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Works Made for Hire

§ 9.05.02
Key point 9-05.02. Works created by employees within the scope of their employment are "works made for hire." The employer is deemed to be the "author" of such a work, and owns the copyright in it unless it executes a signed writing assigning the copyright back to the employee.

1. In General

It is common for church employees to compose music or write books or articles in their church office during office hours. What often is not understood is that such persons do not necessarily own the copyright in the works they create. While the one who creates a work generally is its author and the initial owner of the copyright in the work, section 201(b) of the Copyright Act specifies that "in the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author … and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright."

The copyright law defines "work made for hire" as "a work prepared by an employee within the scope of his or her employment." There are two requirements that must be met:

  1. the person creating the work is an employee, and
  2. the employee created the work within the scope of his or her employment.

Whether one is an employee will depend on the same factors used in determining whether one is an employee or self-employed for federal income tax reporting purposes. [69] See R. Hammar, Church and Clergy Tax Guide chapter 2 (published annually by the publisher of this text). However, the courts have been very liberal in finding employee status in this context, so it is possible that a court would conclude that a work is a work made for hire even though the author reports his or her federal income taxes as a self-employed person.

The second requirement is that the work must have been created within the scope of employment. The Copyright Act does not define "scope of employment." However, the United States Supreme Court has found that Congress intended to incorporate common law agency principles as defined in the Restatement (Second) of Agency, to decide whether an employee has created a work within the scope of employment for purposes of the work for hire doctrine. [70] Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). Under section 228(1) of the Restatement (Second) of Agency a work is created within the scope of employment if it meets a three-prong test:

  1. It is the kind of work the author is employed to perform;
  2. The creation of the work occurred substantially within authorized work hours and space; and
  3. The creation of the work was actuated, at least in part, by a purpose to serve the employer. [71] See, e.g., Gilpin v. Siebert, 419 F.Supp.2d 1288 (D. Ore. 2006).
Examples
Pastor B is senior minister of his church. He is in the process of writing a devotional book. Most of the writing is done during regular church office hours, in his office in the church, using church equipment and a church secretary. Pastor B's contract of employment does not address the issue of copyright ownership in the book, and no written agreement has ever been executed by the church that addresses the matter. Under these facts, it is likely that the book is a work made for hire. The result is that the church is the author of the book, it is the copyright owner, and it has the sole legal right to assign or transfer the copyright in the book.
Pastor T is minister of music at her church. She has composed several songs and choruses, all of which were written during regular office hours at the church, using church equipment (piano, paper, etc.). The church has never addressed the issue of copyright ownership in a signed writing. It is likely that the songs and choruses are works made for hire. The result is that the church is the author of these materials, it is the copyright owner, and it has the sole legal right to assign or transfer the copyright in these works.
Same facts as the preceding example, except that Pastor T composes the music in the evening and on weekends in her home. While she is an employee, she did not compose the music "within the scope of her employment," and therefore the music cannot be characterized as works made for hire. The legal effect of this conclusion is that Pastor T owns the copyright in the music, and is free to sell or transfer such works in any manner she chooses without church approval.
Same facts as the previous example, except that Pastor T composes many of her works both at home and at the church office. Whether or not a particular work is a work made for hire is a difficult question under these circumstances. The answer will depend upon the following factors: (1) the portion of the work that is composed at the church office, compared to the portion composed at home; (2) the portion of the work created with church equipment, compared to the portion created with Pastor T's personal equipment; (3) the portion of the work created during regular office hours, compared to the portion created after hours; and (4) the adequacy of Pastor T's personal records to document each of these factors. Unfortunately, a staff member's records may be inadequate. In such a case, work made for hire status will depend upon the staff member's own testimony, and the testimony of other witnesses (such as other staff members).
Doing Outside Work at Home

Do you have a writer or composer on staff at your church? If so, it is possible that this person is doing some writing or composing on church premises, using church equipment, during office hours. One way to minimize or avoid the problems associated with work made for hire status is to encourage staff members to do all their writing and composing at home. Tell staff members that (1) if they do any writing or composing at church during office hours, their works may be works made for hire; and (2) the church owns the copyright in such works. By urging staff members to do all their personal writing and composing at home, the church also will avoid the difficult question of whether works that are written partly at home and partly at the office are works made for hire.

