Religious Institutions Update: August 2009

Timely Topics

Faith-based organizations, like all tax-exempt organizations, are prohibited from engaging in activities that result in inurement of the church’s or organization’s income or assets to insiders. Private inurement happens, for example, when a religious institution pays unreasonable compensation to an insider or transfers property to insiders for less than fair market value. If the Internal Revenue Service discovers an excess benefit transaction, it may impose an excise tax on a “disqualified person” initially equal to 25 percent of the amount of the excess benefit to be paid by the individual directly (not the organization); then, if the person fails to correct the excess benefit within the taxable period, it may impose an additional tax of 200 percent of the excess benefit. In addition, the IRS may impose a tax equal to 20 percent of the amount of the excess benefits up to a maximum of $20,000 on officers, directors or trustees who enabled the transaction. The beneficiary of the excess benefit transaction is also required to return the excess benefits to the organization. “Disqualified persons” include persons who, at any time during the five-year period ending on the date of an excess benefit transaction, were in a position to exercise substantial influence over the affairs of the tax-exempt organization, or any family member of such a person. The prospect of so-called intermediate sanctions make compensation studies and fair market value analyses critical to assess the reasonableness of compensation packages and property transfers to insiders.

Key Cases

Tax-Exempt Bond Financing May Benefit a Pervasively Religious University

In Gillam v. Harding Univ., No. 4:08-CV-00363BSM, 2009 WL 1795303 (E.D. Ark. June 24, 2009), plaintiffs sued Harding University and the City of Searcy, Arkansas Public Educational and Residential Housing Facilities Board, contending that issuing tax-exempt bonds to it violated the federal Establishment Clause and state constitutional amendment prohibiting appropriations of money, loans or credit to any institution. (Art. 12, § 5, Ark. Const.) The court disagreed and granted summary judgment to the defendants. Plaintiffs contended that Harding University, which is associated with the Churches of Christ, is a “pervasively sectarian” university. But the court called into question the viability of the “pervasively sectarian” test based on Mitchell v. Helms, 530 U.S. 793 (2000), and found that it was not the nature of the institution, but the character of the aid equally available to religious and non-religious institutions that was determinative. The court found that the state acted more like a conduit in this transaction and considered the tax-exempt bonds at issue similar to a permissible property tax exemption. According to the bond documents, they could not be spent on facilities to be used for sectarian instruction, a place of worship, or in connection with any part of the program of a school or department of divinity. The court also found no violation of the state constitution (Art. 12, § 5, Ark. Const.), because “public resources were not expended in the issuance of the bonds,” and public assets did not secure them.

Parochial School Teacher Held a Ministerial Employee

In Coulee Catholic Schs. v. Labor and Industry Rev. Comm’n, Dep’t of Workforce Dev., No. 2007AP96, 2009 WL 2151815 (Wis. July 21, 2009), the question whether the Equal Rights Division of the Wisconsin Department of Workforce Development had jurisdiction to determine if Coulee Catholic Schools committed unlawful age discrimination turned on whether an elementary school teacher was a “ministerial employee.” At all levels of appeal until the last, the state said she was not a ministerial employee, premised upon a “quantitative approach” to her primary duties. Under this approach, courts require that religious tasks encompass the largest share of the employee’s primary duties. The Wisconsin Supreme Court rejected this test as too narrow; it took a “functional approach” focused on “whether a position is important to the spiritual and pastoral mission of the church.” This test “involves significantly less intrusion into the affairs of houses of worship and religious organizations,” as opposed to one that permits interference “so long as the leaders are spending (presumably) 49 percent or less of their time or tasks on whatever the court determines to be ‘religious activities.’” The court held that both the federal Free Exercise Clause and the more expansive state free exercise clause (Art. I, § 18, Wis. Const.) prohibited employment discrimination claims against employees whose positions “are important and closely linked to the religious mission of a religious organization.”

