Taxation

Church Property

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania

Church Law and Tax 1990-09-01 Recent Developments

Taxation – Church Property

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

• A Pennsylvania court ruled that a nonprofit corporation that published religious materials was not exempt from property taxes. The publisher (which was not affiliated with a church or denomination) publishes quarterly Bible study guides that it makes available for a suggested annual donation of $20. The court noted that the property of “purely public charities” is exempt from taxation under state law, and that an institution qualifies as a purely public charity only if it (1) advances a charitable purpose, (2) donates a substantial portion of its services, (3) benefits a substantial and indefinite class of persons who are legitimate subjects of charity, (4) relieves the government of some of its burdens, and (5) operates entirely free from the private profit motive. The court concluded that the publisher failed to satisfy a number of these requirements. For example, only 14% of its materials were distributed without charge—too low to comprise a “substantial” portion of its total materials. Further, the court rejected the publisher’s claim that its operating deficits for the previous two years demonstrated that it operated on a nonprofit basis. The court observed that the deficits existed only because of large expenses labeled in the publisher’s financial statements simply as “other expenses.” When questioned about the nature of these expenses, the publisher’s president could not identify them. The court found this evidence insufficient to support the publisher’s contention that it operated without a profit motive. Finally, the court concluded that the publisher failed to demonstrate that it relieved the government of some of its burden. The publisher had emphasized that “our purpose is to introduce people to God through the Jewish Christian scriptures in such a way that they are made aware of the difference between right and wrong, and the importance of choosing the right, and in such a way that they are introduced to the importance of loving their neighbor and of fulfilling a responsible role in their families, their workplace, and in society.” While acknowledging that this indeed was a laudable objective, the court could not agree that the publisher was relieving a governmental burden, since the Constitution “prohibits the government from endorsing any religion.” Scripture Union v. Deitch, 572 A.2d 51 (Pa. Common. 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: m70 c0690

Legal Developments

Zoning

A Pennsylvania state court ruled that a local zoning board acted improperly in refusing to

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property, Zoning

A Pennsylvania state court ruled that a local zoning board acted improperly in refusing to allow a church to use a portion of its property for counseling services.

The church sought a permit allowing it to convert a building containing the church offices into a counseling center. The church offered extensive pastoral counseling services to members and non-members alike.

A zoning board denied the church's request on the ground that professional counseling was not a permitted use in a residential district (in which the church was located). The board expressed the view that "the counseling sought to be offered was of a secular nature and not directly related to the church's function."

The church challenged this ruling in court, and won. The court ruled that the church's properties could lawfully be used for counseling since "counseling is an integral part of the church's activities" and therefore was a permissible "church use." Church of the Saviour v. Zoning Hearing Board, 568 A.2d 1336 (Pa. Common. 1989).

Legal Developments

Zoning – Part 2

Church Law and Tax 1989-09-01 Recent Developments Zoning Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Zoning

Church Law and Tax 1989-09-01 Recent Developments

Zoning

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

• A Pennsylvania state court ruled that an Orthodox Jewish synagogue had improperly been denied a permit to construct a parking lot with 19 spaces on its property. The synagogue was located in a home in a residential zone, and was informed by zoning officials that the property could no longer be used for such purposes unless 19 parking spaces were added to the property. The synagogue’s application for approval to construct 19 parking spaces on its property was denied because it would “adversely affect the traffic conditions” in the vicinity despite the congregation’s insistence that its tenets prohibited the use of vehicles on the Sabbath or on holy days. The court ruled that permission to construct the parking spaces had improperly been denied, since “the central, uncontradicted fact of this case is that … Orthodox Jews do not drive on their Sabbath day of worship or on Jewish religious holidays,” and accordingly that construction of the parking spaces would not “adversely affect the traffic conditions” of the neighborhood. Orthodox Minyan of Elkins Park v. Cheltenham Township Zoning Hearing Board, 552 A.2d 772 (Pa. Common. 1989).

