Kansas

Legal Developments

Court Ruling Exposes Limitations of Church Audit Procedures Act

This ruling means churches cannot assume their records are immune to IRS summons, including those held by banks and other third parties.

Richard R. Hammar, Attorney, CPA
Bio

A federal district court in Kansas ruled that the protections of the Church Audit Procedures Act did not apply to an Internal Revenue Service (IRS) summons seeking access to a church’s financial records maintained by its bank.

The backstory

A church founded in 2009 by a married couple (the pastor and his spouse) “self-declares” as a church rather than filing an application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code (IRS Form 1023). 

This church operates a thrift store that accepts donated goods and sells them to the public, and has a small space in its thrift store set up as a coffee shop.

In February 2021, the IRS assigned an agent to determine whether the church engaged in prohibited political campaign intervention, and if a “church tax inquiry” was warranted. 

The assignment covered the period of January 1, 2019, through December 31, 2020.

In June2021, the Commissioner of the Tax Exempt and Government Entities Division approved the agent’s request to open an inquiry.

The agent issued a Notice of Church Tax Inquiry (“NCTI”) informing the church there were concerns the church:
  • was operating as a thrift shop, rather than as a church; 
  • may have engaged in prohibited political campaign intervention in 2020; 
  • may be liable for unrelated business income tax (“UBIT”) from the operation of a coffee shop in 2019 and 2020; and 
  • may be liable for additional Form 941 employment taxes for wages paid to the founding couple in 2019 and 2020. 

The NCTI included a list of questions for the church from the IRS, but it did not request any documents. 

In July 2021, the church responded with answers to the questions, and it provided copies of various documents.

After reviewing the church’s response, the agent still had concerns about the church’s tax-exempt status as a church, possible liability for UBIT, and liability for additional taxes under the Internal Revenue Code. 

The agent then sought and received approval to begin a church tax examination, which was approved by the Commissioner in  September 2021. The agent issued a Notice of Church Tax Examination (“NCTE”) to the church on September 7, 2021. It informed the church that the IRS continued to have concerns. The NCTE also included, among other things, a description of the church records and activities that might need to be examined and an offer of a pre-examination conference.

On October 14, 2021, the agent and his group manager conducted a pre-examination conference with the church’s authorized representative. The pre-examination conference did not resolve the IRS’s concerns, so it notified the church’s representative that the IRS would be moving forward with the examination.

Later that month, the agent issued an Information Document Request (“IDR”) to the church seeking a number of things, including copies of the church’s bank statements from January 1, 2019, to December 31, 2020.  

The church responded that the request was overly broad and objected to producing the bank statements.

In December 2021, the agent sent IRS Letter 3164-E to the church advising of the IRS’s intent to contact third parties during a contact period spanning January 22, 2022, to January 22, 2023, as part of the IRS’s examination. The letter informed the church of its right to request a list of people contacted. 

On December 22, 2022, the agent sent a letter to the church indicating the documents requested in the IDR, including bank statements, were delinquent, and issued a second IDR seeking the church’s bank statements.

In February 2022, the agent issued a summons to the church’s bank seeking 14 separate categories of the bank’s records from all accounts in the church’s name for the period of January 1, 2019, through December 31, 2020. Specifically, the summons requested: 

(1) Monthly statements; 

(2) Deposit offsets (front and back); 

(3) Deposit tickets;

(4) Cancelled checks (front and back); 

(5) Signature cards; 

(6) Debit and credit memos; 

(7) Loan applications, including lines of credit, and all documents related to loan(s); 

(8) Financial statements; 

(9) Safe deposit box entry cards; 

(10) Cashier’s checks and applications; 

(11) Money orders; 

(12) Foreign and domestic letters of credit and wires of funds along with related documents disclosing source of funds and, for wires of funds, the destination of the funds along with any related correspondence;

 (13) Agency agreements and correspondence; and

 (14) Closing transaction on the account (check, wire transfer, and so on, regardless of amount).

In March 2022, a representative of the church’s bank informed the agent that the bank had collected documents as directed by the summons, but those documents were being held pending resolution of the church’s petition to “quash” the summons (in other words, have it voided through a legal process).

General principles regarding IRS summons

Section 7602 of the tax code authorizes the IRS to summons a witness to testify and to produce books, papers, records, or other data that may be relevant or material to an investigation. Section 7602 also identifies the purposes for which the IRS may issue summonses. The purposes are:
  • To ascertain the correctness of any return;
  • To prepare a return where none has been made;
  • To determine the liability of a person for any internal revenue tax;
  • To determine the liability at law or in equity of a transferee or fiduciary of a person in respect of any internal revenue tax;
  • To collect any internal revenue tax liability; or,
  • To inquire into any offense (civil or criminal) connected with the administration or enforcement of the internal revenue laws.

Meanwhile, section 7609 of the tax code authorizes the IRS to issue a summons seeking specified records of a third party, such as a taxpayer’s bank. 

The IRS explains: “A third-party summons is a summons directed to a person other than the person with respect to whose liability or return the summons is issued, or any officer or employee of such person.”  (Internal Revenue Manual 25.5.6.3.1)

In issuing a summons, the IRS must act “in good faith.” The IRS demonstrates it issued a summons in good faith by establishing:
  • the investigation will be conducted pursuant to a legitimate purpose, 
  • that the inquiry may be relevant to the purpose, 
  • that the information sought is not already within the [IRS’s] possession, and 
  • that the administrative steps required by the [Internal Revenue Code] have been followed—in particular, that the Secretary or his delegate, after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect.

These four requirements are known as the “Powell factors” (named after a federal appeals court decision that first articulated them).

