Eligibility of Lay Church Employees for the Housing Allowance

The Tax Court issues an important decision.

Bio

The Tax Court issues an important decision—Haimowitz v. Commissioner, T.C. Memo. 1997-40 (1997)

Article summary. The Tax Court recently addressed the issue of whether an administrator of a Jewish synagogue qualified for a housing allowance. The Court ruled that the administrator did not qualify since he was not ordained, commissioned, or licensed, and there was no evidence that a housing allowance had been properly designated. This feature article reviews the Court’s decision and addresses its relevance to other religious workers.

The tax code contains a number of special provisions that apply to “ordained, commissioned, or licensed ministers.” One of those special provisions is the housing allowance. Stated simply, a portion of a minister’s compensation that is designated in advance by an employing church as a housing allowance is excluded from taxable income for income tax reporting purposes, to the extent it is used for housing expenses and does not exceed the fair rental value of the home (furnished, including utilities). This is one of the most significant tax benefits available to ministers.

There are three requirements that must be met in order for a church worker to be eligible for a housing allowance: (1) the recipient must be a minister, (2) the housing allowance must represent compensation for services performed in the exercise of ministry, and (3) the allowance must be properly designated. In many cases, it is obvious whether or not these requirements are met. But in some cases it is not. In a recent decision the United States Tax Court addressed this question. The case involved the question of whether or not a “synagogue administrator who was neither a rabbi nor a cantor qualified for a housing allowance.” The court’s decision provides helpful guidance to all religious organizations. This feature article will review the facts of the case, summarize the court’s ruling, and evaluate the relevance of the ruling to other religious organizations and workers.

facts

A temple administrator of a Jewish synagogue participated for many years in a retirement plan maintained by the synagogue. After his retirement he did not report distributions from the retirement plan as taxable income since they were designated by the plan as a housing allowance. The IRS audited the administrator and determined that the retirement distributions were fully taxable since the administrator did not qualify for a housing allowance. The administrator appealed to the tax court.

The administrator had worked for the same synagogue for thirty years until his retirement. He was a college graduate, with a degree in social studies, but he never attended a religious seminary. Following his retirement he was recognized as a “fellow in synagogue administration” by the Synagogue Administrators Association.

The administrator’s responsibilities with the temple varied over time. He was hired initially as an executive director, performing mostly administrative functions such as hiring and recruitment tasks. The temple had a rabbi and a cantor working for it, both of whom performed the temple’s religious functions. The administrator never fulfilled the role of either. However, he eventually performed more religious duties for the temple as a “religious functionary”. These “religious” duties included the following:

• Over the course of his thirty years with the temple, he assisted about 500 students with their bar mitzvah preparations, though most of the training was conducted by the cantor and rabbi. The cantor would teach the students how to chant their Torah portions, and the rabbi would rehearse with them on the pulpit. The administrator would then attempt to “enhance” the students’ performance for a week or two before the ceremony. This included such duties as helping students with memorization of blessings, Torah readings, and elocution.

• He performed as the temple’s marriage ceremony director. He would meet with engaged couples to discuss wedding preparations. His advice was mostly organizational in nature and related to the specific details of planning a wedding. While he frequently participated in the wedding ceremony as a witness to the contract he never officiated.

• He assisted the rabbi with various tasks during the religious services. This included the duty of assigning certain responsibilities to congregants who performed these tasks during services. He also performed the following other activities for the temple: He managed cemetery lots that the temple made available to its congregants; he visited and conducted services for mourners; and he provided weekly speakers for senior citizens.

The retired administrator did not claim that he was a rabbi or cantor. Rather, he asserted that he qualified as a “minister of the gospel” because he performed duties as a “religious functionary” for the temple.

the court’s ruling

The Tax Court began its opinion by noting that

a “minister of the gospel” may exclude from gross income “the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” In order for a minister to exclude a parsonage allowance, three criteria must be met: (1) the minister must provide services which are ordinarily the duties of a “minister of the gospel”; (2) the excluded amounts must actually be used to rent or otherwise provide a home; and (3) the rental allowance must be properly designated.

IRS conceded that the administrator used the retirement distributions for housing expenses, but it insisted that he did not qualify for a housing allowance with respect to these distributions since (1) at the time he contributed toward the retirement plan he was not a “minister of the gospel,” and (2) the retirement distributions were not properly designated by the temple as a housing allowance. The court addressed these two claims separately.

minister of the gospel

The court noted that the tax law does not define the phrase “minister of the gospel”, and there is no clear meaning of the term in the legislative history. Further, the income tax regulations “define only what a minister does, but not what a minister is”:

[T]he regulations list the following services which are considered those of a minister: (1) the performance of sacerdotal functions; (2) the conduct of religious worship; and (3) the performance of services in control, conduct, and maintenance of religious organizations. We also consider important whether the taxpayer was duly ordained, commissioned, or licensed, and whether the particular church or denomination recognized that person as a minister or religious leader.

Did the retired administrator’s duties as a “religious functionary” fall within the three types of services of a minister as described in the regulations? The court concluded that they did not:

As the temple’s employee, most of [the administrator’s] responsibilities related to some aspect of the Jewish religion. We note, however, these duties were more organizational than religious in nature and did not require performance from one who held ministerial authority.

Equally revealing, however, were the religious rites and ceremonies [he] did not perform. [He] admitted that he never fulfilled the role of either rabbi or cantor. The record displays his lack of such responsibility. [He] assumed responsibility over the bar and bat mitzvah students only in the last week or two of their training and only to enhance the efforts of the rabbi and cantor. The rabbi and cantor, however, held the main parochial responsibilities for the students’ training.

Further, [the administrator] acted as the marriage ceremony director and participated in wedding ceremonies as a witness. His responsibilities as director, however, were mostly secular in nature. While [he] participated in wedding ceremonies, he never officiated. Further, [he] assisted the rabbi with various functions during religious services. It was the rabbi, however … who actually led those services for which [the administrator] assisted. Finally, although [the administrator] visited and conducted services for mourners, he, presumably, did not officiate at the funerals.

[W]ith the sole exception of conducting services for mourners [the administrator] did not regularly perform those duties that ministers of the Jewish faith customarily perform.

The court also concluded that the administrator was never “ordained, commissioned, or licensed” as required by the regulations. He had admitted that he was not an ordained rabbi or commissioned cantor. Further, the fact that he was recognized as a Fellow in Synagogue Administration was not relevant, for two reasons. First, he “did not hold this title while he performed his duties with the temple. Rather, he received this honor … about 7 years after he left the temple.” Second, even if he had received this honor while performing services for the temple, it would not have established that he was ordained, commissioned, or licensed as a recognized religious official of the Jewish religion. Rather, as the title Fellow in Synagogue Administration suggests, the designation “reflects that [he] merely performed duties as an administrator, a primarily secular function.”

Finally, the court concluded that there was no evidence that the temple considered the administrator to be a religious leader.

The court concluded:

[W]e find that [the administrator] failed to demonstrate that he was a “minister of the gospel” as specified in the regulations and case law. As a judicial body we are loath to evaluate ecclesiastical authority in the various religious disciplines. We emphasize that our opinion is based on the record before us, and our finding should not diminish the importance of [the administrator’s] contributions to his community.

designation of rental allowance

The court also ruled that the administrator failed to qualify for a housing allowance since he did not establish that a housing allowance had ever been properly designated. The court noted that to qualify for a housing allowance “the amount paid to a minister, to rent or otherwise provide a home, must be designated as a [housing] allowance pursuant to official action taken in advance of such payment.” The income tax regulations specify that a designation “may be evidenced in an employment contract, in minutes of or in a resolution by a qualified organization, or in any appropriate instrument evidencing such official action. Without official designation, no exclusion is allowable.”

The court concluded that the administrator failed to demonstrate that the temple properly designated any portion of his retirement income as a housing allowance: “Completely missing from the record were details of the employment arrangement in which he and the temple were engaged. In fact, [he] presented no evidence which even [remotely] relates to the notion of official designation.”

relevance to other religious organizations and workers

What is the relevance of this ruling to other religious organizations and workers? Consider the following points:

1. Qualifying for a housing allowance. The court correctly noted that eligibility for a housing allowance requires that two conditions be met:

• the person is a minister of the gospel

• the housing allowance is provided as compensation for services performed in the exercise of ministry

2. Minister of the gospel. The first condition that must be met in order to qualify for a housing allowance is ministerial status. The recipient must be a minister of the gospel. The court concluded that the administrator did not qualify for a housing allowance since he was not a minister of the gospel. In reaching this decision, the court made a number of important observations that will be useful to other religious organizations in evaluating whether an employee is a minister of the gospel for tax purposes:

• While the tax code limits housing allowances to ministers of the gospel, neither the code nor the income tax regulations define this term.

• The income tax regulations do define “what a minister does.” They list the following functions: (1) the performance of sacerdotal functions; (2) the conduct of religious worship; and (3) the performance of services in control, conduct, and maintenance of religious organizations.

Key point. In deciding whether or not an individual performs the functions of a minister, consideration must be given not only to the religious duties the individual performs, but also to the religious duties that are not performed.

Key point. The court stressed that the performance of some religious functions is not enough to make one a minister for federal tax purposes. The administrator in this case performed a number of religious functions, but these were largely administrative in nature. More importantly, he performed few of the duties of an ordained, commissioned, or licensed minister.

Key point. The court did not say whether all three of the functions mentioned in the regulations must be performed in order for an individual to qualify as a minister for federal tax purpose.

• The regulations also refer to a “duly ordained, commissioned, or licensed” minister, and so this is another “important consideration.”

Key point. The court observed that “[w]e also consider important whether the taxpayer was duly ordained, commissioned, or licensed.” Other decisions of the Tax Court have made clear that this is not merely an “important” consideration, it is absolutely essential. No one can be a “minister” for federal tax purposes who is not, at a minimum, “ordained, commissioned, or licensed.”

• The court added another important consideration in determining whether or not a person is a minister for federal tax purposes-“whether the particular church or denomination recognized that person as a minister or religious leader.”

• The court referred to the fact that the administrator had no seminary training.

• The court referred to two prior Tax Court rulings addressing the definition of the term minister for federal tax purposes—Knight v. Commissioner, 92 T.C. 199 (1989) and Wingo v. Commissioner, 89 T.C. 922 (1987). As noted in prior issues of this newsletter, the Knight decision modified the Wingo decision. As a result, it is unfortunate that the court referred to the Wingo decision, which contains a far more restrictive definition of the term minister.

• The court acknowledged the difficulties associated with any attempt by the civil courts to define ecclesiastical terms: “As a judicial body we are loath to evaluate ecclesiastical authority in the various religious disciplines. We emphasize that our opinion is based on the record before us, and our finding should not diminish the importance of [the administrator’s] contributions to his community.”

4. Designating a housing allowance. The court concluded that even if the administrator were a “minister” for federal tax purposes, he would still be ineligible for a housing allowance since there was no evidence that a housing allowance had ever been properly designated for him. The court noted that to qualify for a housing allowance “the amount paid to a minister, to rent or otherwise provide a home, must be designated as a [housing] allowance pursuant to official action taken in advance of such payment.” The income tax regulations specify that the designation of the allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.”

Key point. Under no circumstances can a minister exclude any portion of an allowance retroactively designated by a church. The designation need not be in advance of the calendar year, but it will only be effective from the date of its enactment.

5. Consistency. “Ministers” are eligible for the following four special tax rules with respect to services they perform in the exercise of their ministry:

• the housing allowance exclusion (and the exclusion of the fair rental value of a church-owned parsonage)

• exemption from self-employment taxes (if several conditions are met)

• self-employed status for social security purposes (if not exempt)

• wages exempt from federal income tax withholding (ministers use the quarterly estimated tax procedure to pay their income taxes and self-employment taxes, unless they elect voluntary withholding of these taxes)

Here is the important point—persons who qualify as “ministers” for federal tax purposes must be consistent with regard to these four special tax rules—if one applies, then they all apply. To illustrate, persons who qualify as a minister for federal tax purposes not only are eligible for a housing allowance, but in addition they (1) are self-employed for social security (they pay self-employment taxes rather than FICA taxes), and (2) are exempt from federal income tax withholding (they use the estimated tax procedure to prepay these taxes).

6. Clergy of other faiths. The court acknowledged that the tax code uses the term “minister of the gospel” and that this term refers to clergy of the Christian faith. However, it insisted that “Congress did not intend to exclude those persons who are equivalent of ministers in other religions” and that “rabbis and cantors of the Jewish faith are considered ministers who can also qualify for the parsonage exclusion.”

7. Value of a Tax Court “memorandum” decision. The court’s decision was a “memorandum” decision, meaning that it was a ruling by only one judge. “Regular” opinions of the Tax Court, such as the Knight case, are of much greater precedential value than memorandum opinions, since they are decisions by the full Tax Court.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

It Pays to Check Your Bank Account

Court ruling shows importance of checking bank statements to ensure you aren’t losing your money.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

It Pays to Check Your Bank Account

Court ruling shows importance of checking bank statements to ensure you aren’t losing your money.

Richard R. Hammar

Background. In 1977 a woman deposited $1 million in an investment account at a bank. She instructed the bank to accumulate earnings and leave them in the account. Within a year, the bank had lost the entire $1 million through poor investments, leaving only a small amount of earnings. Nearly twenty years later the woman sued the bank. She claimed that the loss of her investment was caused by the bank’s breach of its “fiduciary duties.” The bank argued that the lawsuit should be dismissed since the statute of limitations had expired. It noted that under state law bank customers have ten years to bring such a lawsuit, and that this period had long since expired.

The court’s ruling. A trial court ruled in favor of the bank, and the woman appealed. A state appeals court upheld the trial court’s decision in favor of the bank. The court noted that a bank customer “has a duty to exercise reasonable care and promptness” in examining bank statements. It pointed out that the bank had sent the woman (and her husband and accountant) monthly statements from the time she first invested funds with the bank, and that she was thereby “put on notice” of the loss of her funds long before the statute of limitations expired on her claim. The court rejected the woman’s claim that the ten-year limitations period should be extended because of her failure to discover the loss of her funds. It observed that

a cursory review, month to month, would have revealed the depletion of approximately $1 million in principal within a twelve month period. If anything, [the bank] attempted to aid [the woman] by sending multiple sets of the monthly statements. [She] had sufficient information to excite her attention. [She] had sufficient notice to alert her to the possibility that something was happening to her funds. Any unreasonable ignorance of the facts by [her] regarding the account activity is not excused …. [She] had sufficient notice to put her on guard that something was going on with her account.

Relevance to church treasurers. Nearly every church has one or more bank accounts, and several have endowment or other designated funds in an investment account. Be sure to review each monthly statement (and its contents) so that you can detect unexplained or unforeseen losses, unauthorized signatures, alterations, and other irregularities. This case illustrates that a failure to recognize problems may jeopardize a church’s legal right to correct or address them. Robinson v. Whitney National Bank, 683 So.2d 847 (La. App. 1996).

This article originally appeared in Church Treasurer Alert, April 1997.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Using Church Credit Cards

The IRS issues a helpful ruling.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

Using Church Credit Cards

The IRS issues a helpful ruling.

Richard R. Hammar

IRS Letter Ruling 0706018

Background. Many churches have obtained credit cards for their pastor or another staff member. If a few basic rules are followed, this can be a convenient way to handle business expenses. Unfortunately, church treasurers often are not aware of these rules, and this can result in problems for the person who uses the card. A recent IRS ruling addresses the ideal way to handle employer-provided credit cards.

Facts of the case. An employer has several employees who travel on business and incur travel and entertainment expenses. The employer implements a business expense reimbursement program using credit cards. Here are the features of the plan:

the employer obtains a credit card in each employee’s name
use of credit cards is restricted by policy to business travel and entertainment expenses
monthly credit card statements are sent directly by the credit card company to employees
employees are responsible for the payment of all charges, unless an expense report is submitted to the employer
if an employee submits a business expense report to the employer that meets certain requirements, the employer pays those expenses directly to the credit card company
a business expense report must be submitted within one week after incurring an expense
business expense reports for travel expenses (transportation, meals, lodging while away from home overnight) must show (1) the business purposes of the trip, (2) the amount of each expense, (3) dates of travel, and (4) travel locations
business expense reports for entertainment expenses must show (1) the business purpose of the entertainment including a description of the business activity conducted, (2) an identification of the person or persons entertained sufficient to establish a business relationship with the employer, (3) the amount of each separate expenditure for entertainment, (4) the date of the entertainment, (5) the location of the entertainment, (6) the type of entertainment (if not apparent from the designation of the place of entertainment), and (7) if the entertainment immediately precedes or follows a business discussion, the employee also must identify those persons entertained who participated in the business discussion, and the nature of the business discussion
employees whose business expenses are supported by the expense report (and receipts) are “reimbursed” by the employer (it sends a check to the credit card company for the amount of the expenses)
employees are required to return to the employer (within sixty days) any employer reimbursements in excess of substantiated business expenses

What the IRS said. The employer’s business expense reimbursement arrangement is “accountable” because it meets the following three requirements: (1) only those expenses with a “business connection” are reimbursed; (2) only those expenses that are properly substantiated (as to amount, date, location, and business purpose) are reimbursed; and (3) employees are required to return to the employer within sixty days any reimbursements in excess of substantiated expenses.

The IRS noted that reimbursements paid under an accountable plan are not reportable by the employer or employee as taxable income. This means that the reimbursements are not reported by the employer on the employee’s W-2, or on Form 941. Further, the employee does not report the reimbursements as income on his or her income tax return.

Key point. The IRS cautioned that if an arrangement does not satisfy one or more of the three requirements of an accountable plan, then all amounts paid under the arrangement are treated as paid under a “nonaccountable plan” and must be reported as income on the employee’s W-2 and Form 1040, and the employer’s Form 941. Further, such reimbursements would be subject to tax withholding for ministers who have elected voluntary withholding, and nonminister employees.

What about your church? Does your church make credit cards available to ministers or other staff members? If so, this ruling will provide you with useful guidance. Some churches will satisfy the requirements for an accountable plan summarized above, but many will not. It is fairly common for churches to simply provide a pastor with a credit card, in the pastor’s name, without any restrictions on use. There is nothing “wrong” with such an arrangement. It violates no law. But it is not the ideal arrangement for the pastor from a tax standpoint, since it will be a “nonaccountable” arrangement. As noted above, this means that the church will need to report all charges as taxable income on the minister’s W-2 and on its Form 941. The minister will then be able to claim a business expense deduction on Schedule A (Form 1040), but only if the minister uses Schedule A and only to the extent that the minister’s business expenses exceed 2 percent of his or her adjusted gross income.

If your church lets pastors or other staff members use a credit card, now would be a good time to reconsider such a practice in light of this ruling. If your arrangement is not accountable, consider making it accountable by conforming to the practices outlined above.

Example. Rev. G is senior minister of his church. The church reimburses him for all of his business expenses by means of a credit card (in the church’s name). However, Rev. G is not required to account for such expenses by providing the church treasurer with receipts documenting the amount, time, place, business purpose (and, in the case of entertainment expenses, the business relationship) of each expense. Rev. G simply informs the treasurer at the end of each month of the total expenses incurred during that month. Assume further that Rev. G cannot itemize deductions on Schedule A (he does not have sufficient deductions), and that he is an employee for income tax reporting purposes. If Rev. G receives reimbursements of $4,000 in 1997: (1) the church would report the entire reimbursements ($4,000) as income on Rev. G’s W 2, and Rev. G would report them as income (salary) on his Form 1040; (2) Rev. G cannot deduct the reimbursed expenses as adjustments to gross income (on Form 1040), since they are “nonaccountable” (i.e., he did not adequately account to the church for such expenses); (3) Rev. G cannot deduct the reimbursed expenses as a miscellaneous itemized deduction on Schedule A since he does not have sufficient expenses to itemize. In other words, all of Rev. G’s business expense reimbursements are includable in his income for tax purposes, but he cannot offset any of this income by deducting any portion of his business expenses. Even if Rev. G could itemize deductions, his nonaccountable reimbursed expenses would be treated just like unreimbursed expenses—they are deductible only as miscellaneous itemized deductions, and then only to the extent that they (along with most other miscellaneous expenses) exceed 2 percent of Rev. G’s adjusted gross income. These undesirable tax consequences could have been avoided had the church adopted an accountable reimbursement plan. Under these circumstances, the church would not have reported the $4,000 of reimbursements as income on Rev. G’s W 2, and Rev. G would not have to report the reimbursements or claim the expenses on his Form 1040.

Example. Rev. C has a church credit card (in the church’s name) on which he charges only church related business expenses. Each month, Rev. C submits a statement of all charges to the church treasurer along with an expense statement documenting the amount, date, place, business nature (and, in the case of entertainment expenses, the business relationship). This is a proper reimbursement policy, and as a result Rev. C need not report any of the charges as income and he need not deduct any expenses, and the church need not report any of the reimbursements as compensation on Rev. C’s W 2.

This article originally appeared in Church Treasurer Alert, April 1997.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Church Liability for the Sexual Misconduct of Ministers

A California court renders a questionable decision.

Richard R. Hammar, Attorney, CPA

Bio

A California court renders a questionable decision-Roman Catholic Bishop v. Superior Court, 50 Cal. Rptr.2d 399 (Cal. App. 1996)

[Negligence as a Basis for Liability, Denominational Liability]

Article summary. A California court ruled that a Catholic church was not responsible on the basis of negligent hiring for a priest’s acts of child molestation, since they had not been aware of any similar incidents of misconduct at the time the priest was employed. Further, the church could not be liable for the victim’s injuries on the basis of negligent supervision, since most if not all of the priest’s acts did not occur in the course of any official church duties and did not occur on church premises. The most astonishing aspect of the court’s ruling was its conclusion that a church, like any employer, can be sued on the basis of invasion of privacy or sexual harassment if it inquires into a prospective employee’s past sexual behavior. This conclusion is unfortunate, since it may put children at greater risk in California and in any other state that reaches a similar conclusion. This important ruling is addressed fully in this feature article.

A California court reached the shocking conclusion that a Catholic church did not have a legal duty to make inquiries into a priest’s sexual history at the time he was employed since doing so would have exposed it to liability for invasion of privacy and sexual harassment! Here we see the absurd results that can occur when legal rights are carried to extremes. If this lamentable ruling is not reversed by the state supreme court, California may become a magnet for pedophiles seeking employment with religious and secular employers alike, free from inquiries that might reveal the danger they pose to innocent children. This article will review the facts of this case, summarize the court’s ruling, and assess its significance to other churches.

Facts

Note. The facts summarized below are as stated by the victim in her lawsuit.

A 15—year—old female (the “victim”) claimed to have been “regularly and repeatedly sexually molested” by her parish priest. She sued her church, alleging that it negligently hired, retained and supervised the priest because it should have known of his dangerous propensities as a sexual exploiter of children. Specifically, the victim alleged that

the priest was under the direct employ, supervision, agency and control of the church, and that his employment duties “included providing for the spiritual and emotional needs of, and religious instruction for, parishioners, including providing for the proper supervision of minor parishioners entrusted to his care”

the diocese and its churches had held themselves out to be a safe environment in which persons could worship, and they thereby “entered into an express or implied duty to properly supervise her and to provide her with a reasonably safe spiritual environment”

the church assumed a duty to the victim by “holding [the priest] out to the public as a competent and trustworthy Roman Catholic priest and counselor of high morals”

The victim claimed that the church breached its duty to her by exposing her to a priest “who was an unfit agent with dangerous propensities, and by not properly supervising her.” She claimed the church “should reasonably have known of [his] dangerous propensities as a child sexual exploiter” and “despite such knowledge, [it] negligently retained or failed to supervise [him] in a position of trust and authority” where he was able to harm her. The victim claimed that the church failed to provide reasonable supervision of the priest, and failed to reasonably investigate him and warn her.

