There is a blockbuster religious freedom case that is currently pending before the United States Supreme Court. Courts have generally believed that federal employment discrimination statutes do not apply to church employees performing religious functions.

However, in Hosanna-Tabor Evangelical Lutheran Church and School v. EEOC, the question has been raised as to whether the “ministerial exception” applies not simply to religious leaders, but also to teachers at religious schools – particularly someone who teaches the full secular curriculum, but also teaches daily religion classes, is a commissioned minister and regularly leads students in prayer and worship.

Specifically, the case revolves around a teacher in a religious elementary school in Michigan who was diagnosed with narcolepsy and eventually fired.

The religious tenants of the school’s sponsoring denomination – the Lutheran Church-Missouri Synod (LCMS) – required any disputes be handled by the church tribunal; however, the teacher did not abide with the policies of the denomination regarding dispute resolution, but rather sued the church and school in secular court under the Americans with Disabilities Act (ADA), claiming her termination was due to her disability (which, of course, is not a permissible action by employers under the ADA).

Religious reasons
The church and school insist that the terminated employee was a “commissioned minister” and that her termination was for religious reasons; therefore, that the case is subject to the ministerial exception (i.e., dismissal from the secular courts).

As described in the petition for certiorari filed with the Supreme Court:

“The ‘ministerial exception’ bars lawsuits that interfere in the relationship between a religious organization and employees who perform religious functions — most obviously, lawsuits seeking to compel a religious organization to reinstate such an employee or seeking to impose monetary liability for the selection of such employees. As the first court adopting the ministerial exception explained: ‘The relationship between an organized church and its ministers is its lifeblood’; allowing the state to interfere in that relationship — effectively allowing judges and juries to pick ministers — would produce ‘the very opposite of that separation of church and State contemplated by the First Amendment.’ McClure v. Salvation Army, 460 F.2d 553, 558, 560 (5th Cir. 1972).

“Based on this principle, every circuit has agreed that the ministerial exception bars most lawsuits between a religious organization and its leaders. Every circuit has also agreed that the ministerial exception extends beyond formally designated ‘ministers’ to include other employees who play an important religious role in the organization.”

Tenets of faith
The ministerial exception to employment law was established to give religious groups the freedom to hire and fire people performing religious functions, in order to uphold the tenets of their particular faith. The rationale is that the ministerial exception lets religious organizations practice their religion and convey their beliefs without being subject to employment discrimination laws.

For example, the Catholic Church does not permit women to serve as priests; however, the church is free from a discrimination claim due to the ministerial exception to federal employment laws.

In a common employment claim scenario, a church employs a minister and then that minister sues the church alleging some violation of either Title VII (such as retaliation, racial discrimination, gender discrimination, or sexual harassment), the Age Discrimination in Employment Act (ADEA), or the ADA. In such a scenario, the majority of courts will apply the ministerial exception, which results in the case being dismissed.

However, in the Hosanna-Tabor case, the issue at hand is whether the ministerial exception can be extended to an employee who, though a commissioned minister who taught religious studies and lead children in prayer, mostly taught secular subjects such as math and English. In this case, the teacher filed a discrimination claim, and the church filed a motion to dismiss based on the ministerial exception. The U.S. Court of Appeals for the Sixth Circuit sided with the teacher, and the church appealed to the U.S. Supreme Court.

Freedom of religion
Generally, courts feel that they cannot get involved in such issues without coming into conflict with the freedom of religion clauses in the First Amendment. Many commentators argue that the ministerial exception is wrong and should not be applicable based on the fact that it does not matter whether the church had a religious basis for making its decision; rather, the mere fact that a church and a minister are involved are enough to warrant dismissal of the case.

These same commentators argue that, instead of being applied as a blanket rule, the ministerial exception should only be applied when the employees claim is grounded in a religious context (rather than a strictly employment-related context, such as sexual harassment for example).

Some who argue in favor of doing away with the ministerial exception concede (albeit grudgingly) that there may be instances of exception for certain employees who perform “exclusively” religious function.

However, this “exception” would be fairly difficult to implement considering that most church employees, including the ministers, perform at least some nonreligious administrative duties on a regular, if not daily, basis.

Religious enough?
If the government’s argument is accepted, the courts would be involved in disputes about the selection and termination of clergy at all levels and in every denomination. Basically, this would mean that, in every future case, a court – and not the church itself – could decide whether the church’s reasons for firing or not hiring a minister were good (i.e., religious) enough.

As you can see, based on the facts alone, this is a case about whether a teacher in a faith-based school who teaches a non-religious subject but who has some religious duties should be considered a “ministerial” employee, such that the school is largely free to make decisions about her employment without running afoul of employment laws.

However, for many this is a vitally important case dealing with the separation of church and state.

Supporting the school’s decision to invoke the ministerial exception are multiple and various groups, including Roman Catholics, Mormons, Presbyterians, United Methodists, Seventh-day Adventists, Hindus, United Sikhs, Muslims, Episcopalians, Reform Jews and Orthodox Jews.

These groups hope the high court will hold that the ministerial exception applies not only to religious leaders but also to others within a religious organization, which would provide religious organizations with a broad-based protection from discrimination lawsuits. A ruling is not expected until next spring or summer.

David Middlebrook is a partner and Wendi L. Hodges is an attorney of Anthony and Middlebrook, The Church Law Group, Grapeville, TX. www.churchlawgroup.com

Thanks to the “Employment At Will Doctrine,” employers have historically been granted broad latitude in the area of hiring and firing employees. Under the Employment At Will Doctrine an employer has the right to fire an employee at any time with or without notice, and with or without cause.