The IRS can demonstrate good faith by submitting an affidavit from the investigating agent. 

The taxpayer, however, has an opportunity to challenge that affidavit, and to urge the court to quash the summons “on any appropriate ground.” Grounds can include an improper purpose.

Impact of the Church Audit Procedures Act (Tax Code Section 7611)

The church argued that the Church Audit Procedures Act applied to the third-party record keeper summons that the IRS served upon its bank and placed limits on the IRS’s examination of the records sought by the summons. 

Church tax inquiries

The Church Audit Procedures Act restricts the IRS when conducting church tax inquiries and church tax examinations. It provides, in pertinent part, that the IRS may begin a “church tax inquiry” only if it meets reasonable belief and notice requirements:
  • The reasonable belief requirement is met if “an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church–(A) may not be exempt, by reason of its status as a church, from tax or may be carrying on an unrelated trade or business … or otherwise engaged in activities subject to taxation … .” 
  • The notice requirement is met if, before beginning such inquiry, the Secretary of the Treasury Department provides written notice to the church of the beginning of such inquiry, and an explanation of the concerns which gave rise to such inquiry, and the general subject matter of such inquiry, and a general explanation of the applicable administrative and constitutional provisions with respect to such inquiry (including the right to a conference with the Secretary before any examination of church records), and provisions of this title which authorize such inquiry or which may be otherwise involved in such inquiry.

Church tax examinations

A “church tax examination” is any examination, for purposes of making a church tax inquiry, of church records at the request of the IRS, or the religious activities of any church. The Church Audit Procedures Act restricts the IRS with respect to church tax examinations. It provides a church tax examination by the IRS may be made only:
  • in the case of church records, to the extent necessary to determine the liability for, and the amount of, any tax imposed, and
  • in the case of religious activities, to the extent necessary to determine whether an organization claiming to be a church is in fact a church for any period. 

The Church Audit Procedures Act defines “church records” to mean “all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors.” And, it exempts from the definition of “church records” any records acquired pursuant to a third party summons. IRC 7611(h)(4)(B)(i).

Deciding the church’s request to quash 

The court concluded that the third-party summons seeking the church’s banking and financial records “fell squarely” within this exception to the definition of church records, meaning that the church’s objection to the summons of its bank records was unfounded.

Enforcement of the IRS’s third-party summons to the church’s bank “is therefore governed by section 7609 through application of the Powell factors [see above] and is not subject to the additional restrictions on church tax examinations set forth in section 7611 of the Church Audit Procedures Act, notwithstanding the summons was issued in conjunction with a church tax inquiry and examination.” 

Notably, “the plain language of [the Act] expressly excludes records obtained from third-party record keepers—such as banks—from the definition of ‘church records’.” 

The tax regulations provide that “records held by a third-party record keeper bank are not ‘church records,’ and access to such records is permitted through a third-party summons under section 7609, without complying with the procedures in section 7611” pertaining to the Church Audit Procedure Act. 

Therefore, the Internal Revenue Service may request a church to provide information necessary to locate third-party records (for instance, bank records), including information regarding the church’s chartered name, state and year of incorporation, and location of checking and savings accounts, without application of the procedures of section 7611. . . . 

Records (for instance, cancelled checks or other records in the possession of a bank) held by third party record keepers, as defined in section 7609, are not considered church records. Thus, subject to the provisions set forth in section 7609 regarding third party summonses, access is permitted to such records without regard to the requirements of the procedures set forth in section 7611.

Having made this determination, the court then addressed whether the IRS had demonstrated that the summons was issued in good faith under the four-factor test articulated in Powell.

The first Powell factor requires that the IRS show “the investigation will be conducted pursuant to a legitimate purpose,” and the second Powell factor requires the IRS show “the inquiry may be relevant to the purpose.” The IRS asserted that the “books, papers, records, and other data sought by the summons may be relevant” to the following purposes:

Determine whether [the Church] was operating as a thrift shop rather than as a church or whether [the Church] may have unrelated business income and therefore may be liable for UBIT. Further, the information may be relevant to identify bank accounts used by [the Church]. Identifying bank accounts used by [the Church] in turn may also be relevant to determine whether [the Church] may have engaged in prohibited political campaign intervention in 2020, may have unrelated business income and therefore may be liable for UBIT from the operation of a coffee shop in 2019 and 2020, and may be liable for additional Form 941 employment taxes for wages paid to [the pastor and his wife] in 2019 and 2020.

The court concluded that “the IRS’s stated purposes … are clearly consistent with the IRS’s duty and authority to make the inquiries, determinations, and assessments of all taxes … imposed by [the Internal Revenue Code]. The IRS has satisfied its initial burden to show it is conducting its investigation pursuant to a legitimate purpose or purposes under the first Powell factor and the inquiry may be relevant to those purposes under the second Powell factor.” 

The court found that the records sought by the IRS summons also satisfied the third and fourth Powell factors (the information sought by the IRS is not already within its possession, and the administrative steps required by the tax code have been followed).

What this means for churches 

This case illustrates the authority of the IRS to seek records from third parties (including banks) pertaining to a church’s tax status and liabilities. This authority is not affected by the fact that a summons seeking third-party records was issued in conjunction with a church tax inquiry and examination.

The case also is helpful because it is one of the few federal court rulings to address the meaning and application of the Church Audit Procedures Act.

Church v. United States, 2022 WL 17830849 (D. Kan. 2022).

Legal Developments

Volunteer Worker Injured on Church Property Not Eligible for Workers’ Compensation

Church Law and Tax Report Volunteer Worker Injured on Church Property Not Eligible for Workers’

Church Law and Tax Report

Volunteer Worker Injured on Church Property Not Eligible for Workers’ Compensation

Key point 8-07.2. All states have enacted workers’ compensation laws to provide benefits to employees who are injured or become ill in the course of their employment. Benefits generally are financed through insurance premiums paid by employers. Churches are subject to workers’ compensation laws in most states.