The church asked the court to dismiss the case on the ground that it was not negligent. It insisted that it did not know and had no reason to suspect that the priest posed any risk to parishioners prior to the victim’s accusations. In essence, the church argued it had no civil duty to investigate its employees and the constitutional requirement separating church and state barred the victim’s civil action for negligent hiring and supervision of a priest. A trial court rejected the church’s argument, and the case was appealed.

The court’s ruling

A state appeals court dismissed the victim’s lawsuit against the church. The court’s reasoning is summarized below.

Negligent hiring

The court acknowledged that “an employer may be liable to a third person for the employer’s negligence in hiring or retaining an employee who is incompetent or unfit.” However, the court qualified this rule by noting that

one who employs another to act for him is not liable … merely because the one employed is incompetent, vicious, or careless. If liability results it is because, under the circumstances, the employer has not taken the care which a prudent man would take in selecting the person for the business in hand …. Liability results … not because of the relation of the parties, but because the employer … had reason to believe that an undue risk of harm would exist because of the employment.

The court noted that the harm the victim suffered was criminal sexual abuse of a minor by her priest. It observed: “There is nothing in the record to indicate [the priest] had a criminal history or had been previously implicated in sexual abuse of a minor. Thus the church could not have had antecedent knowledge of [his] purported criminal dangerousness.” That is, evidence that the priest had engaged in sexual misconduct with adults did not necessarily make him a risk to children. The court observed that the victim failed to prove any facts “showing an undue risk of harm that [the priest] would commit criminal child sexual abuse if he were employed by the church.”

But even if evidence of sexual misconduct with adults would be relevant in evaluating a priest’s risk of committing similar acts upon children, the church “had no actual knowledge of [his] sexual activity with [her] or anyone else until it heard [her] mother’s report and [the priest’s] admissions.” In other words, the church could not be responsible for the priest’s molestation of the victim on the basis of negligent hiring if it had no knowledge of any prior misconduct by the priest at the time he was hired or ordained.

The court referred to a prior case in California in which a court ruled that a church could be liable on the basis of negligent hiring for a pastor’s acts of child molestation since there was evidence that the church was aware of prior acts of molestation by the pastor prior to the time he was hired. The court concluded that this case was not relevant since the victim had failed to prove that the church was aware of any prior acts of child molestation by the priest at the time he was employed. Evidence of prior acts of sexual misconduct with adults was not enough.

The court referred to the following testimony by other priests and church officials in support of its conclusion that the church had not been guilty of negligent hiring when it employed the priest:

An assistant to the bishop of the diocese testified that until the day the victim’s mother informed him of her daughter’s accusations, no one in the church had received any report of misconduct or wrongdoing by the priest. The assistant and bishop later met with the priest, who admitted to the molestation of the victim, and affairs with an adult female in California and two adult females in the Philippines. This was the first knowledge anyone in the church had of the priest’s affairs.

A priest who shared a residence with the offending priest for several months prior to the alleged acts of molestation testified that he “never saw any sign that [the priest] had any problems with his celibacy,” had pornographic magazines or that he paid particular attention to any girls in the parish. He never received any complaints about the priest.

Another priest who lived with the offending priest for two years prior to the incidents in question testified he “never saw any signs [the priest] had any problems with his celibacy.” He never received complaints about the priest and “never had any reason to suspect that he had or would engage in sexual conduct with anyone, whether an adult or a minor.”

Another priest who worked closely with the offending priest in 1990 and 1991 testified that he “never became aware of any facts which called for [the priest’s] discipline” or that the priest “had any problems with his promise of chastity as a priest.”

A church official testified that since the priest was ordained in the Philippines before coming to California, “there was no duty on the part of the Diocese of San Diego to screen or test him for matters relating to sexuality, unless and until a sexual problem manifested itself. Under canon law, priests, like the rest of the faithful, have a right to privacy.”

The victim also claimed that the diocese was negligent in hiring the priest because, as part of its voluntarily screening process, it failed to “ask him whether he had problems with his vows of celibacy.” The victim claimed that if the priest had been asked, he “would have admitted that he had two sexual relationships in the Philippines and one here in San Diego with a parishioner. Undoubtedly, armed with this knowledge, any reasonable employer would have done an even more extensive investigation and most certainly would not have entrusted the care of minor girls to him without very close supervision.” The court disagreed. It noted that even if the diocese had learned of the priest’s prior sexual affairs with adults

it is illogical to conclude [it] should have anticipated [he] would commit sexual crimes on a minor. More important, the legal duty of inquiry [the victim] seeks to impose on the church as an employer would violate the employee’s privacy rights. Privacy is a fundamental liberty implicitly guaranteed by the federal Constitution and is explicitly guaranteed under the California Constitution as an inalienable right. The right encompasses privacy in one’s sexual matters and is not limited to the marital relationship. Although the right to privacy is not absolute, it yields only to a compelling state interest. Here there was no compelling state interest to require the employer to investigate the sexual practices of its employee. Moreover, the employer who queries employees on sexual behavior is subject to claims for invasion of privacy and sexual harassment. Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co., 18 Cal. Rptr.2d 692 (1993).

Similarly [the victim’s] contention the church should have required [the priest] to undergo a psychological evaluation before hiring him is unavailing. An individual’s right to privacy also encompasses mental privacy. We conclude the church did not fail to use due care in hiring [the priest].

Negligent supervision

The victim also claimed that the diocese negligently supervised the priest. The court rejected this argument, noting that “nearly all” of the acts of molestation occurred when the priest took the victim from her home to various public places and hotels.” The court added:

Similarly, there is no special relationship here creating a heightened duty of care based on a priest/parishioner relationship. In the context of a claim for negligent counseling, our Supreme Court explained in Nally v. Grace Community Church, supra, 253 Cal. Rptr. 97, that the legislature has exempted clergy from licensing requirements applicable to other counselors. That exemption is in recognition “that access to the clergy for counseling should be free from state imposed counseling standards, and that “the secular state is not equipped to ascertain the competence of counseling when performed by those affiliated with religious organizations.”

© Copyright 1997, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m67 m86 c0297

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Charitable Contributions Addressed in Final IRS Regulations

Important information for church treasurers.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

Charitable Contributions Addressed in Final IRS Regulations

Important information for church treasurers.

Richard R. Hammar

Background. The rules for substantiating charitable contributions of $250 or more that took effect in 1994 continue to cause confusion. The IRS issued proposed regulations last year that address some of the questions that have arisen. The public was invited to comment on these regulations, and the IRS recently released final regulations based in part on these comments. There are a few provisions in the final regulations that will be of interest to church treasurers, and they are summarized and illustrated in this article.

Key point. Familiarity with the final regulations will help church treasurers properly credit and receipt charitable contributions.

Intent to make a charitable contribution. For many years, the IRS has ruled that persons who receive goods or services in exchange for a payment to a charity are eligible for a charitable contribution deduction only with respect to the amount by which their payment that exceeds the fair rental value of the goods or services they received. The final regulations add an additional condition—donors may not claim a charitable contribution in such a case unless they intended to make a payment in excess of the fair market value of the goods or services.

Example. A church sells tickets to a missions banquet. The cost of each ticket is $100, though the fair market value of the meal is only $20. Persons who purchase tickets are eligible to claim a charitable contribution deduction in the amount of $80—if they intended to make a payment in excess of the amount of the dinner.

How will church treasurers know when donors intend to make a payment in excess of goods or services received in exchange? The final regulations aren’t of much help here. They simply state that “the facts and circumstances” of each case must be considered.

Key point. One rule of thumb may help—the greater the amount by which a payment exceeds the market value of goods or services received in exchange, the more likely the donor intended to make a charitable contribution. In the previous example, it is clear that donors intend to make a contribution since the ticket price ($100) obviously exceeds the value of the dinner. This is a good reason to set ticket prices at a level obviously higher than the value of a meal received at an appreciation banquet.

Key point. Most persons who buy tickets to missions banquets, or who receive a free dinner in appreciation for a contribution, do not make their contribution in order to get a free meal. They would give the same amount whether or not the meal was received. As a result, an argument could be made that charitable contribution deductions should not be reduced by the value of appreciation meals. While there is much merit to this logic, the IRS has rejected it.

Refusal of benefits. What if a member purchases a $100 ticket to a church’s missions banquet (in the above example), but has no intention of attending the banquet? Is the member entitled to a charitable contribution deduction of $100, or $80? In other words, must a charitable contribution be reduced by the amount of goods or services that a donor refuses to accept?

The IRS addressed this issue when it released the final regulations, noting that “a taxpayer who has properly rejected a benefit offered by a charitable organization may claim a deduction in the full amount of the payment to the charitable organization.” How does a donor reject a benefit? The IRS suggested that charities create a form containing a “check-off box” that donors can check at the time they make a contribution if they want to refuse a benefit.

Key point. The IRS distinguishes goods or services that were made available to a donor but not used, from those that were properly rejected. To illustrate, donors who purchase a ticket to a missions banquet for $100 must reduce their contribution by the value of the meal ($20 in the above example) even if they decide not to attend the banquet. However, if at the time a donor purchases a ticket he indicates unequivocally and in writing that he will not be attending the banquet, then the church treasurer can receipt the donor for the full value of the ticket ($100). And, the IRS has noted that in such a case the receipt issued by the church “need not reflect the value of the rejected benefit.”

Timely receipts. The new rules for substantiating charitable contributions that took effect in 1994 deny a deduction for individual contributions of $250 or more unless the donor receives a receipt from the charity that complies with several requirements. One of those requirements is that the donor must receive a “contemporaneous” or timely receipt from the charity. This means that the receipt acknowledging the contribution must be received by the donor on or before the earlier of the following two dates: (1) the date the donor files a tax return claiming a deduction for the contribution, or (2) the due date (including extensions) for filing the return.

Will the IRS actually deny a charitable contribution deduction to a donor simply because she did not receive a timely receipt from the charity? To illustrate, assume that a church issues receipts to donors in February of 1997 reflecting their contributions for 1996. Kathy made weekly contributions of $25 to the church, but in addition made a special contribution to the church building fund of $1,000. If Kathy files her tax return in January (prior to receiving the receipt from the church), is her $1,000 contribution to the building fund jeopardized? The official comments to the final IRS regulations leave no doubt that this contribution may be disallowed if Kathy’s tax return is audited. The IRS stated that a donor who files a return before receiving a receipt from a charity cannot “correct” this situation by filing an amended tax return since “a written acknowledgment obtained after a taxpayer files the original return for the year of the contribution is not contemporaneous within the meaning of the statute.”

Key point. Church treasurers must take the contemporaneous requirement seriously. Donors who file tax returns before receiving a proper receipt from the church may lose a deduction for every individual contribution of $250 or more. Filing an amended return will not help. Our recommendations: (1) Issue receipts as soon as possible after the start of each new year. (2) Advise donors at the end of each year not to file their tax returns until they have received a written acknowledgement of their contributions from the church. This communication should be in writing, and should be placed in the church bulletin or newsletter for the last few weeks of each year or included in a letter to all donors. Here is some sample wording: “IMPORTANT NOTICE: To ensure the deductibility of your church contributions, please do not file your income tax return until you have received a written acknowledgment of your contributions from the church. You may lose a deduction for some contributions if you file your tax return before receiving a written acknowledgement of your contributions from the church.”

Key point. Donors can continue to use canceled checks to substantiate individual contributions of $250 or more.

Multiple contributions. This is the biggest surprise in the final regulations. Let’s say that Don makes ten separate contributions to his church during 1997 of $250 or more. Must the church issue a written receipt that lists each of these contributions separately, or can the ten contributions be lumped together as one amount? The official comments to the final regulations contain the following statement: “[F]or multiple contributions of $250 or more to one charity, one [receipt] that reflects the total amount of the taxpayer’s contributions to the charity for the year is sufficient.” In other words, the church is free to lump all of Don’s contributions together as one amount on its receipt.

Key point. Most churches currently itemize individual contributions on receipts provided to donors, and many will want to continue this practice even though it is not legally required. A receipt that merely provides donors with a lump sum of all their contributions will be of no value to a donor who wants to correct a discrepancy.

Key point. The official comments to the final regulations also confirm that multiple contributions of less than $250 are not combined to trigger the substantiation rules applicable to contributions of $250 or more.

Out-of-pocket expenses. Let’s say that Greg, a member of First Church, participates in a short-term missions project and in the process incurs $300 of unreimbursed out-of-pocket travel expenses. The IRS has long acknowledged that such expenses are deductible as a charitable contribution. But what about the new rules for substantiating charitable contributions of $250 or more? Do they apply to this kind of contribution? Is the church responsible for keeping track of Greg’s travel expenses in order to determine if they are $250 or more? Must it issue a receipt that states the amount of travel expenses incurred?

The proposed regulations issued by the IRS last year specified that where a taxpayer incurs unreimbursed expenses in the course of performing services for a charitable organization, the expenses may be substantiated by an “abbreviated written acknowledgment” provided by the charity containing the following information:

a description of the services provided by the donor
the dates when the services were provided
whether or not the charity provided any goods or services in return, and
if the charity provided any goods or services, a description and good faith estimate of the fair market value of those goods or services

In addition, the abbreviated written acknowledgment must be received by the taxpayer before the earlier of (1) the date he or she files a tax return claiming the contribution deduction, or (2) the due date (including extensions) for the tax return for that year.

In response to several comments, the final regulations drop the requirement that the abbreviated acknowledgment include the dates on which the volunteer services were performed. However, the final regulations keep the other requirements of the abbreviated acknowledgment summarized above.

Example. Here is an example of an abbreviated written acknowledgement that complies with the final regulations:”Greg Jones participated on a missions trip sponsored by First Church in the nation of Panama. His services included working in a medical clinic. The church provided no goods or services in return for these services.” The church should be sure that Greg receives this receipt before the earlier of (1) the date he files a tax return claiming the contribution deduction, or (2) the due date (including extensions) for the tax return for that year.

Form of contribution. In releasing the final regulations the IRS also addressed the question of whether a written receipt acknowledging contributions of $250 or more must be in a particular format. The IRS noted that “as long as it is in writing and contains the information required by law, a contemporaneous written acknowledgment may be in any format.”

The IRS noted that it is authorized by law to issue regulations allowing charities to satisfy the new charitable contribution substantiation requirements (for contributions of $250 or more) by filing a return with the IRS including the necessary information. This kind of reporting has not yet been implemented. However, in releasing the final regulations the IRS noted that it is examining “whether any existing IRS forms can be modified to assist in their use in substantiating charitable contributions.”

This article originally appeared in Church Treasurer Alert, February 1997.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Liability of Church Board Members for Seizing a “Corporate Opportunity”

Church boards have mandated fiduciary duties.

Richard R. Hammar, Attorney, CPA

Bio

White Gates Skeet Club, Inc. v. Lightfine, 658 N.E.2d 864 (Ill. App. 1995)

Background. The law imposes special “fiduciary duties” upon the board members of churches and other charities. The idea is simple. Board members are chosen to represent the organization, and so they must abide by the highest principles of integrity and loyalty in their dealings with it. One of these fiduciary duties is the duty not to “usurp” or misappropriate a corporate opportunity. What this means is this—board members cannot buy property that they know the church would have an interest in, and then sell it to the church for a profit. Such behavior violates the fiduciary duty the board members owe to the church.

A recent case. This principle was illustrated in a recent case. Some of the officers of a charity knew that the charity needed adjacent land. When they learned that adjacent land was available for sale they bought it in their own names, planning to later sell it to the charity at a profit. The charity sued the officers, and a court ruled that the officers held the property “in trust” for the charity. It observed that the courts have been “uncompromising” in ruling that under these circumstances board members hold title “in trust” for their corporation. This rule is “based on a wise public policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation.”

Relevance to church treasurers. Many church board members are unaware of the fiduciary duties they owe to the church. As this case illustrates, unfamiliarity with these duties can result in embarrassment and personal liability. Church treasurers can help by having church board members review this article.

Example. Bill is a member of the board of his church. He knows that the church needs to purchase six adjacent homes to expand its parking lot. He learns that the owners of one of the homes are interested in selling their home. Bill privately meets with the homeowners, and offers to pay $60,000 for their home. His offer is accepted, and he becomes the owner of the home. Bill later offers to sell the home to the church for $75,000. Bill views himself as a shrewd investor trying to make an honest profit. He is wrong. He has violated a fiduciary duty by “usurping” a corporate opportunity.

This article originally appeared in Church Treasurer Alert, November 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Can Bankruptcy Trustees Recover Charitable Contributions?

A federal appeals court issues an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

Can Bankruptcy Trustees Recover Charitable Contributions?

A federal appeals court issues an important ruling.

Richard R. Hammar

In Re Young, 82 F.3d 1407 (8th Cir. 1996)

Background. A member of your church suffers a business setback that prompts him to file for bankruptcy. Several weeks later, your church receives an official letter from the bankruptcy trustee, demanding that the church return all contributions the member made within a year of filing his bankruptcy petition. How would you respond? This is an important and practical question that every church treasurer should be prepared to answer. A recent court ruling provides helpful guidance.

Key point. The court’s decision is of utmost importance to churches and church treasurers. The number of persons filing for bankruptcy protection is at an all-time high. It is not uncommon for several members within the same church to have had their debts discharged in bankruptcy. This exposes the church to possible demands from a bankruptcy trustee to return contributions made by a debtor within a year of filing a bankruptcy petition.

A recent case. Bruce was a devoted church member and a faithful giver. Mounting debts caused him to file for bankruptcy in 1992. His church received a letter from a bankruptcy trustee demanding a return of the $13,000 in contributions Bruce made to the church during the year preceding his bankruptcy filing. The church refused to comply, and a bankruptcy court ordered it to do so. The court relied on a provision in the bankruptcy code giving bankruptcy trustees the authority to “avoid” or cancel transfers of money or property by a bankrupt debtor, made within one year of the filing of a bankruptcy petition, unless the debtor received “in exchange” goods or services of “reasonably equivalent value.” The purpose of this provision is to prevent unscrupulous persons from giving away their assets to friends and relatives, filing for bankruptcy and having their debts discharged, and then having their assets returned to them. You are free to transfer property within a year of filing for bankruptcy, but unless you receive in exchange goods or services of reasonably equivalent value, a bankruptcy trustee can cancel your transfer and order the property returned to the bankruptcy court.

The church insisted that Bruce did receive services of “reasonably equivalent value” in exchange for his contributions, including worship, teaching, and counsel. Therefore, the bankruptcy trustee could not cancel the contributions and insist that the church return them. The court disagreed. It conceded that Bruce received valuable benefits from the church, but it insisted that these benefits were not provided “in exchange” for Bruce’s contributions. Quite to the contrary, the church would have provided these benefits to Bruce whether or not he contributed anything. As a result, the church failed to establish that Bruce received anything of reasonably equivalent value in exchange for his contributions to the church. This meant that the bankruptcy trustee could recover the $13,000 in contributions Bruce had made during the year prior to his bankruptcy petition.

The church appealed, and a federal appeals court ruled in favor of the church. It agreed that the church failed to prove that it provided anything of reasonably equivalent value in exchange for Bruce’s contributions. It noted that “church services were available to all regardless of whether any contributions were made,” that Bruce’s contributions were “in no way linked to the availability of church services,” and that there had been “no exchange of contributions for church services.” As a result, the bankruptcy trustee could order the church to return Bruce’s contributions since he had received nothing in exchange for his contributions.

However, the court concluded that allowing the trustee to recover Bruce’s contributions from the church would violate the federal Religious Freedom Restoration Act. This Act provides that the government “shall not substantially burden a person’s exercise of religion” unless it “demonstrates that application of the burden to the person (1) is in furtherance of a compelling governmental interest, and (2) is the least restrictive means of furthering that compelling governmental interest.” The court concluded that the bankruptcy trustee’s recovery of Bruce’s contributions would “substantially burden” the exercise of religion of both Bruce and his church, since both believed in the principle of tithing. It further concluded that there was no “compelling governmental interest” that would justify this burden, and therefore the Act would be violated if the trustee were permitted to recover Bruce’s contributions.

Key point. The federal appeals court noted that “finding that the church services had some economic benefit and that the debtor made the contributions in exchange for those services would call into doubt treating those contributions as deductible charitable contributions.”

Relevance to church treasurers. What is the relevance of this case to church treasurers? Given the increasing number of persons who are filing for bankruptcy, it is likely that many churches in the future will receive letters from bankruptcy trustees demanding a return of contributions made by bankrupt debtors. Church treasurers need to be prepared to respond to these demands. The comments listed below will help.

1. Your church is in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, and considers tithing to be an important religious practice.

You are covered by the federal appeals court decision summarized in this article. This issue has been resolved for churches in your state. Bankruptcy trustees are prohibited by the Religious Freedom Restoration Act from requiring churches to return contributions paid by bankrupt debtors.

Key point. A few federal courts have suggested that the Religious Freedom Restoration Act is unconstitutional. So far, two federal appeals courts have addressed the constitutionality of the Act, and both have concluded that it is constitutional. Someday the Supreme Court may decide this issue. If the Supreme Court determines that the Act is unconstitutional, then the federal appeals court ruling discussed in this article would be reversed, and bankruptcy trustees would be empowered to insist that churches return the contributions of bankrupt debtors (made within a year of filing a bankruptcy petition). Churches could still argue that such a practice violates the first amendment’s guaranty of religious freedom. This issue was not addressed by the federal appeals court.

Key point. The bankruptcy trustee in the case discussed in this article has asked the United States Supreme Court to review the case. Any developments will be reviewed in future editions of this newsletter.

2. Your church is in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, but does not consider tithing to be an important religious practice.

You are not covered by the federal appeals court decision summarized in this article. Since tithing is not an important practice, there would be no “substantial burden” on the exercise of religion, and therefore the Religious Freedom Restoration Act would not be violated. Bankruptcy trustees would not be barred by the appeals court’s decision from insisting that churches return the contributions of bankrupt debtors (made within a year of filing a bankruptcy petition).

3. Your church is not in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, and considers tithing to be an important religious practice.

You are not covered by the federal appeals court decision summarized in this article. However, the decision may still be of some relevance. While it is not binding, it will be given some weight since it is a federal appellate decision. If you are contacted by a bankruptcy trustee who demands that you return the contributions of a bankrupt church member, you should retain an attorney who can inform the bankruptcy trustee about the ruling discussed in this article. Many trustees would defer to this decision (even though it is not binding upon them) rather than pursue litigation. Others may not.

Lower level federal courts in some states have addressed this issue and reached conflicting results. Most of these rulings occurred before the Religious Freedom Restoration Act was enacted, and so they are of limited significance.

4. Your church is not in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, or South Dakota, and does not consider tithing to be an important religious practice.

This article originally appeared in Church Treasurer Alert, November 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

A Summary of Recent Tax Legislation

Eight key provisions that church treasurers need to know.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

A Summary of Recent Tax Legislation

Eight key provisions that church treasurers need to know.

Richard R. Hammar

Background. Congress enacted four major tax laws in August. It is essential for church treasurers to be familiar with a number of key provisions in these laws that will have a direct impact on church finances and reporting. This article contains a summary of the eight provisions of most importance to church treasurers.

#1—Liability of board members for noncompliance with payroll tax requirements. The IRS can assess a 100 percent penalty against corporate officers who willfully fail to withhold federal taxes from employees’ wages or who fail to pay over withheld taxes to the government. This law has been applied to church board members and treasurers. A new law clarifies that this penalty is not to be imposed on volunteer, unpaid members of any board of a tax-exempt organization to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial activities of the organization, and do not have actual knowledge of the failure. However, this provision cannot operate in such a way as to eliminate all responsible persons from responsibility.

