Religious Institutions Update: February 2012

Timely Topics

At the request of Senate Finance Committee member Charles Grassley, the Commission on Accountability and Policy for Religious Organizations has formed to wrestle with tax-related policy questions of import to non-profit and religious institutions, including:

• Should the tax benefits associated with the charitable contribution deduction be preserved?
• Should the law be amended to require the governing documents of an organization to prohibit excess benefit transactions as a condition of exempt status, and should organization managers be subject to personal penalties for approving an excess benefit transaction when they had “reason to know”?
• Should the parsonage exclusion be limited to a specific dollar amount, and should it be phased out for an individual whose modified adjusted gross income exceeds an agreed upon threshold amount?
• Is there any circumstance in which a church should be required to file a Form 990 or something similar that is available for public inspection?
• Should the “rebuttable presumption” protection for decisions regarding compensation and related-party transactions be eliminated and replaced with “minimum standards for due diligence”?
• Should guidelines be developed for compensation studies advising, for example, when, if ever, a comparison to for-profit organization is appropriate, and should the compensation studies and data used by an organization be subject to public disclosure?

The full list of questions under review and other information is available at www.religiouspolicycommission.org. The Commission, its panels and legal counsel to the Commission, including Holland & Knight, are aggressively seeking public input in this process. Input can be provided at the link above or by attending a virtual “Town Hall” meeting on Friday, February 17 from 1:00-2:30 p.m. EST: www.religiouspolicycommission.org/townhall. The Commission’s deliberations, which will lead to recommendations and final reports, are likely to help shape future federal tax policy. Accordingly, this is a good opportunity for you to influence tomorrow’s tax laws.

Key Cases

Parsonage Allowance Applies to a Single Home

In Commissioner of IRS v. Driscoll, Case No. 11-12454 (11th Cir. Feb. 8, 2012), the Court of Appeals for the Eleventh Circuit reversed the U.S. Tax Court’s ruling allowing taxpayers to apply the “parsonage allowance” income exclusion of IRC § 107(2) to multiple houses. During the years 1996 through 1999, Phil Driscoll Ministries, Inc., a tax-exempt organization, paid to Philip A. Driscoll, an ordained minister, a parsonage allowance for the acquisition, care and maintenance of his principal residence and a lake house. Mr. and Mrs. Driscoll filed tax returns that excluded from their gross income the parsonage allowance allocated to both homes. The Internal Revenue Service issued a notice of deficiency to petitioners for these years, denying them the income exclusion under section 107(2) for that portion of the parsonage allowance allocated to the second house. When the Driscolls petitioned the U.S. Tax Court for redetermination of the deficiency, the IRS argued that section 107 limits a minister’s excludible parsonage allowance to a single home inasmuch as the statute refers to “a home.” A divided court disagreed on the grounds that the IRC cross-references the Dictionary Act, which requires that “words importing the singular include and apply to several persons, parties or things.” § 7701(m)(1). Overturning this ruling, the court of appeals ruled that the Dictionary Act, by its own terms, does not apply if “the context indicates otherwise,” and on the grounds that “any cross references ‘are made only for convenience, and shall be given no legal effect.’” The court also looked to legislative history and the general admonition to narrowly construe income exclusions when concluding that “a home” has a singular connotation.

Religious School Teacher Qualifies as a “Minister” Barred from Bringing an Employment Discrimination Lawsuit

In Hosanna-Tabor Evangelical Lutheran Church and Sch. v. Equal Employment Comm’n, Case No. 10-553 (Jan. 11, 2011), the U.S. Supreme Court unanimously confirmed the existence of a “ministerial exception” — grounded in both the Free Exercise Clause and Establishment Clause of the First Amendment — that operates as an affirmative defense to bar a “minister” from bringing an employment discrimination lawsuit against a religious institution. The lawsuit at issue was for a violation of the Americans with Disabilities Act (ADA). Courts of appeal have recognized the existence of a ministerial exception for decades, but the question never previously reached the United States Supreme Court. The Court declined to adopt a test for who qualifies as a “minister,” but agreed that the K-4 religious schoolteacher involved in the case qualified, and that the exception “is not limited to the head of a religious congregation....”

The particular facts the Court found important to the teacher’s status as a “minister” included these: (1) the Lutheran Church-Missouri Synod school where she taught held the teacher out as a minister by, inter alia, extending a call to her for religious service and commissioning her; (2) the teacher had received a significant degree of religious training; (3) the teacher held herself out as a minister by, inter alia, accepting a formal call to religious service, claiming a special housing allowance on her taxes and referring to herself as serving in a “teaching ministry”; (4) the teacher’s job duties reflected a role in conveying the church’s message and carrying out its mission including “transmitting the Lutheran faith to the next generation.” Concurring, Justice Thomas expressed his view that the religious institution’s sincere views of who is a minister should be enough. In a separate concurrence, Justices Alito and Kagan emphasized that ordination and the title “minister” are not essential. They said the ministerial exception “should apply to any ‘employee’ who leads a religious organization, conducts worship services or important religious ceremonies or rituals, or serves as a messenger or teacher of its faith.”

