July 17, 2012

Religious Institutions Update: July 2012

Holland & Knight Update
Nathan A. Adams IV | Tom Kinasz

Timely Topics

Religious institutions and other charitable organizations must acknowledge their donors’ charitable contributions in a manner that satisfies applicable income tax laws. If the donor fails to receive a contemporaneous written acknowledgment complying with these laws, the donor’s charitable contributions are not deductible. The rules governing donation acknowledgments have been strictly interpreted by the IRS and the courts, as shown by a recent Tax Court decision (Durden v. Commissioner, Tax Court Memo 2012-140) in which a married couple’s charitable contributions to their church were not deductible because the church did not provide written acknowledgments satisfying the substantiation requirements under the Internal Revenue Code (“Code”).

Generally, charities receiving contributions of $250 or more must provide the donor with a contemporaneous written acknowledgment that satisfies Code Section 170(f)(8). This provision requires that the acknowledgment must include: the amount of cash contributed and a description of any contributed property; a statement whether the charity provided any goods or services in consideration for the contribution; and a description and good faith estimate of the value of the goods or services, if any, provided to the donor, or if such goods or services consist solely of intangible religious benefits, a statement to that effect. The acknowledgment will be provided “contemporaneously” if the donor receives the acknowledgment on or before the first to occur of the date on which the donor files the tax return for the year in which the contribution was made or the due date for filing the donor’s tax returns.

In the Durden case, the taxpayers filed a 2007 tax return claiming more than $25,000 of deductions for charitable contributions. Nearly all of these deductions were for contributions to their church, made primarily by checks in amounts larger than $250. Upon auditing the taxpayers, the IRS disallowed all of the claimed deductions. In response to the IRS action, the taxpayers provided records of their contributions, including copies of cancelled checks and a letter from their church acknowledging receipt of the contributions. However, the church’s letter did not include a statement as to whether the church provided any goods or services to the couple in consideration for their contributions. In connection with the IRS audit, the couple later obtained a second acknowledgment from the church containing the previously omitted statement.

The Tax Court upheld the IRS disallowance of the deduction by finding that the plain language of the tax law requires the written acknowledgment to contain a statement describing the goods or services, or lack thereof, given in consideration of the contributions. The court found that this statement was mandatory under the Code and was necessary to enable the IRS to determine the deductible portion of the taxpayers’ contributions. The court also concluded that the second acknowledgment was not “contemporaneous” and refused to consider it since it was not received within the time prescribed by the tax rules.

The Durden case illustrates the importance for religious institutions and other charitable organizations to follow carefully, with the assistance of church–state counsel, written substantiation requirements of the Internal Revenue Code when acknowledging donations from their benefactors. Failure to deliver timely and complete acknowledgments could result in donors losing deductions for their contributions.

Key Cases

Non-Religious Organization Stated Claim Under RLUIPA When Precluded from Building Chapel

In Anselmo v. Cnty. of Shasta, No. 2:12-361 WBS EFB, 2012 WL 2090437 (E.D. Cal. June 8, 2012), the court ruled that an individual and the non-religious organization of which he was the sole owner stated a claim under the “substantial burden” prong of the Religious Land Use and Institutionalized Persons Act (RLUIPA) when the county precluded him from building a chapel on his property. The plaintiffs alleged that the individual’s ability to build and use a chapel on his land was “central to his ability to worship his religion in accordance with his core beliefs ... .” He described his ability to construct the chapel as “an act essential as a demonstration of his faith.” The court ruled that it was more than a mere inconvenience without the chapel for him to drive three hours every day in order to worship, but left for trial the question whether this burden is a substantial burden under RLUIPA. After observing that the court knew of no precedent squarely ruling that qualified immunity should be extended under RLUIPA and no Ninth Circuit case deciding that damages are available against individuals for violations of RLUIPA, the court ruled the defendants were entitled to qualified immunity anyway based on precedent proliferating the view without analysis. Among the reasons given was the novelty of a non-religious property owner asserting rights under RLUIPA. The court ruled the defendants were immune from monetary damages. The court rejected the plaintiffs’ free exercise claim for lack of evidence of disparate enforcement or religious animus; denied their due process claim; denied their RLUIPA claim premised upon the ADA and the county building code prohibiting construction without a license because neither are zoning, landmarking or land use regulations; and denied their RLUIPA claim premised upon the “equal terms” provision because no religious institution was involved.