A Kansas court ruled that a volunteer worker who was injured while removing a tree from church property was not an employee of the church and therefore was not eligible for workers’ compensation benefits. A church board agreed to cut down two large trees on the church’s property that were hanging over a neighbor’s property. The church could not afford to pay someone to remove the trees, so a board member rounded up about 15 people to help cut down and remove the trees. Several people brought their own chainsaws to help with the project. One of the volunteers (the “victim”) was a board member’s son, and the board member asked him if he would use his truck to pull a trailer to haul away the wood. The board selected the day the trees would be removed. The church provided lunch for the workers that day. The board told the victim that he could have the wood since he was hauling it away.

The first day, the victim and the rest of the group cut down the trees and removed the wood. The victim was the only person who received the wood from the felled trees. While the board member told the workers to cut the trees down, he did not tell them how to do it or how to cut up the tree branches. No one from the church gave any training to the victim on how to cut down the trees. The board member later testified that his son was not an employee of the church at any time. The church did not provide any of the chainsaws or equipment.

On the second day of trimming—approximately a week later—the pastor told the victim that he wanted the remaining stumps cut to the ground. The victim cut his hand with a chainsaw as he attempted to cut one of the stumps. The saw kicked back, caused him to lose his balance, and then the saw struck the fingers on his right hand. He was taken to the emergency room and later had reparative surgery. He missed six weeks of work from his regular job. He has lingering grip and sensitivity issues in this right hand.

The victim testified he was not an employee of the church at the time. Rather, he was employed as a forklift driver for a distribution company. He was not a member of the church but attended on occasion. He also testified that this was a one-time job and he did not have an ongoing relationship with the church. He said there were no set hours for the job, just that the job be completed.

The victim filed a workers’ compensation claim for the injuries to his right hand. He incurred over $50,000 in medical bills. A physician testified that the victim suffered a 34 percent permanent impairment to his right upper extremity. The church had workers’ compensation insurance, but its policy did not contain an inclusion, amendment, or endorsement covering volunteers.

After a full hearing, an administrative law judge (ALJ) denied workers’ compensation benefits because the victim had failed to prove the existence of an employer-employee relationship. The ALJ found that neither the victim nor the church considered him an employee of the church and there was never any intent to create an employment contract. Rather, the ALJ found the working relationship was that of an independent contractor, if anything at all, based on the victim using his own equipment and there was no evidence of the right of the church to control the method or manner of performing the work. The ALJ also stated that the victim was paid in-kind on a one-time basis with cords of wood and that such payment does not constitute “wages.” The Workers’ Compensation Appeals Board agreed with the ALJ’s conclusion that the victim was an independent contractor and added: “[He] was simply doing his father a favor and agreed, along with 15 others, to cut down two trees and haul away the wood. He was not an employee of the church.”

On appeal to a state appeals court, the victim argued that the ALJ and Board erred in finding that he was an independent contractor, not an employee of the church, and therefore not entitled to workers’ compensation benefits.

The Court began its opinion by noting that “there is no absolute rule for determining whether one is an independent contractor or an employee. Generally, each case must be determined on its own facts.” However,the Court noted that “there are some well-recognized tests which courts have used in determining whether one is an independent contractor or an employee,” and that “the principal test is based upon the control exercised: Who has the right to direct what work will be done and when and how the work will be performed? This test is commonly referred to as the ‘right of control’ test.”

The victim argued that he was an employee of the church, not an independent contractor. He had no control over the 15 volunteers who helped remove the wood. He did not set the date and time to remove the trees, and he was working under the supervision of his father and the pastor. He asserted that it was undisputed that he was specifically instructed by the pastor to cut the stumps as close to the ground as possible, and that he received wages in the form of wood from the fallen trees and no other person involved received any type of payment or compensation. Since he had no control over the job, he could not be an independent contractor.

The court pointed to the following additional factors to support its conclusion that the victim was a contractor rather than a church employee:

  1. The existence of the right of the employer to require compliance with instructions.
  2. The extent of any training by the employer.
  3. The degree of integration of the worker’s services into the employer’s business.
  4. A requirement that the services be provided personally by the worker.
  5. The existence of hiring, supervising, and paying assistants by the worker.
  6. The existence of a continuing relationship between the worker and the employer.
  7. The degree of establishment of set hours of work.
  8. The requirement of full-time work.
  9. The degree of performance of work on the employer’s premises.
  10. The degree to which the employer sets the order and sequence of work.
  11. Whether payment is by the hour, day, or job.
  12. The extent to which the employer pays the worker’s business or travel expenses.
  13. The degree to which the employer furnishes tools, equipment, and materials.
  14. Whether the employer has the right to discharge or terminate the worker.
  15. Whether the worker is engaged in a distinct occupation or business.
  16. Whether the work is part of the regular business of the employer.
  17. Whether the parties believe they are creating the relation of employer and employee.

    18. The court concluded that these factors overwhelmingly demonstrated that the victim was a contractor rather than a church employee, and therefore was ineligible for workers’ compensation benefits:

    Here, it is our opinion that when measured by the foregoing standards, the recorded evidence sufficiently supported the findings adopted by the ALJ and Board. Ample substantial competent evidence in the record before us, as echoed in the factual findings below, demonstrates that the church did not possess a right of control over the victim in his completion of the job of cutting down the trees, loading them into his truck and trailer, and cutting the stumps to the ground. There were no conditions of his employment or rules regarding completion of the job. An independent contractor is one who, in the exercise of an independent employment, contracts to do a piece of work according to his or her own methods and who is subject to his or her employer’s control only as to the end product or final result of his or her work. The evidence, therefore, leads to one reasonable inference, i.e., the victim was an independent contractor and is not entitled to workers’ compensation.

