November 7, 2013

Religious Institutions Update: November 2013

Lex Est Sanctio Sancta
Holland & Knight Update
Nathan A. Adams IV

Timely Topics

Diminished donations have led many faith-based organizations to become more creative about increasing revenue. Sometimes these organizations look beyond ordinary ministry functions to supplement income with unrelated activities. For example, parochial schools may lease property to communications companies for cell towers, churches may lease parking lots, and other religious organizations may offer advertising in publications and on signage. Unwittingly, the institutions may create unrelated business taxable income, which is "the gross income derived by any organization from an unrelated trade or business regularly carried on by it" less certain deductions.

An "unrelated trade or business" is "any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function." The mere fact that the income from the unrelated enterprise facilitates the organization's core ministry is insufficient to avoid unrelated business taxable income. Certain exemptions exist for activities such as rental income derived from real property that is not debt financed or use of real property, substantially all of which (85 percent or more) is used for exempt purposes.

An exempt organization can lose its tax-exempt status if its nonexempt activities or purposes comprise more than an "insubstantial part of its activities." Although there is no exact definition of what is "insubstantial," a rule of thumb many practitioners use is less than 20 percent. Religious institutions that generate unrelated business taxable income must file Form 990-T even if they do not ordinarily file a Form 990. Contact qualified counsel if you are uncertain whether your organization is generating unrelated business taxable income or want to explore this type of revenue as a means to supplement income.

Key Cases

Court Upholds Biblically Based Arbitration Clause in Wrongful Death Case

In Spivey v. Teen Challenge of Fla., Inc., No. 1D12-4377, 2013 WL 5584237 (Fla. 1st DCA Oct. 11, 2013), the court affirmed the trial court's decision to require biblically based arbitration of a wrongful death claim contrary to the personal representative's argument that it violated her free exercise rights. In March 2011, upon Nicklaus Ellison's initial enrollment in the Teen Challenge substance abuse treatment program, he signed an agreement requiring any disputes to be resolved in accordance with the Rules of Procedure for Christian Conciliation by the Association of Christian Conciliation Services. In May 2011, Teen Challenge "discharged" Nicklaus for violating program rules, but he later returned to the program as a condition of release from incarceration. Nicklaus soon relapsed. His mother, Pamela Spivey, asked Teen Challenge to transfer him from its Pensacola facility to its Jacksonville location. Nicklaus did not execute a new agreement containing an arbitration clause when he returned to Teen Challenge or was transferred. In August 2011, Teen Challenge dismissed Nicklaus when he appeared intoxicated. That night, he died from multiple drug toxicity.

The appeals court agreed with the trial court that the evidence indicated that "the intent of the parties" was that the original enrollment agreement "would last throughout the enrollment into the Teen Challenge Program, which continued by his acquiescence from Pensacola on through to Jacksonville." The court concluded that no substantial issue in the record required an evidentiary hearing on this point. Next, the court ruled that "courts routinely uphold agreements to submit disputes to religious arbitration in the absence of fraud, duress or corruption." The court decided that if Ms. Spivey could not comply with the arbitration clause into which her son entered because she objected on free exercise grounds to prayer or other aspects of the arbitration, she should resign and have a replacement appointed as personal representative. The court observed that, in substance, the rules of the arbitration appeared indistinguishable from secular arbitration. In addition, religious principles exclusively affected the process, but did not alter the substantive guidance on principles of negligence, wrongful death or the collateral source rule.

Courts Reach Conflicting Decisions on the Contraceptive Coverage Mandate's Effect on For-Profit Companies

In Gilardi v. U.S. Dep't of Health and Human Servs., No. 1:13-cv-00104, 2013 WL 5854246 (D.C. Cir. Nov. 1, 2013), a split court ruled that, although two closely held subchapter S corporations employing 400 employees were not themselves "persons" within the meaning of the Religious Freedom Restoration Act (RFRA), the corporations' two shareholders could be entitled to an injunction against the contraceptive coverage mandate contained in the Patient Protection and Affordable Care Act (PPACA). The court ruled that the Free Exercise Clause protects only religious organizations without regard to the difference between for-profit and not-for-profit entities. The companies at hand conceded they were not religious organizations. Judge A. Raymond Randolph disagreed that it was necessary to address this question, but all three judges on the panel agreed that the companies' shareholders had Article III standing to challenge the mandate, although it was premised on government regulation of their company.

Next, the court ruled that: (1) the mandate substantially burdened the companies' religious exercise and (2) the government lacks a compelling interest pursued in the least restrictive manner to justify the burden. The court found that the burden was not remote or too attenuated because it arose not at the point of purchasing the contraceptive, but when the government coerced them to select the healthcare plan for their employees or pay crippling fines — thereby violating their moral agency and compelling contributions for the propagation of opinions they disbelieve. The court considered the government's interests behind the mandate, including "safeguarding the public health," "protecting a woman's compelling interest in autonomy" and "promoting gender equality" as too nebulous, abstract, and, in any event, insubstantial. Furthermore, even if the interest were sufficient, the court ruled that it suffers from two flaws that make the argument self-defeating, including: (1) there are viable alternatives to the mandate and (2) the mandate is under-inclusive due to an array of exemptions.