Compelled Pregnancy-Related Speech Struck

In Greater Baltimore Ctr. for Pregnancy Concerns, Inc. v. Mayor and City Council of Baltimore, No. 11-1111, 11-1885, 2012 WL 2402573 (4th Cir. June 27, 2012), the court ruled an ordinance unconstitutional that required any provider of pregnancy-related services that did not also provide or refer its clients for abortions or certain birth-control services (e.g., crisis pregnancy centers) to post a conspicuous sign in its waiting room to that effect. The court rejected the defendants’ argument that the nonprofit centers which offered services for free were engaged in commercial speech defined as “services ‘which have commercial value.’” The court observed, “[I]t is difficult to imagine any charitable organization whose speech would not be considered ‘commercial’” under this definition. The defendants argued that they had two compelling interests to compel the speech: (1) to counter “deceptive business practices”; and (2) to protect the health of pregnant women and to ensure that pregnant women who seek abortions have prompt access to medical services. The court disagreed they possessed any such compelling interests because (1) there was no evidence that the plaintiff misled women, (2) the ordinance did not reach the vast majority of sources that pregnant women consulted, and (3) the defendants promoted their interest exclusively by restricting the plaintiff’s speech. Last, the court concluded the ordinance was not narrowly tailored because it failed to regulate actual false advertising; was overinclusive because it applies to centers that are not deceptive; and several alternatives would address the problems targeted by the ordinance while imposing a lesser burden on speech.

Former Church Member States Defamation and Breach of Fiduciary Duty Claims Against Pastor and Church

In Bilbrey v. Myers, No. 5D11-1036, 2012 WL 2465242 (Fla. 5th DCA June 29, 2012), the court of appeal reversed in part the trial court and held that a former church member could state a claim against First Pentecostal Church of South Brevard, Inc. and its pastor for defamation and breach of fiduciary duty under the “neutral principles” approach. The court of appeal recognized a fiduciary duty between a pastor and a parishioner. The court of appeal affirmed the trial court’s dismissal of the plaintiff’s claims for intentional infliction of emotional distress and invasion of privacy due to the church autonomy doctrine and lack of subject matter jurisdiction. The complaint alleged that on several occasions the pastor falsely accused the former member of being a homosexual. The pastor made the statements during a meeting in his office to which he called the plaintiff and three others; in a sermon two weeks after the meeting; when the plaintiff sought to have his ministerial license transferred to Michigan; and when he contacted the plaintiff’s pastor in Michigan.

For-Credit Release Time Education Program Upheld

In Moss v. Spartanburg Cnty. Sch. Dist. Seven, No. 11-1448, 2012 WL 2445028 (4th Cir. June 28, 2012), the court held that a public school’s policy enacted pursuant to a 2009 South Carolina statute conferring academic credit on high school students for off-campus religious instruction from accredited schools complied with the Establishment Clause. The court found that a non-Christian family had standing to challenge the policy, although they did not participate in the classes, were not harassed and were not adversely affected because the family received a letter in the mail from the Bible school indicating that it would be conducting a release time course. The court held that a Christian family in the same circumstances, but which did not receive any mailing lacked standing, as did the Freedom from Religious Foundation to which they belonged. The court ruled, “Far from establishing a state religion, the acceptance of transfer credits by public schools sensibly accommodates the ‘genuine choice among options public and private; secular and religious.’” (citation omitted).

RLUIPA Claim of Home Bible Study Plaintiffs Dismissed

In Salman v. City of Phoenix, Case No. CV 12-1219-PHX-JAT, 2012 WL 2261118 (D. Ariz. June 15, 2012), the court dismissed, based on the doctrine of res judicata and the Rooker-Feldman doctrine, the plaintiffs’ RLUIPA and Arizona Freedom of Religious Exercise Act (RFRA) claims related to their multiple convictions for holding weekly Bible studies on their property in violation of the zoning code. The court held that it did not matter that an order of dismissal without prejudice in a prior case on the same facts was not an adjudication on the merits, because the issue that led to dismissal was adjudicated on its merits and was conclusively determined. The plaintiffs neglected to show that anything had changed. Furthermore, the court ruled that the plaintiffs’ claims would necessarily depend on the court reaching opposite findings on the issues discussed in state court.

Injunction Upheld Granting Denomination Access and Control Over Church and Appointing New Pastor

In Church of God in Christ, Inc. v. Bd. of T’ees of Emmanuel Church of God in Christ, Wichita, Case No. 104,859, 2012 WL 2053573 (Kan. App. June 8, 2012), the Kansas Court of Appeals concluded that the district court had subject matter jurisdiction to resolve a church property dispute and so did the appellate court to review the matter. The Church of God in Christ, Inc., a hierarchical denominational church, received a default judgment and injunction against the board of trustees and several individual members of Emmanuel Church of God in Christ after the defendants purported to transfer church property to an entity they created. After three years of litigation and a ruling that the new entity held the church property in trust for the denomination, the parties participated in mediation, but the church still would not give up the property in accordance with the mediated settlement when the denomination refused to allow its request for transfer to another jurisdiction. The injunction granted the denomination “access and control” over the church property, removed the board of trustees of the new entity and named the new pastor appointed by the bishop as the chief executive officer of the corporation. The appellate court recognized that courts ordinarily lack subject matter jurisdiction over issues relating to the selection of clergy, but ruled that in this case the pastoral appointment was interrelated with a property dispute which it could decide. The appellate court observed that the defendants never filed a motion to set aside the default judgment and, thus, did not preserve the issue for appeal. Likewise, the court held that the defendants waived any affirmative defenses for failure to file an answer. Last, the court ruled that it was unnecessary for the plaintiff to name the new entity holding title to the property in the lawsuit under the “trust pursuit rule.”