Presently, the doctrine is still a viable legal doctrine, but it has been weakened over the years by numerous court decisions, federal and state laws and regulations and employment contracts.  So while churches must strive to comply with all of these enforced employment rules and regulations, how can they protect their religious beliefs, teachings, morals and values?

An employer may always discharge an employee for good cause, even if an employment contract provides for a definite term of employment. Good cause for discharging an employee is defined as the employee’s failure to perform the duties in the scope of employment that a person of ordinary prudence would have done under the same or similar circumstances.

An employee’s act constitutes good cause for discharge if it is inconsistent with the continued existence of the employer‑employee relationship. The standard for measuring an employee’s job performance is whether the employee performed the duties involved “substantially” or “reasonably well,” rather than whether the employee achieved specific results, unless the employment agreement required specific results.

Employees may sue
However, sometimes ex-employees will sue their former employer (i.e. the church) if they do not agree with the church’s position or reasoning for terminating their employment. If an employee, particularly a pastor, is terminated for a moral failure, and then that terminated employee brings suit against the church for wrongful termination, then the courts will usually apply what is known as the “ministerial exception.”

This exception generally prohibits the civil courts from resolving employment disputes between churches and their ministers because those disputes often involve questions of religious doctrine (which the courts will not touch).  However, it is important to note that the ministerial exception does not apply when the employee in question is one whose duties are primarily secular (for example, the church secretary).  So, what can a church do to protect itself in this area, allowing themselves to terminate an individual who may be living in direct contradiction to the moral values and teachings of the organization?

One possibility would be to include a morals clause in the employment agreements of all employees that allows for termination of the employee if the employee engages in morally offensive conduct or does something to damage the reputation of the employer.

These sorts of provisions are common in certain industries, such as entertainment and even sports (particularly where actors or athletes may have a tendency to engage in activities that, if brought to the public’s attention, could harm the reputations of their employers). Take, for example, the recent events involving actor

Charlie Sheen. Warner Brothers Television released portions of Sheen’s contract, particularly the language of a “moral turpitude clause” that, they argued, allowed them the option to treat his actions as a breach of contract.

What’s moral turpitude?
What, you may ask, is moral turpitude?  Moral turpitude is a legal concept in the United States that refers to “conduct that is considered contrary to community standards of justice, honesty or good morals.”  The case law concerning moral turpitude suggests that, like indecency laws, it will be judged region by region, such that what reaches the level of moral turpitude in Georgia may not reach that level in California.

There does appear to be some consistency in the decisions though. For one, most courts have found that a felony reaches the level of moral turpitude. This is because a felony is a serious crime against society and fits well into the definition. Other than a felony, the most common action found to reach the level of moral turpitude is a wrong action that includes fraud or deceit. Generally, a misdemeanor does not reach the level of moral turpitude. However, when combined with deceit, it does.

Churches can include such provisions in their own standard employment agreements, though it would be appropriate to take such a provision a step farther. Rather than requiring an occurrence of a felony, a church could include a provision allowing for termination of the employment simply if the employee does not live in accordance with the church’s accepted standards of living.

A sample clause that could be included into the church’s standard employment agreement form could be something along the lines of the following:

As an employee of the church, employee must understand that s/he is a part of a Christian church and that his/her employment is a God-ordained vocation. In this regard, employee must fully support and live consistently and in accordance with any Statement of Faith and Christian standards of living as may be set forth in the church’s employee handbook or bylaws, by such directives as may be issued from church leadership, and most importantly by biblical standards.

By including such a provision in the employment agreements of all of the church’s employees, the church will (1) make sure that all employees are informed up front that they are subject to dismissal for engaging in behavior in violation of the church’s moral teachings, (2) obtain the employees acknowledgment that they understand that they are employees of a church and therefore subject to higher standards, and (3) help to protect itself from lawsuits brought by employees dismissed for moral failings.

It is our experience that the employees of churches are generally upstanding, good-hearted individuals who operate with the best of intentions and in accordance with the teachings of the Bible. But we all know the old saying that “the road to Hell is paved with good intentions,” and moral failures do happen. Just make sure that your church is prepared to deal with such failures when or if they occur.

David Middlebrook is a partner and Wendi L. Hodges is an attorney of Anthony and Middlebrook, The Church Law Group, Grapevine, TX. www.churchlawgroup.com

“A good name is more desirable than great riches,” says Proverbs 22:1 but it takes an effort to keep it that way.

For two years Father Luke Strand, a young priest at Holy Family Catholic Community in Fond du Lac, WI, had driven a car emblazoned with a “God Squad” logo. Unfortunately for him, the electronics retail giant Best Buy did not find much redeeming quality in his attempt at adding a little levity to his ministry. It sent Father Strand a cease and desist letter for infringing on its registered Geek Squad trademark.

What was once strictly a concern of for-profit businesses, today “branding” is just as important for nonprofits, including churches and ministries, as they are for corporations. Although churches and ministries do not market products and services in the same way that for-profit companies do, they nevertheless rely on their names, logos, slogans and other trademarks to express their identities and convey messages to the public.

Trademarks and ministries
Trademarks are important to churches, ministries, church networks and denominations, and other nonprofits for a number of reasons:

Trademarks embody the goodwill and reputation of an organization. The goodwill and reputation of an organization and its programs takes years of hard work to establish. Such goodwill and reputation is key to successful operation of your organization’s mission.