© 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: m82 m35 c0589

Legal Developments

Freedom of Religion – Part 1

Church Law and Tax 1989-07-01 Recent Developments Freedom of Religion Richard R. Hammar, J.D., LL.M.,

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Schools

Church Law and Tax 1989-07-01 Recent Developments

Freedom of Religion

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

• A federal district court in Pennsylvania ruled that a public high school that allows outside, non-school related groups to use its facilities during noninstructional hours may not deny the same privilege to any group on the basis of the religious content of its speech. The school in question allowed a number of community groups to use its facilities after hours, including scouting organizations, Rotary Club, Kiwanis, Lions, Junior Chamber of Commerce, labor unions, and commercial concerts. However, it refused to allow an evangelical Christian organization to rent the school auditorium for a religious program. The religious group petitioned the court for an order prohibiting the school from refusing to rent the facilities to it. The court agreed, noting that the school had created an “open forum” by allowing community groups to use its facilities, and that the constitutional guaranty of freedom of speech barred the school from discriminating against religious groups because of the content of their speech. It observed that the school “cannot continue to allow the designated groups and organizations to use its facilities, but exclude any applicant … who seek to use the facilities to speak about religion, because that would once again be content-based discrimination against speech in an open forum.” The court did note that if a religious group desired to use the facilities for “some sort of religious ceremony, rite, or ritual, then [the school] would be permitted, under constitutional standards, to deny a facility use application since the forum created by [the school] is an open one only for speech purposes.” Gregoire v. Centennial School District, 701 F. Supp. 103 (E.D. Pa. 1988).

Legal Developments

Freedom of Religion – Part 4

Church Law and Tax 1989-05-01 Recent Developments Freedom of Religion Richard R. Hammar, J.D., LL.M.,

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Freedom of Religion, Schools

Church Law and Tax 1989-05-01 Recent Developments

Freedom of Religion

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

• A federal court in Pennsylvania ruled that a state law regulating homeschooling was invalid. The law in question permitted homeschooling, but required “properly qualified private tutors” to provide the daily instruction. The term “qualified private tutor” was not adequately defined by the law, and this led to differing interpretations among the 501 school districts within the state. The court quoted one education expert who had testified that he “had heard everything that one can imagine, from persons qualified with an eighth grade education to Ph.Ds.” Such a law, concluded the court, was so vague that a parent who educated his or her children at home could not determine in advance whether such instruction was lawful under the state homeschooling law. Such a law is “unconstitutional for vagueness.” Jeffery v. O’Donnell, 702 F. Supp. 516 (M.D. Pa. 1988).

Legal Developments

Freedom of Religion – Part 2

Church Law and Tax 1989-01-01 Recent Developments Freedom of Religion Richard R. Hammar, J.D., LL.M.,

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Freedom of Religion, Schools

Church Law and Tax 1989-01-01 Recent Developments

Freedom of Religion

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

• Can a public high school science teacher be dismissed for repeatedly making references to religion in his classes over the objections of his students and superintendent? Yes, concluded a Pennsylvania state court. The teacher allegedly had made numerous references in his classes to God, Christianity, demons, devils, prophesies from the book of Revelation, and hell. He allegedly required one student (who had been temporarily ousted from class for disciplinary reasons) to pray with him in a hallway as a condition of reentering the room, and informed his classes that “God is truth and truth is God.” The teacher was warned repeatedly that his actions could lead to his dismissal. When asked pointblank if he would stop imposing his religious views on his classes, he answered “no,” and explained that he “was a Christian and that part of his mission was in a sense evangelistic.” The teacher was dismissed, and challenged his dismissal in court. The Pennsylvania Commonwealth Court ruled that the dismissal had been appropriate. It observed that “where a teacher indicates his preference for a particular type of religion and seeks to promote that religion or any religion among his students, the teacher’s constitutional right to freedom of religion and speech must give way to our country’s historic [nonestablishment of religion] clause] set forth in the first amendment.” The court acknowledged that discussions in public schools “about religion, where relevant to classroom course material, are permissible,” but it concluded that the teacher’s conduct “exceeded the constitutional boundaries within which discourse about religion is permissible.” Rhodes v. Laurel High School District, 544 A.2d 562 (Pa. Common. 1988).

Legal Developments

Court Struck Down a County “Occupational Tax” That Was Applied to a Catholic Priest

The Pennsylvania supreme court ruled that government may properly tax the income of a minister,

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Income Taxes - Clergy, Tax Exemption

The Pennsylvania supreme court ruled that government may properly tax the income of a minister, but it may not tax the occupation of a minister. The court relied in part on the following language in a 1943 ruling of the United States Supreme Court: "It is one thing to impose a tax on the income or property of a preacher. It is quite another thing to exact a tax from him for the privilege of delivering a sermon …. A state may not impose a charge for the enjoyment of a right granted by the federal constitution."