Courts Assert “Neutral Principles of Law” Jurisdiction Over Non-Property Disputes

Under the First Amendment, the Supreme Court has indicated that civil courts are not prohibited from resolving property disputes to which only neutral principles of law apply. Jones v. Wolf, 443 U.S. 595 (1979). It has also indicated, however, that where disputes require doctrinal exegesis, civil courts must not exercise jurisdiction, underscoring the importance of properly structuring the foundational documents of religious institutions. Watson v. Jones, 80 U.S. 679 (1872). Some have argued that the neutral principles of law approach should not apply except to property disputes, but two courts in Pennsylvania recently held otherwise where the record allegedly did not yet show the disputes turned on church doctrine. In Connor v. Archdiocese of Philadelphia, No. 43 EAP 2008, 2009 WL 2138977 (Pa. July 20, 2009), the Supreme Court of Pennsylvania reversed lower courts that determined they lacked jurisdiction to decide whether a parochial school defamed a student after allegedly announcing his expulsion for carrying a penknife. Likewise, in Askew v. Trustees of the General Assembly of the Church of the Lord Jesus Christ of the Apostolic Faith, Inc., No. 09-15, 2009 WL 2180140 (E.D. Pa. July 21, 2009), a federal district court held that it had jurisdiction to decide a dispute filed by a disaffected member who argued that church trustees had misappropriated church funds, wasted assets, paid themselves salaries and stipends, and funded private expenditures with corporate assets. According to the court, “It is only when the resolution of the ultimate legal question at issue require direct doctrinal exegesis on which no church authority has passed that courts must close their doors. But those doors remain open until the parties have developed the issues to a sufficient degree so that it is evident that the legal rights turn upon doctrinal questions.”

Moratorium on Land Use Applications Violates Church’s Rights

In City of Woodinville v. Northshore United Church of Christ, No. 80588-1, 2009 WL 2048334 (Wash. July 16, 2009), the Northshore United Church of Christ applied for a temporary use permit from the City of Woodinville, Wash., to allow a movable encampment of homeless people in the Puget Sound area to locate temporarily on its property, but the City, several months earlier, passed and extended a six-month moratorium on all land use permit applications. The court held that the moratorium substantially burdened the church’s religious exercise in violation of the state free exercise clause (Art. I, § 11, Wash. Const.); that clause was previously held more protective than its federal counterpart. The court also held that by failing to process the church’s application, the city breached an agreement that it had with the church requiring it to apply for a permit and, therefore, excused the church’s performance of the agreement. The court did not reach the church’s claim under the federal Religious Land Use and Institutionalized Persons Act (RLUIPA).

Court of Appeals Refuses to Interfere with Civil Rights Investigation

In Ocean Grove Camp Meeting Ass’n of the United Methodist Church v. Vespa-Papaleo, No. 07-4253, 07-4543, 2009 WL 2048914 (3d Cir. July 15, 2009), the U.S. Third Circuit Court of Appeals affirmed the ruling of the district court that the court must abstain from interfering with an investigation brought by the New Jersey Division on Civil Rights into whether a religious campground violated the New Jersey Law Against Discrimination when it denied access to its Boardwalk Pavilion to two couples who wanted to perform civil union ceremonies there. The Court considered the investigation “judicial in nature.” Based on important state interests, it held that there is an adequate opportunity for the plaintiff to raise its constitutional challenge in the state proceeding, and found no exception to the abstention doctrine applied for state proceedings undertaken in bad faith or for extraordinary circumstances. With regard to the campground’s request to clarify its rights to use the rest of its property, the court of appeals remanded the case to the district court to determine whether relief is proper.

Religious Institutions in the News

So far in 2009, 17 violent crimes have been reported against churches; this includes six homicides. Additionally, churches lost $6.3 million in property damage due to burglary, theft, robbery, arson and vandalism.

According to the Giving USA Foundation, overall charitable giving dropped 2 percent between 2007 and 2008, but giving to religious organizations rose by 5.5 percent. See "Giving Through Thick and Thin." 

The Freedom From Religion Foundation sued to enjoin the engraving of “In God We Trust” on the walls of Washington’s newest federal building. See " In Lawsuits We Trust."

FCC changes on wireless-microphone frequencies may affect churches with sound systems dependent on the 700-megahertz band. See Original website reference no long available (6/29/12)