The public judges the quality of ministry services and the credibility of teachings from an organization based on the reputation of the source. Proper protection of a trademark helps to strengthen your ministry’s goodwill.

Adequate trademark protection prevents public confusion. Without trademark protection, other organizations may intentionally or unintentionally use a name similar to your church or ministry, leading to confusion among the public. Today, instead of traditional names like “First Baptist,” churches are increasingly adopting highly distinctive names such as “Mosaic” or “The Vine.” Such contemporary names are “brands” that convey certain messages in reaching particular audiences.

Trademark protection allows churches to prevent others from copying or unintentionally adopting similar names and creating confusion. Public confusion may result in anything from seekers driving to the wrong location, or worse, people finding a different ministry that espouses teachings contrary to yours. And in situations where the media is involved, confusion can result in a public relations nightmare.

Trademarks enable a ministry or church network to maintain doctrinal integrity. In the Christian community, people need to know whether a church or ministry’s underlying teachings are trustworthy. Trademarks help the public to associate a name, a church network or association with certain beliefs. Failure to protect the association or ministry name can lead to disputes about the right to use the name. If a trademark is properly protected, the association can compel an individual church whose teachings stray from its core beliefs to cease using the association’s name.

For instance, after a theological dispute in 2006, a former member of the Seventh-Day Adventist Church founded his own church with three members under the name, “A Creation Seventh Day & Adventist Church.” Fortunately for the Seventh-Day Adventist Church, they had earlier registered the SEVENTH-DAY ADVENTIST trademark and used it to stop the dissident member from using his confusingly similar church name. The dissident member argued that the phrase was a generic term referring to a type of religious belief, but in 2010, a Tennessee court found that the Seventh-Day Adventist Church had properly used and protected the name as a trademark, and enjoined the dissident member from further use of his infringing church name.

Trademark protection can prevent deliberate infringement or tarnishment of an organization’s name. Often, Christian ministries have detractors who deliberately seek to tarnish the ministry’s name. For example, in 1997 an individual opposed to the group Jews for Jesus set up a website using the “Jews for Jesus” name, deliberately trying to draw people away from Jews for Jesus.

His website directed viewers to another website that attempted to show people “how the Jews for Jesus cult is founded upon deceit and distortion of fact.” By enforcing its federally registered trademark, Jews for Jesus successfully stopped the individual from continuing to tarnish its organizational name.

Protecting your trademarks
Churches, ministries and other nonprofits should take the following steps to protect their trademarks:

Conduct trademark searches prior to use. Prior to adopting a new trademark, an organization should have trademark counsel conduct a trademark search to determine if the proposed mark is available.

Register your trademarks. Registration of a mark with the U.S. Patent and Trademark Office entitles the owner to significant legal benefits.

Use the proper notice symbols. Prior to registration, a trademark should be tagged with the TM symbol. This symbol alerts the public to your claim to a mark. After registration, a mark should be tagged with the registered ® symbol.

Always enter into written license agreements with those whom you permit to use your marks. Such an agreement is an important means of preserving the integrity of your mark in the event of a dispute.

Monitor your marks and pursue infringers. For key marks, you may wish to consider subscribing to professional trademark “watch” services that monitor for confusingly similar marks. Once you are aware of marks that are confusingly similar to your organization’s marks, consult a trademark attorney for help in stopping the infringing use. Failure to stop infringing uses of the mark can result in the weakening of rights in the mark, and damage your ministry’s goodwill and reputation.

The most cost-effective time to begin protecting your brand is in the early stages of creating a new organizational name or launching a new program, service, or product.

Kenneth Liu is a partner in the intellectual property group of Gammon & Grange, P.C., McLean, VA.   www.gg-law.com

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Brands and trademarks

A “brand” is the public identity represented by a name, logo or other identifier. A “trademark” is a legal term for the intellectual property embodied within a brand. The two words are often used interchangeably.

Trademarks include not only organizational names, but also:

• Logos and designs
• Acronyms
• Slogans and jingles
• Program names
• Names of publications
• Anything that identifies a service or product – even colors and smell

Most pastors are probably familiar with the provision in the Tax Code that allows pastors and ministers to exempt a parsonage, or housing allowance from their taxable income. However, an opinion filed in mid-December 2010 in the United States Tax Court case, Driscoll vs. IRS, has caused quite a stir.

In this case, a ministry paid to an ordained minister a parsonage allowance which the minister used to provide himself with both a principal home (in town) and a second home (a lake house). The IRS felt that this was a bit greedy and assessed him with additional income and fraud penalties.

Two situations
The Tax Court, however, has disagreed with the IRS and has ruled that, at least for now, a minister may exclude from his income the housing allowances used to pay the mortgage on multiple houses.

Internal Revenue Code Section 107 permits qualified ministers to exclude housing-related compensation from gross income to the extent it relates to service performed in their ministry. Section 107 allows a tax-free housing benefit for a “minister of the Gospel” in two situations. First, the employer can allow the minister to live rent-free in a home (parsonage) owned by the church.

The value of the parsonage must be clearly distinguished from other compensation. Second, if a parsonage is not provided to the minister, a nontaxable housing allowance can be provided so that the minister can rent or buy a home.

The Tax Court has specified five factors used to identify a minister as defined under Section 107. An individual possessing these factors would presumably qualify as a minister: (1) performing sacerdotal functions (weddings, funeral, etc.); (2) conducting worship services; (3) controlling or maintaining the organization; (4) considered a spiritual leader; and (5) ordained, licensed, or commissioned (required in all cases). Once a church employee is qualified as a minister and is performing ministerial duties, then Section 107 of the Tax Code exempts from income the fair market rental value of a parsonage.