However, it is likely that pastors' sermons will be considered works made for hire, whenever and wherever they are composed, since sermons are one of the most important functions that a pastor performs.

The parties "expressly agree otherwise"

Section 201(b) of the Copyright Act specifies that "in the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author … and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright." This provision recognizes a presumption that employers are the authors of works made for hire, and own the copyright in such works.

However, this presumption can be negated if an employer and employee execute a written, signed agreement that recognizes the employee as the owner of "all of the rights comprised in the copyright." The burden is on the employee to provide evidence of an agreement that satisfies the requirements of section 201(b). If an employee is unable to do so, the presumption of employer ownership prevails.

There are three important issues that are raised by such agreements:

  1. do they comply with the requirements specified in section 201(b);
  2. do they result in prohibited inurement of church assets to the benefit of private individuals, thereby jeopardizing the church's tax-exempt status; and
  3. do they constitute excess benefit transactions trigging federal excise taxes (called "intermediate sanctions") against the recipients?
These issues will be considered separately.

(1) the requirements of section 201(b)

Section 201(b) of the Copyright Act recites three requirements that must be met in order for an employee to divest an employer of the copyright in a work made for hire:

  • the parties have "expressly agreed" that the employee, rather than the church, is the author of a work made for hire and owns the copyright in the work;
  • the agreement is contained in a "written instrument"; and
  • the agreement is "signed by them."

A written agreement, between a church and employee that is signed by both parties, could satisfy these requirements. But can they be met by a "copyright policy" that purports to apply to all employees? To illustrate, some churches have adopted a generic "copyright policy" (often as part of a policy manual) that purports to disclaim church ownership of works created by employees, even if the works meet the definition of works made for hire. The intent of these policies is to have a written agreement that comports with section 201(b).

Do such policies overcome the presumption that the employer owns the copyright in works made for hire? No court has addressed this question in a case involving a church, but a few courts have addressed it in cases involving private universities. Several private universities have adopted copyright policies that allow professors to retain the rights to the material they create in the scope of their employment (i.e., lectures, notes, audiovisual presentations), consistent with long-standing academic tradition. Some of these policies create an exception in the case of works specifically commissioned by the university. Such cases are helpful since private universities are exempt from taxation under section 501(c)(3) of the Internal Revenue Code as are churches and many other religious organizations. A typical university copyright policy states, in relevant part:

Copyright Ownership; Assertion of Rights
A. Traditional Faculty Authorship Rights - In keeping with longstanding academic custom, the University recognizes faculty ownership of copyright in traditional works of authorship created by faculty such as textbooks, other works of nonfiction and novels, articles, or other creative works, such as poems, musical compositions and visual works of art, whether such works are disseminated in print or electronically.
B. Assertion of Rights by the University - The University asserts copyright ownership in any work of authorship that is: (i) created with substantial use of University resources, financial support or non-faculty University personnel beyond the level of common resources provided to faculty; (ii) created or commissioned for use by the University; or (iii) created under the terms of a sponsored project where the terms of the sponsored project require that copyright be in the name of the University. …

Obviously, the intent of such policies is to create a written agreement between the university and its faculty, pursuant to section 201(b) of the Copyright Act that overcomes the presumption of employer ownership of works made for hire and vests ownership of such works in the professors who create them. However, there are potential problems with this approach. Most notably, some courts have ruled that university copyright policies do not divest the university of its copyright ownership of works made for hire if they do not fully comply with the three requirements specified in section 201(d) (noted above). Consider the following cases.