Stajkowski v. Carbon County Board of Tax Assessment, 541 A.2d 1384 (Pa. 1988)

Legal Developments

Court Ruled That an Apartment Building Operated by a Lutheran Agency Was Exempt From Property Taxation

A Pennsylania state appeals court ruled that a 96-unit apartment building located on a 40-acre

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property, Tax Exemption, Taxation - Church Property

A Pennsylania state appeals court ruled that a 96-unit apartment building located on a 40-acre retirement community operated by an agency of the Lutheran Church in America was exempt from property taxation.

The court concluded that the apartments qualified for exemption under a state law exempting "institutions of benevolence or charity … founded, endowed, and maintained by public or private charity," since the facility "charges monthly apartment fees that are by no means exorbitant and that are below actual operating cost; it does not request or receive financial information from apartment applicants before admission, and it routinely grants exonerations from payment of a portion of the monthly fee to residents who later demonstrate financial need."

However, the court ruled that 81 cottage units located on the same property were not exempt since the cottage operation consistently realized a substantial profit, and only a few residents were receiving a subsidy on the payment of fees. Appeal of Lutheran Social Services, 539 A.2d 895 (Pa. Common. 1988)

Legal Developments

Court Ruled Church’s Property Was Not Owned by the Denomination

Is a dissident church or a religious denomination entitled to the church's property following its

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Charters, Constitutions, and Bylaws, Church Property

Is a dissident church or a religious denomination entitled to the church's property following its disaffiliation from the denomination? This important question was addressed by a Pennsylvania state appeals court.

In 1982, a church voted to disassociate from the Orthodox Church in America and to affiliate with the Russian Orthodox Church Outside of Russia (the "Church Abroad") because of a proposed revision by the Orthodox Church in its calendar. The proposed revision altered the dates of several holy days (for example, Christmas was moved from January 7 to December 25). After the church's attempted disassociation, the Orthodox Church sought a court order requiring the church to turn over all of its assets to the parent denomination.

The state appeals court agreed with the the local congregation that such an order would be inappropriate. The court noted that the civil courts do have a role to play in some church disputes: "All disputes among members of a congregation … are not doctrinal disputes. Some are simply disputes as to meaning of agreements on wills, trusts, contracts, and property ownership." Such disputes, involving principles of civil law, may be resolved on the basis of "neutral principles of law" involving no intrustion "into the sacred precincts." However, "where the resolution of the issue involves questions of discipline, faith, ecclesiastical rule, custom or law, a civil court must defer to the highest church [tribunal] to which the question has been carried."

The court held that an award of a local church's assets to a parent denomination was possible only if the denomination could demonstrate "(1) an actual transfer of property from the congregation to the hierarchical church body, or (2) clear and unambiguous documentary evidence or conduct on the part of the congregation evincing an intent to create a trust in favor of the hierarchical church body."

The court observed that the denomination could not satisfy the first test, since the local congregation "never relinquished its right to possession or legal title to the church property." On the contrary, the church's original affiliation with the Orthodox Church was accompanied by a letter expressing its intent to retain ownership and control of its property.

As to the second requirement, the court observed, after reviewing the church's charter, constitution, bylaws, and the bylaws of the Orthodox Church, that none of these documents contained any "clear and unambiguous" language creating a trust in favor of the Orthodox Church.

The court also rejected the denomination's claim that its "hierarchical structure" compelled an award in its favor, since "regardless of the form of government of the church in question, we must examine the relevant deeds, contracts, or other evidence to determine ownership of the disputed property." Orthodox Church of America v. Pavuk, 538 A.2d 632 (Pa. Common. 1988)

Legal Developments

Court Concluded that Denomination Controlled Church Property

A Pennsylvania state appeals court resolved a controversy between a local church and a Synod regarding ownership of church property and who would serve as pastor of the church.

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property

For many years, Trinity Lutheran Evangelical Church was governed by its own constitution and bylaws as well as those of its regional Synod and the Lutheran Church of America (LCA). During the latter part of 1983, a division arose within the congregation because of participation by its pastor (Rev. Roth) in an organization formed to deal with the plight of unemployed workers in the area.

The Synod investigated the problems at the church and recommended certain actions in an effort to reunite the congregation. When the two factions within the church could not agree upon these recommendations, the Synod vacated the pulpit and appointed another pastor to serve. When the church refused to recognize the Synod's designated pastor, the Synod sought and received a court order forbidding the performance of any further pastoral functions at the church by Rev. Roth. Despite the court order, Rev. Roth continued to act as pastor, which resulted in his being jailed for contempt of court.