    What This Means For Churches:

    Though the victim in this case was ultimately considered an independent contractor, and thus not eligible to receive workers’ compensation, church leaders should still consider the following four points:

    1. Are we subject to workers’ compensation law? Church treasurers should know whether their church is subject to state workers’ compensation law. If you are not sure if your church is covered, consider one or more of the following steps: (1) ask a local attorney; (2) ask your church insurance agent; or (3) call the agency in your state that administers the workers’ compensation program.

    2. The risk of being uninsured. Employers that are covered by workers’ compensation law generally pay insurance premiums to cover the cost of benefits paid to injured workers. However, many churches have failed to obtain workers’ compensation insurance, often because of a false assumption that they are “exempt” from workers’ compensation laws. This can expose a church to significant liability for two reasons. First, an injured employee may be able to sue the church for damages in a civil lawsuit. Unlike workers’ compensation benefits, there is no limit on the amount a court can award in a civil lawsuit. Second, the damages a court awards in a civil lawsuit will not be covered under most church insurance policies. Often, general liability policies exclude employee injuries on the assumption that they are covered under a workers’ compensation policy. This can create a dangerous gap in coverage.

    Workers, like the victim in this case, who are deemed to be contractors rather than employees, are not eligible for workers’ compensation benefits. However, they may be able to bring a civil law claim against a church for which they perform services. Such a claim ordinarily is covered by the church’s general liability insurance policy.

    3. Do we have workers’ compensation insurance? If your church is subject to workers’ compensation law, then be sure you have obtained workers’ compensation insurance. If in doubt, ask your church insurance agent.

    4. Employees. Workers’ compensation laws only cover injuries and illnesses suffered by employees on the job. While the courts generally define the term “employee” broadly, there are limits, as this case demonstrates. And note that the fact that a church treats a worker as self-employed for income tax reporting purposes does not mean that the worker is self-employed for workers’ compensation. Miller, 2015 WL 5458679 (Kansas App. 2015).

Legal Developments

Responding to a Disruption During a Service

Court says church isn’t liable for restraining woman.

Richard R. Hammar, Attorney, CPA
Bio

A Kansas court ruled that a church was not liable for the use of reasonable physical force by an usher in restraining a woman during a church service who was making threats against the pastor.

It's critical for church leaders to note this ruling because it shows the level of control they can have regarding a disruptive person. Churches do not have to tolerate persons who disrupt religious services. Church leaders can ask a court to issue an order barring the disruptive person from the church's premises. If the person violates the order, he or she may be removed from church premises by the police, and may be found to be in contempt of court.

In Kansas, a church member ("Esther") had a dispute with her church regarding a stained glass window committee of which she was a member. After the church removed her from the committee she resigned her membership in the church. Esther continued to make numerous contacts by phone and letter with the leadership and members of the church. The tone of the messages varied from apologetic to abusive. Most of the messages concerned Esther's belief that church leaders, especially the pastor, had lied about her.

Many of the letters appear to have been sent to the entire congregation. Some of the contacts could be taken as threatening or, at least, disturbing. For example, on one occasion Esther went to the church to confront the pastor. They had a brief conversation and then the pastor asked her to leave. Esther got upset and yelled at the pastor that she hated him and hoped he would go to hell, and she hit him three times on the arm. She then left.

A few months later she showed up at church on a Sunday morning just as a worship service was concluding. Four deacons and ushers formed a barricade to prevent her from following them into the sanctuary. She apparently tried, unsuccessfully, to push past them. She then yelled at the pastor through the sanctuary doors that he had lied about her. When the pastor did not respond, Esther turned and began yelling to church members who were still standing in the lobby in order to rebuke them for not following scripture and for not helping her. An usher ("Tim"), who had some military experience, was concerned by Esther's anger and was not sure what she might attempt to do. He used his military experience to grab her in a way that would cause brief pain but would not cause any permanent injury. As soon as she agreed to leave, Tim let go of her. He held her arms for about 15 to 20 seconds. Esther did not have any bruises and needed no medical care as a result of the incident.

Following this incident the church sought a restraining order prohibiting Esther from entering church property or contacting staff or members of the church. Esther counterclaimed by asserting that Tim, the usher, had committed battery against her while attempting to restrain her and remove her from the church. The trial court dismissed the battery claim, and Esther appealed.

A state appeals court began its opinion by defining battery as "the unprivileged touching or striking of another with the intent that the contact be harmful or offensive." The court rejected Esther's contention that Tim should have known that touching her as he did was an offensive act:

This mischaracterizes his testimony. He did agree that he does not "ordinarily grab women because that would be offensive." But the situation here was hardly a "normal" or "ordinary" situation. At the time of the alleged battery, Esther was not a member of the church. It appeared to Tim that others were in danger. He "didn't know what she was capable of, she was out of control. She kept screaming and kept trying to get to the pastor. She kept forcing herself up to people to get to him."

Esther did not verbally threaten anyone, but Tim thought "her actions showed otherwise." Importantly, at that time, he knew she had hit the pastor during an earlier encounter and was generally aware of the nature and existence of the dispute between her and the pastor. He thought some force was necessary because she "was screaming so loudly, and I did ask her, but just asking her was not going to get her out of here."

The court noted that the church's bylaws specified that ushers were to assist in maintaining "a worshipful atmosphere in the church," and, among other duties, were to "take care of any disruption or emergency situation during services" and restore "the sanctuary to physical orderliness following each service."