Case study. For over twenty years a man (the "plaintiff") was employed by Brown University as a full-time photographer. A dispute arose as to the copyright ownership in the photographs that he took in the course of his employment. The plaintiff insisted that he owned the copyright as a result of the university's copyright policy, which stated: "It is the university's position that, as a general premise, ownership of copyrightable property which results from performance of one's university duties and activities will belong to the author or originator. This applies to books, art works, software, etc." Other than this policy, no written agreement was signed by the plaintiff and university that addressed copyright ownership in the photographs.
A federal district court noted that section 201(b) of the Copyright Act "requires an express, written agreement signed by both parties to overcome the work made for hire presumption of employer ownership." The plaintiff argued that the university's copyright policy constituted an express, written agreement that altered the presumption of employer ownership in works for hire created by employees in the course of their employment. The court disagreed:
It is a bedrock principle that when the statutory text's meaning is plain, courts are obligated to enforce the provision as written. The language of the work made for hire doctrine could not be clearer: it requires the parties to make an express agreement, memorialized "in a written instrument signed by them". …
In section 201(b) Congress unambiguously set forth the requirement that in order to overcome the work for hire presumption there must be a clearly expressed written agreement, signed by the parties, stating as much. This court finds that the work made for hire doctrine applies to the images in the absence of an express agreement to the contrary that is signed by both [the plaintiff and the university]. The copyright policy is patently inadequate to overcome the presumption of university ownership under the work made for hire doctrine.
The court rejected the plaintiff's contention it would have been "illogical" to have had all university employees sign the policy.[72] Foraste v. Brown University, 248 F.Supp.2d 71 (D.R.I. 2003).
Case study. A man (the "plaintiff") was hired by a community college at its full-time staff photographer. After 15 years of employment the plaintiff's position was eliminated by the college, and a dispute arose over ownership of the photographs that he had taken. The plaintiff conceded that the photographs were works made for hire, but he insisted that he was the copyright owner because of a college policy that vested copyright in works made for hire in the employees themselves. He claimed that his annual employment contracts "incorporated by reference" the college's policy manual which contained the copyright policy. The policy read, in part: "Members of the staff who develop materials shall have complete copyrights to such materials and all royalties which may accrue from such materials unless [the college] and the staff member have previously entered into an agreement … for the specific purpose of producing such materials. Under such an agreement [the college] shall hold the copyright."
A college representative testified that the copyright policy was adopted to address issues related to faculty members who write and edit textbooks. He stated that the copyright policy "means that a staff member who authors a textbook or writes a research paper owns the copyright to the work." This representative asserted that the plaintiff did not own the copyrights to the photographs because "he was hired by the college to take photographs for the college's use and that is what he was paid for."
The plaintiff sued the college to establish his copyright ownership in the photographs. The court noted that the photographs were works for hire, and as such the college (employer) was presumed to be the owner of the copyright in the photographs unless "the parties have expressly agreed otherwise in a written instrument signed by them." The court concluded:
By the terms of [section 201(b)] the agreement must be in writing and must be signed by both parties. The statutory language is "signed by them," that is, by both parties, and it means what it says. … [O]ne reason a signed statement is required is to make the ownership of property rights in intellectual property clear and definite, so that such property will be readily marketable. This is consistent with Congress' goal in revising the 1976 Act "of enhancing predictability and certainty of copyright ownership." Therefore, there must be a sufficient writing to rebut the presumption that the employer retains the copyright in a work made for hire. It is the employee's burden to show the existence of a writing granting the employee the copyright in any work made for hire. Unwritten understandings or writings not containing the signatures of both parties are insufficient to rebut the presumption. …
Section 201(b) of the Copyright Act requires that an agreement altering the statutory presumption be both written and express. … The parties' agreement altering the statutory presumption that the employer owns the copyright in a work made for hire must appear on the face of the signed written document. In this case, there is no signed written instrument which states, on its face, that plaintiff owns the copyright in the photographs. … An agreement altering the statutory presumption under the Copyright Act must be express.
Plaintiff has not shown an express agreement signed by both parties which states, on its face, that plaintiff has the copyright in the photographs. Therefore, plaintiff has not met his burden to show a sufficient writing to rebut the presumption that the college retained the copyright in the photographs, which were works made for hire. … This court concludes that the parties did not expressly agree to rebut the statutory presumption that the employer owns the copyright in a work made for hire. Accordingly, the college owns the copyright in the photographs and is entitled to judgment as a matter of law.[73] Manning v. Board of Trustees, 109 F.Supp.2d 976 (C.D. Cal. 2000). See also Baltimore Orioles, Inc. v. Major League Baseball Players Association, 805 F.2d 663 (7th Cir. 1986), cert. denied, 480 U.S. 941 (1987); Vanderhurst v. Colorado Mountain College District, 16 F.Supp.2d 1297 (D. Colo. 1998).
Case study. Two university professors began a research project testing the use of an ultrasound machine to scan cattle to determine the quality of the beef prior to slaughter. This research resulted in the development of live animal intramuscular fat prediction software (LAIPS). A dispute arose as to who owned the copyright in the software. The professors conceded that the software was a work made for hire, but they insisted that they owned the copyright because the parties so agreed in a signed writing pursuant to section 201(b) of the Copyright Act. The "writing" was a university copyright policy that was contained in the university faculty handbook which each professor accepted at the time of hire. The policy stated that the ownership of copyright in traditional scholarly works remains with the faculty authors. A federal court rejected the professors' claims, and ruled that the university had not abdicated its copyright ownership in the disputed work through a signed writing. It concluded:
An agreement altering the statutory presumption under the Copyright Act must be express. An employee policy is insufficient to alter the statutory presumption under the Copyright Act. … [The professors] have failed to produce a written agreement between themselves and the university that expressly states on its face that [they] would have claim to a copyright to [the software] to the exclusion of [the university].
Even if the faculty handbook constituted an express, written agreement as required by the statute, there is no record evidence that [these professors] signed any letters of intent incorporating the faculty handbook into their employee contracts, as copies of such were not produced anywhere in the record. …[74] Rouse v. Walter & Associates, 513 F.Supp.2d 1041 (S.D. Iowa 2007).
Case study. A federal appeals court, in construing section 201(b) of the Copyright Act, observed: "In light of this statutory language, the fact that there is no written agreement between the parties regarding ownership of the copyrights … is dispositive regarding the validity of the [employer's] copyrights. [The employee's] protestations about the alleged oral agreement concerning the ownership of these copyrights is thus entirely beside the point."[75] Saenger Organization, Inc. v. Nationwide Ins. Licensing Associates, Inc., 119 F.3d 55 (1st Cir. 1997).
Case study. A federal court rejected a teacher's assertion that there was an "academic exception" to the work for hire doctrine. The court noted that such an exception requires that the parties sign a written instrument pursuant to section 201(b) of the copyright Act acknowledging that teachers owned the copyright in their works. The court also noted that the "academic tradition" granting authors ownership of their own scholarly work "is not pertinent to teaching materials that were never explicitly prepared for publication … as opposed to published articles by university professors."[76] Shaul v. Cherry Valley-Springfield Cent. School District, 363 F.3d 177 (2nd Cir. 2004).

