Pastor, Church & Law

Key point 6-15. The procedure for dissolving an incorporated church is specified by state nonprofit corporation law.

The dissolution of incorporated churches generally is regulated by state corporation law since the state alone has the authority to dissolve those organizations it has created.⁴⁴³ FLETCHER CYC. CORP. § 7971 (perm. ed. 2008).Corporate dissolutions may be either voluntary or involuntary. A voluntary corporate dissolution is accomplished by the corporation itself. Most state religious and nonprofit corporation laws contain a specific procedure for voluntary dissolution, which generally consists of the following elements:

1. Board resolution. The board of directors adopts a resolution recommending that the corporation be dissolved and directing that the question of dissolution be submitted to the church membership.
2. Notice to members. All voting members are notified in writing that the question of dissolution will be discussed at a special or general meeting of the members.
3. Approval. A resolution to dissolve the corporation is adopted if it receives at least two-thirds voter approval.
4. Notice to creditors. Notice of the dissolution is mailed to all creditors of the former corporation.
5. Payment of debts. All corporate liabilities are paid. Any assets remaining after payment of liabilities are transferred to the organization or organizations, if any, prescribed in the dissolved corporation’s charter or in the controlling rules of a church hierarchy, if any, with which the church is affiliated. If neither the charter nor controlling rules of a religious hierarchy specifies how corporate assets are to be distributed following dissolution, the assets are conveyed to one or more organizations engaged in activities substantially similar to those of the dissolving corporation.
6. Articles of dissolution prepared. The articles of dissolution are executed. The articles set forth the name of the corporation, the date of the meeting of members at which the resolution to dissolve was adopted, and an acknowledgment that a quorum was present, that the resolution was adopted by at least two-thirds of the members present at such meeting, that all debts of the corporation have been paid, and that all remaining assets of the corporation have been transferred to the organization specified in the corporation’s charter, or, if no organization is specified, to an organization engaged in activities substantially similar to those of the dissolving corporation.
7. Articles of dissolution filed. The articles of dissolution are filed with the secretary of state. If the articles of dissolution conform to all legal requirements, the secretary of state issues to a representative of the dissolved corporation a certificate of dissolution, which is recorded with the office of the recorder of deeds of the county in which the church had been located.⁴⁴⁴ MODEL NONPROFIT CORPORATION ACT §§ 45-51.

It is important to recognize that the IRS maintains that every incorporated church must contain a provision in its charter ensuring that in the event of a dissolution the assets of the church will pass to a tax-exempt organization. The IRS has stated that the following provision will suffice:

Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.⁴⁴⁵ IRS Publication 557. An abbreviated version of this language, which also is acceptable to the IRS, appears in Rev. Proc. 82-2, 1982-1 C.B. 367.

A church, of course, may specify in its charter the tax-exempt organization to which its assets will pass upon dissolution. A dissolution clause is necessary in order to ensure the tax-exempt status of a church, since a church will not be considered entitled to tax-exempt status if any part of its net earnings or assets is payable to or for the benefit of any private individual.⁴⁴⁶ I.R.C. § 501(c)(3). The income tax regulations also specify that an organization is not organized exclusively for exempt purposes if its assets are payable to individuals or nonexempt organizations upon dissolution.

It is important to emphasize that the property of a dissolved church will be conveyed to a charitable organization having purposes and activities substantially similar to those of the dissolved church if neither the church charter nor controlling rules of an ecclesiastical hierarchy provide otherwise. To illustrate, one court ruled that the members of a dissolving church had no authority to distribute church assets to a theological seminary or a servicemen’s center, since neither organization was substantially related in purpose or activity to the dissolving church.⁴⁴⁷ Metropolitan Baptist Church v. Younger, 121 Cal. Rptr. 899 (1975).And, if a dissolving church is affiliated with a religious hierarchy whose internal rules require that the assets of a dissolving local church revert to the parent organization, the members of a dissolving church have no authority to distribute the church’s assets to another organization.⁴⁴⁸ Polen v. Cox, 267 A.2d 201 (Md. 1970); German Evangelical Lutheran St. Johannes Church v. Metropolitan New York Synod of the Lutheran Church in America, 366 N.Y.S.2d 214 (1975), appeal denied, 378 N.Y.S.2d 1025 (1975).In addition to the procedures specified by state corporation law, church corporations also are bound by the procedural requirements of their own charters and bylaws, or the controlling rules of a parent ecclesiastical body, in a dissolution proceeding.⁴⁴⁹ Presbytery of the Covenant v. First Presbyterian Church, 552 S.W.2d 865 (Tex. App. 1977).

