Church Property – Part 1

A church corporation that was reinstated after having been dissolved for failure to submit an annual corporate report to the secretary of state should be treated as a corporation.

Church Law and Tax2006-03-01

Church property – Part 1

Key point 6-04.1. Churches may have a number of reporting requirements under state law. One of the most important is the filing of an annual corporate report with the office of secretary of state. This requirement applies to incorporated churches in many states. Failure to comply with this requirement can cause the church’s corporate status to lapse.
Reporting Requirements for Churches

* The Montana Supreme Court ruled that a church corporation that was reinstated after having been dissolved for failure to submit an annual corporate report to the secretary of state should be treated as a corporation back to the time of its dissolution. A church incorporated as a nonprofit corporation under state law in 1998. It hired an attorney to oversee its responsibilities as a corporation, including filing required annual corporate reports with the secretary of state. Sometime after the attorney filed an annual report in 1999, he moved to another state and failed to inform the church that it needed to continue filing annual reports in order to retain its status as a corporation. The church failed to file the next annual report, prompting the secretary of state to suspend and later dissolve the church’s corporate status. The secretary of state sent notice of the suspension to the church, but it sent the notice to the church’s former attorney’s now vacant office. Therefore, the church did not receive word that its corporate status had been dissolved, and it continued operating as though it was a religious corporation.

Following the dissolution of the church corporation, a couple donated a plot of land to the church. The couple gave the land partly because they wished to help the church, but also partly because they wanted to take advantage of the tax deduction for such a large gift. The couple asked church officers if the church was a corporation and were told “yes.” The church planned on building a new sanctuary on the donated land, but before it could do so, it had to raise the level of the land. As a result, it erected a sign asking the public to dump fill dirt on the property. Many persons took advantage of this opportunity. Unfortunately, much of the fill contained asphalt and garbage. The local Department of Environmental Quality told the church that the asphalt and garbage had to be removed from the fill. The church removed it at considerable expense, and later sued some of the persons (the defendants) who had dumped the debris. At this time, the church and defendants learned for the first time that the church’s corporate status had been dissolved by the secretary of state. As a result, the defendants asked the trial court to dismiss the church’s lawsuit. The court did so, reasoning that the church could not have accepted the gift of land from the donors because at that time it was not a corporation; and since the church did not acquire ownership of the land, it lacked “standing” to sue the defendants. The church appealed, citing the following provision in the state nonprofit corporation law: “Any restoration of corporate rights pursuant to this chapter relates back to the date the corporation was involuntarily dissolved, and the corporation shall be considered to have been an existing legal entity from the date of its original incorporation.”

The court noted that the couple donated the property to the church in 2002, three years after the church’s corporate status was dissolved, and that the church’s corporate status was reinstated in 2004 after the church learned of the problem. The court concluded, based on the above-quoted provision in the state nonprofit corporation law, that “we must now treat the church as though it were a legal corporation able to accept donated property in 2002.”

The couple also claimed that their donation should be revoked because they made it with the false understanding that the church was a legal corporation. The church asserted that the couple did not so much intend to make their gift to the church as a corporation, but “to the people of the church,” and that even if they had known that the church was not a corporation, they would still have made their gift. The court applied the “corporation by estoppel” doctrine to resolve the dispute. Under this doctrine, “a person or entity who has contracted with, or otherwise dealt with a company as a corporation is estopped to deny its corporate existence.” The court pointed out that the couple was raising the church’s lack of corporate status solely to avoid the question of liability. It concluded, “It would be inequitable to allow them to escape this possible liability just because the church, acting in good faith, was involuntarily dissolved at the time the possible liability arose.”

Application. This case is important for two reasons. First, it illustrates an important principle of nonprofit corporation law. In many states, churches that are incorporated as nonprofit corporations must file annual reports with the office of secretary of state. Failure to do so may result in a lapse or dissolution of corporate status. However, this case demonstrates that the corporate status of a lapsed church may be “cured” through a reinstatement of corporate status, since reinstatement “related back” to the date of dissolution.

Second, this case indicates that members who donate property or funds to a church may not be able to recover their contribution on the basis of an erroneous assumption that the church was incorporated, since the “corporation by estoppel” theory, which is recognized in most states, precludes such a result. Valley Victory Church v. Sandon, 109 P.3d 273 (Mont. 2005).

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