According to these cases, a generic copyright policy will not divest a church of its copyright ownership in works for hire since such a policy typically will fail one or more of the three requirements specified in section 201(b) of the Copyright Act (see above) for overcoming the presumption of employer ownership of such works.

What if a church requires new employees to sign a statement at the time of hire agreeing to be bound by the church's copyright policy or a policy manual that includes a copyright policy? Will these signed statements satisfy the requirements of section 201(b)? Possibly. The court in the Rouse case (see above) noted that "even if the faculty handbook constituted an express, written agreement … there is no evidence that [these professors] signed any letters of intent incorporating the faculty handbook into their employee contracts. …" This suggests that signed statements by employees agreeing to be bound by the terms of their employer's copyright policy may satisfy the requirements of section 201(b) and divest the employer of copyright ownership of works for hire. But without clear precedent to this effect, such a conclusion is precarious and should not be relied upon by church leaders when attempting to address the issue of works for hire. The best practice is to have a separate written agreement between the church and each employee in which the parties expressly agree that the employee, rather than the church, is the author of a work made for hire, and that is signed by both parties.[77] Rouse v. Walter & Associates, 513 F.Supp.2d 1041 (S.D. Iowa 2007).

If a policy or agreement purporting to vest copyright ownership in works for hire in the employees who create them fails to comply with the three requirements for such an agreement under section 201(b) of the Copyright Act, then the church owns the copyright in such works and has the exclusive right to publish or distribute them. This outcome raises a number of issues, including the following: (1) the application of the federal unrelated business income tax to royalties received by the church from a publisher that publishes a work made for hire in which the church retains the copyright; and (2) the possible violation of the "operational test" for tax-exempt status under section 501(c)(3) of the federal tax code. Both of these issues are addressed below.