The new law also requires the IRS to develop materials to better inform board members of tax-exempt organizations (including voluntary or honorary members) that they may be subject to this penalty. The IRS is required to make such materials routinely available to tax-exempt organizations.

Example. Bill serves as treasurer of his church. Due to financial difficulties, a decision is made by the pastor to use withheld payroll taxes to pay other debts. The IRS later asserts that the church owes $25,000 in unpaid payroll taxes. The church has no means of paying this debt. The IRS later insists that Bill and the other members of the church board are personally liable for the debt. It is likely that Bill is a responsible person who may be liable for the 100 percent penalty since he has authority over the day-to-day financial activities of the church. The new law will not protect him. However, the new law will protect those members of the church board who (1) are volunteer, unpaid members; (2) serve solely in an honorary capacity; (3) do not participate in the day-to-day or financial activities of the organization; and (4) do not have actual knowledge of the failure to pay over withheld taxes to the government.

Example. A church board votes to use withheld taxes to pay other debts of the church. Over a three year period the church fails to deposit $100,000 in withheld taxes. The IRS claims that the board members are personally liable for the 100 percent penalty for failing to deposit withheld taxes. All of the members of the board claim they are protected by the provisions of the new law. They are not correct, since the new law specifies that its provisions cannot operate in such a way as to eliminate all responsible persons from responsibility.

#2—Interim sanctions. The so-called “Taxpayer Bill of Rights 2,” signed into law by the president in August of 1996, contains a provision allowing the IRS to assess “intermediate sanctions” (an excise tax) against exempt organizations in lieu of outright revocation of exempt status. The intermediate sanctions may be assessed only in cases of “excess benefit transactions,” meaning one or more transactions that provide unreasonable compensation to an officer or director of the exempt organization. An excess benefit transaction is defined as:

any transaction in which an economic benefit is provided to a “disqualified person” (someone in a position to exercise substantial influence over the affairs of the organization) if the value of the benefit exceeds the value of the services provided by the disqualified person, or
to the extent provided in IRS regulations (to be released later), any transaction in which the amount of an economic benefit provided to a disqualified person is based on the revenues of the organization, if the transaction results in unreasonable compensation being paid

A committee report to the new law clarifies that the parties to a transaction are entitled to rely on a presumption of reasonableness with respect to a compensation arrangement with a disqualified person if such arrangement was approved by a board of directors (or committee of the board) that: (1) was composed entirely of individuals unrelated to and not subject to the control of the disqualified person involved in the arrangement; (2) obtained and relied upon objective “comparability” information, such as (a) compensation paid by similar organizations, both taxable and tax-exempt, for comparable positions, (b) independent compensation surveys by nationally recognized independent firms, or (c) actual written offers from similar institutions competing for the services of the disqualified person; and (3) adequately documented the basis for its decision.

Key point. A disqualified person who benefits from an excess benefit transaction is subject to a penalty tax equal to 25 percent of the amount of the excess benefit. An exempt organization’s managers who participate in an excess benefit transaction knowing that it is an improper transaction are subject to a penalty tax of 10 percent of the amount of the excess benefit (up to a maximum penalty of $10,000). It is possible that the IRS will assess this penalty against church board members who participate in an excess benefit transaction involving a pastor or other church employee.

This provision generally applies to excess benefit transactions occurring on or after September 14, 1995.

#3—Including telephone numbers on 1099 forms. All 1099 forms issued after December 31, 1996, must contain the name, address, and telephone number of a “contact person” who can answer questions the recipient may have about the form. The purpose of this new requirement is to give recipients of 1099 forms the ability to contact a person who was responsible for preparing the form and who presumably has the ability to answer any questions the recipient may have.

Key point. For many churches, the “contact person” will be the church treasurer. This means that all 1099 forms issued by the church must contain the name, address, and telephone number of the treasurer. In other churches, the contact person will be a business administrator.

#4—Increase in the federal minimum wage. The minimum wage increased to $4.75 on October 1, 1996, and increases to $5.15 on October 1, 1997. Church treasurers often ask if the minimum wage law applies to churches. That depends. Any worker employed in an “enterprise engaged in commerce” must be paid the minimum wage, with certain exceptions. The law specifically includes schools and preschools in the definition of an enterprise engaged in commerce, and so a worker employed by a church-operated school or preschool should be paid the minimum wage. It is also likely that the government would claim that churches engaged in commercial or business activities, or that engage in significant interstate sales or purchases, must pay the minimum wage.

Key point. Employers are not required to pay the minimum wage to “any employee employed in a bona fide executive, administrative, or professional capacity” if income tests are met. The definitions of these terms are complex, and should not be relied upon without the assistance of legal counsel.

Example. A church operates a preschool, and employs a director and nine workers. The church must pay the nine workers the minimum wage (currently $4.75 per hour). It is possible that the director would qualify as a professional employee. If so, the church would not be required to pay the minimum wage to this person.

#5—Treating workers as self-employed. Churches, like any employer, face substantial penalties if they classify workers as “self-employed” and the IRS later reclassifies those workers as employees.

Example. A church employs three part-time custodians. Each custodian works twenty hours per week. For the past ten years the church has treated these workers as self-employed, and as a result does not withhold taxes from their pay and issues them a 1099 each year. The IRS reclassifies these workers as employees. The church is now subject to a number of possible penalties, including: (1) liability for the full amount of income taxes and FICA taxes not withheld from these workers’ wages; (2) an additional penalty of 1.5% of each worker’s wages, for failure to withhold income taxes; and (3) an additional penalty of 20% of each worker’s share of FICA taxes, for failure to withhold FICA taxes. The cumulative effect of these penalties can be substantial.

Imposing penalties on employers for improperly classifying workers as self-employed is viewed by many as unfair, since the definitions of the terms “employee” and “self-employed” are so vague. In 1978, Congress agreed and enacted a law exempting employers from penalties associated with the classification of workers as self-employed if they have a reasonable basis for doing so based on (1) published IRS rulings or court decisions; (2) past IRS audit practice with respect to the employer; (3) a long-standing recognized practice of a significant segment of the industry in which the worker is engaged; or (4) any other reasonable basis for treating a worker as self-employed. Over the years, the IRS interpreted this provision very narrowly, causing many employers to be ineligible for the relief from penalties that Congress so clearly intended. One of the tax laws enacted by Congress this past summer reaffirms the protections of the 1978 law, and adds a number of provisions making it more likely that employers will receive the relief intended. Here are some of the key provisions:

The new law clarifies that a “long-standing recognized practice” shall not be construed “as requiring the practice to have continued for more than ten years.” The IRS had said that the practice must have existed for at least ten years.
The new law clarifies that “in no event shall the significant segment requirement … be construed to require a reasonable showing of the practice of more than 25 percent of the industry.” The IRS had said that at least 50 percent was required.
The new law specifies that if an employer establishes a “prima facie case” that it was reasonable to treat a worker as self-employed on the basis of precedent (IRS or court rulings), prior audit practice, or a long-standing practice of a significant industry segment, then the burden of proof shifts to the IRS to prove that the worker is an employee.
If an employer changes its treatment of workers from self-employed to employees for employment tax purposes, such a change cannot be considered in evaluating whether or not the workers were employees or self-employed for prior years.
The IRS must, at or before the commencement of an audit involving worker classification issues, provide the employer with written notice of the protections of the 1978 law.

Example. Same facts as the previous example. How will the new law help protect the church from penalties the IRS may attempt to impose as a result of the church’s improper classification of the custodians as self-employed? The church can argue that it is exempt from any penalties because it had a “reasonable basis” for treating its custodians as self-employed. One way for the church to establish a reasonable basis is to prove that its treatment of the custodians as self-employed was based on a “long-standing recognized practice” of a “significant segment of the industry” in which the custodians are engaged. Under the new law, it will be easier for the church to prove these elements. Since it has treated the custodians as self-employed for ten years, it meets the “long-standing recognized practice” requirement. And, in meeting the “significant segment of the industry” test the church will not be required to establish that more than 25 percent of churches (not 50 percent, as had been required by the IRS) treat part-time custodians as self-employed. Note that the 25 percent rule is the maximum, and that a church could argue that the treatment of part-time custodians as self-employed represents the practice of a significant industry segment even if less than 25 percent of churches treat part-time custodians as self-employed. The church should also insist that it has met the “prima facie case” requirement under the new law, which shifts the “burden of proof” to the IRS to prove that the custodians are not self-employed.

Key point. The law requires that all tax forms filed by the employer (1099, 941, etc.) since 1978 must be consistent with self-employed status of the worker. In other words, if a church has treated a worker as self-employed, then it must have issued the worker 1099 forms rather than W-2 forms since 1978 (or since the worker was employed, if later).

#6—New definition of “highly compensated employee.” One of the new tax laws enacted by Congress simplifies the definition of the term “highly compensated employee.” This is a very important provision for church treasurers, because it will determine whether certain fringe benefits provided to church employees are taxable or tax-free. Church treasurers need to know this in order to correctly complete W-2 and 941 forms. The key point is this—certain fringe benefits that “discriminate” in favor of a highly compensated employee are taxable to that employee, even if they otherwise would be nontaxable. The most common examples of these fringe benefits for church workers include cafeteria plans, flexible spending arrangements, qualified tuition reductions, employer-provided educational assistance, and dependent care assistance.

For the past several years there have been two problems associated with the definition of the term “highly compensated employee.” First, the definition has been so complicated that many church treasurers had difficulty applying it. Second, and perhaps even more importantly, the definition included the highest paid officer of a church or other employer no matter how little this person was paid. The new definition responds directly to both of these problems. First, it adopts a simple definition of a highly compensated employee—beginning in 1997 a highly compensated church employee is one who had compensation for the previous year in excess of $80,000 (and, if an employer elects, was in the top 20 percent of employees by compensation). The $80,000 figure will be adjusted each year for inflation.

Example. A church operates a private school, and charges annual tuition of $2,000. In 1996, the senior pastor (who also serves as the president of the school) is allowed to send his daughter to the school without charge. The senior pastor’s total compensation for 1996 is $35,000. The church provides no tuition reductions to other school or church employees. The “tuition reduction” granted to the senior pastor ($2,000) is discriminatory, and so the entire amount must be reported as income on the pastor’s W-2. This is because the benefit discriminates in favor of the pastor, who meets the definition of a highly compensated employee (even though he earns only $35,000 for the year) because he is the highest paid officer of the school.

Example. Same facts as the previous example, except that the year is 1997. The new definition of a highly compensated employee takes effect in 1997, and under this definition the pastor is not a highly compensated employee since he earns less than $80,000. The fact that he is the highest paid officer (regardless of the amount of his compensation) no longer makes him a highly compensated employee.

#7—Delay in implementing electronic deposit of payroll taxes. Some church treasurers are still not aware that they soon may be required to deposit payroll taxes electronically. Under the Electronic Federal Tax Payment System (EFTPS), employers that deposited at least $50,000 in payroll taxes in 1995 must enroll with a private contractor hired by the IRS and begin making deposits of payroll taxes either by telephone or by computer beginning on January 1, 1997. One of the tax laws recently enacted by Congress postpones the January 1, 1997 deadline for six months. As a result, churches and other employers have until July 1, 1997 to begin depositing payroll taxes electronically—if they made payroll tax deposits of at least $50,000 in 1995.

Example. A church had 6 employees in 1995, with a total payroll of $130,000, and deposited $23,000 in payroll taxes. It is not required to deposit payroll taxes electronically in 1997.

Example. A church had 15 employees in 1995, with a total payroll of $320,000, and deposited $62,000 in payroll taxes. It is required to begin depositing payroll taxes electronically in 1997 as of July 1 of that year.

Example. A church had 6 employees in 1995, with a total payroll of $130,000, and deposited $23,000 in payroll taxes. In 1997 it has 10 employees and expects to deposit more than $50,000 in payroll taxes. It is not required to deposit payroll taxes electronically in 1997 since it did not deposit more than $50,000 in payroll taxes in 1995.

Key point. Future issues of this newsletter will discuss the new electronic filing requirements in more detail.

#8—Medical savings accounts (MSAs). Beginning in 1997, some workers will be allowed to open medical savings accounts (MSAs) as a means of paying for certain health expenses. An MSA will look a lot like an IRA—a worker will be able to make tax-deductible contributions to his or her account, an employer can make nontaxable contributions, and any interest earned by the account is tax-deferred. Funds can be distributed tax-free from an MSA only to pay medical expenses.

MSAs will not be available to everyone. There were many in Congress who were opposed to the idea of “incentivizing” taxpayers to reduce medical spending by allowing them to pay for some medical expenses out of their own funds. A compromise was reached that allows MSAs only during a trial period (from 1997 to 2000); allows no more than 750,000 MSAs; and restricts MSAs to workers who are covered under an employer-sponsored “high deductible” medical plan of a “small employer” (having fewer than 50 employees during either of the two preceding years), or who are self-employed. A “high deductible” plan is a health insurance plan with a deductible of at least $1,500 in the case of single coverage and $3,000 in the case of coverage of more than one individual.

There are limits on the amounts that employees and employers can contribute to an MSA. The maximum annual contribution that can be made to an MSA is 65 percent of the deductible under the high deductible plan in the case of individual coverage and 75 percent of the deductible in the case of family coverage. Contributions for a year can be made until the due date for the individual’s tax return for the year (determined without regard to extensions).

As MSAs receive more attention in early 1997, it is likely that many church employees will be asking their church treasurer for information concerning these accounts and their availability to church workers.

Example. A church has 8 employees, and offers a health insurance plan provided through commercial insurance with a deductible of $500 in the case of single coverage and $1,000 in the case of family coverage. None of the church employees is eligible for an MSA. While they are employed by a small employer (fewer than 50 employees), they are not participating in a “high deductible health plan.”

This article originally appeared in Church Treasurer Alert, October 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

The Legal Consequences of Clergy Seducing Employees

A federal court issues an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

Article summary. A federal court in Texas addressed the complex legal issues surrounding the sexual seduction of church employees by a minister. The court concluded that the employees could sue the minister for negligence, breach of a fiduciary duty, and intentional infliction of emotional distress—even though the sexual relationships were allegedly consensual. However, the court dismissed the employees’ sexual harassment claims against the minister, all of the employees’ claims against the church, and the minister’s wrongful termination claim against the church. This important ruling is discussed fully in this feature article.

When a minister engages in a sexual relationship with a church employee, several legal consequences may result affecting the minister, church, and employee. Many of these consequences were illustrated in a recent federal court ruling in Texas. The court’s ruling will be instructive to all church leaders. This article will summarize the facts of the case, explain the court’s ruling, and evaluate the importance of the case to other churches and church staff members.

Facts

A church’s minister of education was contacted by a woman seeking marital counseling. At the time, the woman was employed as a waitress at a local restaurant. The relationship resulted in a sexual affair that lasted several months. During this time the minister hired the woman as a receptionist at the church. She later informed the minister that she wanted to quit seeing him.

At the same time that he was seeing this woman the minister was engaging in sexual relations with another woman who had come to him for marital counseling. The second woman, like the first woman, was hired to work in the church office. The second woman informed the minister that she wanted to terminate their relationship after an affair lasting nearly a year and a half.

The two women worked next to each other in the church office. One of them informed the other of her affair with the minister and was shocked to learn of the other’s similar experience. The women informed a church deacon of their relationships with the minister, and the minister was confronted immediately. He confessed to the church’s senior minister that he had committed adultery with both women, and accepted the church’s request to resign. The two women were placed on administrative leave with pay pending an investigation, and a few months later they were dismissed.

The women later sued the dismissed minister on the basis of:

malpractice in pastoral counseling
breach of fiduciary duties
sexual harassment in employment
intentional infliction of emotional distress

The women also sued the church on the basis of:

breach of fiduciary duties
malpractice in pastoral counseling
intentional infliction of emotional distress
negligent hiring
negligent retention
negligent supervision
sex discrimination in dismissing them from employment
sexual harassment in employment
retaliation for disclosing sex discrimination

Both the dismissed minister and church asked the court to dismiss the case. The court’s response to these requests is summarized below.

The claims against the dismissed pastor

malpractice in pastoral counseling

The women claimed that the dismissed minister’s conduct constituted “malpractice in pastoral counseling.” The minister countered by arguing that pastoral counseling is rooted in religion and cannot be the basis for civil liability. The court concluded that the pastor could be sued for his actions. It observed that

[we agree] with the many decisions that have held that an action for clergy malpractice could not be maintained because the evaluation of such a complaint would require the court to extensively investigate and evaluate religious tenets and doctrines. However, tort claims for behavior by a cleric that does [sic] not require the examination of religious doctrine are cognizable. The free exercise [of religion] clause does not relieve an individual of the obligation to comply with neutral laws of general applicability … nor does it shield clergy from all liability for their wrongs.

In addition, while spiritual counseling, including a cleric’s marital counseling, may implicate first amendment rights, the court is not convinced that [the women’s] allegations permit [the minister] to assert a free exercise defense. When the free exercise [of religion] clause is raised as a defense, the threshold question is whether the conduct of the defendant is religious. In the spiritual counseling context, the free exercise clause is relevant only if the defendant can show that the conduct that allegedly caused plaintiff’s distress was in fact part of the belief and practices of the religious group.

In other words, pastoral counseling is protected from civil liability only if the practice is itself religious. In this case, however, the actions of the dismissed minister in engaging in prolonged adulterous affairs with two women were not religious. The court observed:

[The minister’s] preying on [the women], masqueraded in the form of marriage counseling, constitutes conduct that is not subject to first amendment protection. Certainly such conduct is not part of the beliefs and practices of [the church]. Therefore, to the extent that [the women’s] claim is based on [the minister’s] holding himself out to provide services of a marriage counselor, [their] claim under these circumstances is for professional malpractice by a marriage counselor, not clergy malpractice. Although [the lawsuit] labels this claim negligence (malpractice in pastoral counseling), the court will construe the claim based on the facts alleged as one for professional malpractice by a marriage counselor.

In support of this conclusion, the court pointed to the following facts: (1) The minister offered his services to help the women with their marital problems. (2) Each woman claimed that the minister offered “to provide me with marital counseling,” and described the nature and extent of the marriage counseling and the fact that the minister bragged about his “skills and experience as a marital counselor.” (3) The minister held himself out as a skilled and experienced marital counselor with a psychology degree, and undertook to provide such counseling.

• Key point. The courts have consistently refused to find clergy liable on the basis of “malpractice” for their pastoral counseling. However, this case illustrates that this rule only applies to the content of counseling that is religious in nature, and not to inappropriate behavior that is engaged in during the counseling relationship. The court concluded that ministers who engage in sexual contact with counselees in the course of marriage counseling may be sued on the basis of malpractice—as marriage counselors rather than as clergy.

breach of fiduciary duties

The women claimed that the dismissed minister breached his “fiduciary duty” to them by taking advantage of the “special confidence and trust” they had placed in him as a pastoral counselor. Specifically, they maintained that a fiduciary relationship existed on the basis of the following factors:

(1) They entered into a counselor—counselee relationship with the dismissed minister based, in part, on his representations regarding his expertise in marriage counseling.

(2) The dismissed minister solicited their trust and confidence with his alleged ability to help them with their marital problems.

(3) The dismissed minister made misrepresentations to them for the purpose of seducing their affections and emotional dependence for his own benefit rather than their’s.

(4) The dismissed minister breached his fiduciary duty in disclosing to others confidential information he obtained during counseling with the two women.

The church insisted that the position of religious advisor does not impose a fiduciary duty or establish a fiduciary relationship. The church pointed out that no Texas court had recognized a fiduciary relationship between a minister and a member of a congregation. Once again, the court agreed with the women and allowed them to sue the dismissed minister for breaching a fiduciary duty that he owed them as a pastoral counselor. While conceding that Texas courts have not recognized a fiduciary relationship between a minister and counselee, the court did note that the state supreme court had recognized that certain “informal relationships” may give rise to a fiduciary duty. The supreme court stated that such “informal fiduciary relationships … may arise where one person trusts in and relies upon another, whether the relation is a moral, social, domestic or merely personal one.” The supreme court further noted that because not every relationship involving a high degree of trust and confidence is a fiduciary relationship, “the law recognizes the existence of [such] relationships in those cases in which influence has been acquired and abused, in which confidence has been reposed and betrayed.”

The state appeals court concluded that “genuine issues of material fact are present in this case regarding whether confidential relationships existed between [the dismissed minister and the women] in which influence had been acquired and abused, in which confidence had been reposed and betrayed.” As a result, in ruled that the women could proceed with their lawsuit against the minister on the basis of a breach of his fiduciary duties. The court noted that if the women’s allegations were true, it

would have little difficulty finding that [the dismissed minister owed the women] a fiduciary duty as a marriage counselor …. His duty would be created by his undertaking to counsel them. Moreover, [his] alleged undertaking would create a duty to engage in conduct designed to improve [the women’s] respective marital relationships. Thus, entering into the sexual relationships would be clear evidence of a breach of [his] fiduciary duties.

• Key point. A number of courts have ruled that a “fiduciary relationship” arises when a minister engages in a counseling relationship with another person, and that this relationship imposes a duty upon the minister to act in the best interests of the counselee. This duty is breached when the minister engages in sexual contact with the counselee. This may be true even if the sexual contact is consensual.

• Key point. The court suggested that a minister can be sued on the basis of a breach of fiduciary duty if confidential information obtained during the counseling relationship is disclosed.

sexual harassment in employment

The women claimed that the dismissed minister sexually harassed them. The court rejected this theory of liability. It noted that to establish sexual harassment in the work place, a plaintiff must show that:

(1) she belongs to a protected class; (2) she was subject to unwelcome sexual harassment; (3) the harassment was based on sex; (4) the harassment affected a term, condition, or privilege of employment; and (5) the employer knew or should have known of the harassment and failed to take prompt remedial action.

The court ruled that the minister could not be liable for sexual harassment for his activities prior to the time the women terminated their sexual relationships with him. It concluded that the women’s argument that they were incapable of giving psychological consent is without merit … the court finds that [they] freely consented to their respective adulterous affairs with [the minister].

• Key point. The court erred in ruling that sexual harassment cannot exist if the victim consents to the harassment. The law defines sexual harassment as “unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature.” Sexual harassment occurs if the offender’s actions are unwelcome, even if the victim consents to them. Many times victims feel they have choice but to consent. The United States Supreme Court, in addressing this question, observed: “[T]he fact that sex—related conduct was voluntary in the sense that the complainant was not forced to participate against her will, is not a defense to a sexual harassment suit …. The gravamen of any sexual harassment claim is that the alleged sexual advances were unwelcome …. The correct inquiry is whether [the victim] by her conduct indicated that the alleged sexual advances were unwelcome, not whether her actual participation in sexual intercourse was voluntary.” In other words, a female employee may engage in voluntary sexual contact with a supervisor because of her belief that her job (or advancement) depends on it. While such contact would be voluntary, it is not necessarily welcome. Sexual harassment addresses unwelcome sexual contact, whether or not that contact is voluntary.

The court found no evidence of sexual harassment after the women terminated their sexual relationships with the dismissed minister. Further, the dismissed minister had no opportunity to punish the women for terminating their relationships with him since he was fired a few weeks later when the women informed church officials.

intentional infliction of emotional distress

The women claimed that the dismissed minister’s misconduct amounted to “intentional infliction of emotional distress.” The court noted that intentional infliction of emotional distress requires proof that (1) the dismissed minister acted intentionally or recklessly; (2) his conduct was extreme or outrageous; (3) his actions caused the women emotional distress; and (4) the emotional distress was severe. The court concluded that the dismissed minister’s misconduct, if proven, could satisfy all four of these requirements. It observed: “[The women’s] allegations that [the minister] sexually harassed [them] at work, made graphic sexual comments and gestures, and engaged in a sexual relationship, at relatively the same time, with two employees who worked within a few feet of each other, could rise to the level of extreme or outrageous conduct under certain circumstances.”