Nevertheless, Rev. Roth continued to dictate sermons which were read to the congregation. In addition, church board members transferred $9,500 out of a church bank account to their own personal accounts, and reduced the church's insurance coverage by 70%.

Because of these actions, the Synod declared the church "defunct," and, pursuant to the LCA constitution, ordered the board to transfer all church assets to the Synod. The board refused to comply with this request (some board members locked themselves in the church basement), and the Synod obtained another court order citing the board for contempt of court and ordering them to convey all church properties to the Synod.

The board members were "conditionally" jailed for between 30 and 60 days, with the understanding that they would be released immediately upon their willingness to comply with the court's orders.

A Pennsylvania state appeals court affirmed the lower court's orders. Specifically, it held that:

The lower court did not exceed its authority in confining the pastor or board members for contempt of court.
The incarceration of the pastor and board members was a "conditional commitment to achieve compliance with a court order" and as such was civil rather than criminal in nature. Accordingly, there was no requirement for a jury trial.
The lower court's orders upholding the Synod's rulings (declaring the pulpit vacant and ordering all church properties transferred to the Synod) did not violate the church's constitutional guaranty of religious freedom, since "the members of Trinity are free to practice their religion as they see fit and to express themselves in any manner, so long as they do not interfere with the Synod's use of the church …."
Civil courts must defer to the decision of ecclesiastical organizations involving questions of discipline, faith, or ecclesiastical rules, except in those cases where an ecclesiastical organization "fails to follow its own rules and procedures."

The constitution of the LCA gave churches the right to appeal determinations of a Synod to the "annual convention of the Synod." Since there was evidence that the church had appealed the Synod's rulings to the "convention of the Synod," and that the appeal was never heard, the court ordered the trial court to determine whether or not an appeal had in fact been filed and if so whether or not it was properly heard.

If the Synod failed to follow the LCA constitution, then the civil courts need not defer to its rulings. Regardless of whether one agrees with the result in this case, the fact remains that the Pennsylvania appeals court ignored the clear and binding pronouncement of the United Stated Supreme Court in Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976), that the civil courts are bound to defer to the determinations of ecclesiastical organizations involving questions of doctrine or polity even if those determinations are arbitrary in the sense that they fail to adhere to the organization's own internal rules.

The Supreme Court's ruling has been criticized by many as encouraging irresponsible conduct by religious organizations. Nevertheless, it remains the law of the land and the Pennsylvania appeals court erred in ignoring it. Trinity Lutheran Evangelical Church v. May, 537 A.2d 537 (Pa. Common. 1988)

Legal Developments

Social Security – Part 1

Church Law and Tax 1988-07-01 Recent Developments Social Security Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: Federal

Church Law and Tax 1988-07-01 Recent Developments

Social Security

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

• The United States Supreme Court has let stand a federal appeals court ruling that rejected a challenge to the treatment of churches under the social security program. As noted in the November-December 1987 issue of Church Law & Tax Report, churches are free to exempt themselves from the employer’s share of social security (FICA) taxes by filing a timely exemption application (Form 8274), but only at the cost of significantly increasing the tax liability of their nonminister employees who are thereafter treated as self-employed for social security purposes. Many churches that waived their liability for the employer’s share of FICA taxes have had to increase the compensation of their nonminister employees in order to offset the significant increase in taxes that such persons experience because of the church’s election (i.e., an increase from 7.51% of wages to 13.02%). This dilemma, argued a Baptist church in Pennsylvania, unconstitutionally restricts the religious freedom of churches by forcing them (contrary to their religious convictions) to divert church resources away from religious and charitable functions in order to enable employees to pay the increased tax liability. A federal district court and a federal appeals court both rejected the church’s claim, and the church appealed the case to the Supreme Court. On March 22, 1988, the Court refused to hear the case, thereby letting stand the federal appeals court’s ruling.

© Copyright 1988, 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: m68 0488

Legal Developments

Public School Cannot Prohibit Students from Distributing Religious Literature in Hallways Before School Starts

Can a public junior high school prohibit students from distributing religious literature in school hallways

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Freedom of Religion, Schools

Can a public junior high school prohibit students from distributing religious literature in school hallways before the start of each school day? This question was addressed by a federal district court in Pennsylvania.