(2) the church's tax-exempt status: inurement

One of the conditions for exemption from federal income taxation under section 501(c)(3) of the federal tax code is that none of a church's assets inures to the personal benefit of any individual other than as reasonable compensation for services. Is this condition violated by an agreement between a church and an employee, pursuant to section 201(b) of the Copyright Act, in which the parties expressly agree that the employee, rather than the church, owns the copyright in works made for hire? Consider the following example.

Example. A senior pastor is a gifted writer. He is planning on writing a book for the popular market, but would like to resolve the issue of copyright ownership in advance. Since he plans on doing most of the work at his church office, during regular office hours, the book will be a work for hire. The pastor discusses this with the church board, and an agreement is reached that the pastor will own the copyright in the book. As a result, the church and pastor sign an agreement stating that the pastor will own the copyright in all works that he creates in the course of his employment. The pastor completes the book, and it is published and marketed by a prominent publisher. The book is very popular, and results in the payment of substantial royalties to the pastor. Does this arrangement constitute the inurement of a church asset (copyright ownership in a work made for hire) to the personal benefit of the pastor? If so, the church's tax-exempt status is jeopardized, since one of the conditions of exemption under section 501(c)(3) of the tax code is that there is no inurement of a church's assets to the personal benefit of any individual, other than reasonable compensation for services.

If a church transfers the copyright in a work made for hire to an employee pursuant to a written agreement, this may be viewed by the IRS as private inurement of the church's resources to an individual. If so, this could jeopardize the church's tax-exempt status.

Key point. Private universities, like churches, are exempt from taxation under section 501(c)(3) of the tax code. Many private universities have entered into written agreements with professors in which they renounce copyright ownership in professors' works for hire. Neither the IRS nor any court has ruled that these agreements constitute prohibited inurement, jeopardizing a university's tax-exempt status. As a result, this risk should not be overstated. But on the other hand, the consequences of a loss of exempt status are so undesirable that extreme caution must be exercised. Agreements divesting a church of copyright ownership in works for hire should not be used without the advice of legal counsel.

Neither the IRS nor any court has addressed the tax consequences of such an arrangement to a church. However, it is possible, if not likely, that a church's transfer of the copyright in works made for hire to the employees who created them will constitute private inurement in violation of section 501(c)(3) of the tax code, thereby jeopardizing the church's tax-exempt status. The IRS construes inurement as follows:

An organization's trustees, officers, members, founders, or contributors may not, by reason of their position, acquire any of its funds. They may, of course, receive reasonable compensation for goods or services or other expenditures in furtherance of exempt purposes. If funds are diverted from exempt purposes to private purposes, however, exemption is in jeopardy. The Code specifically forbids the inurement of earnings to the benefit of private shareholders or individuals. … The prohibition of inurement, in its simplest terms, means that a private shareholder or individual cannot pocket the organization's funds except as reasonable payment for goods or services.

When a church employee writes a book during office hours at the church, using church equipment, supplies, and personnel, the copyright in the work belongs to the church. If the church chooses to renounce its legal rights in the book, and transfers the copyright back to the employee by means of a written agreement pursuant to section 201(b) of the Copyright Act, then it is relinquishing a potentially valuable asset that may produce royalty income for several years.

Few if any churches would attempt to "value" the copyright and report it as additional taxable compensation to the employee, and as a result it is hard to avoid the conclusion that such arrangements result in inurement of the church's assets to a private individual. The legal effect is to jeopardize the church's tax-exempt status. This risk must not be overstated, since only a few bona fide churches have had their exempt status revoked by the IRS in the last fifty years, and none because of a transfer of copyright to an employee who created a work made for hire. But the consequences of a loss of tax-exempt status would be so undesirable that the risk should be taken seriously. A church should not enter into such an agreement without legal counsel.

