed within scope of employment. The court acknowledged that the acts in question were intentional rather than negligent, but it concluded that even intentional acts of an employee can be imputed to an employer if “the employee’s misconduct occurred within the scope of the employment” or if “the employee was doing what his employment contemplated.” However, the court observed that “there is no liability [on the part of the employer] when the servant steps aside from his employment to commit a wrongful act to accomplish some purpose of his own.” The court held that “generally the jury should resolve the question of whether an employee was acting within the scope of his employment.” And, since the trial court had ruled in favor of the Boy Scouts without letting the case go to the jury, the appeals court remanded the case back to the trial court for a jury trial on the issue of respondeat superior. Obviously, this is an important decision for any organization (including churches and denominations) that operates a scouting or camping program. Churches and denominational agencies that operate youth camps must exercise extreme care in selecting and supervising workers (both volunteer and compensated). At a minimum, this will mean reference checks, an appropriate application form, never leaving minors in the custody of one adult, and refusing to hire anyone whom you have reasonable cause to believe is unfit. A feature article in a future issue of Church Law & Tax Report will address in detail the issue of church hiring practices. M.V. v. Gulf Ridge Council of Boy Scouts or America, Inc., 529 So.2d 1248 (Fla. App. 2nd Dist. 1988).

Court Invalidated a Gift to Charity in the Will of a Decedent on the Ground That it Had Been Made Within Six Months of Death

Many states have laws that invalidate gifts to charity contained in wills executed within a

Many states have laws that invalidate gifts to charity contained in wills executed within a prescribed period prior to a donor's death. Such laws, often referred to as "mortmain statutes," are designed to prevent "deathbed gifts" to churches.

One court has observed that such laws are designed to "prevent a testator during his last illness from being importuned or otherwise influenced, by hope of reward or fears of punishment in the hereafter, to leave his estate in whole or in part to charity or to the church."

A Florida state appeals court invalidated a gift to charity in the will of a decedent on the ground that it had been made within six months of death. A Florida statute (section 732.803 Florida Statutes) provides that an heir can contest such a gift, unless a prior will of the decedent (executed more than six months prior to his or her death) made a gift in substantially the same amount to the same charity.

Obviously, this problem can be avoided in most cases by encouraging church members to execute their estate plans during their most productive years.

Gorn v. Temple B'Nai Israel, 526 So.2d 118 (Fla. App. 2nd Dist. 1988)

Court Upheld the Criminal Conviction of a Mother for “Maliciously Disciplining” Her Child

A Florida state appeals court upheld the criminal conviction of a mother for "maliciously disciplining"

A Florida state appeals court upheld the criminal conviction of a mother for "maliciously disciplining" her child. The mother, who beat her 7-year old son with a belt on his back, arms, and shoulders, was convicted under a Florida law banning the "malicious punishment" of children.

The court acknowledged that "a parent does not commit a crime by inflicting corporal punishment on her child if she remains within the legal limits of the exercise of that authority." However, when the corporal punishment is "malicious," a crime occurs. The court concluded that corporal punishment oversteps the bounds of permissible discipline if it is motivated by malice, rather than educational purposes; if it is inflicted upon frivolous pretenses; if it is excessive, cruel, or merciless; or if it results in great bodily harm, permanent disability, or permanent disfigurement.

The court observed that the Swedish parliament banned all corporal punishment of children (including punishment inflicted by parents) in 1979 by a vote of 259 to 9. While this extreme action has not been taken in the United States, the court observed that "cases like this should stand as a warning to those, parents and others alike, who quickly turn to corporal punishment as a solution to their child discipline problems. It is apparent that there is a serious risk of `going too far' every time physical punishment is administered. The consequences now may include not only harm to the child but criminal prosecution as well." Herbert v. State, 526 So.2d 709 (Fla. App. 4th Dist. 1988)

Court Ruled Church Members Had Authority to Obtain a Court Order Requiring an Accounting of Church Funds

Court stated that when the members of the church decided to incorporate, they submitted themselves to the jurisdiction of the state courts in all matters of a corporate nature, such as accounting for funds.

A group of church members who had contributed funds to their church demanded that the church give an "accounting" of the use of the contributed funds. When the church refused, the members turned to the courts for relief.

A trial judge ordered an immediate accounting, as well as annual audits "forever," and required the church to disclose the contents of a church safety deposit box to the complaining members. The church appealed, arguing that the civil courts had no jurisdiction over a church, and even if they did, they had no authority to order accountings or annual audits.

A state appeals court, in upholding the trial judge's ruling regarding an accounting and inspection of the church's safety deposit box, observed that "we are of the opinion that this is not an improper interference by the government into a church, or ecclesiastical, matter. When the members of the church decided to incorporate their body under the laws of the state of Florida, they submitted themselves to the jurisdiction of the state courts in all matters of a corporate nature, such as accounting for funds." However, the court reversed the trial judge's order requiring annual audits forever, since "we cannot agree it is proper to order annual, ad infinitum, audits of the books" of a church. Matthews v. Adams, 520 So.2d 334 (Fl. App. 5th Dist. 1988)

Court Confirmed Civil Courts Are Prohibited from Resolving Church Property Disputes on the Basis of Religious Doctrine

A Florida court confirmed the general principle that the civil courts "are prohibited from resolving

A Florida court confirmed the general principle that the civil courts "are prohibited from resolving church property disputes on the basis of religious doctrine."

The civil courts are without jurisdiction to resolve such disputes when the "underlying controversy concerns religious doctrine and only incidentally affects other matters." Archdiocese of Miami v. Sama, 519 So.2d 28 (Fla. App. 1987)

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Court Ruled Church’s Unimproved Lot Was Exempt from Real Estate Taxes

A Florida state court ruled that a church-owned unimproved lot was exempt from real estate

A Florida state court ruled that a church-owned unimproved lot was exempt from real estate taxes.

The court observed that "while the land was substantially vacant and unimproved and was not used by the church continuously, nevertheless, the land was being actually and presently used by the church for religious purposes sporadically and improvements and greater physical use were planned.

The church's present religious use of the property, while not evidenced by improvements and not continuous, was exclusive of any other use and was not incidental to any nonexempt use." Hausman v. First Baptist Church, 513 So.2d 767 (Fla. App. 1987)

Court Ruled Church Had No Duty to Warn or Take Precautionary Measures

A child was injured on church property when he tripped on one of several bricks

A child was injured on church property when he tripped on one of several bricks surrounding the base of a large tree. While it was dark outside, there was sufficient light from outdoor floodlights to permit the victim and other children to play football.

A Florida appeals court ruled in favor of the church, on the ground that "we do not think that a tree with a surrounding brick border constitutes a dangerous condition or concealed peril," and accordingly "there was no duty on the part of the church to warn or take other precautionary measures, such as installing better lighting." Grajeda v. Winter Springs Community Evangelical Congregational Church, 509 So.2d 384 (Fl. App. 1987).

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