The claims against the church

breach of fiduciary duty, malpractice in pastoral counseling, intentional infliction of emotional distress

The women claimed that the church was liable for the dismissed minister’s breach of fiduciary duty, malpractice in pastoral counseling, and intentional infliction of emotional distress. The court noted that the church could be liable for these “intentional wrongs” only if the dismissed minister was acting “within the course and scope of his employment” at the time he was counseling the women and engaging in sexual contact with them. The court concluded that the women had failed to prove that the minister’s misconduct occurred within the course and scope of his employment:

Counseling was not a part of [the dismissed minister’s] job description or within his job authority. [The senior pastor] informed [him] that he was never to counsel ….

In addition, the court notes that sexual misconduct by a member of the clergy is, by the weight of the authority, beyond the scope of employment of the cleric. Furthermore, [the church’s] policy provided that adultery by any member of the clergy is immediate grounds for dismissal. Thus, the court finds that [the church] should not be held vicariously liable for any intentional torts attributed to [the dismissed minister].

The court conceded that the dismissed minister’s counseling could be within the course and scope of his employment if church officials were aware that he was counseling with the two women but took no action to stop him. The women pointed to the following incidents to demonstrate that the church knew the minister was counseling with them:

On one occasion an associate minister of the church walked into the dismissed minister’s office and found him alone with one of the two women. The associate minister later informed the woman that the dismissed minister was not supposed to be counseling with anyone. The court concluded that this incident did not prove that the church “knew” that the dismissed minister was counseling with one of the women, because when the associate minister asked the woman if the dismissed minister had been counseling with her she replied “no.”

The two women provided several examples of other women who “felt uncomfortable” around the dismissed minister. The court insisted that this evidence does not show that [the church] knew that [the dismissed minister] was counseling [the women] or that he was engaged in a sexual relationship with them.

The senior pastor told the dismissed minister that his car was seen parked outside the home of one of the two women. Again, the church insisted that this evidence did not establish that the church was aware that the dismissed minister was counseling with the woman. Further, it pointed out that “when [the women] informed [the church] of [the minister’s] conduct [the church] promptly requested [his] resignation.”

The women also claimed that the church was liable for the dismissed minister’s acts on the basis of ratification. The court conceded that an employer that ratifies the misconduct of an employee may be liable for that misconduct. It noted that ratification occurs when the employer fails to repudiate the known acts of an employee. However, it found that the church did not ratify the [wrongful] acts because [the women] have failed to show that [the church] knew or should have known about such conduct.

negligent hiring, negligent retention, negligent supervision

The women claimed that the church was responsible for their injuries on the basis of its negligence in hiring, retaining, and supervising the dismissed minister. The court disagreed. It noted that

In Texas, employers have a duty to inquire as to the competence and qualifications of those the employer considers for employment …. To prevail on a claim for negligent hiring or supervision, a plaintiff must show that the employer retained in its employment an individual who was incompetent or unfit for the job as a result of a failure to make a reasonable inquiry into the individual’s competence and qualifications.

However, the court concluded that the church “made a reasonable inquiry into [the dismissed minister’s] competence and qualifications.” It pointed to the following factors:

A member of the church’s pastoral search committee was informed by a friend that the dismissed minister had a good reputation.

A member of the church’s pastoral search committee contacted three references from the dismissed minister’s previous employer (another church). All three references had favorable comments regarding the minister.

A member of the pastoral search committee met with the dismissed minister on one occasion.

The church’s senior pastor and two other church members met with the dismissed minister on another occasion.

The dismissed minister and his wife met with all of the members of the search committee.

A former pastor of the dismissed minister’s prior church employer, and currently a denominational leader at the state level, told the senior pastor that “I want you to know that if I were to leave denominational work and go back into the pastorate today, that I would do whatever I had to do and pay whatever I had to pay to get [the dismissed minister] on my staff as education minister. He’s the best there is.” The denominational official was the dismissed minister’s supervisor for more than ten years in his prior church.

The church received a very favorable recommendation from another denominational official.

The court concluded: “[The church] was only required to conduct a reasonable search, not an exhaustive investigation. Therefore, the court finds that [it] did conduct a reasonable search into [the dismissed minister’s] competence and qualifications before it hired him.”

In rejecting the women’s claim that the church was guilty of negligent retention and negligent supervision the court pointed out that the church “did not know, nor should it have known, that [the minister] was counseling [the women] and engaging in a sexual relationship with them.” The court noted that the women “worked within a few feet of each other without knowing of each other’s relationship with [the minister].”

• Key point. The court concluded that the church was not negligent in hiring the minister on the basis of (1) the positive comments of several references, including the minister’s former supervising pastor, and (2) a personal interview.

• Key point. The court concluded that a church cannot be responsible on the basis of negligent retention or negligent supervision for the sexual misconduct of a pastor if his two victims worked next to each other in the church office and were unaware of the other’s relationship with him.

sex discrimination in dismissing the women from employment

The women claimed that the church committed unlawful sex discrimination in violation of Title VII of the Civil Rights Act of 1964 by dismissing them from employment. The court noted that to win a sex discrimination case under Title VII, a plaintiff must

first prove by a preponderance of the evidence a prima facie case of discrimination. The plaintiff may prove her case by direct or circumstantial evidence. A plaintiff makes out a prima facie case of sex discrimination by proving: (1) she was discharged; (2) she was qualified for the position; (3) she was within the protected class at the time of discharge; and (4) she was replaced by someone outside the protected class, or otherwise discharged because of her sex. If the plaintiff is successful in making out a prima facie case of discrimination, the burden shifts to the defendant to show a legitimate, nondiscriminatory reason for the adverse employment decision. If the defendant articulates a nondiscriminatory reason of its adverse employment action, then the presumption is rebutted and the plaintiff must prove that the nondiscriminatory reason was a pretext for discrimination.

The court concluded that the women had failed to demonstrate that the church committed sex discrimination, noting that

[they] have offered no evidence to show that they were replaced by someone outside the protective class, or that they were discharged because of their sex. Thus, [they] have failed to make out a prima facie case of discrimination. In addition, even if [they] did make out a prima facie case of discrimination, [they] have produced no evidence to show that [the church’s] reasons for terminating them were a mere pretext for discrimination. Rather, after [the church] learned that [the women and the dismissed minister] had entered into adulterous relationships [the church] placed [the women] on administrative leave with pay pending an investigation and advice from the insurance carrier regarding potential church liability. Furthermore, [the church] promptly requested [that the minister] resign. After [the women] were placed on leave [the church] assigned their former duties to incumbent female employees.

The court noted that the church’s personnel policies provide that any moral conduct that is inconsistent with the “Lord’s standards” is “just cause” for an employee’s dismissal. The women did not dispute that entering into an adulterous relationship was inconsistent with the Lord’s standards. After the church concluded its investigation it offered the women the opportunity to resign. When they refused, the church terminated them for violating the personnel policy prohibiting conduct inconsistent with the Lord’s standards. Based on this uncontradicted evidence, the court concluded that the women “have failed to offer any evidence to show that [the church’s] reasons for terminating them were a mere pretext for discrimination.” The court rejected the women’s claim that their conduct was somehow legitimized by their inability to “consent” to their sexual relations with the minister.

The women claimed that the dismissed minister received a more favorable termination package, and that this amounted to sex discrimination by the church in violation of Title VII. The court rejected this argument, noting that the church asked the dismissed minister to resign immediately, and gave him one month severance pay. The church placed the women on involuntary leave with pay for two months, and paid them for two months of psychiatric counseling. The court concluded that “[a]ny difference in the termination package between [the women and the minister] is immaterial to a proper determination of [the women’s] sex discrimination claim.”

• Key point. Churches are free to dismiss employees for violation of religious standards, so long as such dismissals are not a pretext for unlawful discrimination and “similar cases are treated similarly.” In this case, the church avoided liability for sex discrimination since it treated similarly a male and two females guilty of adultery.

sexual harassment in employment

The court noted that the women had failed to demonstrate that the dismissed minister had sexually harassed them, and therefore the church could not be responsible either. The court further noted that even if the women had proven that the dismissed minister’s actions amounted to sexual harassment, his employing church could not be responsible for his acts unless it “knew or should have known of the harassment and failed to take prompt remedial action.” The court pointed out that the church “did not know, nor should it have known of [the minister’s] conduct.”

This is the second serious error made by the court (the first was its conclusion that “consensual” acts can never constitute sexual harassment). Guidelines published by the Equal Employment Opportunity Commission (a federal agency that enforces Title VII) specify:

[A]n employer … is responsible for its acts and those of its agents and supervisory employees with respect to sexual harassment regardless of whether the specific acts complained of were authorized or even forbidden by the employer and regardless of whether the employer knew or should have known of their occurrence. The Commission will examine the circumstances of the particular employment relationship and the job junctions performed by the individual in determining whether an individual acts in either a supervisory or agency capacity.

With respect to conduct between fellow employees, an employer is responsible for acts of sexual harassment in the workplace where the employer (or its agents or supervisory employees) knows or should have known of the conduct, unless it can show that it took immediate and appropriate corrective action.

To summarize, if the dismissed minister was the church’s agent or was a “supervisory employee” the church could have been responsible for his acts of sexual harassment whether or not it knew or should have known they were occurring—even if they were strictly forbidden by the church’s policies. It is possible if not likely that a minister of education (such as the dismissed minister) would be deemed an agent or supervisory employee.

retaliation for disclosing sex discrimination

The women claimed that the church had committed unlawful “retaliation” against them in violation of Title VII. Title VII prohibits employers from retaliating against employees for conduct protected by Title VII. The women claimed that the church retaliated against them unlawfully by dismissing them for disclosing the relationships they had conducted with the dismissed minister. The court disagreed, noting that the church could not be responsible for retaliation since its decision to dismiss the women was not sex discrimination.

The minister’s claims against the church

The dismissed minister sued the church on the basis of breach of contract and wrongful dismissal. Specifically, he claimed that the senior pastor and a deacon “made unkept promises” to him that induced him to sign his letter of resignation and letter of repentance. One alleged promise was that the pastor would “secure him reemployment without breaching confidences.” Presumably, this meant that the senior pastor would recommend the dismissed minister to other congregations without disclosing the nature of his misconduct. The court pointed out that the senior pastor did not promise to secure reemployment for the dismissed minister, but merely assured him that he would “help him find a job.” The court observed that “this naked assertion does not constitute a binding contract because it lacks consideration.” The court also concluded that the first amendment prevents the civil courts from resolving wrongful dismissal lawsuits brought by dismissed ministers against their former churches:

Civil court review of ecclesiastical decisions of church tribunals, particularly those pertaining to the hiring or firing of clergy, are in themselves an extensive inquiry into religious law and practice, and hence forbidden by the first amendment. Courts have concluded that matters touching the relationship between a church and its minister, determination of salary, and assignment of duties and location, are matters of church administration and government and thus purely of ecclesiastical cognizance. Religious bodies may make apparently arbitrary decisions affecting the employment status of their clergy members and be free from civil review having done so. By its very nature, the inquiry which [the dismissed minister] would have us undertake into the circumstances of his discharge plunges an inquisitor into a maelstrom of church policy, administration, and governance. It is an inquiry barred by the free exercise clause [of the first amendment].

[The minister] argues that this court can decide this case based on neutral principles because it involves a general contractual dispute. [A federal appeals court has] stated that “the neutral principles doctrine” “has never been extended to religious controversies in the areas of church government, order and discipline, nor should it be.” Hutchison v. Thomas, 789 F.2d 392 (6th Cir. 1986). [The dismissed minister’s] claim relates to his employment as a minister …. Therefore, his claim “concerns internal church discipline, faith, and organization, all of which are governed by ecclesiastical rule, custom, and law.” Therefore, the court finds that the first amendment bars [the minister’s] claims ….

Significance of the case to other churches

What is the relevance of this ruling to local churches? Obviously, a decision of a federal district court in Texas is of limited significance since it has no direct or binding effect in any other state. Nevertheless, there a number of aspects to the ruling that will be instructive to church leaders in every state. Consider the following:

1. Malpractice in pastoral counseling. The court acknowledged that ministers cannot be sued on the basis of malpractice if the resolution of such a lawsuit would require a court to “extensively investigate and evaluate religious tenets and doctrines.” On the other hand, when ministers engage in sexual contact with counselees in the course of a counseling relationship they are subject to civil liability for their acts. Further, the court pointed out that the minister held himself out as a qualified marriage counselor, and it was in this capacity that the two women sought out his services.

• Key point. Ministers who hold themselves out as marriage counselors are more vulnerable to malpractice claims than pastors who engage in counseling in the course of their pastoral duties.

2. Breach of fiduciary duties. The court concluded that ministers who engage in marriage counseling may create a fiduciary relationship with their counselees that imposes upon them a duty to act in the counselees’ best interests. Taking advantage of a counselee’s dependence or vulnerability for purposes of sexual gratification represents a blatant violation of this duty that subjects the minister to legal liability.

• Key point. Ministers who engage in sexual contact with a counselee may be guilty of a number of “intentional wrongs” including battery, breach of a fiduciary duty, and intentional infliction of emotional distress. Generally, intentional wrongs are not covered under a church’s liability insurance policy, and so a minister who commits such acts may find that he must pay for his own attorney and any portion of a judgment or settlement attributable to his conduct. Further, such acts constitute a criminal offense in several states.

3. Sexual harassment in employment. The court erred in concluding the minister was not guilty of sexual harassment with respect to “consensual” sexual contacts with the two female employees. As noted above, sexual harassment occurs if the offender’s actions are unwelcome, even if the victim consents to them. The court also erred in holding that the church could not be liable for the minister’s acts (even if they did constitute sexual harassment) since it was not aware they were occurring. As noted above, guidelines published by the Equal Employment Opportunity Commission specify that “an employer … is responsible for its acts and those of its agents and supervisory employees with respect to sexual harassment regardless of whether the specific acts complained of were authorized or even forbidden by the employer and regardless of whether the employer knew or should have known of their occurrence.”

While the court was completely off base in its analysis of the women’s sexual harassment claims, the case does illustrate the potential significance of this basis of liability. Had the court decided these issues correctly, the church likely would have been found liable—assuming that the minister was an agent or supervisory employee of the church.

Sexual harassment is a form of “sex discrimination” prohibited by Title VII of the Civil Rights Act of 1964. Note that Title VII only applies to employers that (1) have 15 or more employees, and (2) are engaged in interstate commerce. Accordingly, it does not apply to most churches (it does apply to many denominational agencies engaged in interstate sales). The court in this case assumed that Title VII applied to the church, without any explanation.

• Key point. Title VII does not apply to most churches. However, most states have enacted their own civil rights laws that often ban sex discrimination and sexual harassment, and it is much more likely that these state laws will apply to churches. As a result, sexual harassment is a theory of liability that all churches should take seriously.

A current EEOC regulation entitled “EEOC Guidelines on Discrimination Because of Sex” specifies, in part:

(a) Harassment on the basis of sex is a violation of Sec. 703 of Title VII. Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when (1) submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s employment, (2) submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual, or (3) such conduct has the purpose or effect of unreasonably interfering with an individual’s work performance or creating an intimidating, hostile, or offensive working environment.

This regulation confirms the conclusion reached by numerous state and federal courts that sexual harassment includes at least two separate types of conduct:(1) “Quid pro quo” harassment, which refers to conditioning employment opportunities on submission to a sexual or social relationship, or (2) “hostile environment” harassment, which refers to the creation of an intimidating, hostile, or offensive working environment through unwelcome verbal or physical conduct of a sexual nature.

4. Sex discrimination. One of the most important aspects of this case was the court’s conclusion that the church did not commit sex discrimination when it fired the two female employees since it did not treat them any less favorably than it treated the male minister who was sexually involved with them. This case illustrates that churches subject to Title VII can discriminate in employment decisions on the basis of religious standards. However, there are a few very important qualifications here that were mentioned by the court:

The discrimination must in fact be based on religion. Religion cannot be a “pretext” to discriminate on the basis of sex, pregnancy, or some other protected category.

While a church can discriminate on the basis of religion, it must do so in a way that does not adversely impact a protected group of employees. The dismissed female employees insisted that the severance package the church offered the dismissed minister was more attractive than what they were offered. The court evaluated the terms and conditions of the termination of all of these workers, and concluded that the church had treated the women and the male minister similarly. The dismissed minister was forced to resign immediately, and was given one month severance pay. The church placed the two women on involuntary leave with pay for two months, and paid them for two months of psychiatric counseling. The court concluded that [a]ny difference in the termination package between [the women and the minister] is immaterial to a proper determination of [the women’s] sex discrimination claim.

• Key point. Churches can discriminate against employees on the basis of religion, but they must be able to demonstrate that religion is not a pretext of discriminating against a protected group of workers. If the church had dismissed the women but not the minister, the religious exemption would not apply.

5. Negligent hiring. The court acknowledged that employers can be liable on the basis of negligent hiring for the misconduct of an employee committed in the course of employment if a reasonable background investigation into the employee’s “competence and qualifications” was not conducted at the time of employment. In this case, the court concluded that the church conducted a reasonable investigation into the minister’s competence and qualifications at the time he was hired. It based this conclusion on the following facts: (1) the church obtained favorable references from three persons in the minister’s previous church; (2) the minister was interviewed on three occasions (by a member of the pastoral search committee, by the senior pastor and two church members, and by the entire pastoral search committee); and (3) the church obtained favorable references from two denominational officials—one of whom was the minister’s former supervising pastor.

6. Negligent retention and supervision. The court reached the perfectly logical conclusion that a church cannot be liable for negligently retaining and supervising a minister who commits adultery with two female employees if the employees themselves, who worked next to each other in the church office, were not aware of the other’s relations with the minister. This will be a useful precedent to other churches that are accused, in hindsight, of negligently retaining or supervising a minister.

7. The church’s lack of knowledge. The court concluded that the church was not aware that the minister of education was engaging in unauthorized marital counseling, despite the fact that (1) on one occasion an associate minister of the church walked into his office and found him alone with one of the two female employees who later filed the lawsuit; (2) the two female employees provided several examples of other women who “felt uncomfortable” around the dismissed minister; and (3) the senior pastor told the minister of education that his car was seen parked outside the home of one of the two female employees.

• Key point. Had the church known that the minister was violating church policy by engaging in unauthorized counseling, the court would have found it liable for the minister’s wrongful acts on several grounds. This illustrates a critical point—churches that have adopted policies must be sure those policies are being followed. A failure to abide by stated policies can expose a church to significant legal risks. Church leaders should periodically review policies, and assess whether or not they are being followed. If they are not, efforts should be made to immediately begin enforcing them. If this is no longer possible with respect to a particular policy, it should be abandoned.

8. Ratification. The court concluded that the church had not “ratified” the minister’s wrongful acts since it did not know of them and fail to repudiate them.

9. The what ifs? The church in this case handled matters very well. Consider the following: (1) It thoroughly screened the minister of education before hiring him; (2) church policy prohibited the minister from engaging in counseling; (3) church leaders had no knowledge that the minister of education was engaging in unauthorized counseling or in wrongful conduct; (4) when confronted by the two women with allegations of wrongdoing, the church immediately launched an investigation resulting in a paid leave of absence for the women and a forced resignation of the minister; and (5) the church offered comparable “severance packages” to the two women and the minister, thereby avoiding liability for sex discrimination. What if any of these factors had not been present? What if the church had not screened the minister when he was hired? What if the church was aware of unauthorized counseling by the minister of education? What if the church was aware of the minister’s wrongful acts but took no action against him, or treated the women less favorably than the minister? In any of these situations, the church would have faced potentially significant liability for the minister’s wrongful acts.

This case demonstrates how a church can meaningfully reduce its exposure to legal risk by how it handles employment decisions. Church leaders should ask themselves this question—if a woman in our church made similar allegations against our minister, would we be as successful in avoiding liability? Or, would we be vulnerable? This case will provide church leaders with helpful guidance in reducing exposure to legal risk.

Sanders v. Casa View Baptist Church, 898 F. Supp. (N.D. Tex. 1995)

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

IRS, SSA Brief Employers on Electronic Filing Initiatives

Both organizations hope to be paperless after 1999.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

IRS, SSA Brief Employers on Electronic Filing Initiatives

Both organizations hope to be paperless after 1999.

Richard R. Hammar

Soon, paper documents, such as IRS federal tax deposit payment coupons, will be a thing of the past and, as they develop electronic alternatives, both the Service and the Social Security Administration (SSA) are looking to the employer community. Lillie McCracken, the project manager for the IRS Cash Management System, told employers at an April 10 seminar sponsored by the American Payroll Association that the Service plans to have the paper coupon system eliminated after 1999.

The phase-out of paper is the compliment to the five-year phase-in of a system to electronically collect federal depository taxes. Norman Goldstein, senior financial executive for the SSA, briefed employers on how the move to electronic filing will change the SSA’s guidance for filing wage reporting information.

The shift from paper filing of tax deposits to electronic filing was mandated under the North American Free Trade Agreement Implementation Act (PubLNo 103-182) and began at the start of 1995, with employers whose annual employment tax deposits exceeded $78 million. It will become fully phased in by January 1999 when taxpayers who pay $20,000 in deposits each year will be required to file electronically.

McCracken briefed filers on how the Service plans to conduct the transition from the current electronic deposit payment system, TaxLink, a prototype system that was adopted to implement the electronic payment mandate when NAFTA was enacted. The Service’s electronic payment initiative will move from TaxLink to a new Electronic Federal Tax Payment System (EFTPS), which is scheduled to become fully operational later this year.

According to McCracken, the Service will begin to notify depositors how to switch to or enroll in the EFTPS during May and June. The system is currently under review by an independent auditor, she said. Once it has been validated and certified, the Service will be seeking volunteers to go online in the new system.

The SSA is also gearing up for more electronic communication with filers. In August, when SSA hosts its payroll reporting conference, officials plan to roll out a draft version of the SSA’s revision of its technical information bulletin for submitting wage and tax reports on magnetic media, commonly known as TIB 4. According to Goldstein, the draft will include changes that the SSA plans to implement to make room for an electronic, rather than paper-based, reporting environment. Included in those revisions will be the elimination of unused fields and support for using 8-inch diskettes. The proposed TIB 4 will also consolidate TIBs 5, 6 and 7, which provide guidance to employers in Puerto Rico, the U.S. Virgin Islands and Guam, respectively, for submitting wage and tax data to the federal government.

The infrastructure is being put into place to eliminate forms like Form W 3, Transmittal of Income and Tax Statements, and Form 6559, Transmitter Report of Magnetic Media Filing, Goldstein indicated. He predicted that, in the coming tax year, the SSA will initiate a personal identification number system to serve as an alternative to more traditional paper-based signatures.

This article originally appeared in Church Treasurer Alert, August 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Recent Trends in Employment Discrimination Cases

Lawsuits are on the rise and are not often covered by insurance policies.

Richard R. Hammar, Attorney, CPA

Bio

Background. Church treasurers should take seriously the threat of an employment discrimination lawsuit. Not only are these kinds of lawsuits a rapidly growing area of litigation, but they often are not covered by a church’s insurance policies. This means that in many cases a church will be forced to hire an attorney and pay all legal fees incurred in the defense of such a lawsuit, in addition to paying any settlement or judgment.