Case study. A federal court ruled that use of a church to write materials that are then copyrighted in the name of the church's founder, and for which he received royalties, is a clear use of the church for a private purpose, and constitutes inurement.[78] Church of Scientology v. Commissioner, 83 T.C. 381 (1984).
Case study. The Tax Court ruled that a church was no longer being operated in accordance with section 501(c)(3) of the tax code, and therefore the IRS was entitled to revoke its tax-exempt status. The court found substantial evidence of private inurement to the church's founder and his family, including salaries, management fees, support of the founder's family, and royalty payments on the founder's writings.[79] Church of Scientology of California v. Commissioner, 83 T.C. 381 (1984).
Key point. One way to avoid the problems associated with works made for hire is to encourage staff members to do all their writing and composing at home. Tell staff members that (1) if they do any writing or composing at church during office hours, their works may be works made for hire; (2) the church owns the copyright in such works; and (3) the church can transfer copyright to the writer or composer, but this may constitute "inurement" of the church's assets to a private individual, jeopardizing the church's tax-exempt status. By urging staff members to do all their personal writing and composing at home, the church also will avoid the difficult question of whether works that are written partly at home and partly at the office are works made for hire.
Are Sermons Works Made for Hire?

Are a minister's sermons works made for hire that are owned by the employing church? To the extent that sermons are written in a church office, during regular working hours, using church secretaries and equipment, it is possible if not likely that they are works made for hire since they are created by an employee within the scope of employment.

The argument could be made that sermons are works for hire even if composed by ministers at home, during "non-office" hours, since they comprise one of the most important functions that they perform on behalf of their employing church and congregation.

The characterization of sermons as works for hire has several consequences, including the following:

  • The church owns the copyright in the sermons, unless the parties have expressly agreed otherwise in a signed writing that meets the requirements of section 201(b).
  • Any written agreement between a church and a minister that transfers copyright ownership in works for hire to the minister may constitute inurement of church assets to the personal benefit of the minister in violation of section 501(c)(3) of the tax code. This jeopardizes the church's tax-exempt status.
  • The church has the exclusive right to copy and distribute the minister's sermons. To illustrate, if a minister's sermons are recorded and distributed publicly, and the minister resigns his or her position and accepts a position at another church, he or she does not have any legal rights with respect to the sermons preached at the previous church. Any further public distribution of the sermons could be done only by the previous church, and not the minister.
  • The minister would not have the legal authority to publish a book based on the sermons that he or she has preached at the church, since the church is the copyright owner of the sermons (as works for hire). As a result, only the church can create, publish, and distribute publications based on the sermons.
  • If the church receives royalties on the sales of works for hire, this may generate unrelated business income tax.
  • If the church receives royalties on the sales of works for hire, this may violate the "operational test" under section 501(c)(3) of the tax code (which requires that public charities be operated exclusively for exempt purposes), thereby jeopardizing the church's tax-exempt status.
  • If the church receives royalties from the publication and sale of a work for hire, and remits them back to the employee-author, this may constitute prohibited inurement that will jeopardize the church's tax-exempt status.

(3) excess benefit transactions

Section 4958 of the tax code empowers the IRS to assess "intermediate sanctions" in the form of substantial excise taxes against insiders (called "disqualified persons") who benefit from an "excess benefit transaction." Section 4958 describes the following excise taxes:

  • A disqualified person who benefits from an excess benefit transaction is subject to an excise tax equal to 25 percent of the amount of the excess benefit (the amount by which actual compensation exceeds the fair market value of services rendered). This tax is paid by the disqualified person directly, not by his or her employer. A disqualified person generally is a director or officer of a church or charity, or a relative of such a person.
  • If the 25 percent excise tax is assessed against a disqualified person and he or she fails to correct the excess benefit, the IRS can assess an additional tax of 200 percent of the excess benefit.
  • If the IRS assesses the 25 percent tax against a disqualified person, it is permitted to impose an additional 20 percent tax on any organization manager (any officer, director, or trustee) who participates in an excess benefit transaction knowing it is such a transaction, unless the manager's participation "is not willful and is due to reasonable cause." This tax is limited to a maximum of $20,000 per manager (but the total tax on all mangers cannot exceed $20,000).