The Court found that the Court of Appeals for the Sixth Circuit, in reaching the opinion that the teacher did not qualify for the ministerial exception, put too much weight on the fact that lay teachers at the school performed the same religious duties as called teachers and that called teachers also performed secular duties. The Equal Employment Opportunity Commission considered conclusive the allegation that only 45 minutes of the teacher’s day concerned exclusively religious functions. In contrast, the Supreme Court ruled, “The amount of time an employee spends on particular activities is relevant in assessing that employee’s status, but that factor cannot be considered in isolation, without regard to the nature of the religious functions performed....” The Court concluded, “Requiring a church to accept or retain an unwanted minister, or punishing a church for failing to do so, intrudes upon more than a mere employment decision. Such action interferes with the internal governance of the church, depriving the church of control over the selection of those who will personify its beliefs.”

Constitutional Amendment Forbidding Courts from Considering Sharia Law Held Unconstitutional

In Awad v. Ziriax, Case No. 10-6273, 2012 WL 50636 (10th Cir. Jan. 10, 2012), the Court of Appeals for the Tenth Circuit affirmed the grant of preliminary injunctive relief to a Muslim resident of Oklahoma who brought an action against state election officials, alleging that a resolution approved by over 70 percent of Oklahoma voters, proposing amendment to the Oklahoma Constitution to forbid courts from considering or using international law or Sharia law, violated the Establishment Clause. The injunction precluded certification of the election results. Contrary to the state’s arguments, the court determined that the plaintiff had standing to bring his claims inasmuch as he faced the consequences of a statewide election approving a constitutional measure that would disfavor his religion relative to others. The court also determined that the dispute was ripe as a challenge to the facial validity of the proposed amendment and required no factual development. On the merits, the court applied the Larson test, which provides that if a law discriminates among religions, it can survive only if it is “closely fitted to the furtherance of any compelling interest asserted.” Larson v. Valente, 456 U.S. 228 (1982). The court determined that the proposed amendment violated this test and was, therefore, subject to strict scrutiny, because it banned only one form of religious law, Sharia law. Strict scrutiny requires the government to show: (a) a compelling government interest, and (b) that the amendment is “closely fitted” to that compelling interest. The court ruled that the proposed amendment failed both tests, because the state identified no actual problem the challenged amendment seeks to solve and because the amendment completely banned Sharia law, which is “hardly an exercise of narrow tailoring.”

Disaffiliating Missouri Congregation Retains Title to Church Property

In Heartland Presbytery v. Gashland Presbyterian Church, Case No. WD 73064, 2012 WL 42897 (Mo.App. W.D. Jan. 10, 2012), the Missouri Court of Appeals for the Western District applied the neutral principles of law approach, including “objective, well-established concepts of trust and property law,” to find that a disaffiliating local congregation did not hold title to its church property in trust for the denomination. Gashland Presbyterian Church notified Heartland Presbytery of the Presbyterian Church (U.S.A.) (PCUSA) that it sought to affiliate with the Evangelical Presbyterian Church. Heartland filed a complaint seeking to enforce the denomination’s rights to the church property. The circuit court granted the church’s motion to dismiss and the court of appeals affirmed. First, the court agreed that the deed does not create a trust in the denomination’s favor; rather, it stated in unqualified terms that the property belong to “Gashland Community Church, Gashland, Missouri.” Second, the court held that the church’s Articles of Incorporation made clear that title to the church’s property vests, without qualification, in the church; that the church property could only be conveyed to others pursuant to specific authorization of its members; and that the church was subject to the denomination in ecclesiastical matters, but impliedly not other matters such as a property dispute. The court held that any conflict in the bylaws had to yield to the articles of incorporation and, in any event, expressed doubt that general statements in the bylaws that the PCUSA’s Constitution is “obligatory upon” the church, and that nothing in the bylaws “shall nullify or contravene the provisions of the [PCUSA’s] Constitution” was sufficient to establish an express trust. Last, the court held that PCUSA’s Book of Order could not, standing alone, establish the existence of a trust when at the time the Book of Order’s property-trust clause was adopted the property in question was owned only by the congregation, and there was not an effective expression of the congregation’s intent to create a trust.

Challenge to Illinois Appropriations Benefiting Religious Institutions Dismissed

In Sherman v. Quinn, Case Nos. 10-3722, 10-3925, 2012 WL 9292 (7th Cir. Jan. 12, 2012), the U.S. Court of Appeals for the Seventh Circuit held that plaintiff’s counsel failed to establish excusable neglect required to warrant an extension of time to file a notice of appeal in an action brought against the governor and other state officials, challenging direct funding through appropriations for infrastructure improvements and other projects benefiting churches and parochial schools contained in the “Illinois Jobs Now!” capital bill. The court dismissed the appeal.

Religious Institutions in the News

The Obama administration announced that it will not broaden the religious exemption in rules that would require employers to provide contraception coverage to employees. See http://www.washingtonpost.com/national/on-faith/top-catholic-bishop-feels-betrayed-by-obama/2012/01/25/gIQAl5c6QQ_story.html

On Jan. 12, 2012, religious leaders from a variety of faith traditions released an open letter entitled, “Marriage and Religious Freedom: Fundamental Goods that Stand or Fall Together.” See http://www.usccb.org/issues-and-action/marriage-and-family/marriage/promotion-and-defense-of-marriage/upload/Marriage-and-Religious-Freedom-Letter-Jan-12-2012-4.pdf

Since 1968, tithing has slumped from 3.11 percent of income to 2.38 percent. See http://www.washingtonpost.com/national/on-faith/yes-mormons-tithe-but-most-others-dont/2012/02/02/gIQAJyKBlQ_story.html