Discrimination laws exist at the federal, state, and sometimes local levels. These laws prohibit various kinds of discrimination by employers against employees and applicants for employment. For example, the most comprehensive federal non-discrimination law is Title VII of the Civil Rights Act of 1964, which prohibits employers that have at least 15 employees and that are involved in interstate commerce from discriminating against an employee in any employment decision (such as hiring, dismissal, fringe benefits, and discipline) on the basis of race, color, national origin, religion, or sex. Other federal laws ban discrimination in employment based on age and disability. There are very limited exemptions for religious organizations under some of these laws.

Key point. Most states have enacted similar laws, and it is much more likely that these will apply to churches since they generally apply to employers with fewer than 15 employees and there is no requirement that the church be engaged in interstate commerce.

Survey of discrimination cases. Recent government data contain information that will be helpful to church leaders in evaluating employment discrimination litigation. Consider the following:

• The number of complaints filed with the EEOC is staggering—more than 87,000 complaints were filed in 1995. This number represents a slight (4 percent) decline over the number of complaints filed in 1994.

• There were an estimated 20,000 employee discrimination lawsuits filed in federal courts in 1995 according to government estimates—up from 8,500 cases filed in 1990. This does not include lawsuits filed in state courts alleging violations of state anti-discrimination laws. But only 410 of the federal lawsuits filed in 1995 were brought by the EEOC (a federal agency that enforces federal civil rights laws). This is only 2 percent of all cases. The rest of the cases were brought by individual employees directly. The EEOC is filing fewer lawsuits than in the past. It brought over 7 percent of all federal discrimination lawsuits in 1990.

Tip. Here is a critical tactical point to consider. Employers win employment discrimination lawsuits far more often when a jury is not involved. For 1994 (the most recent year for which data is available) employee-plaintiffs won 43 percent of employment discrimination cases tried before a jury, but only 22 percent of cases tried before a judge without a jury! Church leaders should keep these results in mind in evaluating whether or not to demand a jury in a discrimination lawsuit.

• Juries are far more generous in awarding money damages than judges. The average jury award in 1990 was $371,000. When judges heard cases without a jury the average award was much less—only $161,000.

Key point. This data further supports the tactical advantage of not demanding a jury in a discrimination lawsuit. Not only is the probability of success much greater for a church or other employer when a jury is not involved, but the damages awarded when the employer loses are much lower.

• Few church leaders realize that the amount of money awarded by both juries and judges in discrimination lawsuits has been declining significantly over the past few years. The average award by a jury was $371,000 in 1990. But by 1994 the average had dropped 73 percent to $102,000! The average award by a judge (without a jury) dropped from $161,000 in 1990 to $36,000 in 1994—a 78 percent drop.

Tip. This information will be useful to church leaders in evaluating whether or not to settle discrimination lawsuits, and if so, for what amount.

This article originally appeared in Church Treasurer Alert, August 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Liability of Churches and Denominational Agencies for the Sexual Misconduct of Ministers

A federal court issues an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

A federal court issues an important ruling—Nutt v. Norwich Roman Catholic Diocese, 921 F. Supp. 66 (D. Conn. 1995)

[Negligence as a Basis for Liability, Denominational Liability]

Article summary. A federal court in Connecticut dismissed a lawsuit brought against a church and diocese by two adults who had been sexually molested by a priest when they were minors. The court ruled that the church and diocese were not responsible for the victims’ injuries on the basis of respondeat superior or negligence. The court cautioned that churches and denominational agencies are potentially liable on the basis of negligence for injuries sustained by victims of sexual molestation if they have knowledge of prior sexual misconduct by the molester. However, since the victims could not prove that church officials either knew or should have known of any previous sexual misconduct by the offending priest, the negligence claims had to be dismissed. The court ruled that the first amendment guaranty of religious freedom does not necessarily protect a church or denominational agency from liability in a lawsuit based on negligent hiring, retention, or supervision if the victim’s claims do not implicate issues of ecclesiastical concern.

In a decision that will be relevant to both churches and denominational agencies, a federal court in Connecticut dismissed a lawsuit brought by two adults against their church and diocese for injuries they allegedly sustained when they were sexually molested while minors by a priest. The court’s decision addresses a number of important legal issues, including respondeat superior, the statute of limitations, freedom of religion, and the effect of prior notice of inappropriate conduct. This article will summarize the facts of the case, review the court’s ruling, and assess the significance of the case to other churches and denominational agencies.

Facts

Note: All of the facts summarized below are based on the allegations of the victims, and were assumed to be true by the court for purposes of its decision.

In 1977, two brothers began serving as altar boys in a Catholic church. The victims, now both adults, allege that from 1979 through 1985 their priest showed them pornographic movies, and engaged in various forms of sexual contact with them while on out—of—town trips. In 1992, one of the victims and his parents met with church officials and complained about the priest’s sexual misconduct. Shortly after these complaints, the priest was relieved of his duties, pending an investigation. The brothers later filed a lawsuit against the priest, based on reckless assault and battery, negligent assault and battery, negligence, intentional or reckless infliction of emotional distress, and unintentional infliction of emotional distress. The brothers also sued their church and diocese. The brothers asserted that these institutional defendants were responsible for their injuries on the basis of respondeat superior and negligence (in hiring, retaining, and supervising the priest).

The court’s ruling

The defendants asked the court to dismiss the case. They claimed that the brothers’ lawsuit was barred by the statute of limitations. The church defendants claimed that the court was barred from resolving the lawsuit by the first amendment guaranty of religious freedom. The court agreed that the respondeat superior claims had to be dismissed, but it refused to dismiss the negligence claims. The court’s decision is summarized below.

respondeat superior

Respondeat superior is a legal doctrine that makes an employer legally responsible for the negligence of an employee committed within the scope of employment. As the court noted, central to the issue of liability under the doctrine is whether the employee was acting within the scope of his or her employment. If the employee was acting within the scope of his or her employment, the employer may be liable for the plaintiff’s acts. The court noted that the test in Connecticut as to whether an employee is acting within the scope of his or her employment rests on whether the employee was furthering the employer’s business.

The brothers claimed that the priest, as an employee of the three Roman Catholic institutional defendants, acted within the scope of his employment as a parish priest when he allegedly sexually assaulted and abused them. The court disagreed: Even if [the priest] committed the acts alleged by the plaintiffs, however, there is no evidence to support a finding that these acts were in furtherance of his employer’s business and therefore within the scope of his employment. It continued:

There is nothing in the record to indicate that the alleged sexual abuse by [the priest] was motivated by any purpose or object that would serve his employer. Indeed, as the affidavits submitted by the defendants indicate, the laws and standards of the Roman Catholic Church expressly prohibit priests from engaging in any sexual activity of any kind. Thus, even if [the priest] engaged in sexually abusive conduct, he did so only after abandoning the church’s tenets and his personal commitment to celibacy. Sexually abusive conduct amounts to the abandonment of the Church’s business. As a matter of law, therefore, the alleged sexual abuse, even if true, can not be said to further the defendant’s business and therefore is outside of the scope of employment.

As a result, the court dismissed the brothers’ respondeat superior claims against the church and diocese.

statute of limitations

The three Catholic institutions insisted that the brothers’ negligence claims against them were barred by the statute of limitations. They pointed out that negligence claims under Connecticut law must be brought within two years from the date when the injury is first sustained or discovered, but in no event more than three years from the date of the negligent conduct. The court pointed out that another Connecticut statute specifies that no action to recover damages for personal injury to a minor, including emotional distress caused by sexual abuse, sexual exploitation or sexual assault may be brought by such person later than seventeen years from the date such person attains the age of majority. The court concluded that this seventeen year statute applied, and that the brothers’ lawsuit was filed before seventeen years had elapsed since their eighteenth birthdays.

free exercise of religion

The church and diocese claimed that even if they were subject to the seventeen—year statute of limitations, the brothers’ claims must be dismissed because the free exercise of religion clause of the first amendment to the United States Constitution prohibits intrusion by the court into the employment practices of [the church or diocese]. Specifically, the church and diocese insisted that the court’s resolution of the brothers’ claims of negligent hiring, retention, or supervision of the offending priest would promote exactly that type of state involvement in religion which the first amendment intends to prevent, that is, the intrusion of secular interests into matters of purely ecclesiastical concern. The church and diocese quoted from the ruling of another court in a similar case:

Any inquiry into the policies and practices of church defendants in hiring or supervising their clergy is barred by the first amendment because it might foster excessive state entanglement with religion. It might involve the court in making sensitive judgments about the proprieties of the church defendants’ supervision in light of their religious beliefs. The defendants thus contend that personnel issues involving their clergy must be determined by the laws and policies of the Roman Catholic Church, which are based upon the religious tenets of Roman Catholicism, rather than upon nonecclesiastical law. Dausch v. Ryske, 1993 WL 34873, N.D. Ill. 1993 (unpublished opinion), affirmed, 52 F.3d 1425 (7th Cir. 1994).

The court in the Dausch case (quoted above) relied in part on another federal court decision in Schmidt v. Bishop, 779 F. Supp. 321 (S.D.N.Y. 1991), in which the court observed:

Furthermore, any inquiry into the policies and practices of the church defendants in hiring or supervising their clergy raises the same kind of first amendment problems of entanglement discussed above, which might involve the court in making sensitive judgments about the propriety of the church defendants’ supervision in light of their religious beliefs. Insofar as concerns retention or supervision, the pastor of a Presbyterian church is not analogous to a common law employee. He may not demit his charge nor be removed by the session, without the consent of the presbytery, functioning essentially as an ecclesiastical court. The traditional denominations each have [sic] their own intricate principles of governance, as to which the state has no rights of visitation. Church governance is founded in scripture, modified by reformers over almost two millennia. As the Supreme Court stated [long ago]: It is not to be supposed that the judges of the civil courts can be as competent in the ecclesiastical law and religious faith of all these bodies as the ablest men in each are in reference to their own. It would therefore be an appeal from the more learned tribunal in the law which should decide the case, to the one which is less so. Watson v. Jones,80 U.S. 679 (1872). It would therefore also be inappropriate and unconstitutional for this court to determine after the fact that the ecclesiastical authorities negligently supervised or retained the [pastor]. Any award of damages would have a chilling effect leading indirectly to state control over the future conduct of affairs of a religious denomination, a result violative of the text and history of the [first amendment].

The brothers strenuously disagreed with this argument. They insisted that to have the protection of the first amendment the church’s claims must be “rooted in religious belief,” and this simply was not the case. Their claim that the church and diocese were negligent in hiring or retaining the priest did not implicate any religious belief or practice, and therefore the first amendment could not be used as a defense.

The court agreed with the brothers. It observed:

Although no Supreme Court decision has determined the applicability of the free exercise clause of the first amendment as a defense for a religious organization’s negligent conduct, the Court has held that the first amendment does not create blanket tort immunity for religious institutions or their clergy, thus allowing clergy and clerical institutions to be sued for the torts they commit. Moreover, the court has “never held that an individual’s religious beliefs excuse him from compliance with an otherwise valid law prohibiting conduct that the state is free to regulate. On the contrary, the record of more than a century of our free exercise jurisprudence contradicts that proposition.” Department of Human Resources v. Smith, 494 U.S. 872, 878—79 (1990).

The court quoted from a 1940 decision of the Supreme Court:

Conscientious scruples have not, in the course of the long struggle for religious toleration, relieved the individual from obedience to a general law not aimed at the promotion or restriction of religious beliefs …. We first had occasion to assert that principle in [1879 when] we rejected the claim that criminal laws against polygamy could not be constitutionally applied to those whose religion commanded the practice. “Laws,” we said, “are made for the government of actions, and while they cannot interfere with mere religious belief and opinions, they may with practices …. Can a man excuse his practices to the contrary because of his religious belief? To permit this would make the professed doctrines of religious belief superior to the law of the land, and in effect to permit every citizen to become a law unto himself.” Minersville School Dist. Bd. of Ed. v. Gobitis, 310 U.S. 586 (1940).

The court noted that other decisions have consistently held that the right of free exercise does not relieve an individual of the obligation to comply with a “valid and neutral law of general applicability on the ground that the law [prohibits] conduct that his religion prescribes.” The court concluded:

Based upon these decisions, it is difficult to see how the [brothers’] claims against the [church and diocese] would foster excessive state entanglement with religion. The common law doctrine of negligence does not intrude upon the free exercise of religion, as it does not “discriminate against [a] religious belief or regulate or prohibit conduct because it is undertaken for religious reasons.” The court’s determination of an action against the [church and diocese] based upon their alleged negligent supervision of [the priest] would not prejudice or impose upon any of the religious tenets or practices of Catholicism. Rather, such a determination would involve an examination of the defendants’ possible role in allowing one of its employees to engage in conduct which they, as employers, as well as society in general expressly prohibit. Since the Supreme Court has consistently failed to allow the free exercise clause to “relieve [an] individual from obedience to a general law not aimed at the promotion or restriction of religious beliefs,” the [church and diocese] cannot appropriately implicate the first amendment as a defense to their alleged negligent conduct.

notice of previous misconduct

The church and diocese claimed that even if the free exercise clause does not bar the brothers’ claims, the claims should be dismissed because the church and diocese d”id not owe the [brothers] any duty to prevent the alleged sexual misconduct of [the priest].” Specifically, the church and diocese argued that because of the absence of any notice or knowledge of any alleged sexual misconduct problem by the priest, neither the church nor the diocese owed the brothers any duty to guard against sexual misconduct. Once again, the court rejected the position of the church and diocese. The court acknowledged that negligence is a breach of the duty to exercise “due care,” and that “the ultimate test of the duty is to be found in the reasonable foreseeability of harm resulting from a failure to exercise reasonable care.” That is, for the church and diocese to have been negligent they must have owed a “duty” to the brothers to exercise reasonable care with regard to their safety. And, such a duty existed with respect to injuries that were reasonably foreseeable. The court added that “this does not mean foreseeability of any harm whatsoever or foreseeability of the particular injury which happened.” Rather, “[t]he test is: Would the ordinarily prudent man in the position of the defendant, knowing what he knew or should have known, anticipate that harm of the general nature of that suffered was likely to result?”

The court noted that the brothers alleged in their lawsuit that the church and diocese had notice of the priest’s sexual misconduct by virtue of the fact that he had received treatment sessions for sexual abuse of minors during the period of 1979—1993 at a Catholic treatment centers in New Mexico and Maryland. These allegations were not denied or disproven by the church and diocese in their responses to the brothers’ lawsuit. Accordingly, the court denied the request by the church and diocese to dismiss the brothers’ negligence claims.

However, the court invited the church and diocese to refile their motion to dismiss if they could produce evidence (by affidavit or otherwise) disproving the brothers’ claim that during 1979—1993 the priest received treatment for sexual abuse of minors at Catholic facilities in New Mexico and Maryland. The church and diocese promptly refiled their motion to dismiss, accompanied by affidavits from church officials claiming that they had no knowledge (or reason to suspect) that the priest had ever participated in any retreat or treatment for sexual abuse of any kind. The brothers failed to reply to this new evidence, other than to reaffirm what they had said in their original lawsuit. This was not enough, the court concluded, to rebut the new evidence. Accordingly, since the brothers had failed to refute the claims of the church and diocese that they had no prior knowledge of any sexual misconduct on the part of the offending priest, the negligence claims had to be dismissed.

cause

The church and diocese claimed that, even if they owed a duty to the brothers, the alleged breach of that duty was not the cause of the brothers’ alleged injuries and therefore the church and diocese could not be responsible for those injuries. Specifically, they asserted that it was the alleged sexual misconduct by the priest that caused their injuries “rather than any possible negligence on the part of either [the church or diocese].” The court observed: “Because there is a disputed issue of fact as to whether the [church and diocese] had knowledge of [the priest’s] alleged sexual misconduct, the court cannot determine, as a matter of law, that [their] alleged negligence in supervising [him] was not the … cause of the [brothers’] injuries. Accordingly, the defendants’ argument fails.”

The court noted that the church and diocese could refile their motion to dismiss the case if they could produce evidence (by affidavit or otherwise) disproving the brothers’ claim that during 1979—1993 the priest received treatment for sexual abuse of minors at Catholic facilities in New Mexico and Maryland. As noted above, the church and diocese did refile their motion to dismiss, accompanied by affidavits from church officials claiming that they had no knowledge (or reason to suspect) that the priest had ever participated in any retreat or treatment for sexual abuse of any kind. Since the brothers failed to refute this new evidence, the court dismissed the negligence claims against the church and diocese. These agencies not only owed no duty to the brothers under these circumstances and therefore could not have been negligent, but their alleged failure to adequately supervise the priest was not a cause of the brothers’ injuries.

Significance of the case to other churches

What is the significance of this case to other churches and denominational agencies? Obviously, the decision of a federal court in Connecticut has limited effect. It will not be binding on any court outside of the State of Connecticut, and may be rejected by state courts within Connecticut. Nevertheless, the decision represents an extended discussion of the liability of churches for the sexual misconduct of clergy, and accordingly it may be given special consideration by other courts. For this reason, the case merits serious study by church leaders in every state. With these factors in mind, consider the following:

1. Respondeat superior. This case represents another in a long line of cases that have reached the same conclusion—churches cannot be liable on the basis of respondeat superior for the sexual misconduct of ministers since such misconduct is not within the scope of employment. This basis of liability is so weak that many sexual misconduct victims who sue their church do not even mention it.

2. Free exercise of religion. Many courts have concluded that the first amendment guaranty of religious freedom prevents the civil courts from evaluating whether or not a church was negligent in hiring, retaining, or supervising a minister who sexually abuses a minor or adult. Many of these decisions have been addressed in previous issues of this newsletter (including both the Dausch and Schmidt cases, quoted above). This court concluded that the first amendment is not an absolute bar to civil court resolution of such lawsuits—assuming that no inquiry into doctrinal matters is required. Such a ruling will make it easier for other courts to reach the same conclusion. This case should be an incentive for churches to implement and consistently apply adequate screening and supervisory measures with regard to clergy and lay workers.

3. The relevance of prior knowledge of misconduct. The most important aspect of the court’s ruling was its conclusion that a church can be liable on the basis of negligence for the sexual misconduct of a minister if it knew (or, with a reasonable effort, should have known) of facts suggesting that the minister posed a risk of such misconduct. Stated differently, if a church does have such knowledge (or, with a reasonable effort, should have known) then it can be responsible for a victim’s injuries on the basis of negligence—either in the selection, retention, or supervision of the minister. The importance of such a conclusion cannot be overstated. Churches and denominational agencies are assuming significant legal risks in most states when they (1) fail to respond to information suggesting that a minister has engaged in sexual misconduct, or (2) fail to investigate a minister’s background at the time the minister is employed, or granted ministerial credentials by a church or denominational agency. The lesson is this—churches and denominational agencies must not ignore information suggesting that a minister has engaged in sexual misconduct.

The court in this case dismissed the church and diocese from the lawsuit, and found them not to have been guilty of negligence, because the victims could not refute the affidavits of church leaders that they had no knowledge that the priest had received treatment for the sexual abuse of minors. Had church officials been aware of this treatment, the case would not have been dismissed and the church and diocese would have been forced to defend themselves in court.

4. Miscellaneous. There are two other aspects of this case that deserve comment. First, many of the acts of sexual molestation occurred during out—of—town trips when only one of the brothers accompanied the priest. It is startling how willing some parents are to allow their children to accompany an adult under these circumstances. Churches that adopt procedures to reduce the risk of such incidents occurring (for example, by following the two—adult rule) not only reduce the risk of misconduct, but they also reduce if not eliminate the risk of false accusations. Second, the diocese acted immediately to suspend the priest when the brothers’ parents disclosed the acts of molestation. Allowing a church employee or volunteer who is accused of sexual misconduct to remain in his or her position in effect makes the church a guarantor of the safety of others. This is an extraordinary risk. Such a person should never be allowed to remain in his or her position without the advice of an attorney. Of course, the accusation may be unfounded, and a prompt and thorough investigation is essential. If there is clear and convincing evidence that the person is innocent, he or she may be returned to the original position. Again, legal counsel is essential, particularly if the evidence of guilt is inconclusive.

While a number of states require child care center workers to be screened, very few states have responded directly to the National Child Protection Act. As a result, in most states churches are not required to obtain criminal records checks on paid employees and volunteers who work with minors outside of the context of a day care facility. This is an evolving area of law, and we will be returning to it in future issues of this newsletter as necessary to keep you informed.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Image: D-Keine

The Consequences of Embezzlement

Four unpleasant surprises when fraud is exposed in a church.

Richard R. Hammar, Attorney, CPA

Bio

Persons who embezzle church funds face a number of consequences. Some of them may come as unpleasant surprises. Here are four of them.

Felony conviction

Embezzling church funds is a felony in most states, and conviction can lead to a term in a state penitentiary. The definition of embezzlement varies slightly from state to state, but in general it refers to the wrongful conversion of property that is lawfully in your possession. The idea is that someone has legal control or custody of property or funds, and then decides to convert the property or funds to his or her own personal use.

Key point. It does not matter that the embezzler intended to pay back the embezzled funds. This intent in no way justifies or excuses the crime. The crime is complete when the funds are converted to one’s own use—whether or not there was an intent to pay them back.

Key point. Sometimes an embezzler, when caught, will agree to pay back embezzled funds. This does not alter the fact that the crime of embezzlement has occurred. Of course, it may be less likely that a prosecutor will prosecute the case under these circumstances. And even if the embezzler is prosecuted, this evidence may lessen the punishment. But the courts have consistently ruled that an actual return of embezzled property does not purge the offense of its criminal nature or absolve the embezzler from punishment for his or her wrongdoing. Also, note that church officials seldom know if all embezzled funds are being returned. They are relying almost entirely on the word of the thief.

Tax evasion

In many cases the embezzler’s biggest concern is not the possibility of being prosecuted for the crime of embezzlement. Rather, it is the possibility of being prosecuted by the IRS for tax evasion. Embezzlers never report their illegally obtained “income” on their tax returns. Nor do they suspect that failure to do so may subject them to criminal tax evasion charges. In fact, in some cases it is actually more likely that the IRS will prosecute the embezzler for tax evasion than the local prosecutor will prosecute for the crime of embezzlement.

Example. A church accountant embezzled $212,000 in church funds. His scheme was to divert to his own use several designated offerings, and to inflate the cost of equipment that he paid for with his own funds and that the church later reimbursed at the inflated amounts. The accountant not only was found guilty of embezzlement, but he was also convicted of tax evasion because he had failed to report any of the embezzled money as taxable income. He was sentenced to a 2-year prison term, followed by 2 years of probation.

Recovery of property purchased with embezzled funds

Here’s a real shocker—persons who receive property purchased by the embezzler with embezzled funds may be required to return the property to the church!

Example. A church bookkeeper embezzled several thousand dollars by issuing checks to a fictitious company. He opened an account in the name of a fictitious company, issued church checks to the company for services that were never performed, and then deposited the checks in the fictitious company’s account. He later withdrew the funds and purchased two automobiles which he gave to a friend. A court ruled that the friend had to give the cars back to the church, since they had been purchased with embezzled church funds. The point here, as noted by the court, is that one who acquires property with embezzled church funds may be required to transfer the property to the church.

Insurance company lawsuits

As if the three consequences summarized above are not enough, embezzlers face an additional consequence—they may be sued by an insurance company that pays a claim based on the embezzlement. Many churches purchase insurance to cover financial losses due to theft or embezzlement. Insurance companies that pay out claims based on such losses are free to sue the persons responsible.

Example. A court ruled that an insurance company that paid out $26,000 to a charity because of an act of embezzlement could sue the embezzler for the full amount that it paid. Such cases illustrate an important point—a church employee or volunteer who embezzles church funds may be sued by the church insurance company if it pays out a claim based on the embezzlement.