Intermediate sanctions may be assessed against a minister, and possibly members of a church board, in a couple of ways:

  • Ministers and other church employees who retain ownership of a work made for hire because of a written agreement by which the church divests itself of copyright ownership may be subject to this penalty. The point is this—since the church is the legal owner of the copyright in a work made for hire, it is legally entitled to any income generated from sales of the work. By letting an employee retain the copyright, and all rights to royalties, the church may be viewed as paying additional compensation to the employee in this amount. If the work generates substantial income, then this may trigger intermediate sanctions if the employee's total compensation exceeds what is reasonable.
  • If the church elects to retain the copyright in works made for hire, but pays a minister additional compensation (i.e., a fee, or a percentage of royalties) in recognition of the work involved in creating a work, this may result in excess compensation triggering intermediate sanctions if the amount of the additional compensation is substantial.
Example. A senior pastor writes a book in the course of his church employment. In order to avoid jeopardizing its tax-exempt status, the church elects to retain the copyright in the book. The church agrees to pay the pastor one-half of all royalties earned from sales of the book. The book sells well, and results in substantial royalties. This arrangement may result in the assessment of intermediate sanctions against the pastor. It also may constitute prohibited inurement, thereby jeopardizing the church's tax-exempt status.[80] Church of Spiritual Technology v. U.S., 26 Cl.Ct. 713 (Cl.Ct. 1992). See also IRS Letter Ruling 200912038 (2008).
Resource. The subject of intermediate sanctions is addressed fully in chapter 4 of Richard Hammar's Church and Clergy Tax Guide.
Key point. Intermediate sanctions can be imposed only against "disqualified persons" and "managers." IRS regulations define a disqualified person as any person who was in a position to exercise substantial influence over the affairs of the organization at any time during the five-year period ending on the date of the transaction. This includes any officer or director, or a relative of such a person.
Key point. Church board members are exposed to an excise tax if they authorize a transfer of copyright in a work made for hire to the employee who created it.
Works Made for Hire—A Checklist of Important Points
  • A "work made for hire" is any book, article, or piece of music created by an employee in the course of employment.
  • Factors to consider in deciding whether or not a work was created in the course of employment include the following: (1) Was the work written or composed during office hours? (2) Was the work created on church property? (3) Was the work created using church equipment? (4) Was the work created using church personnel?
  • The employer owns the copyright in a work made for hire.
  • An employer, by a signed writing, can transfer copyright in a work made for hire to the employee who created it.
  • A church that transfers the copyright in a work made for hire to the employee who created it is jeopardizing its tax-exempt status, since this may constitute "inurement" of its assets to a private individual.
  • A church that transfers the copyright in a work made for hire to the employee who created it may be exposing the employee to intermediate sanctions.

The parties have not "expressly agreed otherwise"

Section 201(b) of the Act specifies that "in the case of a work made for hire, the employer … is considered the author … and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright." What if a church employee creates a work for hire and no written agreement is signed that transfers copyright ownership to the employee, or an agreement is signed that fails to comply with the legal requirements described in section 201(b) of the Copyright Act (see above)? In such cases the presumption that the church, as employer, is the copyright owner prevails. The risk of prohibited inurement is reduced if not avoided if the church retains the copyright in works made for hire and receives all the royalties from sales of the works. However, there are several additional issues to consider in such cases, including the following:

(1) inurement

If the church elects to pay a "bonus" or some other form of taxable compensation to the author, this raises additional questions as noted above. And, if the church pays a substantial portion, or all, of the royalties directly back to the employee, this will raise the possibility of prohibited inurement.[81] Church of Spiritual Technology v. U.S., 26 Cl.Ct. 713 (Cl.Ct. 1992).

Example. Pastor G is senior pastor of his church. He writes a book in his office at the church during office hours and using church equipment. He reads an article about works made for hire, and is concerned about the legal implications. He discusses the matter with the church board. In order to eliminate any risk to the church's tax-exempt status, the church board decides that the church will retain the copyright in Pastor G's book. The publisher is contacted, and agrees to list the church as the copyright owner on the title page and to pay royalties from sales of the book directly to the church. The church board agrees to pay Pastor G a "bonus" in consideration of his additional services in writing the book. The bonus is added to Pastor G's W-2 at the end of the year. This arrangement will not jeopardize the church's tax-exempt status so long as the additional compensation paid to the pastor is reasonable.
Case study. A federal court ruled that a church may violate the ban on inurement of its assets to the personal benefit of private individuals if it receives royalties from sales of works for hire and remits the royalties to the employees who created them.[82] Church of Spiritual Technology v. U.S., 26 Cl.Ct. 713 (Cl.Ct. 1992). See also IRS Letter Ruling 200912038 (2008).
Case study. The IRS ruled that a nonprofit organization that made funds available to authors and editors for preparing teaching materials and writing text books, and under the terms of the contract with the publisher received royalties from the sales of published materials and then shared them with those individuals, did not qualify for tax exemption under section 501(c)(3) of the tax code.[83] Revenue Ruling 66-104, 1966-1 C.B. 135.
(2) unrelated business taxable income