The court concluded that the school, by permitting various student groups to meet on school property during noninstructional hours, had created a limited "public forum." Accordingly, the school could not restrict any group's speech on the basis of the content of the speech, unless the restriction was necessary to serve a "compelling state interest" and it was "narrowly drawn to achieve that end."

Banishing Christian students to "sidewalks and parking lots" violated the students' constitutional right of free speech, concluded the court, and was not supported by any compelling state interest. The court rejected the school's argument that the restrictions were necessary in order to avoid violating the nonestablishment of religion clause: "Accommodation … of a religious organization in accordance with a limited public forum does not constitute a state imprimatur on the particular religion involved."

The court emphasized that its conclusion "in no way affects [the school's] power to enforce reasonable time, place, and manner regulations" designed to insure that no student group materially interferes with the educational process or interferes with another person's rights.

Finally, the court rejected the students' claims that the "Equal Access Act" had been violated (it only addresses the right of students to engage in voluntary meetings on public school property during noninstructional hours), and that their constitutional right to freely exercise their religion had been abridged (the students were free to distribute literature and engage in evangelism in any public place, including the school parking lot). Thompson v. Waynesboro Area School District, 673 F. Supp. 1379 (M.D. Pa. 1987)

Legal Developments

Court Rejected Truck Driver’s Claim that His Earnings Were Exempt Because He Was a Church

A federal district court in Pennsylvania rejected a truck driver's contention that his earnings were

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Tax Exemption

A federal district court in Pennsylvania rejected a truck driver's contention that his earnings were exempt from federal taxes because he was a church.

The taxpayer had established a church (that had been denied tax-exempt status by the IRS), and signed a vow of poverty which provided "I hereby make an irrevocable gift of all my possessions … and all my income whatsoever, regardless of the form of the income, to the church. Outside employment income is not personal income, but rather gift income to the church, and not of the individual."

The taxpayer established a checking account in the church's name into which all his secular earnings were deposited. Checks thereafter were drawn on the church account to pay for the personal expenses of the taxpayer. No taxable income was reported and no tax returns were filed.

In rejecting the taxpayer's claim, the court reaffirmed the "basic rule of tax law that an assignment of income by a taxpayer of compensation for services is ineffectual to relieve the taxpayer of tax liability regardless of the motivation behind the assignment." In addition, the alleged "vow of poverty" did not relieve the taxpayer of tax liability since "the manner in which he conducted his financial affairs was the same as it was before he was ordained."

The court also rejected the taxpayer's argument that subjecting him to income taxes violated his right to exercise his religion. The taxpayer, noted the court, was still free to operate his church and deposit his secular earnings in the church account. He simply could not avoid taxes through such a scheme. The court found the taxpayer guilty of three counts of income tax evasion. U.S. v. Washington, 672 F. Supp. 167 (M.D. Pa. 1987)

Legal Developments

Court Ruled building Owned by Franciscan Friars Used as Missionary Headquarters Qualified for Property Tax Exemption

Does a building owned by the Order of Franciscan Friars and used as a missionary

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Church Property, Tax Exemption

Does a building owned by the Order of Franciscan Friars and used as a missionary headquarters qualify for a property tax exemption under Pennsylvania law? Yes, concluded a Pennsylvania state court.

Noting that Pennsylvania law exempts from tax all properties used for purely charitable purposes, the court concluded that a building used as a missionary headquarters is charitable in nature. It defined "charity" to include an organization "designed to benefit an indefinite number of people from a religious standpoint" even though the organization performs no "non-religious charitable work."

This conclusion was not affected by the fact that eight priests used the property as a residence, since "the provision of living quarters is not inconsistent with a purely public charity." Order of Franciscan Fathers v. Board of Property Assessment, 534 A.2d 568 (Pa. Common. 1987)

Legal Developments

Court Rejected School District’s Claim that Allowing School Facilities to Be Used for Religious Purposes Would Violate the First Amendment

Can a high school legally prohibit religious groups from using an auditorium that is available

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: First Amendment, Freedom of Religion, Schools

Can a high school legally prohibit religious groups from using an auditorium that is available without restriction to non-religious community groups?

A federal district court in Pennsylvania said no. Here are the facts. A Christian student group requested permission to use a high school auditorium for a one-night performance and evangelistic message by a noted magician. The students' application included the application fee of $1,379. When school authorities discovered that the proposed use of the auditorium included a religious message, they denied the application, citing a school policy prohibiting "use of school facilities for religious services, instruction, or activities."