First Amendment Precludes Inquiry into Misappropriation of Church Funds

In Askew v. T’ees of the General Assembly of the Church of the Lord Jesus Christ of the Apostolic Faith, Inc., Case No. 11-1916, 2012 WL 2433497 (3d Cir. June 28, 2012), the Third Circuit held that the non-entanglement principle embedded in the Religion Clauses of the First Amendment prevented it from deciding whether a church and its officials were misappropriating church funds for personal use, breaching their fiduciary duty to the church, and failing to submit annual financial statements to the Commonwealth of Pennsylvania. The plaintiff’s standing or concrete injury-in-fact hinged upon whether he is a church member, which the church’s highest adjudicatory denied. The court found that church membership is an ecclesiastical matter and that the authority to excommunicate members “falls squarely within the realm of matters insulated from civil court review.” The court concluded, “We are not competent to upset judgments made by the General Overseer in this doctrinally sensitive area, for there are no neutral principles of law that shed light on the membership composition necessary for the good of the Church.” It added that controlling precedent precludes it from probing whether the bishop complied with the procedures for excommunication.

Property Dispute Decided in Favor of Missouri Church with Kansas Property

In Colonial Presbyterian Church v. Heartland Presbytery, Case No. WD 74374, 2012 WL 2378232 (Mo.App. June 26, 2012), the Missouri Court of Appeals ruled that under the neutral principles of law approach, disputed church property was never conveyed in trust to the denomination and, thus, remained with the church. The court determined that the denomination’s constitution, which purported to convey the church property in trust, was not binding upon the church because the church never indicated an intention to create the trust in favor of the denomination by signing it. The denomination did not argue any basis for a constructive trust. Also, the constitution did not describe the property. Some of the church property lies in Kansas, but the court ruled that Missouri law applied, rather than the Kansas “rule of deference” standard, because both parties are Missouri entities and the most significant relationship test required it. Also, the court was skeptical that the Kansas Supreme Court would apply the rule of deference under the circumstances.

City’s Moratorium Preventing Church Construction Actionable

In Church v. City of Medina, Case No. 11-275 (MJD/FLN), 2012 WL 2395195 (D. Minn. June 25, 2012), the plaintiff stated a facial challenge to the city’s zoning decision not to approve its construction plans and the city’s one-year building moratorium on all church construction enacted one month later. The plaintiff’s construction application was the only one pending. During the moratorium, the city enacted a new zoning district including the church and recommended a maximum building size smaller than the church proposed. Once the moratorium was lifted, but before the city’s planning commission voted on the plaintiff’s application, the church withdrew it and filed suit. The court dismissed the plaintiff’s as-applied RLUIPA, First Amendment and other challenges to the city’s zoning ordinance for lack of ripeness, because the city did not rule on the church’s application. The court rejected the church’s futility argument. But the court allowed the plaintiff’s facial challenges premised upon the Equal Protection, Free Speech, Due Process and Establishment Clause; the court also rejected the city’s mootness defense to the church’s claims related to the construction moratorium. Although the city lifted the moratorium, the court held not moot the church’s claims for compensatory and nominal damages suffered as a result of the moratorium.

Religious Institutions in the News

Religious groups have reacted to the U.S. Supreme Court’s healthcare ruling with a range of responses, a sampling reflected here: http://www.religionnews.com/politics/law-and-court/religious-reaction-to-health-care-ruling

Reports conflict on the state of donations to religious institutions in 2011; one shows them down while charitable donations in general rose 4 percent, http://www.washingtonpost.com/national/on-faith/donations-to-religious-institutions-decline-for-second-straight-year/2012/06/20/gJQA9sK7qV_story.html, but another suggests that 51 percent of churches saw an increase in giving over 2010. http://www.religionnews.com/ethics/money-and-giving/report-says-church-giving-on-the-rebound

Southern Baptists elected the first black president and barely approved an alternate unofficial descriptor: “Great Commission Baptists.” http://www.washingtonpost.com/national/on-faith/southern-baptists-approve-alternate-name-but-barely/2012/06/20/gJQAB7q9qV_story.html; http://www.latimes.com/news/nation/nationnow/la-na-nn-fred-luter-elected-20120619,0,6655924.story

The Florida Baptist Convention, which contended it was merely a church support organization, was found liable for pastoral misconduct. http://articles.orlandosentinel.com/2012-05-17/news/os-baptist-sex-abuse-verdict-20120517_1_triangle-community-church-douglas-w-myers-church-planter

The Catholic Health Association rejected a White House proposal aimed at easing faith-based objections to the contraception mandate. http://www.pewforum.org/Religion-News/Catholic-hospitals-reject-birth-control-compromise.aspx

The National Association of Evangelicals has proposed a code of ethics for pastors. http://www.nae.net/images/content/Code_of_Ethics_for_Pastors.pdf

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