Churches and religious organizations, like other tax-exempt organizations, may engage in income-producing activities unrelated to their tax-exempt purposes, as long as the unrelated activities are not a substantial part of the organization's activities. However, the net income from such activities will be subject to the unrelated business income tax if the following three conditions are met:

  • the activity constitutes a trade or business,
  • the trade or business is regularly carried on, and
  • the trade or business is not substantially related to the organization's exempt purpose. The fact that the organization uses the income to further its charitable or religious purposes does not make the activity substantially related to its exempt purposes.

In general, rents from real property, royalties, capital gains, and interest and dividends are not subject to the unrelated business income tax unless financed with borrowed money.

Resource. The unrelated business income tax is addressed fully in chapter 12 of Richard Hammar's annual Church & Clergy Tax Guide.
(3) the "operational test" under section 501(c)(3)

To be exempt from federal income taxes, section 501(c)(3) of the tax code requires that a church be "operated exclusively" for exempt purposes. This requirement is referred to as the operational test. The income tax regulations specify that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of the exempt purposes specified in section 501(c)(3) and if no more than an insubstantial part of its activities are not in furtherance of an exempt purpose.

If a church receives a substantial amount of royalties through the publication and sale of a work made for hire in which it retained the copyright, an argument could be made that this amounts to a substantial non-exempt function that jeopardizes its tax-exempt status.

2. Specially commissioned works made for hire

There is a second kind of work made for hire. The copyright law defines "work made for hire" to include "a work specially ordered or commissioned for use as a contribution to a collective work, as part of an audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire."

The second type of work made for hire, as noted above, is "a work specially ordered or commissioned for use as a contribution to a collective work, as part of an … audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire." Most of these terms are defined in section 101 of the Copyright Act (see appendix). Note that for a commissioned work to be a work for hire, the following three requirements must be satisfied:

(1) the work must be one of the specific types of works listed (audiovisual work, translation, etc.),

(2) the work must have been commissioned by another party, and

(3) the parties must have both signed a written instrument characterizing the work as a work made for hire. A work generally is "commissioned" if one party requests another to prepare it.

Example. A publisher asks Pastor Judy, a seminary professor, to write a commentary on the Psalms for use as an instructional text. Pastor Judy is not an employee of the publisher. A written contract is signed, but no mention is made regarding the status of the work as a work made for hire. The commentary is a specially commissioned work (an instructional text), but it is not a work made for hire since the parties did not agree in a signed writing that it would be a work made for hire. The result is that Pastor Judy is the author and retains the copyright ownership in the work, unless such ownership is otherwise transferred to the publisher or another party.
Example. A publisher asks Pastor Steve, a minister of music, to prepare a musical arrangement of a public domain hymn. Pastor Steve is not an employee of the publisher. A contract is signed by both parties, in which the arrangement is characterized as a work made for hire. A musical arrangement is one of the types of works that may qualify as a specially commissioned work made for hire (the definition of "supplementary works" in section 101 of the Act includes "musical arrangement?'). Since the arrangement was commissioned, and the parties both signed a written agreement characterizing the work as a work made for hire, the requirements for a specially commissioned work made for hire are satisfied. The result is that the publisher is deemed the author of the arrangement, and therefore is the copyright owner.
Example. Same facts as the preceding example, except that the written contract did not characterize the arrangement as a work made for hire. Under these circumstances, the work cannot qualify as a specially commissioned work made for hire, and accordingly Pastor Steve remains the author and copyright owner unless ownership is otherwise transferred.
Example. A religious periodical asks Pastor Larry to write an article on a selected issue. A contract is signed that merely recites a deadline and the amount of compensation. Pastor Larry is not an employee of the publisher. This cannot be a specially commissioned work made for hire (contribution to a collective work) since the parties did not sign an agreement characterizing the article as a work made for hire. As a result, Pastor Larry is the author and copyright owner unless ownership is otherwise transferred.
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