Against the background of the peculiar facts here presented, it was not error for the trial court to conclude that Tim's belief that his job was to "help keep the peace in the church" and to "step up to calm the situation down, and diffuse the situation" if someone became disorderly. In short, his belief that some force was necessary to terminate Esther's intrusion was reasonable, as was his belief that a further request would be useless. She admitted that she was angry and shouting. And the amount of force used was reasonable—a brief 15- to 20-second restraint causing no injury.

What this means for churches

Many churches have encountered disruptive individuals. In many cases, church ushers are the first responders, but they often are unsure what actions are appropriate and may be fearful of legal reprisals if physical force is exerted. This case illustrates that physical force may be legally justified in such cases, if reasonable in light of all the circumstances. Obviously, no two cases will be identical, and there may be legitimate debate over what is "reasonable" in a particular case. Unfortunately, these decisions are not made following an extended time of contemplation, but rather spontaneously in the midst of a crisis. Here are some options for church leaders to consider:

(1) Call the police. This often is the best option.

(2) Some churches use a police officer as a security guard during worship services. The officer will be able to confront a disruptive person with minimal to no liability for the church.

(3) If someone is threatening to inflict physical harm or to disrupt a worship service, and the church does not have a security guard, then immediate intervention by church staff may be necessary. Physically restraining such a person should always be viewed as a last resort. More than one person should be involved in the restraint so that unfounded allegations of brutality can be rebutted.

(4) In some cases church leaders may be able to avoid such incidents by obtaining a restraining order from a local court.

(5) Ushers should periodically receive training on these issues.

First Church v. Nowak, 209 P.3d 764 (Kan. App. 2009).

Legal Developments

Negligent Hiring Liabilities

A federal court in Kansas ruled that a victim of child abuse made a viable claim against a charity that hired the molester as a youth worker despite knowledge of a history of sexual misconduct.

Richard R. Hammar, Attorney, CPA
Bio

Church Law & Tax Report

Negligent Hiring Liabilities

A federal court in Kansas ruled that a victim of child abuse made a viable claim against a charity that hired the molester as a youth worker despite knowledge of a history of sexual misconduct.

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

Key point 10-04. A church may be liable on the basis of negligent selection for a worker’s molestation of a minor if the church was negligent in the selection of the worker. Negligence means a failure to exercise reasonable care, and so negligent selection refers to a failure to exercise reasonable care in the selection of the worker. Liability based on negligent selection may be imposed upon a church for the acts of employees and volunteers.

* A federal court in Kansas ruled that a victim of child abuse made a viable claim against a charity that hired the molester as a youth worker despite knowledge of a history of sexual misconduct. An adult male (“Don”) worked as a volunteer wrestling coach for an amateur wrestling club (the “charity”). He met a 13-year-old male (the “victim”) who participated in the charity’s wrestling program. During the next two years, Don molested the victim in a variety of locations, including his own home.

Don had a history of sexual misconduct. He was prosecuted several years before for sexual misconduct with young males in another state. The prosecution is a matter of public record. The victim sued the charity, claiming that it was responsible for Don’s wrongful acts on the basis of several theories, including negligent selection. Specifically, the victim argued that the charity knew about Don’s history of sexual misconduct with young males and that he was likely to commit future harm to children, and that it “ratified, abetted and enabled” him to abuse the victim by permitting him to act as a volunteer coach. In addition, the victim argued that the charity was liable for failing to report Don to the proper authorities upon receiving information that he was engaging in sexual misconduct with minors. The charity asked the court to dismiss all of the victim’s claims.

The court noted that a motion to dismiss is appropriate only when “it appears beyond a doubt that the plaintiff can prove no set of facts in support of its claims which would entitle it to relief.” The court ruled that a dismissal of the victim’s claims was inappropriate since he had produced sufficient evidence in support of those claims. It noted that liability based on “aiding and abetting others” requires proof of the following: (1) the person whom the defendant aids must perform a wrongful act causing injury; (2) at the time the defendant provides assistance, he or she must be generally aware of his or her role in part of a wrongful or illegal activity; and (3) the defendant must knowingly and substantially assist in the violation.

The court concluded that the victim had produced sufficient proof of “aiding and abetting” to survive a motion to dismiss. He “certainly alleges that Don performed a wrongful act causing injury. Additionally, he alleges that the charity knew about Don’s past sexual misconduct with minors in athletic programs, knew that he was likely to commit future harm to children … and it nevertheless permitted him … to act as a volunteer coach. The victim further alleges that it failed to report Don to the proper authorities upon receiving information that he was engaging in sexual misconduct with students. These allegations generally indicate that the charity was aware of its role in Don’s misconduct during the time period when he was serving as a volunteer in their programs and that it knowingly and substantially assisted in his misconduct by allowing him to continue as a volunteer in their programs and not reporting him to the proper authorities. These allegations are sufficient to state a claim under an aiding and abetting theory.”

The court also ruled that there was sufficient evidence that the charity “ratified” Don’s behavior to let this claim proceed to trial. It observed: “Upon acquiring full knowledge of all the material circumstances of an agent’s unauthorized act, the principal must promptly repudiate the act or it will be presumed that the principal has ratified and affirmed the act.” According to the victim, the charity “knew about Don’s propensities and nevertheless allowed him to serve as a volunteer … and then failed to report him to the authorities once it learned about his misconduct.”