To be excludible, the housing allowance must be related to a home and be properly documented. According to Regs. Sec. 1.107-1(b), “home” means a dwelling place (including furnishings) and the appurtenances thereto (e.g., a garage). Regs. Sec. 1.107-1(c) explains that the allowance is excludible only to the extent spent (1) to rent a home, (2) to purchase a home and (3) on expenses directly related to providing a home (e.g. taxes, utilities, repairs, etc.).

Note that thus far, the regulations keep referring to a “home” (singular). The recent opinion in Driscoll vs. IRS is extraordinary in that it expressly allowed the minister to take a housing allowance on both of his residences.

One home only
In the case, the IRS argued that the use of the word “home” in Section 107 refers only to one home. However, Driscoll countered with the argument that Section 7701(m) of the Code provides that “singular may include plural.” On this particular issue, after working its way through certain phrasing and legislative history issues, the Tax Court ruled in favor of Driscoll and opined that both of the minister’s houses were “homes” for the purposes of Section 107, and both could be excluded from the minister’s taxable income.

This case is a big win for pastors because, for now, it provides legal support for a minister to exclude from income housing allowances used to pay the mortgage on multiple houses. We want to stress, however, that the Tax Court has acknowledged that this was a case of first impression, and members of Congress have already suggested that, in light of this case, Section 107 should be revised to limit income tax benefits to a “primary” residence (i.e. one home).

David Middlebrook is a partner and Wendi L. Hodges is an attorney of Anthony and Middlebrook, The Church Law Group, Grapevine, TX. www.churchlawgroup.com

Churches spend considerable amounts of time and effort to put in place policies and procedures designed to prevent occurrences of child abuse within their ministries. Employees and volunteers get diligently screened and effectively trained; unfortunately, the unthinkable still happens. Even with the best-laid plans, child predators occasionally find their way into churches.

In addition to building and enforcing the defensive mechanisms of the church, it is imperative that leaders also plan for the worst. The good news is that it is possible to be prepared to face such a reported incidence of child abuse proactively and positively.

The first step in the plan is to coordinate a response team made up of a group of persons within the church, as well as outside professionals who are schooled, skilled and ready to respond to a report of child abuse.

Never ignore allegation
It is critical to never ignore an allegation of child abuse, no matter how unlikely it may seem. Many of the problems faced by churches in the past, such as continued abuse of children and large monetary awards levied against the institutions, could have been easily avoided had the church leaders faced the problem when first reported.

A case in point would be a recent scenario in Arizona where church leaders were made aware that a father was sexually abusing his eldest daughter. A later summary from the police states that at the time the pastors told the victim that because her father was repentant, she should forgive him and restore the relationship. The pastors did not report the allegations to authorities, and while the father did stop his alleged abuse of the older girl, he continued to abuse his younger daughter for an additional year or more.

Consequently, the pastors were later arrested on suspicion of failing to report alleged sex crimes. This case demonstrates that it is crucially important that the church’s leadership understand that there may be legal obligations required of them in addition to the spiritual concerns of repentance and healing. While the pastors in this case presumably did not act with ill intent nor mean to cause harm to any of the individuals involved, their failure to report the father’s actions with the elder daughter went against the State of Arizona’s reporting requirements, therefore causing the pastors to be criminally and/or civilly liable.

While an allegation may in fact turn out to be false, it is incumbent upon church leaders to thoroughly investigate and report any accusations levied against any church worker, volunteer, or congregant. Having an attitude that refuses to properly investigate the accusations because “everyone knows he would never do something like that” will endanger future children and expose your church to financial liability.

In the event that your church ever receives an allegation of child abuse, whether on the church’s premises or not; whether with an employee or congregant, the church should focus on both the giving and receiving of information. Interviews with child victims must be handled with extreme caution and should not take place without the advice and consent of the church’s attorney. Encourage open dialogue and an understanding and supporting attitude during any conversations. Also, the following general procedures should be followed:

Notify the parents. If the report received was about a worker of the church and not about the parent or guardian of the child victim, the Response Team Leader should immediately place a telephone call to the parents or guardian of the child victim. At that time, an in-person meeting between the Response Team Leader and Director of Children’s Ministries and the parents of the child victim should be scheduled.

Notify the accused. Again, if the report received was about a worker of the church and not about the parent or guardian of the child victim, it will be necessary to notify the alleged wrongdoer of the receipt of the report of child abuse. Inform the alleged wrongdoer that the church is not on a witch-hunt; rather, the church is acting responsibly to a serious allegation and is on a quest to find the truth. The  church should seek to gain basic “who, what, when, where, and how” information from the alleged wrongdoer.

If the alleged wrongdoer is an employee, an involuntary leave of absence pending the outcome of the investigation should be implemented immediately upon receipt of the report. The church, in consultation with the church’s attorney, must carefully consider the issue of whether such involuntary leave of absence should be with or without pay.

If the alleged wrongdoer is a volunteer, immediate and indefinite suspension of volunteer privileges should occur pending the outcome of the formal investigation.

Notify your insurance carrier. It may seem odd to notify your insurance carrier of an allegation of abuse upon the initial receipt of a report of child abuse and before there has been a final determination; however, this may be necessary because your insurance may require immediate notification for coverage. Many insurance policies do not cover sexual issues because of the high risk of liability.