Confidentiality and privileged communications

Sometimes ministers learn of embezzlement through a confession by the embezzler in the course of confidential counseling. This presents the minister with a dilemma—either protect the confidentiality of the confession and refuse to disclose it, or ignore confidentiality and disclose the confession. This dilemma is compounded by the fact that some ministers have been sued for disclosing confidential information without the consent of the other person. Embezzlers may claim that they confessed their crime to their minister in confidence and in the course of spiritual counseling, with no thought that the minister would disclose the information to others.

Tip. Ministers who disclose confidential information without permission risk being sued for breaching their duty of confidentiality. When an employee or volunteer approaches a minister and confesses to embezzling church funds, there normally will be an expectation that the minister will keep that information in confidence. There is no sign above the minister’s desk that says, “warning, confessions of criminal activity will be promptly shared with the board or with the civil authorities.” Ministers who violate this expectation need to understand that they face potential legal liability for doing so—unless they have the employee’s permission, in writing.

Ministers who receive a confidential confession of embezzlement from a church employee or volunteer should not disclose this information to others, including the church board, without the person’s written permission. If the embezzler does not consent to the disclosure of the confession, and refuses to meet with the board, the minister should not disclose the information to any other person. Disclosure under these circumstances could result in a lawsuit being brought against the minister and church.

Does this mean that the minister should drop the matter? Not necessarily. The minister is free to gather independent evidence that embezzlement occurred, so long as this is done without disclosing the confession. For example, the minister could persuade the church board to hire a CPA to conduct an audit of the church’s financial records. Such a procedure may reveal that embezzlement has occurred. The minister also should attempt to persuade the embezzler to confess to the board.

Key point. Closely related to the concept of confidentiality is the clergy-penitent privilege. Ministers cannot be compelled to disclose in court the contents of confidential communications shared with them in the course of spiritual counseling.

Example. Late one night, a church treasurer arranged a meeting with her priest after informing him that she “had done something almost as bad as murder.” The treasurer, after requesting that their conversation be kept confidential, informed the priest that she had embezzled $30,000 in church funds. The priest, with the permission of the treasurer, sought the assistance of the church board. The board decided that the embezzlement had to be reported to the local police. The treasurer was later prosecuted for embezzling church funds, and she was convicted and sentenced to 4 months in jail despite the fact that she fully repaid the church prior to her trial. She appealed her conviction on the ground that it had been based on her confidential statements to the priest which, in her opinion, were “penitential communications” that were privileged against disclosure in court. The appeals court concluded that the statements made by the church treasurer to the priest were not privileged since they involved a “problem-solving entreaty” by the treasurer rather than “a request to make a true confession seeking forgiveness or absolution—the very essence of the spiritual relationship privileged under the statute.” That is, the treasurer sought out the priest not for spiritual counseling, but to disclose her embezzlement and to seek his counsel on how to correct the problem. The court also emphasized that the treasurer had “released” the priest from his assurance of confidentiality by consenting to his disclosure of the facts of the case to the church board members.

Informing the congregation

Church leaders often refuse to disclose to the congregation any information about an incident of embezzlement for fear of being sued for defamation. This concern is understandable. However, serious problems can occur when the pastor or church board dismisses a long-term employee or volunteer for embezzlement and nothing is disclosed to the membership. Church leaders under these circumstances often are accused of acting arbitrarily, and there is a demand for an explanation. Refusal to respond to such demands may place the church leadership in an even worse light.

There is a possible answer to this dilemma. Many states recognize the concept of “qualified privilege.” This means that statements made to others concerning a matter of common interest cannot be defamatory unless made with malice. Statements are made with malice if they are made with a knowledge that they are false, or with a reckless disregard as to their truth or falsity. In the church context, this privilege protects statements made by members to other members concerning matters of common interest. Such communications cannot be defamatory unless malice is proven. Church leaders who decide to disclose why an embezzler was dismissed can reduce the legal risk to the church and themselves by following a few basic precautions:

Only share information with active voting members of the church—at a membership meeting or by letter. The qualified privilege does not apply if the communication is made to non-members.
Adopt procedures that will confirm that no non-member received the information.
Limit your remarks to factual information and do not express opinions.
Prepare in advance a written statement that is communicated with members, and that is approved in advance by an attorney.

Key point. In some cases, it is helpful to obtain a signed confession from an individual who has been found guilty or who has confessed. If the individual consents to the communication of the confession to church members, then you can quote from the confession in a letter that is sent to members of the congregation, or in a membership meeting. Be sure that this consent is in writing.

Key point. One court ruled that a church could be sued for defamation for sharing suspicions regarding a church treasurer’s embezzlement with members in a congregational meeting. The court concluded that the treasurer should have been investigated and dismissed by the board, without informing the congregation. While no other court has reached a similar conclusion, this case suggests that church leaders should disclose cases of embezzlement to the church membership only if (1) absolutely necessary (for example, to reduce congregational unrest), and (2) an attorney is involved in making this decision.

Avoiding false accusations

In some cases it is not certain that embezzlement has occurred, or that a particular individual is guilty. A church must be careful in how it proceeds in these cases to avoid possible liability for defamation or emotional distress.

Example. A church convened a special business meeting at which the church treasurer was accused of embezzling church funds. Following this meeting the treasurer was shunned by church members who viewed her as guilty. This case is tragic, since the treasurer had been a long and devoted member of the church. Her life was ruined by the allegation, and she had to leave the church. It was later proven that she was completely innocent. She later filed a lawsuit, accusing the pastor and members of the church board of defamation. A court agreed with her, and awarded her a substantial verdict. The court pointed out that the accusation of embezzlement was based on flimsy evidence and could have easily been refuted with any reasonable investigation. The court concluded that church leaders are liable for defamation if they charge a church worker with embezzlement without first conducting a good faith investigation. The court also pointed out that the charges should not have been disclosed to the congregation, but rather should have been discussed among the church board and a decision made at that level on whether or not to dismiss the treasurer.

This case provides church leaders with very helpful guidance in handling suspicions of embezzlement. Do not rush to judgment. Conduct a deliberate and competent investigation, and let the church board resolve the issue without involving or informing the congregation, if possible. In some cases, congregational outrage may occur following the dismissal of an embezzler by the pastor or church board, especially if nothing is communicated to the congregation about the basis for the action. In these cases the board may decide that the membership must be informed. If so, refer to the above discussion on “informing the congregation.”

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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How to Address Suspicions of Embezzlement

Four strategies to guide uncomfortable conversations as you seek to uncover the truth.

Richard R. Hammar, Attorney, CPA

Bio

Sometimes a person who has embezzled church funds will voluntarily confess—usually out of a fear that he or she is about to be “caught.” But in many cases the embezzler does not confess—at least initially. Discrepancies or irregularities may occur which cause church leaders to suspect this person. Consider the following examples.

The same person has counted church offerings for many years. The pastor inadvertently notices that offerings are always higher when this person is absent (due to illness, business, or vacation).
Church officials noticed that a church bookkeeper was living a higher standard of living than was realistic given her income. Among other things, she purchased an expensive home and a luxury car.
Church offerings have remained constant, or increased slightly, despite the fact that attendance has increased.
A church treasurer notices that a church official with sole signature authority on the church checking account has purchased a number of expensive items from unknown companies without any documentation to prove what was purchased and why.

Church leaders often are unsure how to address suspected cases of embezzlement. The suspected embezzler is almost always a trusted member or employee, and church leaders are reluctant to accuse such a person without irrefutable evidence that he or she is guilty.

Seldom does such evidence exist. The pastor may confront the person about the suspicion, but in many cases the individual will deny any wrongdoing—even if guilty. This compounds the frustration of church officials, who do not know how to proceed.

Here is a list of steps that church leaders can take to resolve such difficult cases:

Confront the suspected embezzler

The pastor and at least one other church leader should confront the suspected embezzler. Inform the person that the church has evidence indicating that he or she has embezzled church funds. Seek a confession. Inform the person that if no one confesses, the church will be forced to call in a CPA firm to confirm that embezzlement has occurred, and to identify the probable embezzler.

Tip. Embezzlement is a criminal offense. Depending on the amount of funds or property taken, it may be a felony that can result in a sentence in the state penitentiary. This obviously would have a devastating impact on the embezzler, and his or her family.

If the evidence clearly indicates that a particular member or employee has embezzled church funds, but this person denies any wrongdoing, inform him or her that the church may be forced to turn the matter over to the police for investigation and prosecution.

Tip. Embezzlers never report their illegally obtained “income” on their tax returns. Nor do they suspect that failure to do so may subject them to criminal tax evasion charges! In fact, in some cases it is actually more likely that the IRS will prosecute the embezzler for tax evasion than the local prosecutor will prosecute for the crime of embezzlement.

If the evidence clearly indicates that a particular member or employee has embezzled church funds, but this person denies any wrongdoing, inform him or her that the church may be forced to turn the matter over to the IRS for investigation and possible prosecution.

Conduct an audit

Have a local CPA conduct an audit to establish that embezzlement has occurred, and provide an estimate of how much was embezzled.

If the suspected embezzler denies any wrongdoing (or if embezzlement is suspected but it is not clear who is guilty), church leaders should consider hiring a local CPA firm to look for evidence of embezzlement. There is a good possibility that the embezzlement will be detected, and that the perpetrator will be identified.

Tip. CPAs can also help the church establish a strong system of internal control to reduce the risk of embezzlement in the future.

Many church leaders have found that turning the investigation over to a CPA firm is much more acceptable than conducting the investigation internally. The CPA firm is completely objective, and ordinarily will not know the suspected embezzler. Further, few church members will object to the church hiring a CPA firm to detect wrongdoing and help establish a sound system of internal control.

Contact the police or local prosecutor

If the suspected embezzler does not confess, or if embezzlement is suspected but it is not clear who is guilty, church leaders must consider turning the matter over to the police or local prosecutor. This is a very difficult decision, since it may result in the prosecution and incarceration of a member of the congregation.

Respond to a confession

In some cases the embezzler eventually confesses. Often, this is to prevent the church from turning the case over to the IRS or the police, or to a CPA firm. Embezzlers believe they will receive “better treatment” from their own church than from the government. In many cases they are correct.

It often is astonishing how quickly church members will rally in support of the embezzler once he or she confesses—no matter how much money was stolen from the church. This is especially true when the embezzler used the embezzled funds for a “noble” purpose, such as medical bills for a sick child. Many church members demand that the embezzler be forgiven.

They are shocked and repulsed by the suggestion that the embezzler—their friend and fellow church member—be turned over to the IRS or the police! But is it this simple? Should church leaders join in the outpouring of sympathy? Should the matter be dropped once the embezzler confesses?

These are questions that each church will have to answer for itself, depending on the circumstances of each case. Before forgiving the embezzler and dropping the matter, church leaders should consider the following points:

A serious crime has been committed, and the embezzler has breached a sacred trust. The church should insist, at a minimum, that the embezzler must:

disclose how much money was embezzled
make full restitution by paying back all embezzled funds within a specified period of time, and
immediately and permanently be removed from any position within the church involving access to church funds

Tip. Closely scrutinize and question the amount of funds the embezzler claims to have taken. Remember, you are relying on the word of an admitted thief. Is it a realistic amount? Is it consistent with the irregularities or discrepancies that caused church leaders to suspect embezzlement in the first place? If in doubt, consider hiring a local CPA to review the amount the embezzler claims to have stolen.

In many cases the embezzler will insist that he or she is not able to pay back the embezzled funds.

They have been spent. This presents church leaders with a difficult decision, since the embezzler has received unreported taxable income from the church. The embezzler should be informed that the embezzled funds must either be returned within a specified time, or a promissory note must be signed promising to pay back the embezzled funds within a specified period of time.

The embezzler should be informed that failure to agree to either alternative will force the church to issue him or her a 1099 (or a corrected W-2 if the embezzler is an employee) reporting the embezzled funds as taxable income. Failure to do so will subject the church to a potential penalty (up to $10,000) for aiding and abetting in the substantial understatement of taxable income under section 6701 of the tax code.

Tip. An embezzler’s biggest problem ordinarily will not be with the church or even with the local prosecutor. It will be with the IRS for failure to report taxable income. There are only two ways to avoid trouble with the IRS: (1) the embezzler pays back the embezzled funds, or (2) the church reports the embezzled funds as taxable income on a 1099 or corrected W-2.

Church leaders must also remember that they owe a fiduciary obligation to the church and that they are stewards of the church’s resources.

Viewing the offender with mercy does not necessarily mean that the debt must be forgiven and a criminal act ignored. Churches are public charities that exist to serve religious purposes, and they are funded entirely out of charitable contributions from persons who justifiably assume that their contributions will be used to further the church’s mission. These purposes may not be served when a church forgives and ignores cases of embezzlement.

Tip. The federal Employee Polygraph Protection Act prohibits most employers from requiring or even suggesting that an employee submit to a polygraph exam. Employers also are prevented from dismissing or disciplining an employee for refusing to take a polygraph exam.

There is an exception that may apply in some cases—an employer may require that an employee take a polygraph exam if the employee is suspected of a specific act of theft or other economic loss and the employer has reported the matter to the police. However, the employer must follow very strict requirements to avoid liability.

A church should never suggest or require that an employee submit to a polygraph exam, even in cases of suspected embezzlement, without first contacting a local attorney for legal advice.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Legal Implications of Reviewing Employees’ E-Mail

Recent case rules in favor of employer, but not all courts may agree.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

Legal Implications of Reviewing Employees’ E-Mail

Recent case rules in favor of employer, but not all courts may agree.

Richard R. Hammar

Background. A growing number of churches have installed computer systems that permit employees to communicate with one another by means of electronic mail. What happens when a church official or supervisor accesses an employee’s e-mail without permission? Can the church be sued?

A recent ruling. A federal court in Pennsylvania addressed this question in a recent decision. A secular employer maintained an electronic mail communication system in order to promote internal communications between its employees. The employer repeatedly assured its employees that all e-mail communications would remain confidential and privileged. It further assured its employees that e-mail communications could not be intercepted and used against any employee as grounds for termination or reprimand.

Contrary to its own assurances of confidentiality, the employer intercepted private e-mail messages made by one of its employees to another employee. The employer later informed the employee that his employment was being terminated for transmitting what it deemed to be “inappropriate and unprofessional” comments over the e-mail system. The e-mail messages made disparaging comments about a supervisor and referred to a planned holiday party as the “Jim Jones Koolaid affair.”

The court ruled that the employee’s rights had not been violated. It based its ruling on the following factors:

• Pennsylvania recognizes the “employment at will” doctrine meaning that an employer may discharge an “at will employee” (one not hired for a specific term) “with or without cause, at pleasure, unless restrained by some contract” or public policy. Many other states follow this rule.

• Employers may not dismiss an “at will employee” if doing so would violate “a clear mandate of public policy.” But the court rejected the dismissed employee’s claim that the employer’s actions amounted to an invasion of his privacy and as such violated public policy. The court observed:

[W]e do not find a reasonable expectation of privacy in e-mail communications voluntarily made by an employee to [another employee] over the company e-mail system notwithstanding any assurances that such communications would not be intercepted by management …. [B]y intercepting such communications, the company is not … requiring the employee to disclose any personal information about himself or invading the employee’s person or personal effects. Moreover, the company’s interest in preventing inappropriate and unprofessional comments or even illegal activity over its e-mail system outweighs any privacy interest the employee may have in those comments.

Conclusions. This case suggests that employers may not be liable for monitoring employees’ e-mail messages, or for dismissing or disciplining employees on the basis of what they read—even if they assure employees that their e-mail messages are confidential. However, other courts may not agree with this ruling. Church leaders should not monitor employees’ e-mail, or dismiss employees, on the basis of e-mail messages without the advice of an attorney. Smith v. Pillsbury, 914 F. Supp. (E.D. Pa. 1996).

This article originally appeared in Church Treasurer Alert, May 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

The Liability of Churches for Acts of Child Molestation

A federal court issues an important decision.

Richard R. Hammar, Attorney, CPA

Bio

A federal court issues an important decision—Kendrick v. East Delavan Baptist Church, 886 F. Supp. 1465 (E.D. Wis. 1995)

Article summary. The potential legal liability of churches for acts of child molestation occurring on their premises or in the course of church activities remains a serious risk. A federal district court in Wisconsin issued an important ruling finding that a church was not responsible for the molestation of a young boy by a teacher at its school on the basis of negligent hiring or negligent supervision. The court also ruled that the church was not liable on the ground that it failed to comply with a state child abuse reporting statute. However, the court cautioned that its ruling was based on the fact that the victim could not prove that any of the incidents of abuse occurred after the time the church received notice of the offender’s misconduct. This case should provide church leaders with a powerful incentive to respond promptly and responsibly to any allegation of child abuse. Failure to do so will expose the church to needless and avoidable risk.

A federal district court in Wisconsin ruled that a church was not legally responsible for the molestation of a young boy by a teacher at the church’s school. It rejected the victim’s claim that the church was responsible on the basis of negligent hiring, negligent supervision, a failure to notify parents of the offender’s conduct, and a failure to report the abuse to civil authorities as required by state law. The court’s decision was based largely on the fact that the acts of molestation occurred prior to the time that the church had any reason to suspect that the teacher was a child molester. As a result, the case illustrates the critical importance of church leaders promptly and thoroughly investigating allegations of child abuse, and taking appropriate measures to protect children during and after the investigation. This article will review the facts of the case, summarize the court’s decision, and assess the relevance of the case to other churches.

Facts

A church hired a full—time teacher at its private school. The school’s administrator did not recall obtaining an application or resume from the teacher. Nor did the administrator recall contacting the teacher’s previous employers, or college, for references or grade reports. The teacher lived with the administrator (and his wife and small children) from 1982 through 1984, and frequently helped care for the administrator’s children. During the time the teacher taught at the school, a written policy permitted corporal punishment of students to be inflicted only by a parent with a teacher present. The school also had an “unwritten policy” that allowed teachers to administer corporal punishment outside the presence of a student’s parents if another adult were present and the parents were later notified.

While the teacher was employed by the school he removed a young boy (the victim) from class and disciplined him on at least ten occasions. On four of these occasions, the teacher engaged in sexual contact with the victim. The victim never informed either his parents or any church or school officials about the teacher’s behavior. Two months before the end of the teacher’s tenure at the school, the administrator received complaints from the parents of another boy regarding inappropriate behavior by the same teacher. These parents alleged that (1) when the teacher visited their son when he was home ill from school, he took his temperature using a rectal thermometer; and (2) during an overnight church trip with the teacher and a number of other children their son was awakened in the night with a hand near his genitals. The administrator immediately launched an investigation of these charges under the direction of the church board. He interviewed the teacher and the boy whose parents made the accusations, and held a number of meetings with the parents and the church board. While the investigation was in process, the teacher was allowed to remain in the classroom and was not restricted in any way. The administrator’s investigation did not address whether or not the teacher had molested other children. The administrator ultimately concluded that the allegations involving the teacher could not be “proved or disproved.” He noted that the teacher had some medical background and as a result it may have been appropriate for him to use a rectal thermometer. Further, there was no proof that it was the teacher’s hand that was near the boy’s genitals. The administrator decided not to report the allegations to the civil authorities pursuant to the state child abuse reporting statute.

The boy’s parents were not satisfied with this result, and they continued to demand the teacher’s removal. It was at this time that the administrator heard a rumor that the teacher had “had some problem with homosexuality” prior to his employment by the church. In response to this rumor, the administrator contacted the church—affiliated college the teacher had attended, and was informed that the teacher had been temporarily dismissed from the college for a brief period after confessing that he had engaged in homosexual activity on a weekend retreat. Another round of meetings occurred involving the teacher, the administrator, and the president of the college. The three agreed that, even though there was no wrongdoing by the teacher had been proven, the best way to resolve the controversy was for the teacher to resign. He immediately did so—both as a teacher and as a member of the church.

Prior to the parents’ accusations neither the church nor school had any knowledge of improper conduct by the teacher with the victim or any other student.

The victim experienced severe emotional and psychological problems as he matured. When he was in high school, a friend put his hand on the victim’s knee while he was driving a car. The victim reacted by beating his friend uncontrollably. He later explained his behavior as an attempt to punish his friend for what the teacher had done to him years before. After this outburst, the victim was taken to a hospital emergency room where he knocked down a police officer. He was taken to a psychiatric hospital for two weeks, where he was diagnosed with several disorders stemming from the teacher’s abuse.

When the victim was twenty years old, he sued the church claiming that it was legally responsible for the teacher’s misconduct. The victim claimed that the church was responsible for his injuries on the following grounds:

(1) Negligent selection. The victim alleged that the church was negligent in failing to exercise reasonable and sufficient care in the selection of the teacher. Specifically, the victim claimed that the church had failed to perform an adequate background check prior to hiring the teacher by failing to (1) have the teacher complete an employment application, (2) contact prior employers for a reference, and (3) obtain an academic transcript from the college he attended.

(2) Negligent supervision. The victim alleged that the church was negligent in failing to properly supervise the teacher. Specifically, the victim noted that the teacher had disciplined him on several occasions in a manner contrary to the school’s written and unwritten policies on corporal punishment.

(3) Failure to notify. The victim alleged that the church failed to notify the victim’s parents about the teacher’s molestation of the second boy (whose parents made the initial accusations).

(4) Failure to report the abuse. The victim alleged that the church was responsible for his injuries because the administrator, who was a mandatory reporter of child abuse under state law, failed to report the accusations made by the parents of the second boy.

The church asked the court to issue a “summary judgment” in its favor. A summary judgment in favor of a defendant is an extraordinary remedy in which a court summarily dismisses a lawsuit without allowing it to be presented to a jury on the ground that reasonable minds would not rule in favor of the plaintiff.

The court’s ruling

The court issued a summary judgment in favor of the church. Its discussion of each of the victim’s theories of liability is presented below.

negligent selection

The court noted that “negligence” requires proof that (1) the church had a duty to the victim to exercise reasonable care to protect him from harm; (2) the church breached its duty by acting carelessly or in a manner creating an unreasonable risk of harm; (3) the church’s carelessness was the cause of the victim’s injuries; and (4) the victim suffered actual injuries or damages.

The court concluded that the church owed a duty to the victim to exercise reasonable care for his protection. It based this conclusion in part on the Wisconsin child abuse reporting statute, which provides in part:

EXT A … school teacher, administrator or counselor … having reasonable cause to suspect that a child seen in the course of professional duties has been abused or neglected or having reason to believe that a child seen in the course of professional duties has been threatened with an injury and that abuse of the child will occur shall report ….

A violation of this statute may result in criminal penalties. The court observed: “The Wisconsin legislature, then, has specifically imposed on school officials an affirmative duty to protect students from actual or threatened abuse by reporting such conduct to the authorities.” This duty is also based on common sense, since “it is eminently logical to expect that teachers, school administrators, day care employees, and other professionals entrusted with the daily care of children will exercise some degree of care in ensuring their wellbeing and protecting them from harm.”

The court also agreed with the victim that the church breached this duty by failing to exercise reasonable care in the selection of the teacher. It observed:

EXT [I]t is our view that a reasonable jury could nevertheless find that school officials breached their duty to protect students by failing to exercise ordinary care …. [The administrator] does not recall obtaining a job application from [the teacher] nor contacting [his] prior employers [or college] for references or grade reports. [The administrator] did talk to [the teacher’s former pastor] but did so only after [the teacher] had already been employed by the church …. [The teacher] had also lived with [the administrator] and his family from the time he became a volunteer youth pastor for the church; through this experience [the administrator] no doubt became well—acquainted with [the teacher] and observed his demeanor around [the administrator’s] own children.