Application. This case is important for the following reasons. First, the court ruled that a charity can be liable for a volunteer’s acts of sexual misconduct on the basis of “aiding and abetting” and “ratification.” Few courts have recognized these grounds for liability in sexual misconduct cases in the past. Second, the court concluded that the charity was aware of Don’s propensity to molest children, in part because he had been prosecuted for child molestation several years before in another state and this proceeding was a matter of public record. This conclusion suggests that churches and other charities that conduct criminal records checks on youth workers should do so on a national basis, since they may be responsible for knowing criminal prosecutions and convictions that are matters of public record in other states. C.T. v. Liberal School District, 2007 WL 1579472 (D. Kan. 2007).

Legal Developments

Recent Developments in Kansas Regarding Employment Practices

A federal court in Kansas ruled that an employer committed unlawful religious discrimination by dismissing two employees for engaging in religious speech with customers.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1998-03-01

Employment Practices

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

• Key point. Title VII of the Civil Rights Act of 1964 prohibits covered employers from discriminating against employees on the basis of religion. This means that employers must attempt to “accommodate” the religious practices of employees, so long as they can do so without suffering any undue hardship.

A federal court in Kansas ruled that an employer committed unlawful religious discrimination by dismissing two employees for engaging in religious speech with customers. Service America Corporation operates a cafeteria at a General Motors automobile manufacturing plant. Customers walk in, order their meals, receive prompt service, and pay for their meals. Service America’s policy has been to train food service workers to greet customers in an appropriate and friendly fashion by saying things such as “Hello. What can I get for you today?” Two employees (the “plaintiffs”) hired in 1994 frequently greeted customers by saying “God bless you,” “Praise the Lord,” and other similar phrases. At certain times, because they felt that the Holy Spirit moved them to bless all GM employees, they extended such blessings to all of their food service customers. Service America deemed the plaintiffs’ greetings to be inappropriate and contrary to its policy. A number of GM customers complained to Service America about the plaintiffs’ religious speech. On a number of occasions, Service America directed the plaintiffs not to say “God bless you,” “Praise the Lord” or other similar phrases to food service customers. Ultimately, Service America warned each plaintiff that he would be terminated if he refused to stop. Even after being warned, however, the plaintiffs refused to comply. Therefore, Service America terminated their employment. The plaintiffs sued Service America, claiming that its actions violated Title VII of the Civil Rights Act of 1964 which prohibits covered employers from discriminating against employees on the basis of religion. The plaintiffs maintained that they were Christians who felt strongly that because of what God has done for them and the joy He has given them by changing their lives dramatically, they had to say things that were positive, uplifting and inspirational to people with whom they spoke, and their religious greetings emanated from this belief. Honoring God through their speech, through such greetings, was a deep seated and sincerely held religious belief and the plaintiffs could not stop the practice without violating their beliefs. Service America claimed that it did not have to tolerate these employees’ religious practices if doing so would impose an undue hardship on it. It insisted that allowing the plaintiffs to continue their religious greetings would impose an undue hardship because it would jeopardize their business relationship with GM.

The court noted that Title VII makes it unlawful for an employer to “discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s … religion.” Religion is defined to include only those “aspects of religious observance and practice” that an employer is able to “reasonably accommodate … without undue hardship on the conduct of the employer’s business.” The intent and effect of this definition of “religion” is to make it a violation of Title VII for an employer not to make reasonable accommodations, short of undue hardship, for the religious practice of employees.

Courts have implemented a two—step procedure for evaluating claims and allocating burdens of proof under these provisions. First, plaintiff has the burden of establishing a “prima facie case.” A plaintiff establishes a prima facie case of religious discrimination by proving that (1) he or she has a bona fide religious belief that conflicts with an employment requirement; (2) he or she informed the employer of this belief; and (3) he or she was disciplined for failure to comply with the conflicting employment requirement. Once a plaintiff has made out a prima facie case, “the burden shifts to the employer to show that it was unable reasonably to accommodate the plaintiff’s religious needs without undue hardship.”

Service America conceded that the plaintiffs established a prima facie case of religious discrimination. The burden therefore shifted to Service America “to show reasonable accommodation, or that reasonable accommodation would be an undue hardship.” Since Service America did not attempt to accommodate the plaintiffs’ religious practice of blessing food service customers, the issue was whether its refusal to accommodate the plaintiffs’ religious speech violated its obligation under Title VII to “reasonably accommodate” its employees’ religious practice without undue hardship on the conduct of its business. Service America claimed that it could not reasonably accommodate the plaintiffs’ religious greetings and that it therefore had a right to terminate their employment. It claimed that the plaintiffs’ jobs were “completely incompatible” with their religious practices because they were required to serve customers; their greetings contradicted Service America’s legitimate preference for appropriate greetings; and they refused to interact with customers in an appropriate manner. Service America claimed that “the only possible accommodation” would have been to keep plaintiffs away from customers and that any such accommodation was untenable because it would have left Service America shorthanded or required it to hire other employees to pick up the slack caused by plaintiffs’ unwillingness to greet customers as Service America directed.

The court rejected Service America’s claim that retaining the plaintiffs and allowing them to continue their religious greetings would have imposed an undue hardship upon it. It noted that allowing the plaintiffs’ greetings inflicted only a minimal burden on Service America. It stressed that undue hardship cannot be proven by speculation, and yet this is what Service America was attempting to do: “The fear that customers would boycott Service America and bring sack lunches from home to avoid the plaintiffs’ religious speech-and that Service America would sustain a material loss on account of that activity-is more hypothetical than real. Likewise, the fact that the plaintiffs’ greetings might eventually impair the contractual relationship between Service America and General Motors is, while conceivable, speculative at best.” The court then responded to Service America’s claim that it had received complaints from GM workers: “Given the volume of customers served (2,000 to 3,000 per day), plaintiffs are entitled to the benefit of the favorable inference that 20 to 25 complaints over a three—month period presented no material problem for Service America.”