The student group thereafter sued the school district, alleging a violation of the constitutional right of free speech. The court agreed, noting that "the state is not required to open its property to the public in order to allow it to engage in free speech, association and discussion—but once it does, rights of free speech and association guaranteed by the first amendment are entitled to be protected even if that activity includes religion or religious subjects."

The court emphasized that the school district had "opened the school facilities for general use by community groups," including boy scouts, girl scouts, Easter Seals, Kiwanis, Rotary, dance lessons, and a symphony orchestra. In addition, the school was used for adult evening classes which included instruction on occultic religious practices. Having created an "open forum" for free speech and assembly in its school facilities, the district could not deny access to any group on the basis of the content of its speech, even if the speech were religious in nature.

The court rejected the district's claim that allowing school facilities to be used for religious purposes would violate the first amendment's nonestablishment of religion clause: "Nothing in the establishment clause requires the state to suppress a person's speech merely because the content of that speech is religious in character."

The court warned that it would have reached a different conclusion had the evidence indicated that religious speakers "dominated" the open speech forum, or if use of the school facilities included "religious services." While noting that a school can lawfully prohibit all groups from meeting without violating the free speech rights of any group, it prohibited the school district from closing its "open speech forum" before the challenged performance was conducted.

Several churches and religious groups have been denied access to public school facilities that are made available to other community groups. The Pennsylvania ruling, while not binding in other states, will serve as useful precedent for religious groups seeking limited access to public school facilities. Gregoire v. Centennial School District, 674 F. Supp. 172 (E.D. Pa. 1987)

Legal Developments

Scripture Union Not Exempt from State Real Estate Taxes

Church Property

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Tax Exemption

A Pennsylvania state court ruled that Scripture Union was not exempt from state real estate taxes.

Scripture Union is a non-profit organization that distributes bi-monthly publications including a daily guided reading program and commentary on the scriptures. It is not associated with any organized religion. The court concluded that the organization was not eligible for exemption under a state law exempting "purely public charities," since there was no evidence that it provided any of its services gratuitously. Scripture Union v. Deith, 531 A.2d 64 (Pa. Cmwlth. 1987)

Legal Developments

Coverage of Church Employees Under the Social Security (FICA) System

There are three important developments to report concerning the coverage of church employees under the

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Payroll Tax Reporting, Tax Exemption

There are three important developments to report concerning the coverage of church employees under the Social Security (FICA) system:

1. A federal appeals court recently rejected the contention of a local church that the current treatment of churches and church employees under the Social Security program amounts to a violation of the constitutional guaranty of religious freedom.

Here are the facts. In 1983, Congress amended the Internal Revenue Code to make church employees subject, for the first time, to mandatory Social Security (FICA) taxation effective January 1, 1984. Congress later partially restored the previous exemption (retroactive to January 1, 1984) for any church that (1) was opposed for religious reasons to the payment of the employer's share of FICA taxes, and (2) irrevocably elected to exempt itself from Social Security taxation by filing a Form 8274 with the IRS no later than the day prior to the due date of the first employer's quarterly tax report (IRS Form 941) that the church was required to file after July 17, 1984. For churches with nonminister employees as of July 17, 1984, Form 8274 was due not later than October 30, 1984.

A timely election relieves a church of the obligation to pay the employer's share of FICA taxes (7.15% of employee wages in 1987), and relieves each nonminister employee of the obligation to pay the employee's share of FICA taxes (an additional 7.15% of wages in 1987). However, the employee is not relieved of all Social Security tax liability. On the contrary, the nonminister employees of an electing church are required to report and pay their Social Security taxes as self-employed individuals (the "self-employment tax"). And, this tax is significantly greater than the employee's share of FICA taxes. In 1987, for example, the self-employment tax rate is 12.3% of earnings. Therefore, a church employee receiving a salary of $10,000 in 1987 would pay $715 in FICA taxes if his or her church did not file an election on Form 8274 (the church would pay an additional $715). However, if the church filed the election to exempt itself from FICA taxes, the following consequences occur: (1) the church pays no FICA tax; (2) the employee pays no FICA tax; and (3) the employee must report and pay a self-employment tax liability of $1,230.