Judge Edwards dissented on this latter point on the grounds that: challenges to neutral, generally applicable government policies such as the mandate are rarely successful; the mandate does not require the owners to use or purchase contraception themselves; the mandate does not require the owners to encourage the company's employees to use contraceptives; the owners remain free to publicly express their disapproval of contraception; the mandate serves the government's compelling interests; and the exemptions from the mandate are extremely limited.

In Newland v. Sebelius, No. 12-1380, 2013 WL 5481997 (10th Cir. Oct. 3, 2013), the court concluded that the district court did not abuse its discretion in granting a preliminary injunction to Hercules Industries, Inc., a for-profit Colorado corporation, and five of its controlling shareholders and/or officers, barring the Department of Health and Human Services from enforcing its contraceptive coverage mandate contained in the PPACA. The court remanded the case with instructions to abate further proceedings until the U.S. Supreme Court completes its review of Hobby Lobby v. Sebelius, 723 F. 3d 1114 (10th Cir. 2013), wherein the appeals court held that two for-profit corporations were "persons" within the meaning of the RFRA, compliance with the mandate would substantially burden the corporations' religious exercise and the mandate was not narrowly tailored to achieve a compelling interest.

In Eden Foods, Inc. v. Sebelius, No. 13-1677, 2013 WL 5745858 (6th Cir. Oct. 24, 2013), the court affirmed the district court's denial of a for-profit company's motion for a preliminary injunction and remanded the case to the district court with instructions that it dismiss the primary shareholder's claims for lack of jurisdiction. Eden Foods, Inc. is a natural foods corporation that employs 128 individuals. Its founder, president, sole shareholder and chairperson is Roman Catholic. For years, he negotiated with Blue Cross Blue Shield of Michigan for insurance excluding contraception, devices and pharmaceuticals he considered to be abortifacients, but was notified that as of March 15, 2013, Blue Cross would no longer offer such limited medical coverage due to the PPACA. In reliance upon Autocam Corp. v. Sebelius, 2013 WL 5182544 (6th Cir. Sept. 17, 2013), the court ruled that the sole shareholder of the company lacked standing to challenge PPACA under RFRA and ruled that a for-profit corporation is not a person capable of religious exercise under RFRA.

Court Affirms Judgment against Bible Camp in Rezoning Dispute

In Eagle Cove Camp & Conf. Ctr. v. Town of Woodboro, Wis., No. 13-1274, 2013 WL 5820289 (7th Cir. Oct. 30, 2013), the court agreed with the district court that the county zoning code prohibiting a proposed year-round Bible camp on residentially zoned property does not violate the Religious Land Use and Institutionalized Persons Act (RLUIPA) or various state and federal constitutional provisions. Eagle Cove first argued that the town of Woodboro violated RLUIPA's total exclusion provision because no year-round Bible camps are permitted within its borders, but the town subordinated to the county's zoning ordinance. County land could be used for a year-round camp according to the zoning regulations.

The plaintiff next argued that the zoning code imposed a substantial burden on its religious exercise, including its belief that it must operate the camp on the subject property in violation of RLUIPA and the state and federal free exercise clauses. The court rejected this argument, ruling "[i]t is not the land-use regulations that create a substantial burden, but rather Eagle Cove's insistence that the expansive, year-round Bible camp be placed on the subject property." Also, the court rejected the considerable time and money the plaintiff spent on various applications for rezoning as evidence of a substantial burden. The court found that the county has a compelling interest in preserving the rural and rustic character of the town and single-family development around the lake, where Eagle Cove owns 34 acres of property. The court also rejected the plaintiff's equal-terms RLUIPA challenge to the zoning code for lack of evidence that it treats religious land uses less favorably than non-religious recreational camps.

Former Teacher Entitled to Expansive Discovery against Parochial School and Diocese

In Herx v. Diocese of Ft. Wayne-S. Bend, Inc., No. 1:12-CV-122, 2013 WL 5531376 (N.D. Ind. Oct. 7, 2013), the plaintiff, an elementary school teacher, sued her former parochial school employer for not renewing her contract after learning that she was pregnant through in vitro fertilization treatment. The court granted in part and denied in part the plaintiff's motion to compel responses to certain discovery requests opposed by the defendant. The defendants argued that the discovery requests should be limited to all the teachers who signed a regular teaching contract containing the same "morals clause" under which she was not renewed because the decision to not renew her did not involve diocese officials and other teachers are not proper "comparators." The court disagreed and ruled that the plaintiff "is entitled to see how the 'morals clause' has previously been applied to the diocese teachers" and to examine this diocese-wide because the plaintiff "proffered evidence that the diocese officials were 'consulted' about [plaintiff's] contract nonrenewal." The court ruled that the religion clauses do not prohibit the discovery because they preclude merely the government from taking certain actions with respect to religious institutions.

Religious Institutions in the News

Protestant church donations allegedly reached Depression-era record lows in 2011.

Religious discrimination claims remain at historic highs.

Baptism rates are sliding in the United States and overseas.

A Michigan woman has sued InterVarsity Christian Fellowship for alleged wrongful termination, saying she was fired because of her divorce when two males were not. 

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