Notify the authorities. Each state has its own mandatory reporting requirements. It is important to become familiar with the laws of your state and to be willing to make such reports. Failure to do so can result in criminal and/or civil liability, such as in the Arizona case mentioned above. Not only can the church be damaged by such failure to report, but a lawsuit may also be filed against an individual who fails to follow the standards set forth by the state legislature. Very few states protect clergy from reporting suspected child abuse, so the “clergy-penitent” privilege will rarely apply. If in doubt, contact your attorney.

Strategy in place
The church should also have in place a strategy for answering any questions asked by members of the congregation, as well as a strategy for dealing with the media. By being straightforward and honest (while being careful to maintain issues of confidentiality), the public and your congregation will have less reason to speculate, thereby limiting hurt and distrust.

Children are counting on the church to put a plan in place that safeguards and secures them against sexual predators. Aside from a moral duty, most every jurisdiction now has a legal requirement that the church prevents and reports abuse and neglect. We can no longer afford the casualties.

David Middlebrook is a partner and Wendi L. Hodges is an attorney of Anthony and Middlebrook, The Church Law Group, Grapevine, TX. www.churchlawgroup.com

Though current year tax planning often occurs at year-end, this is an even better time for “Next Year” tax planning. Planning for next year with employee compensation options can be particularly effective. Most options are more beneficial if operating the entire year, and some options must be in place before the New Year starts.

There are several compensation related elements that provide important planning opportunities for churches and pastors. The following descriptions are meant to provide enough information to help you know which ones could be useful to you, and some initial steps to begin planning.

Housing allowance
Though obvious to most church leaders, every discussion of minister tax planning must mention the substantial benefit of the housing allowance. The church must designate the minister’s housing allowance in advance of payment.

Health plans
While the health reform legislation made health plans more complicated, they continue to be a substantial non-taxable benefit to employees. At least for 2011, a church can purchase different health insurance products for different employees without non-discrimination concerns. Self-insured and cafeteria plan arrangements cannot discriminate in favor of highly paid employees. Considering these together, a church may provide a good level of health coverage to all regular employees, and provide a better benefit for a few key employees and pastors.

Retirement plans
Qualified retirement plans, 403(b) plans, Simple IRAs and Simple Plans are all tools for helping employees with retirement income. For churches, the 403(b) plan has the added benefit of allowing discriminatory contributions (this must be allowed by the plan document). IRS Publication 4484, “Choose a Retirement Plan for Employees of Tax Exempt and Government Entities” shows attributes of various options useable by churches (available at www.irs.gov/pub/irs-pdf/p4484.pdf). An interactive table and information is available at www.retirementplans.irs.gov/plan-comparison-table/.

Non-qualified deferred compensation plans
These retirement programs can be developed for specific employees or pastors. They offer tremendous flexibility in funding and pay-out provisions to precisely meet the needs of the church and pastor or employee. Non-qualified primarily means they are not a regular pension, retirement or 403(b) plan. Assets belong to the church and nothing is taxed to the employee/pastor until paid to the employee or pastor. Any deferral of compensation payments beyond the year earned should be discussed with your tax professional because of documentation and operation requirements.

Expense reimbursements
Tax-wise, for the employee or pastor, it is always better if church related expenses are reimbursed by an Accountable Reimbursement Plan (ARP). Under an ARP, the church only reimburses expenses that relate to the ministry of the church, that are properly documented, and submitted within a reason time of being incurred. No income or social tax is paid on these. A church concerned about excessive reimbursements may set financial or purpose restrictions, or require authorization.

Education
Pastors and many employees regularly attend seminars or take courses to develop new skills or expertise. Several provisions provide tax benefits for such education, but some confusion about the requirements often means nothing is used. Two options routinely allow to churches to pay for or reimburse expenses associated with:

1. Education to enhance an employee’s skills or knowledge used in their job, which does not lead to a new career can be provided at the employer’s discretion to any employee, without any required “plan.” This could cover tuition, books, travel to and from the educational institution and if the educational institution is out of town, it could include food and overnight lodging. There is no statutory amount limit.

2. Education under an “Employer’s Educational Assistance Program,” using a nondiscriminatory plan may be used for nearly any subject and even lead to a new career. An employee’s annual benefit limit is $5,250, which can only be spent on tuition, fees, books and similar supplies. Though this can’t discriminate in favor of highly compensated employees, a church may restrict the usage to subjects helpful to the church.
Example: A church might use the first item to help a pastor (who is already preaching) get an advanced theology degree by extension, which might require trips periodically to the seminary. The second item could be used to help clerical staff take accounting courses, even though these might be part of an accounting degree program.

Planning to save taxes requires thought and time. Often the best planning involves joint consideration between the church and the pastors or employees. While some options must be offered equally to all, others allow more tailoring to specific situations. The details for most require professional assistance to assure correct implementation and operation. But with increasing tax rates at the state and federal levels, the tax saving potential continues to increase. Now is the time to begin saving taxes for 2011.

John Butler is tax counsel for Capin Crouse LLP, Greenwood, IN.

[ www.capincrouse.com ]

This article is intended to provide accurate and authoritative information in regard to the tax issues covered.
It is provided with the understanding that the authors are not engaged in rendering specific accounting or tax advice. If tax or other expert assistance is required, the services of competent professional persons should be obtained.

The United States Supreme Court on June 28, 2010, decided the case of Christian Legal Society, Hastings College of the Law v. Martinez. In that case, the court ruled that the Christian Legal Society at Hastings College of Law could not restrict membership based upon religious beliefs if it wanted to have official recognition on campus.