The Court emphasized that Title VII “does not necessarily require an employer to allow an employee to impose his religious views on customers.” However, the evidence in this case did not indicate that the plaintiffs were attempting to proselytize GM employees or impose their religious views on others.

Application. This case provides church leaders with an excellent summary of the analysis applied by federal courts in evaluating the claims of employees that an employer has violated their right to be free from religious discrimination in the workplace. Banks v. Service America Corporation, 72 EPD ¶45,018 (D. Kan. 1996). [The Civil Rights Act of 1964]

© Copyright 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m43 c0298

Legal Developments

Recent Developments in Kansas Regarding Ascending Liability

The Kansas Supreme Court ruled that a parent corporation was not liable for injuries suffered by an employee of a subsidiary corporation, since the two entities were not sufficiently interrelated.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax1998-01-01

Ascending Liability

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

The Kansas Supreme Court ruled that a parent corporation was not liable for injuries suffered by an employee of a subsidiary corporation, since the two entities were not sufficiently interrelated. The court listed 10 factors to be considered in deciding whether a subsidiary corporation is an “instrumentality” of a parent corporation (making the parent liable for the obligations and activities of the subsidiary). These 10 factors were essentially the same as the 12 factors mentioned in the previous case. The court also stressed that liability ordinarily will be imposed on a parent for a subsidiary’s liabilities only if the separate incorporation of the subsidiary was done to “permit one of the corporations to evade its just obligations; to promote fraud, illegality, or injustice; or to defend crime.” However, “the mere fact that a subsidiary corporation was organized for the avowed purpose of avoiding liability on the part of the [parent] company does not in itself constitute fraud justifying disregard of the corporate entity of the subsidiary.” Rather, “the courts will disregard the fiction of a separate legal entity when there is such domination of finances, policy, and practices that the controlled corporation has no separate mind, will, or existence of its own and is but a business conduit for its principal.”

Application. Like the previous case, this ruling demonstrates the difficulty that plaintiffs experience when attempting to impute liability to a “parent” organization for the liabilities of a “subsidiary.” Perhaps most importantly, the court noted that the parent will not be liable for the obligations of a subsidiary even if the subsidiary was incorporated for the sole purpose of insulating the parent from liability. Doughty v. CSX Transportation, Inc., 905 P.2d 106 (Kan. 1996).[ Denominational Liability]

© Copyright 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m40 c0198

Legal Developments

Woman Sues for Wrongful Dismissal

Employer discovered employee’s misconduct after dismissing her.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1997-05-01

Employment Practices

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

• Key point. A dismissed employee can pursue a wrongful dismissal claim against a former employer even if he or she was guilty of job-related misconduct of which the employer was unaware. However, if the employer learns of the misconduct following the employee’s dismissal, the damages to which the employee is entitled will be limited.

A Kansas court ruled that an employer can be sued for wrongful dismissal of an employee even if it later learns that the employee had engaged in misconduct on the job that would have resulted in her dismissal had the employer been aware of it. A church-affiliated nursing home dismissed an employee as a result of her inconsiderate treatment of residents. She later sued her former employer for wrongful dismissal. While the lawsuit was pending the employer learned that the former employee had engaged in an act of theft in the course of her employment that would have resulted in her immediate dismissal had the employer known of it. The employer insisted that this discovery of “after acquired evidence” required the court to dismiss the lawsuit. A state appeals court ruled that a dismissed employee is not entitled to any relief in a wrongful dismissal lawsuit if the employer can produce “after acquired evidence” sufficient for termination. The court relied heavily on a 1995 decision of the United States Supreme Court. McKennon v. Nashville Banner Publishing Co., 115 S. Ct. 879 (1995). In the McKennon case, the Supreme Court was faced with the following question-can a 62-year-old employee who is fired due to a “work force reduction” sue his employer for age discrimination if the employer learns (while the lawsuit is pending) that the employee had engaged in theft of confidential company documents in the course of his employment? The Supreme Court ruled unanimously that the former employee could continue his age discrimination lawsuit against the employer despite the discovery of this information. It noted that the discovery of the information did not change the fact that the employer’s decision to dismiss the employee may have been discriminatory. And, allowing such employees to pursue discrimination claims will deter unlawful discrimination. However, the new evidence certainly was relevant in deciding the amount of damages the employee could recover. The Supreme Court observed that in such cases it would be “pointless to order the reinstatement of someone the employer would have terminated … upon lawful grounds.” Further, an award of “front pay” (loss of future earnings) would be inappropriate. On the other hand, the Court concluded that in some cases an award of damages for “back pay” may be appropriate as a limited way to punish an employer for engaging in unlawful discrimination.

Application. Churches and other religious organizations that are sued by a former employee for wrongful dismissal or discrimination should keep this case in mind. If the employer learns of job-related misconduct by the employee prior to his or her dismissal, then this evidence may prevent reinstatement and bar any recovery for loss of future earnings and possibly for back pay. How can an employer learn if such misconduct occurred? One way is to ask the former employee during a pretrial deposition whether he or she engaged in any job-related misconduct that would have been grounds for termination or discipline had the employer been aware of it. Gassman v., Good Samaritan Society, Inc., 921 P.2d 224 (Kan. App.1996). [Termination of Employees]

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m43 c0397

Legal Developments

Judge Orders Rapist to Attend Church

Court rules that order is unconstitutional.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1991-03-01 Recent Developments

Freedom of Religion

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

• A Kansas appeals court ruled that a trial judge’s order requiring a convicted rapist to attend church and perform 1,000 hours of work at the same church was unconstitutional. The court observed: “We concluded that the imposition of the religious conditions on [the defendant as a part of his probation] unreasonably restricted his constitutional freedom. The conditions would require him to continue association with a specific church for a five-year period, regardless of whether he continues to accept its religious beliefs and doctrines. It is not clear from the record how these conditions could be characterized as bearing a reasonable relationship to the protection of the public or the offense committed. Further, it is difficult to conclude that a compelling state interest requires the imposition of these particular probationary conditions. The Kansas Constitution contains a strong prohibition against religious coercion.” State v. Evans, 796 P.2d 178 (Kan. App. 1990).