The corporation law of many states provides that church corporations may be dissolved involuntarily by the attorney general upon the occurrence of one or more of several grounds, including failure to pay fees prescribed by law, failure to file an annual report, fraudulent solicitation of funds, and exceeding the authority conferred by state corporation law.⁴⁵⁰ MODEL NONPROFIT CORPORATION ACT § 51.Such laws typically permit church corporations to be dissolved involuntarily by a director or member if the directors are so deadlocked in the management of the corporation that irreparable injury to the corporation is being suffered; the acts of the directors are illegal, oppressive, or fraudulent; the corporation’s assets are being wasted; or the corporation is unable to carry out its purposes.⁴⁵¹ Id. at § 54(a).

To illustrate, one court found that an involuntary dissolution of a church was warranted since dissension over the dismissal of one minister and the hiring of another was so bitter that the church could no longer conduct its operations.⁴⁵² Fuimaono v. Samoan Congregational Christian Church, 135 Cal. Rptr. 799 (1977).However, one court held that riots and violence within a church that lasted for only two weeks was not a frustration of the church’s purposes and did not constitute an adequate basis for involuntary dissolution.⁴⁵³ Hill v. Abyssinia Missionary Baptist Church, 370 So.2d 1389 (Ala. 1979).

Case study. An Illinois appeals court dismissed a lawsuit brought by members of a church seeking to dissolve their church and have a receiver appointed to liquidate church assets. A schism occurred in a Baptist church over the retention of the pastor. Problems worsened due to disagreements over the pastor’s plan to use church funds to build a school. Some members opposed placing a mortgage on the debt-free church building to raise construction funds. When efforts to remove the pastor and those deacons who supported him failed, some of the disgruntled members filed a lawsuit in civil court seeking an order dissolving the church and transferring its assets to a receiver for distribution to another nonprofit organization. Illinois law permits a voting member or director to “involuntarily dissolve” a nonprofit corporation that is unable to carry out its purposes. The disgruntled members claimed that this procedure was available since the church was unable to carry out its purpose of conducting religious worship because of the controversy. A trial court agreed to dissolve the church and turn over its assets to a receiver for distribution to another nonprofit organization, but a state appeals court reversed this ruling on the ground that the persons who brought the lawsuit did not qualify as members of the church and therefore lacked “standing” to sue. The court noted that even if the former members had standing to sue, they could not prevail since the civil courts lack jurisdiction to determine whether or not the church “could carry out its purposes since the court’s decision of that issue [would violate] the First Amendment’s prohibition against civil courts’ involvement in religious matters. … The underlying dispute, who will be the pastor at [the church], is an ecclesiastical matter which is not within the court’s purview.”⁴⁵⁴ Hines v. Turley, 615 N.E.2d 1251 (Ill. App. 1993).

If a church, in the regular course of its affairs, is unable to pay its debts and obligations as they come due, the nonprofit corporation laws of many states permit an incorporated church to be involuntarily dissolved by a creditor whose claims are unsatisfied.⁴⁵⁵ MODEL NONPROFIT CORPORATION ACT § 54(b).

Unincorporated churches having no affiliation with a religious hierarchy are mere voluntary associations of persons and may dissolve on their own initiative by a vote of the membership, by abandonment of the church, or by withdrawal of all members from the church, assuming that all applicable provisions in the church’s bylaws or other internal rules are followed. The property of unincorporated churches generally is in the name of trustees.

The IRS maintains that an unincorporated church is not eligible for exemption from federal income taxes unless its organizational document stipulates that all assets held in trust for the use and benefit of the church will pass to another charitable, tax-exempt organization upon dissolution of the church. Obviously, neither the trustees nor former members have any personal claim to trust assets following the dissolution of a church. This requirement is based on the fact that the Internal Revenue Code prohibits tax-exempt status to any organization whose net earnings or assets are payable to or for the benefit of any private individual.⁴⁵⁶ I.R.C. § 501(c)(3).

If an unincorporated church has failed to include a provision in its organizational document providing for disposition of trust assets following dissolution of the church, a court may nonetheless direct that all trust assets pass to another charitable organization having similar purposes to those of the dissolved church. This power of the courts to determine the status of the trust assets of a dissolved church is known as the cy pres doctrine.