While this decision was directed at the activities of a university, the erosion of religious freedom that occurred could have a broader impact on religious worship as future courts continue to whittle away at basic constitutional rights. The analysis used to arrive at the decision was based upon the fact that the university was a public property or public forum.

Most churches operate on private property, but they do allow the public at large to come onto church property and it would not take a great deal of effort to extend the reasoning employed in the Hastings case to a church that allows public access and membership. The Hastings decision represents a departure from established court precedent.

‘Accept-all-comers’
The majority opinion in Hastings, written by Justice Ruth Ginsburg, and joined by Justices Stevens, Kennedy, Breyer and Sotomayer, found that the school had the right to require on-campus student organizations to “accept-all-comers” in order to be recognized as a campus organization. In this case, the Christian Legal Society had created a Statement of Faith which it required all members to sign and to agree to live their lives according to the standards described in that statement.

The statement set out traditional Christian tenets of belief regarding such things as the Holy Trinity and the Bible as being the inspired Word of God. It also declared the belief that sexual activity should not occur outside of marriage between a man and a woman. More specifically, CLS took the position that its Statement of Faith meant that homosexuals and non-Christians could not join the group.

When the CLS applied for recognition as a “Registered Student Organization” the application was denied by the school. To be clear, the school was not saying that the CLS could not operate on campus or make use of its facilities for meetings and activities, but that it could not receive all of the same benefits as the other organizations that were registered.

Some of those extra benefits included financial assistance from the school to help pay for group events, the ability to use the school’s newsletter, bulletin board, and email list to make announcements, to participate in a school-sponsored annual Student Organizations Fair to recruit new members and to make use of the school’s name and logo in the group’s communications. The CLS ultimately filed suit alleging that the school’s policy violated the First Amendment right of freedom of speech and freedom of association.

Statement of faith
In deciding for the school, the majority of the court found that the school’s policy was “reasonable and viewpoint neutral” and was therefore not unconstitutional. The court said that CLS was not being required to accept members that did not agree with its Statement of Faith, but that it was only being asked to adopt the school’s “accept-all-comers” policy (and abandon its Statement of Faith) if it wanted to receive the extra benefits associated with official recognition of the group by the school.

The court noted that there has been a long legal history of allowing policies that withhold benefits in these situations as opposed to policies that require undesired action. In this case, the court noted that the school was “dangling the carrot of subsidy, not wielding the stick of prohibition.” The court found that the school’s policy applied to all groups evenly, and was not based upon disfavoring the CLS’s religious point of view.

The court’s dissenting opinion was written by Justice Alito and joined by Chief Justice Roberts, and Justices Scalia and Thomas. The dissent criticized the majority opinion as being based upon “political correctness” and ignoring both factual and constitutional issues that should have been found in favor of the CLS. Judge Alito wrote that the school’s “accept-all-comers” policy was not really the policy of the school at the time the dispute arose, but became the school’s stated policy as the lawsuit progressed.

Justice Alito wrote that the evidence showed that at the time the dispute arose, the school’s policy was to only exclude groups that discriminated on a limited number of specified grounds.

The evidence also showed that other groups were allowed to be officially registered or recognized by the school and yet still have requirements that prospective members agree with or follow the rules or bylaws of those organizations.

The dissenting opinion also criticized the majority for stating that allowing CLS to be recognized and thus be eligible for the same funding as the other recognized groups would amount to a state subsidy.

Ignore prior law
The dissent argued that the funding issue was part of a pretext to ignore prior law. For instance, in a prior Supreme Court case, the Healy case decided in 1972, the court had found that not allowing a student group access to campus facilities and use of school communications such as the school newspaper was a violation of the First Amendment right of freedom of association.

Ultimately, Justice Alito wrote that the only and obvious reason that the Christian Legal Society was not being allowed to register as a campus organization is because of who they were — a religious group. At Hastings, only religious groups were required to admit students who did not share the views of the group.

While the Hastings case involves some legal issues that are unique to that situation, the overall trend of the case is disturbing and threatening to First Amendment rights such as freedom of religion, freedom of speech and freedom of association.

Part of the rationale from the Hastings decision might be used in the future to attempt to force a church to accept “all-comers,” that is persons who do not agree with its Statement of Faith, as members. Churches need to make sure that their basic religious tenets and beliefs are well-documented and that their governing documents including membership requirements are in good order to be prepared for this potential threat.

David Middlebrook is a partner and Robert W. Rucker is an attorney with Anthony and Middlebrook P.C., The Church Law Group, Grapevine, TX.  www.churchlawgroup.com

BY Daniel P. Dalton

Consider this factual situation: A church discovered that an employee has embezzled money from its treasury. The employee is confronted, confesses to stealing money and agrees to pay everything back. Does the church have an obligation to inform the parishioners or members of the crime and penance? The issue will be governed by both state law and the particular denomination or bylaws of a church, and in general, the answer is no.

A recent Massachusetts’ Supreme Court looked at the issue and found that the mere fact that a person is a parishioner of a church is not enough to impose a fiduciary relationship on the congregation thereby requiring legal disclosure. However, other states have found the existence of a fiduciary relationship where, due to an acceptance of a duty, a relationship has developed beyond the impersonal. Such cases usually involve litigation evolving out of the sexual abuse of parishioners at the hands of a church authority, and relate to a breach of a duty of care based in tort.