EXT In sum [the administrator] based his assessment of [the teacher’s] qualifications as a teacher on personal experience and observation as well as one conversation with his former pastor; he did not, however, review any information regarding [the teacher’s] academic record or seek input from previous employers regarding his work experience. Whether a more thorough background check would have revealed any irregularities is a question of [causation]; for purposes of this analysis, however, we believe that a reasonable jury could find that, when hiring someone who was to supervise and interact with young children [the administrator] did not use ordinary care by failing to adequately investigate [the teacher’s] background.

While the court ruled that the victim had established the first two elements of negligence (a duty to exercise reasonable care in the protection of children from harm, and a breach of that duty), it concluded that the victim failed to establish the third element—that his injuries were caused by the church’s actions. Causation in the context of negligence means that the defendant’s negligence was a “substantial factor” in causing the victim’s injuries. It emphasized that “a mere possibility of such causation is not enough; and when the matter remains one of pure speculation or conjecture or the probabilities are at best evenly balanced, it becomes the duty of the court [to rule in favor of the defendant].” The victim insisted that the administrator’s failure to more adequately screen the teacher prior to hiring him was the cause of his injuries since the administrator would not have hired the teacher had he more thoroughly checked his academic and work history and discovered that he had been temporarily suspended from college for “homosexual activity.” The court disagreed:

EXT There is no evidence … to indicate what [the administrator] would have done had he made this discovery …. Absent any other information [a jury] would be left to speculate whether or not a more thorough background check would have even uncovered this information and, if so, whether or not [the administrator] would have nevertheless hired [the teacher]. Had [the administrator] sought [the teacher’s] academic transcript, it is not clear whether he would have noticed this gap in [his] attendance record; and even if he had, attempting to determine the explanation [the teacher] would have given is a matter or pure conjecture. And even assuming that [the teacher] would have told the truth, or that [the administrator] would have contacted [college] officials directly, it is not clear what he would have discovered. Had he reached [the president] or other administrative officers, it appears that he would not have been told of the rumor of [the teacher’s] “homosexual problem,” let alone the details of the incident, given their lack of awareness. And because the reason for disciplinary action taken against students is often times not a matter of public record, it is not clear that he would have received any such information even if he had reached [college officials]. This is especially true where, as here, [the student’s] conduct was not criminal or dangerous to others, and apparently was not considered to be so serious that it precluded his readmission to [the college] and subsequent graduation.

EXT Of course, even assuming that [the administrator] would have become privy to this information had he checked [the teacher’s] academic record, the [victim] has provided no proof that [the administrator] would have found [the teacher] unfit to teach at the [school] …. [I]t is important to note that there is no evidence that [the teacher] had performed unsatisfactorily in any previous jobs or had a substandard academic record; nor is there any indication that [he] had ever been disciplined by any previous employer or for any other conduct at [college] …. [G]iven the fact that [the college] only temporarily suspended [him] after his confession, it appears that his transgression (whatever it was) was deemed a one—time “mistake,” and not a permanent character flaw rendering him unfit for accreditation. It, in fact, seems highly unlikely that [the administrator], after observing [the teacher’s] conduct in his home over the past year and with his own children, would have rejected his teaching application based on a single incident which seemed totally out of character.

The court then turned its attention to the important question of the relevance of homosexual activity when assessing the suitability of an adult to work with minors. This is a question that many church leaders have asked. Does evidence of prior or current homosexual activity automatically disqualify a person for any position involving contact with minors? The court responded as follows:

EXT [T]here is a complete lack of evidence in the record regarding any connection between engaging in homosexual activity (whether or not one identifies himself as a homosexual) and pedophilic behavior. There is no evidence in the record to indicate that the incident at [college] involved children. Based on this, it seems clear that, had [the administrator] learned of this information prior to [the time he hired the teacher] he would not have breached a duty of care to protect students had he hired [the teacher]. And if hiring [the teacher] under such circumstances would not have constituted a breach of duty, then hiring him without the benefit of such information cannot … be considered a cause in fact of the [victim’s] harm. Even assuming, then, that a more thorough background check would have uncovered this information, a [jury] would have no logical basis for concluding that, based on issues relating to sexual orientation, [the administrator] would have found [the teacher] to be unfit to teach, or an increased risk to children.

• Key point. The court concluded that a church is not responsible for acts of molestation by a teacher even if the church hired the teacher with knowledge of prior homosexual behavior, so long as (1) the prior homosexual behavior was a one—time and isolated event; (2) the behavior did not involve children; (3) no statistical evidence is offered showing a connection between a homosexual orientation and pedophilia; and (4) the church was aware of no other allegations of inappropriate contact of minors by the individual. Other courts may not reach the same conclusion.

negligent supervision

The victim claimed that the church was negligent in the supervision of the teacher’s activities, and that this negligence contributed to his injuries. Specifically, the victim argued that the school should have limited the number of times the teacher could have disciplined students, since this would have minimized the risk of molestation. In other words, the victim insisted that a church school has a continuing duty to supervise teachers. The court disagreed that churches or schools have so pervasive a duty of supervision. It based this conclusion on the following considerations:

It noted that the right of teachers to discipline students is “unquestionably reasonable and done in nearly every educational setting.”

It “is not unusual for some students to be reprimanded … numerous times over the course of a school year.”

The administrator received no complaints regarding the improper removal of the victim or any other student from class. Accordingly “from the perspective of [church] officials [the teacher] was administering discipline in the same manner as other instructors. While [he] could have been abusing his trust during the process, there is absolutely no indication that [the administrator] or other school officials were notified or should have been aware that child abuse or any violation of the [church’s] corporal punishment policies was occurring.”

The court concluded that

EXT in order to pursue a claim of negligent supervision in this case, the [victim] must show that [church] officials had notice of [the teacher’s] improper conduct with [the victim] or other students. What from the outside appeared to be a normal and common exercise of authority in this case may very well have been something quite different; [church] officials, however, had no reason to suspect [the teacher] of wrongdoing at any time prior to the [accusations made by the parents of the other boy].

However, the court ruled that the church was “placed on notice” of the teacher’s potential wrongdoing when the parents of the other student communicated their accusations to school officials. The school had a duty to supervise the teacher’s actions from this time forward, and as a result any molestation occurring during this period of time could be attributable to the church’s negligent supervision. The court observed:

EXT After [the allegations of the other student’s parents] were raised, one could arguably conclude that [the administrator] failed to exercise ordinary care by not limiting [the teacher’s] unsupervised contact with students pending his investigation; prior to that time, however, one could not conclude that [church] officials, with no reason to suspect any wrongdoing, acted unreasonably in their supervision of him.

The court noted that the allegations of the second student’s parents were made two months before the teacher left the school, and there was no evidence that the victim was molested during this time. As a result, even if church or school officials breached their duty of adequately supervising the teacher during the last two months of his tenure, this breach was not the cause of the victim’s injuries. The court noted that the victim himself could not recall the dates when he was molested, and it refused to assume that any of the four alleged acts of molestation occurred during the final two months of the teacher’s tenure. The court refused to speculate regarding when the alleged incidents of abuse occurred. It concluded:

EXT [The victim has] not established facts which would allow a reasonable jury to [find that the church’s negligence caused his injuries]. Because [the victim] cannot recall with any degree of reliability the approximate dates on which he was abused, the [jury] would have no logical basis for concluding that any such incident occurred during the sliver of time in which any such breach of duty by [church] officials could be said to have contributed to the [victim’s] injuries. At best, it can be said that the [church] could share responsibility for [the teacher’s] conduct during the last 20 to 25 percent of his teaching tenure; coupled with the fact that [the victim] only recalls being abused four times, the probability that any such incident occurred [during the last two months of the teacher’s tenure] is very low, and cannot be ascertained with any degree of reliability …. [I]t is impossible to base a judgment on conjecture, unproved assumptions, or mere possibilities.

failure to report

The victim claimed that the church breached its duty to report to civil authorities the allegations of abuse made by the parents of the second student, and that this failure to report contributed to the victim’s injuries. It is interesting to note that the court concluded that the accusations of abuse by the parents of the second boy constituted “reasonable cause to suspect” that abuse had occurred thereby triggering a duty to report under the state child abuse reporting law. The court observed:

EXT [T]he use of a rectal thermometer on a school—age child, especially by someone other than a parent or a medical professional, clearly raises eyebrows, and seems difficult to justify absent compelling circumstances. And while the allegations regarding [the teacher’s] alleged fondling of the [second boy] may not have been independently substantiated, it nevertheless seems that a reasonable jury could conclude that [the administrator] would have had “reasonable cause to suspect,” if not believe, that [the teacher] had committed sexual abuse, and would have been obligated to alert the authorities under [the state child abuse reporting law].

However, the court again emphasized that the church’s breach of its duty to report the suspected abuse of the second boy to civil authorities could not have been the cause of the victim’s injuries since the victim could not prove that any of the acts of molestation occurred after the time a child abuse report should have been filed.

failure to notify

The victim claimed that the church failed to notify other parents of the accusations made by the parents of the other student, and that this failure contributed to his injuries. The court agreed that the church had a duty to inform other parents of the accusations made by the parents of the second boy (so they could “ascertain whether or not their children had been harmed by similar conduct”), and that the church breached this duty by not informing them. As noted above, however, the church’s breach of this duty did not cause the victim’s injuries since the victim could not prove that any of the acts of molestation occurred after the church’s duty to notify other parents arose.

Significance of the case to other churches

What is the relevance of this ruling to local churches? Obviously, a decision of a federal district court in Wisconsin is of limited significance since it has no direct or binding effect in any other state. Nevertheless, there a number of aspects to the ruling that will be instructive to church leaders in every state. Consider the following:

1. Negligent selection. All churches use volunteers or paid employees to work with children. If a child is molested by one of these workers, the church may be legally responsible for the injuries on the basis of the “negligent selection” of the worker. “Negligence” consists of a duty to exercise reasonable care with respect to another, a breach of that duty, and injuries that are caused by the breach. The court concluded that the church had a duty to use reasonable care when selecting teachers, and that it breached this duty. It based this conclusion on the following considerations:

The administrator did not recall obtaining a job application from the teacher prior to hiring him.

The administrator did not recall contacting the teacher’s former employers for references.

The administrator did not recall contacting the college the teacher attended for a reference and an academic transcript. What is the relevance of an academic transcript? The court pointed out that it would have shown “gaps” in an individual’s college attendance that might indicate disciplinary action.

• Key point. The court emphasized that it was dealing with an individual who had been hired to teach children. It concluded that “when hiring someone who was to supervise and interact with young children [the school administrator] did not use ordinary care by failing to adequately investigate [the teacher’s] background.”

• Key point. This case illustrates the importance of church and school leaders adequately screening those applicants for volunteer and compensated positions who will be “supervising and interacting with young children.” Failure to do so may subject the church or school to liability for acts of child molestation on the basis of negligent selection.

While the church breached its duty of reasonable care in the selection of teachers, it was not guilty of negligence since its failure to exercise reasonable care was not the “cause” of the victim’s molestation. The court based this conclusion on the following factors:

There was no evidence that the teacher performed unsatisfactorily in any previous job, or that he had ever been disciplined by a former employer. As a result, it was not clear that a more thorough background check would have uncovered any information indicating that the teacher should not be allowed to work with children.

Failure to contact college officials for a reference or academic transcript probably would not have revealed the one homosexual incident since college officials generally do not disclose the nature or basis of disciplinary actions to outsiders. The court observed that

EXT because the reason for disciplinary action taken against students is often times not a matter of public record, it is not clear that he would have received any such information even if he had reached [college officials]. This is especially true where, as here, [the student’s] conduct was not criminal or dangerous to others, and apparently was not considered to be so serious that it precluded his readmission to [the college] and subsequent graduation.

The importance of the court’s decision that the church breached a duty of care to the victim when selecting the teacher is not lessened by the fact that the court found that this breach was not the “cause” of the victim’s injuries. The court reached this conclusion because of two factors that often will not be present in the church context: (1) There was no evidence of any unsatisfactory job performance in the teacher’s previous jobs, and so the church’s failure to conduct a reference check of previous employers could not be the cause of the victim’s injuries. That is, even if the previous employers would have been contacted by the church, no information would have been shared indicating that the teacher posed a risk to children. (2) Failure to contact the teacher’s former college would have been futile, since college administrators generally do not reveal information concerning student discipline.

• Key point. The church was fortunate that nothing in the teacher’s employment or college backgrounds indicated that he might pose a risk to children. If it were likely that reference checks with the teacher’s prior employers and college would have raised questions, then the church’s failure to conduct these checks would have been the cause of the victim’s injuries and the church would have been responsible for the victim’s injuries on the basis of negligent selection. As a result, sound risk management dictates that churches conduct reference checks on employees and volunteers who will be working with minors.

• Key point. While colleges often refuse to disclose to outsiders disciplinary actions taken against students, this is not necessarily true for other institutions (churches, employers, etc.).

• Key point. Churches that are sued on the basis of the negligent selection of a child molester because they failed to conduct a reference check should consider making the same argument that the court adopted in this case—a church cannot be negligent for failing to conduct reference checks if such checks would have revealed no information suggesting that the molester posed a risk of harm to children.

2. The relevance of homosexual activity. Another significant aspect of the court’s ruling was its handling of homosexuality. Many churches have wrestled with the question of whether or not to allow a person to work with children who is a homosexual. Some churches absolutely refuse to allow such an individual to work with children, based on a belief that all homosexuals are pedophiles. Very few courts have addressed this issue, and that makes cases such as this one especially instructive. The court concluded that

EXT there is a complete lack of evidence in the record regarding any connection between engaging in homosexual activity (whether or not one identifies himself as a homosexual) and pedophilic behavior. There is no evidence in the record to indicate that the incident at [college] involved children. Based on this, it seems clear that, had [the administrator] learned of this information prior to [the time he hired the teacher] he would not have breached a duty of care to protect students had he hired [the teacher] …. Even assuming, then, that a more thorough background check would have uncovered this information, a [jury] would have no logical basis for concluding that, based on issues relating to sexual orientation, [the administrator] would have found [the teacher] to be unfit to teach, or an increased risk to children.

• Key point. The court concluded that a church is not responsible for acts of molestation by a teacher even if the church hired the teacher with knowledge of prior homosexual behavior, so long as

(1) the prior homosexual behavior was a one—time and isolated event;

(2) the behavior did not involve children;

(3) no statistical evidence is offered showing a connection between a homosexual orientation and pedophilia; and

(4) the church was aware of no other allegations of inappropriate contact of minors by the individual.

If any one or more of these conditions would not have been met, the court presumably would have found the church negligent for hiring the teacher.

3. Negligent supervision. While churches and schools have a duty to properly supervise youth activities, this duty is not absolute. Churches and schools are not “guarantors” of the safety of children. They will be legally responsible on the basis of negligent supervision for a child’s injuries only if they breach their duty of exercising reasonable care in the supervision of youth activities. The court in this case ruled that neither the church nor school had a “continuing duty” to supervise teachers, and were not automatically liable for the teacher’s acts of molestation. The court observed that

EXT in order to pursue a claim of negligent supervision in this case, the [victim] must show that [church] officials had notice of [the teacher’s] improper conduct with [the victim] or other students. What from the outside appeared to be a normal and common exercise of authority in this case may very well have been something quite different; [church] officials, however, had no reason to suspect [the teacher] of wrongdoing at any time prior to the [accusations made by the parents of the other boy].

But, the court cautioned that once church officials are presented with information indicating that a worker may pose a risk of harm to children, they have a duty to supervise the worker. If the church fails to adequately supervise the worker, and the worker injures a child, the church may be responsible for the injury on the basis of negligent supervision.

• Key point. It is critical for church leaders to respond promptly to allegations of inappropriate sexual conduct by youth or children’s workers. Such allegations immediately impose upon the church (and church leaders) a duty of supervision. Failure to discharge this duty can result in legal liability for the church, and perhaps its leaders, on the basis of negligent supervision.

• Key point. The court concluded that the church could not be liable on the basis of negligent supervision for the teacher’s acts of molestation. However, the court cautioned that its ruling was based on the fact that the victim could not prove that any of the incidents of abuse occurred after the time the church received notice of the offender’s misconduct. This case should provide church leaders with a powerful incentive to respond promptly and responsibly to any allegation of child abuse. Failure to do so will expose the church to needless and avoidable risk.

• Key point. The court concluded that unsubstantiated accusations of misconduct by a parent were enough to impose a duty on the church to supervise the teacher.

4. The church’s investigation. When presented with an allegation of inappropriate sexual conduct by a youth worker, church leaders often are unsure how to respond. This case provides some helpful insight.

the allegations

The school administrator received the following accusation from the parents of a minor concerning the teacher: (1) when the teacher visited their son when he was home ill from school, he took his temperature using a rectal thermometer; and (2) during an overnight church trip with the teacher and a number of other children their son was awakened in the night with a hand near his genitals.

the investigation

The administrator immediately launched an investigation, which included the following steps: (1) He interviewed the teacher; (2) he interviewed the boy whose parents made the accusations; (3) he held a number of meetings with the parents of the boy and the church board.

The administrator’s investigation did not address whether or not the teacher had molested other children.

During the investigation the teacher was allowed to remain in the classroom and was not restricted in any way.

The administrator ultimately concluded that the allegations involving the teacher could not be “proved or disproved.” He noted that the teacher had some medical background and as a result it may have been appropriate for him to use a rectal thermometer. Further, there was no proof that it was the teacher’s hand that was near the boy’s genitals.

The administrator decided not to report the allegations to the civil authorities pursuant to the state child abuse reporting statute.

what should have been done

The administrator’s investigation was potentially inadequate in a number of ways, including the following:

(1) The administrator did not address whether or not the teacher had molested other children.

(2) The teacher was not immediately suspended (with or without pay) from teaching or other school activities pending the investigation.

(3) The administrator did not report the alleged abuse to civil authorities pursuant to the state child abuse reporting law.

(4) The administrator’s conclusion that the allegations of misconduct could not be “proved or disproved” missed the point. The question in such cases is not whether the accusations can be “proved or disproved.” In many cases accusations will not be proved or disproved, but this does not mean that the alleged offender is vindicated and may be allowed to have further contact with minors. The question is whether or not there is a reasonable basis for concluding that the allegations are true. Absolute certainty is not required, and in most cases will not be possible. Many child molesters will deny that they have engaged in wrongdoing, and this forces church leaders to make decisions based on reasonable inferences from the evidence. Finding that there is sufficient evidence of wrongdoing, when the alleged offender denies it, can be unnerving for church leaders who want absolute certainty. Church leaders must recognize that absolute certainty regarding the guilt or innocence of an alleged child molester will often not be possible. What is needed is a reasonable basis for concluding that the alleged offender is guilty. This makes a thorough investigation essential. The investigation should seek out other possible victims, witnesses, and any documentary evidence (photos, letters) that may substantiate the charges.

A church’s investigation can be assisted in some cases by reporting the alleged abuse to civil authorities who receive reports of child abuse. In many cases the civil authorities will conduct their own investigation, which can greatly assist church leaders in reaching an appropriate decision.

• Key point. The court concluded that unsubstantiated accusations of misconduct by a parent were enough to impose a duty on the church to supervise the teacher.

5. Failure to report the abuse. The court concluded that the church had “reasonable cause” to suspect that child abuse had occurred on the basis of the parents’ allegations that the teacher used a rectal thermometer to take their minor son’s temperature and that during an overnight church trip with the teacher and a number of other children their son was awakened in the night with a hand near his genitals. Under the state child abuse reporting law, the church had a duty to report these allegations since there was “reasonable cause” to suspect that abuse had occurred. The Wisconsin child abuse reporting statute provides in part:

EXT A … school teacher, administrator or counselor … having reasonable cause to suspect that a child seen in the course of professional duties has been abused or neglected or having reason to believe that a child seen in the course of professional duties has been threatened with an injury and that abuse of the child will occur shall report ….

The court observed:

EXT [T]he use of a rectal thermometer on a school—age child, especially by someone other than a parent or a medical professional, clearly raises eyebrows, and seems difficult to justify absent compelling circumstances. And while the allegations regarding [the teacher’s] alleged fondling of the [second boy] may not have been independently substantiated, it nevertheless seems that a reasonable jury could conclude that [the administrator] would have had “reasonable cause to suspect,” if not believe, that [the teacher] had committed sexual abuse, and would have been obligated to alert the authorities under [the state child abuse reporting law].

What lessons can be learned here? There may be a duty to report child abuse under state law, even if church officials cannot “prove or disprove” that it occurred, if there is a reasonable basis for believing that it occurred. Absolute certainty is not necessary. Further, note that the court’s interpretation of “reasonable cause” was a broad one. Finally, the court concluded that the child abuse reporting statute imposed a duty on school officials to exercise reasonable care in the protection of children.

• Key point. The court emphasized that the church’s breach of its duty to report the suspected abuse of the second boy to civil authorities could not have been the cause of the victim’s injuries since the victim could not prove that any of the acts of molestation occurred after the time a child abuse report should have been filed.

6. Failure to inform parents. The court recognized a potentially new and significant theory of liability against churches that has not been recognized in any other case. It concluded that a church has a duty to inform parents of accusations of sexual misconduct made against a youth worker so they can “ascertain whether or not their children have been harmed by similar conduct.” However, the court ruled that the church was not responsible for the victim’s injuries on the basis of its failure to notify his parents of the accusations made against the teacher since the victim could not prove that any of the acts of molestation occurred after the church failed to notify his parents.

• Key point. This potential basis of liability makes it even more critical for church leaders to respond immediately to accusations of sexual misconduct by youth workers. Ignoring such accusations subjects the church to liability for future incidents of molestation on the basis of negligent supervision as well as negligent failure to notify other parents.

© Copyright 1996, 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: M67 M10 M86 C0396

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

The Discipline of Church Members

The Iowa Supreme Court issues an important ruling.

Richard R. Hammar, Attorney, CPA

Bio

Article summary.
Churches occasionally are compelled to discipline unruly members. These members sometimes sue their church, claiming that their discipline was defamatory, inflicted emotional distress, or violated the church’s internal rules. Most courts refuse to resolve such lawsuits on the ground that a church’s decisions regarding membership eligibility is an inherently ecclesiastical matter over which the civil courts lack jurisdiction. Such as the conclusion reached by the Iowa Supreme Court in an important decision.

Some churches, when confronted with an unruly or disruptive member who creates dissension within the congregation, respond by either disciplining the individual or dismissing him or her from church membership. Some church leaders resist administering discipline for fear of legal reprisals. This fear is not entirely unfounded, since disciplined members occasionally sue their church on the basis of a number of perceived wrongs including defamation, infliction of emotional distress, and a violation of church procedures. However, most courts that have addressed such lawsuits have dismissed them on the ground that they lack jurisdiction to resolve them. This was the conclusion of the Iowa Supreme Court in an important decision. This article will review the facts of this case, discuss the court’s ruling, and then assess the significance of the case to other churches and ministers.

Facts

In 1990 a member (“John”) in a local Reformed Church was suspended and later excommunicated in a disciplinary action taken by the church’s governing body. The church is affiliated with the Reformed Church of America, a hierarchical body with an established structure and procedures. The governing body of the local church is the consistory, which is made up of the installed ministers of the local church, the elders, and the deacons. The members of the board of elders are the elected spiritual leaders of the church and have the power to discipline members of the congregation. That power includes the power of excommunication.

John had been a member of the church for most of his life. His parents were founding members, and his father donated the land where the church is now located. In 1986 John became concerned over the direction the church was taking when his wife lost her job as janitor of the church and the church’s senior pastor introduced the practice of “spiritual healing.” The introduction of spiritual healing caused discord in the congregation. John became involved in a movement to remove the pastor from the church. The pastor left the church in 1989.