Many churches and church employees consider this situation unfair. Churches are free to exempt themselves from Social Security taxes, but only at the cost of significantly increasing the tax liability of their employees. In response, many electing churches have increased the salary of their employees to compensate for the increase in taxes. Of course, this leaves the church in essentially the same position as if it had not elected to be exempt—it in effect is paying Social Security taxes "indirectly."

This dilemma, argued a Baptist church in Pennsylvania, unconstitutionally restricts the religious freedom of churches by forcing them (contrary to their religious convictions) to divert church resources away from religious and charitable functions in order to increase employee compensation (and thereby "indirectly" pay the Social Security tax).

A federal appeals court rejected this contention. The court based its ruling on a 1982 Supreme Court decision that upheld the imposition of the Social Security tax to employees of Amish farmers though this directly violated the farmers' religious beliefs. The Supreme Court had observed that "tax systems could not function if denominations were allowed to challenge the tax systems because tax payments were spent in a manner that violates their religious belief." It concluded that the broad public interest in the maintenance of the federal tax systems was of such a high order that religious belief in conflict with the payment of the taxes provides no constitutional basis for resisting them. The appeals court found this precedent controlling in resolving the challenge to Social Security coverage of church employees.

The appeals court also rejected the church's argument that the taxation of church employees violates the first amendment's nonestablishment of religion clause by creating an "excessive entanglement" between church and state. It also rejected the claim that the Internal Revenue Code was impermissibly discriminatory in granting clergy an exemption from Social Security coverage but not churches or church employees. Bethel Baptist Church v. United States, 822 F.2d 1334 (3rd Cir. 1987).

2. The Tax Reform Act of 1986 permits churches that have elected to exempt themselves from the employer's share of FICA taxes by filing a timely Form 8274 to revoke their exemption.

However, the Act did not specify how churches could revoke their exemption. Temporary regulations recently issued by the Treasury Department provide that churches can revoke their exemption (starting with any calendar quarter after December 31, 1986) by filing a Form 941 (employer's quarterly tax return) accompanied by full payment of Social Security taxes for that quarter. To illustrate, if a church with three employees elects in November of 1987 to revoke its previous election to be exempt from Social Security taxes, it should simply submit a Form 941 on or by January 31, 1988 (the deadline for filing a Form 941 for the fourth calendar quarter) along with the applicable FICA taxes for that quarter. Thereafter, the deposit rules described in the "Tax Calendar" feature of this newsletter will apply. Of course, if a church revokes its exemption, nonminister employees are no longer treated as self-employed for Social Security purposes, and accordingly should no longer file quarterly estimated tax payments (their FICA taxes will be withheld from their wages).

3. A number of churches having nonminister employees (e.g., an office secretary) apparently do not know whether or not they have elected to exempt themselves from the employer's share of Social Security (FICA) taxes by filing a timely Form 8274.

Churches having nonminister employees as of July of 1984 had until October 30, 1984 to file the election. Churches not having nonminister employees in July of 1984 have until the day before the due date of their first quarterly employer's tax report (Form 941) to file the election. Ordinarily, this form is not required until a church hires a nonminister employee. The due dates for Form 941 are the last day of the month following the end of each calendar quarter (i.e., April 30, July 31, September 30, and January 31). Churches that filed a timely election but that nevertheless paid all employment taxes due from the effective date of their election through December 31, 1986 (a fairly common practice by churches that could not remember if they ever filed the election) are treated as if they never filed the election. Internal Revenue News Release IR-87-94.

Source:Church Law & Tax Report, September-October 1987

Legal Developments

Minister’s Authority to Replace Trustees Involves Ecclesiastical Law

Civil courts must defer to churches and their own ecclesiastical organizations

Richard R. Hammar, Attorney, CPA

Bio

State: Pennsylvania
Categories: Board Members - Removal, Officers, Directors, and Trustees

Can a civil court determine which of two warring factions of church trustees rightfully holds office?

No, ruled a Pennsylvania appeals court. A minister in a local church had ousted several trustees from office, replacing them with new trustees more loyal to himself. The ousted trustees alleged that the minister lacked the authority to replace them, and that they accordingly were still the lawful church board.

The court, noting that civil courts must "defer" to churches and their own ecclesiastical organizations regarding any question of "discipline, faith, ecclesiastical rule, custom, or law," held that the question of a minister's authority to replace church trustees involves ecclesiastical law and therefore must be resolved by the church itself. It ordered the trial court to identify the highest body within the church empowered to decide the issue. Atterberry v. Smith, 522 A.2d 683 (Pa. App. 1987).