In a recent Michigan case the court held that “Michigan law does not recognize a fiduciary duty on the part of a religious organization‚ [and] determining whether a fiduciary relationship exists between a parishioner and a religious entity would involve inquiry into religious doctrine and ecclesiastical polity — [which] [t]his Court has previously declined to exercise jurisdiction over.”

Under most hierarchal religious institutions governing rules, membership is composed of Christians who have accepted the teachings, doctrines, and government of the particular denomination and who have been formally received into its fellowship pursuant to the guidelines established by the governing body. In general, members may attend regularly scheduled meetings and vote on major issues.

Further, members have the ability to bring a derivative action in the name of the corporation for an injury caused by a board member, officer or third party, when the board refuses to do so. However, members are not involved in the day-to-day operations of the organization, as direction and supervision of the nonprofit corporation remain solely within the control of the board of directors.

The direction and supervision of the nonprofit corporation remain solely within the control of the board of directors. The function of the board of directors is to manage the “internal” day-to-day operations of the organization, and further to manage the organizations “external” functions. State nonprofit corporation statutes also provide that directors owe a duty of care, loyalty, good faith, and obedience to the entity.

The duty of care requires that a director discharge his or her duty in good faith, with the care an ordinarily prudent person in a similar position would exercise, and with a reasonable belief that the action to be taken is in best interests of the organization. Board members’ business decisions are afforded the protection of the business judgment rule. Where it applies, the business judgment rule is a presumption that church directors, when making a business decision, acted on an informed basis, in good faith, and with the honest belief that their decision was in the religious entity’s best interest. The business judgment rule has application as a potential defense in two situations: (1) where officers or directors face personal liability; and (2) where a corporation (generally through shareholders in a derivative action) seeks to void a decision of or transaction approved by the board.

Such business decisions are not subject to judicial scrutiny unless the decision or transaction involved self dealing or was wholly irrational, therefore amounting to an egregious breach of a director’s or officer’s duty of care or exercise of such duty in good faith. Most states hold a director or officer to a willful disregard or gross negligent standard.

With a factual scenario, similar to the one presented above, that does not involve self dealing transactions but is merely a business decision involving the internal management of the organization’s day-by-day operations, disclosure is not required. Because a religious organization’s board of directors retains wide discretion over the day-to-day decisions and operations, it has no legal duty to disclose to its members/parishioners the activity of its employees. The reason is that the situation does not involve a self dealing transaction and is merely a business decision involving the internal management of the organization’s day-to-day operations.

Other considerations may play into the decision to disclose information, such as public relations or an underlying simmering in a congregation to find out what is happening in the church.  But from a legal perspective, based on most religious denominations governing rules and state non for profit statutes, disclosure is not warranted.

Daniel P. Dalton is a founding partner of Dalton, Tomich & Pensler, PLC, Bloomfield Hills, MI. www.dtplawfirm.com

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Check your copier contract

Of the top 10 legal issues I address for religious organizations, the one issue I spend the most time on is copier contracts. The typical scenario occurs when a religious institution has a copier contract and in an attempt to lower cost, contacts a competitor copier company to perform a price comparison. A new sales agent arrives at the church, underbids the existing contract and verbally agrees to pay off the existing contract. The church enters into a new long-term copier contract; a new copier arrives a few days later and for a period of 60-90 days, the church is happy.

Then a collection letter comes from the financing company for the original copier company notifying the church that they are in default and demands payment. And shortly thereafter, the “new” copier is broken and calls to the new copier company and salesperson go unanswered. The church decides that it will not pay for the second copier and sends a letter to the second company demanding that they take the copier back. The demand letter is ignored.

Instead, demand letters are sent by both the new and old financing companies for the first copier and the second copier and a lawsuit follows shortly thereafter.

The church then contacts an attorney and is advised that (1) they agree to have the copier company assign the contract to finance companies; (2) the copier company disclaimed any warranties and do not have to fix the machines; (3) the church agreed that all claims are to be litigated in the state of Minnesota using Minnesota law; and (4) they must pay the attorney fees of the companies suing them, litigation irrespective if they win or lose the case.

This is a very familiar scenario. Depending on the facts of the case, there may be some defenses to a copier contract lawsuit. Contact with an attorney familiar with these cases is essential. The key lesson learned is carefully review copier contracts before entering into them. You can negotiate the terms of the agreement. Spend the time with an attorney familiar with the agreements to avoid paying later. Otherwise, you may find yourself on the short end of the bad agreement.
— Daniel P. Dalton

As employers, churches are significantly affected by the new health care reform legislation. The legislation contains no specific exemptions for churches, and in many cases the effect will be the same as on similarly sized business employers.

In some ways, however, the law may have a greater impact on church employers. Churches have historically been exempt from many benefit plan laws, and have had more flexibility in designing and establishing health plans than most non-church employers. For instance, in some churches ministers have substantially better health benefits than other employees. Churches may find some of the new requirements to be more burdensome than an employer with a health plan already under significant government oversight would.

Compared to many non-church employers, churches also tend to have a larger variety of employee categories, such as ministers, lay employees, full-time, part-time and seasonal employees. This may make it more challenging to develop lawful church benefit plans that effectively provide health care for some church employee mixes.

Requirements 2010 – 2013

While many of the new plan requirements have not received extensive publicity, they could affect health plans almost immediately. Some of the requirements we believe will have particular impact on churches include:

• No lifetime or annual cover age limits
• Extension of dependent cover age up to age 26
• Coverage for preventive health services without any cost-sharing requirements
• Mandated specific patient protections
• For insured health plans, no discrimination in favor of more highly compensated employees
• Mandated claims appeals and review processes
• Prohibition on pre-existing condition exclusions
• W-2 reporting of the cost of health coverage (beginning with calendar year 2011 and reported on the Form W-2 issued in 2012)

Some of these do not apply
to “grandfathered plans,” which generally means plans in effect on March 23, 2010. Most apply whether the plan is insured, self-insured, or some combination.