© 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: m47 c0291

Legal Developments

Personal Injuries – Part 4

On Church Property or During Church Activities

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1989-01-01 Recent Developments

Personal Injuries – On Church Property or During Church Activities

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

• When is a church or religious denomination legally responsible for the acts of a pastor? This difficult question was addressed by the Kansas Supreme Court in a significant decision. Here are the facts. A Catholic priest injured the occupants of another vehicle while driving his car in an allegedly negligent manner. At the time of the accident, the priest was on his way to visit a friend, and was driving a car that he both owned and insured. The accident victims sued the priest’s diocese on a theory of “respondeat superior.” Under the respondeat superior doctrine, an employer is responsible for the misconduct of employees that occurs within the scope of employment. It is based on the policy that employers should be accountable for injuries caused by persons whom they have a right to control. Three conditions are required to hold an employer responsible under principle of respondeat superior: (1) the worker causing the injury is an employee and not self-employed; (2) the worker caused the injury while acting within the scope of his or her employment; and (3) the worker caused the injury by his or her own negligence or other misconduct. The court concluded that the diocese could not be sued under this theory since the priest was not an employee of the diocese but rather was self-employed. In reaching this conclusion, the court applied the “right to control” test under which a worker is considered to be an employee if the employer either controls or has the right to control the person’s work. Since an employer has the authority to control an employee, it is responsible for the employee’s misconduct. In reaching its conclusion that the priest was not an employee, the court relied on the following factors: (1) the priest’s “day-to-day activities are within his own discretion and control”; (2) the priest is authorized under canon law to do whatever he feels necessary to carry out his duties; (3) he sets his own hours and vacation; (4) he makes out his own paycheck, and hires and fires non-clergy workers; (5) he has complete discretion in purchasing church supplies and paying bills out of parish funds; (6) his work requires a high level of skill and experience and is generally done without supervision; (7) he was driving his own car at the time of the accident and had obtained his own insurance on the vehicle. Under these facts, the court concluded that the priest was not an employee of the church. And, since self-employed persons are not subject to an employer’s control with respect to the manner and methods of performing their duties, the diocese was not responsible for the priest’s negligence. The court acknowledged that the priest was clearly subject to the “ecclesiastical control” of his bishop, the diocese, and the Catholic Church, but such control was not relevant in determining the issue of legal control for purposes of imputing liability to the diocese on the basis of respondeat superior. The court also noted that the diocese “followed the majority of dioceses in issuing a W-2 form to each priest,” but did this practice inconsistent with its conclusion that the priest was self-employed for purposes of respondeat superior. This decision is significant because it recognizes that (1) a church or religious denomination will not necessarily be legally accountable for the negligence of a minister merely because the minister is subject to the “ecclesiastical control” of the church or denomination, and (2) ministers who are treated as employees for federal income tax purposes (and are issued W-2 forms) will not necessarily be considered employees for purposes of holding their church or denomination legally responsible for their actions under the principle of respondeat superior. A dissenting judge felt that the priest was an employee, and that his negligence should have been imputed to the diocese. The dissenter pointed to the following factors: (1) the diocese issued the priest W-2 forms each year; (2) the priest was on call 24 hours a day; (3) the priest’s term of employment was indefinite; (4) the priest’s work clearly furthered the regular business of the diocese; (5) the priest “was not engaged in an independent occupation in the sense that he contracts with different churches to perform pastoral services on a job-by-job basis; rather, he is engaged solely in his parish and can accept no other assignments without the consent of the bishop.” Brillhart v. Scheier, 758 P.2d 219 (Kan. 1988).

© Copyright 1989, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m58 m86 m40 m42 m29 c0189

Legal Developments

Court Ruled That a Quadriplegic Student Could Not Sue Church Officials for Failing to Obtain Adequate Insurance

The Kansas Supreme Court ruled that a student who was rendered a permanent quadriplegic as

Richard R. Hammar, Attorney, CPA
Bio

The Kansas Supreme Court ruled that a student who was rendered a permanent quadriplegic as a result of injuries sustained while playing football for a church-operated high school could not sue church officials for failing to obtain adequate insurance coverage.

The victim alleged that the school and church officials had been negligent in "failing to properly insure students for injury incurred as a result of school activities and in failing to properly advise and inform students and their parents … of the insurance protection provided to students."

In rejecting this claim, the court cited a state law making the purchase of liability insurance coverage by public schools discretionary rather than mandatory. Such a law, reasoned the court, applied "by implication" to private schools as well. Since private schools were not required to purchase insurance, they could not be liable for failure to have enough coverage to cover catastrophic losses.

"We feel sympathy for the severe injuries suffered by this plaintiff," concluded the court. "However, there are dangers and risks inherent in the game of football and those who play the game encounter these risks voluntarily. It is fundamental that before there can be any recovery in tort there must be a violation of a duty owed by one party to the person seeking recovery …. It is clear under the facts of this case that no … duty existed to properly insure or to advise the plaintiff regarding medical insurance purchased by the defendants for the plaintiff." Wicina v. Strecker, 747 P.2d 167 (Kan. 1987)

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