There was great discord in the church, so an interim pastor was immediately selected who was specially trained in interim ministry to assist troubled churches through their difficulties and make them viable again. John became angry with the interim pastor because he thought he was encouraging his wife to divorce him and his son to disobey him. In April of 1990 the board of elders temporarily suspended John’s privileges of membership and barred him from attending the church services. The congregation was informed of this move. Later the elders asked the police to be present at the church in case John showed up and attempted to disrupt services.

In May of 1990, a church member wrote a letter making formal charges against John. The charges instituted excommunication proceedings. The letter stated, in part:

EXT I feel that the time has come to place before the elders of the [church] the formation of actual written charges against [John] as a member …. These charges come only after much prayer and serious consideration and are being brought forth out of great concern for the well—being of all members of [the church]. The specific charges which are to follow do not come out of any personal vendetta … but rather out of the deep desire for the problems to be resolved for our church. It appears that everyone involved is anxious to get this over with so that we can all get on with our lives. The charges which I am about to present involve the offensive behavior patterns … as witnessed to over a period of time. Some of these offensive behaviors I have witnessed personally; others come from the shared testimony of others. I am hereby charging him with abusing his privileges as a member of the church and for disrupting the communion of the body of Christ. The examples of the offensive behaviors are as follows: First of all, there have been the relentless and demanding phone calls from [him] over a period of the past several months. This includes the many, many phone calls I have personally received, as well as that reported to me by [pastors of the church] and the other elders. These phone calls have been offensive, abusive, harassing, disruptive and threatening in nature. [John] has personally made such statements about [the interim pastor] to me as: “He is a life wrecker, traitor and marriage wrecker”; “I’m going to an institution because of him; My teeth will go a long ways in him”; “I’m going to kick him in the shins” ….

EXT [John] phoned [me again] and demanded a meeting with the consistory on Sunday April 29 and if he did not get his way that he would actually disrupt that morning’s worship services. [He] phoned late that night of April 28 and demanded that I should go over to [the interim pastor’s] house and “kick him out.”

EXT On Sunday April 29 [the interim pastor’s wife] answered the parsonage phone and after telling who he was [John] asked if “Judas was there”?, then went on to ask her “what it was like to live with a Judas”? He also asked her what she thought of “someone who breaks up a marriage”? He also informed her that he “got his directions from God” and that “God was on his side.” At about this time [John] also referred to me as “Judas”. To the best of my knowledge I have stated the above as accurately as possible.

A trial to the church judiciary was held in June of 1990 and John was found guilty of the charges. He was notified that if he failed to show marks of repentance, the board of elders would proceed to excommunication. At a July meeting between John and the elders, the conversation heated up and an elder exploded and called John a “lying bastard.” The elder later apologized to John for the outburst. Later, the board of elders met and voted to excommunicate John. The board sent him a letter informing him that he would be excommunicated from the church effective July 21. The congregation was informed on July 22 that John had been excommunicated.

In September of 1990 the clerk of the consistory sent a letter to John informing him that the consistory of the church, including the interim pastor, would no longer accept any telephone calls from him and that any future calls from him would be considered harassment.

In December the church hired a new pastor to start in February of 1991. The new pastor decided not to become involved in the former conflict. He asked the board of elders to write John a letter informing him that he would not accept his phone calls.

John sued the church, and various pastors and elders, on the basis of the following alleged wrongs:

(1) failure by the church and denominational agencies to follow their ecclesiastical procedures in the excommunication process

(2) defamation

(3) intentional infliction of emotional distress (also called “outrageous conduct”)

John alleged that nine statements made by the defendants were defamatory and constituted outrageous conduct: (1) A letter informing John he was being temporarily suspended from privileges of membership and attending services and setting forth the reasons for the suspension. (2) An oral communication to the church members that John’s privileges of membership and attending services were temporarily suspended. (3) A letter informing John he was excommunicated from the church. (4) An oral communication to the church members that John had been excommunicated. (5) Statements made the week of July 22 through July 28, 1990, allegedly informing church members not to communicate with John. (6) The letter initiating excommunication proceedings against John. (7) A letter from the board of elders mentioning John’ excommunication. (8) The letter informing John that any attempts to call the interim pastor and the members of the consistory would be considered harassment. (9) The letter informing John that the new pastor would not accept his telephone calls and that any calls to him would be considered harassment.

The church asked the trial court to dismiss the lawsuit. The court dismissed all charges, and John appealed.

The court’s ruling

The court reached the following conclusions with regard to the three allegations of wrongdoing contained in John’s lawsuit.

failure to follow church procedure

John appealed the church’s decision to excommunicate him to the regional synod—the final court of appeal from all cases originally heard by a board of elders. The synod affirmed the decision to excommunicate him. John insisted that “proper procedures” were not followed in the excommunication proceedings. The court ruled that John’s dismissal was an internal church matter over which the civil courts have no jurisdiction. It observed: “The general rule is that civil courts will not interfere in purely ecclesiastical matters, including membership in a church organization or church discipline. Iowa’s civil courts have a long tradition of refraining from interfering in purely ecclesiastical matters.” The court referred to an earlier decision of the Iowa Supreme Court involving a lawsuit by individuals who had been expelled from church membership. The plaintiffs in that case asked a civil court to reverse their expulsions. The Iowa Supreme Court refused to do so, and observed: “[O]rdinarily the courts have no jurisdiction over, and no concern with, purely ecclesiastical questions and controversies, including membership in a church organization ….” Brown v. Mt. Olive Baptist Church, 124 N.W.2d 445 (1963).

The court concluded: “[The church’s decision to excommunicate [John] was purely ecclesiastical in nature, and therefore we will not interfere with the action. Interfering with the decision would contravene both our history of leaving such matters to ecclesiastical officials and the first and fourteenth amendments of the United States Constitution.”

defamation

John claimed that although the alleged defamatory statements were made in an ecclesiastical context, defamation involves his civil rights and therefore it was appropriate for a civil court to exercise jurisdiction over his claim. The court rejected this basis of liability. First, it pointed out that defamation requires “publication” of the defamatory material to persons other than the individual who claims to have been defamed. Since at least four of the letters that John claimed were defamatory were sent only to him, they could not be defamatory.

Further, the court pointed out that truth “is a complete defense to defamation,” and therefore oral communications to church members that John’s membership was being temporarily suspended and that he had been excommunicated merely conveyed true and non—defamatory information to the congregation.

The court also found that all of the allegedly defamatory statements made by church officials were protected by a qualified privilege from being defamatory. The court explained the concept of “qualified privilege” as follows:

EXT The qualified privilege arises from the necessity of full and unrestricted communication concerning a matter in which the parties have an interest or duty, and is not restricted within narrow limits. A qualified privilege applies to otherwise defamatory statements when the statements are made in good faith on any subject matter in which the person communicating has an interest, or in reference to which that person has a right or duty, if made to a person having a corresponding interest or duty in a manner and under circumstances fairly warranted by the occasion. The elements of a qualified privilege are (1) good faith, (2) an interest to be upheld, (3) a statement limited in its scope to this purpose, (4) a proper occasion, and (5) publication in a proper manner and to proper parties ….

EXT We believe it is appropriate to apply a qualified privilege to statements made in the context of a church disciplinary proceeding. The May 31 letter constituted formal disciplinary charges against [John]. The statements in the letter were made by a church elder who had a duty imposed by the church to look after the spiritual well—being of the church members. The statements were made only to other church officials who would have a role in the disciplinary proceedings. Any statements made during the course of the ecclesiastical trial would also be qualifiedly privileged.

Even untrue statements may be qualifiedly privileged. The privilege, however, only protects statements made without actual malice …. Actual malice requires proof that the statement was made with ill—will, hatred, the desire to do another harm, or wrongful motive. It may also result from reckless or wanton disregard of the rights of others.

John claimed that church officials acted with malice in communicating some of the information about him. As proof, he cited evidence that (1) a neighboring pastor who assisted the church in finding an interim pastor assisted John’s wife in filing commitment papers against him, and (2) a one—time elder allegedly remarked that the church would be better off without certain families. The court concluded that this information did not prove actual malice on the part of church officials. The neighboring pastor was “not a defendant in this case, so his actions are irrelevant to whether these defendants acted with actual malice.” And, the former elder who made the other statement was “not a defendant and was not on the board of elders when [John] was disciplined. His statement cannot be attributed to the defendants.” As a result, the court concluded that “no actual malice exists and the statements are qualifiedly privileged.”

intentional infliction of emotional distress

John’s lawsuit claimed that the nine allegedly defamatory comments statements constituted “outrageous conduct” by the church officials which caused him to be severely and emotionally distressed. The court noted that “outrageous conduct” or intentional infliction of emotional distress requires proof of the following four elements: (1) outrageous conduct by the alleged perpetrator; (2) the perpetrator’s intentional causing, or reckless disregard of the probability of causing emotional distress; (3) the victim’s suffering severe or extreme emotional distress; and (4) actual and proximate causation of the emotional distress by the perpetrator’s outrageous conduct.

The court added that

EXT to be outrageous, the conduct must be so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community. There must be substantial evidence of extreme conduct: It has not been enough that the defendant has acted with an intent which is tortious or even criminal, or that [he or she] has intended to inflict emotional distress, or even that [his or her] conduct has been characterized by malice, or a degree of aggravation that would entitle the plaintiff to punitive damages for another tort.”

John insisted that the filing of commitment papers against him constituted outrageous conduct. However, the court pointed out that the papers were executed by John’s own wife and a neighboring pastor. Therefore, “because neither is a defendant in this action that conduct is irrelevant.” While acknowledging that John “is understandably disappointed” with the church’s actions, “we do not believe a [jury] could reasonably conclude their conduct rose to the level of outrageousness.”

Significance to other churches and ministers

What is the relevance of this ruling to other churches? Obviously, a decision of the Iowa Supreme Court is of limited significance since it has no direct or binding effect in any other state. Nevertheless, there a number of aspects to the ruling that will be instructive to church leaders in every state. Consider the following:

1. Failure to follow church procedures. The Iowa Supreme Court, like nearly every other court that has addressed the issue in recent years, concluded that a church’s decision to discipline or dismiss a member is an inherently ecclesiastical matter over which the civil courts lack jurisdiction. This is so even if a dismissed member claims that the church failed to follow its own bylaws or other internal rules in disciplining or dismissing him or her. Church leaders should be familiar with the church’s internal rules, and strive to follow them. But most courts refuse to resolve lawsuits by disgruntled members who claim that a church failed to follow these rules.

2. Defamation. Church leaders sometimes confront potentially explosive issues, such as the discipline or dismissal of a member or trusted employee on the basis of misconduct that is known only to a few. Members of a congregation react with confusion and even anger to what is perceived to be an arbitrary action by the church leadership. Church leaders often are reluctant to disclose the basis for their decision for fear of being sued. This case illustrates that the law provides a measure of protection to church leaders under these circumstances who want to make appropriate disclosures of information. Such disclosures will not be defamatory if they communicate truthful information, or if they are protected by a qualified privilege. As the court pointed out:

EXT A qualified privilege applies to otherwise defamatory statements when the statements are made in good faith on any subject matter in which the person communicating has an interest, or in reference to which that person has a right or duty, if made to a person having a corresponding interest or duty in a manner and under circumstances fairly warranted by the occasion.

That is, statements by church members or officials to other members of officials on matters of common interest are protected by a qualified privilege, which means that they cannot be defamatory unless made with actual malice. The court defined actual malice as

“ill—will, hatred, the desire to do another harm, or a wrongful motive. It may also result from reckless or wanton disregard of the rights of others.”

3. Intentional infliction of emotional distress. Many persons have claimed that a church’s actions caused them emotional distress. As this court noted, the concept of “intentional infliction of emotional distress” is clearly defined and will rarely apply to a church. Few church actions or decisions will “be outrageous … so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.”

John v. Estate of Hartgerink, 528 N.W.2d 539 (Iowa 1995)

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Reducing the Risk of Embezzlement

Can the risk of embezzlement be reduced? If so, how? The good news is that

Richard R. Hammar, Attorney, CPA

Bio

Can the risk of embezzlement be reduced? If so, how? The good news is that there are number of steps that church leaders can take to reduce this risk, and most of them are quite simple. Consider the following:

1. Implement an effective system of internal control. The first and most effective deterrent to embezzlement is a strong system of “internal control.” Internal control is an accounting term that refers to policies and procedures adopted by an organization to safeguard its assets and promote the accuracy of its financial records. What procedures has your church adopted to insure that cash receipts are properly recorded and deposited, and that only those cash disbursements that are properly authorized are made? These are the kinds of questions that are addressed by a church’s system of internal control. A table in this newsletter addresses a number of common weaknesses in church internal control that increase the risk of embezzlement. The table provides helpful suggestions for responding to these weaknesses.

Key point. The most important point to emphasize is “division of responsibilities.” The more that tasks and responsibilities are shared or divided, the less risk there will be of embezzlement.

Key point. Many churches refuse to implement basic principles of internal control out of a fear of “offending” persons who may feel that they are being suspected of misconduct. The issue here is not one of hurt feelings, but accountability. The church, more than any other institution in society, should set the standard for financial accountability. After all, its programs and activities are rooted in religion, and it is funded entirely with donations from persons who rightfully assume that their contributions are being used for religious purposes. The church has a high responsibility to promote financial accountability. This duty is simply not met when the practices described above are followed.

2. Screen persons with financial responsibility. Some churches screen bookkeepers, accountants, and other employees who will have access to funds or be involved in financial decisions. Screening can consist of obtaining references from employers, prior employers, and other churches or charities with which the person has been employed or associated.

3. Annual audits. A church can reduce the risk of embezzlement by having an annual audit of its financial records by a CPA firm. An audit accomplishes three important functions:

An audit promotes an environment of accountability in which opportunities for embezzlement (and therefore the risk of embezzlement) are reduced.
The CPA (or CPAs) who conducts the audit will provide the church leadership with a “management letter” that points out weaknesses and inefficiencies in the church’s accounting and financial procedures. This information is invaluable to church leaders.
An audit contributes to the integrity and reputation of church leaders and staff members who handle funds.

Key point. Don’t confuse an audit with a more limited engagement that CPAs will perform, such as a “compilation.”

Key point. Audits can be expensive, and this will be a very relevant consideration for smaller churches. Of course, the time involved in performing an audit for a smaller church will be limited, which will result in a lower fee. Churches can control the cost of an audit by obtaining bids. Also, by staying with the same CPA firm, most churches will realize a savings in the second and succeeding years since the CPA will not have to spend time becoming familiar with the church’s financial and accounting procedures.

Key point. Smaller churches that cannot afford a full audit may want to consider two other options: (1) Hire a CPA to conduct a review, which is a simpler and less expensive procedure. If the review detects irregularities, a full audit may be considered worth the price. (2) Create an internal audit committee if there are accountants or business leaders within the church who have the ability to review accounting procedures and practices and look for weaknesses. These people often are very familiar with sound internal control policies, and will quickly correct weaknesses in the church’s financial operations. An added bonus—such a committee will serve as a deterrent to those who might otherwise be tempted to embezzle church funds.

4. Bonding of persons who handle funds. Churches can address the risk of embezzlement by bonding the church treasurer and any bookkeeper or accountant that is on staff. You can also purchase a blanket policy to cover all employees and officers. It is important to note that insurance policies vary. Some require that the embezzler be convicted before it will pay a claim, while others do not. The period of time covered by the policy will also vary. These are important points to be discussed by your church board in consultation with your insurance agent.

Key point. Insurance is not a substitute for implementing a sound system of internal control.

Church leaders can reduce the risk of embezzlement by reviewing common examples of poor internal controls, such as one person counts church offerings.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Tax Court Addresses Minister Car Expenses

Ruling illustrates importance of maintaining proper records.

Richard R. Hammar, Attorney, CPA

Bio

Church Finance Today

Tax Court Addresses Minister Car Expenses

Ruling illustrates importance of maintaining proper records.

Richard R. Hammar

The Tax Court ruled that a minister could not use the “actual expense” method to compute his car expenses, since he failed to keep records to prove the percentage of total miles that he drove the car for personal reasons. Ministers, like any other taxpayer, can deduct the actual expenses they incur in using a car for business purposes. However, their business expense deduction must be reduced by a “personal use percentage”. This refers to the percentage of total miles that the car is used for personal reasons. The idea is this—expenses incurred in operating a car are deductible as a business expense only to the extent the car is used for business purposes. There is no deduction for expenses allocated to the personal use of a car. Since the minister could not establish the number of miles he drove the car for personal reasons, the personal use percentage could not be computed. This meant that the “actual expense” method could not be used to calculate the deduction for the business use of the car. The court permitted the minister to use the standard mileage rate to compute a deduction for the business use of the car. The court multiplied the standard mileage rate for the year in question times the number of miles the car was driven for business purposes.

What is the relevance of this case to church treasurers? Consider the following: (1) Church employees who use the actual expense method to compute a deduction for the business use of a car should be reminded to maintain adequate records documenting miles driven for both business and personal reasons so they can reduce their business expense deduction by the “personal use percentage.” Employees who use the standard mileage rate should be reminded to keep records to prove the number of miles a car is driven for business purposes. (2) If your church reimburses business expenses under an “accountable” arrangement, you will need to be sure that these same requirements are followed before reimbursing expenses associated with the business use of a car. Parker v. Commissioner, 65 T.C.M. 1740 (1994).

This article originally appeared in Church Treasurer Alert, April 1996.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

Embezzlement Defined

The definition of embezzlement varies slightly from state to state, but in general it refers

Richard R. Hammar, Attorney, CPA

Bio

The definition of embezzlement varies slightly from state to state, but in general it refers to the wrongful conversion of property that is lawfully in your possession. The idea is that someone has legal control or custody of property or funds, and then decides to convert the property or funds to his or her own personal use.

Most people who embezzle funds insist that they intended to pay the money back and were simply “borrowing” the funds temporarily. An intent to pay back embezzled funds is not a defense to the crime of embezzlement. Most church employees who embezzle funds plan on repaying the church fully before anyone suspects what has happened. One can only imagine how many such schemes actually work without anyone knowing about it. The courts are not persuaded by the claims of embezzlers that they intended to fully pay back the funds they misappropriated. The crime is complete when the embezzler misappropriates the church’s funds to his or her own personal use. As one court has noted:

The act of embezzlement is complete the moment the official converts the money to his own use even though he then has the intent to restore it. Few embezzlements are committed except with the full belief upon the part of the guilty person that he can and will restore the property before the day of accounting occurs. There is where the danger lies and the statute prohibiting embezzlement is passed in order to protect the public against such venturesome enterprises by people who have money in their control.

In short, it does not matter that someone intended to pay back embezzled funds. This intent in no way justifies or excuses the crime. The crime is complete when the funds are converted to one’s own use—whether or not there was an intent to pay them back.

What if the embezzled funds are returned? The crime of embezzlement has occurred even if the embezzled funds in fact are paid back. Of course, it may be less likely that a prosecutor will prosecute a case under these circumstances. And even if the embezzler is prosecuted, this evidence may lessen the punishment. But the courts have consistently ruled that an actual return of embezzled funds does not purge the offense of its criminal nature or absolve the embezzler from punishment.

Key point. Even if an embezzler is caught or confesses, and then agrees to “pay back” the embezzled funds, church officials seldom know if all embezzled funds are being returned. They are relying almost entirely on the word of the embezzler.

Why churches often are vulnerable to embezzlement. Many churches refuse to adopt measures to reduce the risk of embezzlement out of a fear of that such measures will reflect a lack of trust in those persons who handle church funds.

Example. Tom has counted the church offering at his church for 25 years. The church board has discussed this arrangement several times, but fails to stop it out of a fear of offending Tom.

Why should church leaders take this risk seriously? For several reasons, including the following:

Survey data. Our survey data (mentioned above) demonstrates that embezzlement is a risk that every church should take seriously.
Removing temptation. Churches that take steps to prevent embezzlement remove a source of possible temptation from church employees and volunteers who work with money.
Protecting reputations. By taking steps to prevent embezzlement a church protects the reputation of innocent employees and volunteers who otherwise might be suspected of financial wrongdoing when financial irregularities occur.
Avoiding confrontations. By taking steps to prevent embezzlement a church avoids the unpleasant task of confronting individuals who are suspected of embezzlement.
Avoiding church division. By taking steps to prevent embezzlement a church avoids the risk of congregational division that often is associated with cases of embezzlement—w ith some members wanting to show mercy to the offender and others demanding justice.
Avoiding the need to inform donors. By taking steps to prevent embezzlement a church reduces the risk of having to tell donors that some of their contributions have been misappropriated by a church employee or volunteer.
Protecting the reputation of church leaders. By taking steps to prevent embezzlement a church reduces the damage to the reputation and stature of its leaders who otherwise may be blamed for allowing embezzlement to occur.
Preserving accountability. Churches that take steps to prevent embezzlement help to create a “culture of accountability” with regard to church funds.

These are powerful motivations for addressing the issue of embezzlement.

How it happens. Let’s look at a few cases of actual embezzlement of church funds to see how it can occur.

Example. An usher collected offerings each week in the church balcony, and pocketed all loose bills while carrying the offering plates down a stairway to the main floor. Church officials later estimated that he embezzled several thousands of dollars over a number of years, before being caught.

Example. The same two persons counted church offerings for many years. Each week they removed all loose coins and currency (not in offering envelopes) and split it between them. This practice went on for several years, and church officials later estimated that the two had embezzled several tens of thousands of dollars.

Example. A church left its Sunday offering, along with the official count, in a safe in the church office until Monday. On Monday morning a church employee deposited the offering. The employee ignored the official counts, and deposited the offering less loose coins and currency (which she retained). The deposits were never checked against the offering counts.

Example. A church child care director embezzled church funds by issuing herself paychecks for the gross amount of her pay (before deductions for tax withholding). The church withheld taxes and paid them to the government, but her paychecks reflected the gross amount of her pay.

Example. A pastor had the sole authority to write checks on the church’s checking account. He used church funds to pay for several personal expenses, amounting to thousands of dollars each year, until his actions were discovered.

Example. A church bookkeeper embezzled several thousand dollars by issuing checks to a fictitious company. He opened an account in the name of a fictitious company, issued church checks to the company for services that were never performed, and then deposited the checks in the fictitious company’s account. He later withdrew the funds and purchased two automobiles which he gave to a friend. A court ruled that the friend had to give the cars back to the church, since they had been purchased with embezzled church funds. The point here, as noted by the court, is that one who acquires property that was purchased with embezzled church funds may be required to transfer the property to the church.

Example. A minister received an unauthorized kickback of 5% of all funds paid by a church to a contractor who had been hired to build a new church facility. The minister received over $80,000 from this arrangement, in exchange for which he persuaded the church to use the contractor. The minister’s claim that the $80,000 represented a legal and nontaxable “love offering” was rejected by a federal court that found the minister guilty of several felony counts. This arrangement was not disclosed to the church board, and obviously amounted to an unauthorized diversion of church funds back to the minister.

Example. A church accountant embezzled $212,000 in church funds. This person’s scheme was to divert to his own use several designated offerings, and to inflate the cost of equipment that he paid for with his own funds and that the church later reimbursed at the inflated amounts. The interesting aspect of this case was that the accountant was not only found guilty of embezzlement, but he was also convicted for tax evasion because he had failed to report any of the embezzled money as taxable income, and was sentenced to prison.

Example. A court ruled that an insurance company that paid out $26,000 to a charity because of an act of embezzlement could sue the embezzler for the full amount that it paid. This is an important case, for it demonstrates that a church employee who embezzles church funds may be sued by the church insurance company if it pays out a claim based on the embezzlement. In other words, the fact that the church decides not to sue the embezzler does not mean that the person will be free from any personal liability. If the church has insurance to cover the loss, the insurance company can go after the embezzler for a full recovery of the amount that it paid out on account of the embezzlement.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.