The requirements for individual coverage and employer plans discussed in the remainder of this article take effect in 2014.

Effective January 1, 2014, U.S. citizens and legal residents must have qualifying health coverage or be subject to a tax penalty. The full penalty will be phased in over several years.

There are several exemptions to the insurance requirement, including low income, unaffordable coverage and hardships. Two religious exemptions, however, are of specific interest to church employees: a religious sect exemption and participation in a health care sharing ministry.

Religious exemption

The religious sect exemption requires that the individual be a practicing member of a religious group with a religious tenant opposing public or private insurance. The group must have been in existence since December 31, 1950. This category may apply to the Amish and similar groups. This is different from some ministers’ Social Security exemptions, which require opposition to public retirement benefits with respect to religious employment but allow private retirement plans. The religious sect exemption for the health plan coverage does not allow either public or private health insurance.

Exempt from requirement

A person who participates in a health care sharing ministry is also exempt from the coverage requirement. The health care sharing ministry must have been in continual existence since December 31, 1999 and meet other requirements.

Effective January 1, 2014, a church that averaged at least 50 full-time employees (“full-time” being more than 30 hours a week) during the preceding calendar year may be subject to penalties if it does not offer affordable minimum essential coverage. The penalty only applies if a full-time employee is certified to the church as having enrolled in health insurance coverage purchased through a state exchange that results in a premium tax credit or cost-sharing reduction allowed or paid to the employee.

A church health plan with more than  200 employees may be subject to automatic enrollment requirements for new employees.

In counting employees for either the 50 or 200 employee threshold, ministers will be treated like any other worker.

Many Christians participate in health care sharing ministries. These ministries often allow Christians to assist one another with medical expenses, at a substantially lower cost than insurance premiums. More information about 
such ministries is available at www.healthcaresharing.org.

A specific exception written into the health care reform legislation allows a participant in a health care sharing ministry to be exempt from the individual health care coverage requirement. The exemption, however, does not make such participation “insurance” for any tax purposes.

For tax purposes, participation is considered a series of gifts. When a participant makes a “payment” they are making a gift and the person who receives a payment to cover medical expenses is receiving a gift.

Since the payments are considered personal gifts, they do not qualify for reimbursement under health insurance policies, employer’s self-insurance, or cafeteria plan medical reimbursement.

It currently appears that an employer’s payment for participation in health care sharing ministries will not meet two requirements of the health care reform legislation. It will not count as payment of insurance or health care under non-discrimination requirements for self-insured or insured health plans. It also will not count as insurance under the provision for penalties in the large employer health plan requirement described above.

Many people believe the loss of tax benefits with health care sharing ministries is more than offset by the reduced medical expenses and sense of sharing among believers. Our goal is simply to alert church employers of some limitations associated with these programs.

John Butler is tax counsel for Capin Crouse LLP, Greenwood, IN.   www.capincrouse.com

This article is intended to provide accurate and authoritative information in regard to the tax issues covered. It is provided with the understanding that the authors are not engaged in rendering specific accounting or tax advice. If tax or other expert assistance is required, the services of competent professional persons should be obtained.

President Obama signed into law the Patient Protection and Affordable Care Act On March 23, 2010, with a follow-up signing of the Health Care and Education Affordability Act of 2010 a week later. This new legislation represents one of the most sweeping overhauls for health care coverage and insurance in United States history.  As the requirements of the new law are implemented through 2014, it is estimated that 95 per cent of the American population will have some form of basic health coverage.

But, the question remains as to whether or not the average business can afford to provide the new mandated coverage and still maintain their normal operations.

Many churches, which are after all, businesses who have employees, are concerned that this new legislation will make it even more difficult to stay within budgets and are considering further staff layoffs rather than having to pay the anticipated higher costs.  Many churches are already struggling with budget issues as their members have been laid off, had pay reductions, or been transferred or had to move during this current economic recession.

We’ve spoken with these church administrators on a daily basis and their concern is very real. The Congressional Budget Office has indicated that these new policies would add more than $9.7 trillion to the national debt over the next decade.  President Obama and other proponents of the bill have been quoted as saying that the new debt would be paid for by raising taxes only on high-income individuals.

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However, in other countries where social programs were to be paid for by the wealthy, such as in England, research showed that these persons found ways to avoid the higher taxation, thus pushing the burden back to the middle class.

The churches that tend to rely upon contributions from a broad-based middle class stand to be directly affected. The church is facing the “double-whammy” prospect of receiving fewer donations to support it while having greater costs associated with paying for the new health care coverage for its employees. There is still great uncertainty as to how the new law may affect flexible benefit plans such as health savings accounts that are popular with many churches.

Until there is further guidance and interpretation from the government, it remains unclear whether the employer contribution to an employee’s health savings plan will count toward the total value of coverage that an employer will be required to offer under the new law.

The law appears to place a limit on deductibles, but the question remains as to whether or not it would apply only to small employers or whether large employers could be affected as well.

David Middlebrook is a partner and Robert W. Rucker is an attorney with Anthony and Middlebrook P.C., The Church Law Group, Grapevine, TX.
[ www.churchlawgroup.com ]