Religious
institutions update: March 2013
Holland & Knight LLP
Nathan Adams and Laura E. Atherstone
March 19 2013
Holland & Knight LLP logo
At
this time of year, when taxes are at the forefront of people’s minds, thousands
of religious institutions will be relying upon the tax benefits and exemptions
carved out for them that have long been a part of the U.S. taxation system.
Religious institutions benefit from tax exemption and having donors that can
deduct their donations from their individual tax returns. Although these tax
benefits have existed since the early days of the republic, property tax
exemptions and deductions for charitable giving have recently come under
pressure both here and abroad, due in part to the economic downturn and public
debt burden.
Property
tax exemptions are now frequently investigated and revoked for facilities
utilized for anything other than traditional worship. For example, unused rooms
in church buildings or temporarily closed church buildings, coffee shops used
as a vehicle for ministry, book stores, vacant land and property owned by a
church but leased to another party have all had their tax exempt status questioned
or revoked in recent years. See, e.g., Holland & Knight's Religious
Institutions Updates from September 2012, May 2012, July 2011 and April 2011.
Changes are even more sweeping overseas; for example, in Italy, where the
Catholic Church will begin paying property taxes on its land. Linking land
usage to inherently religious conduct is now critical to maintain property
exempt status.
With
respect to income taxation, Section 170 of the Internal Revenue Code provides
for taxpayers a charitable contribution deduction for gifts of money or
property made to nonprofit organizations. Recently, there have been a variety
of efforts to lower the deduction. In 2009, President Obama proposed a
deduction cap on the benefit of charitable giving for high-income donors, which
would tend to dissuade taxpayers from exceeding a certain level of charitable
giving. At the beginning of this year, a different provision known as the
"Pease" provision, repealed as part of President Bush's tax cuts,
once again became the law, although its impact is likely to be blunted due to
other income tax changes.
Under
the Pease provision, taxpayers with income over a certain floor are required to
reduce the majority of their itemized deductions by 3 percent of the amount
over which their adjusted gross income exceeds the floor, but the itemized
deductions cannot be reduced by more than 80 percent. The amount of reduction
of itemized deductions under the Pease provision depends entirely on income,
and is independent of the total amount of deductions taken. Nevertheless, the
simultaneous increase in the highest marginal federal income tax rate from 35
percent to roughly 40 percent and the retroactive renewal of the direct
charitable IRA distribution exclusion may have a net positive impact on giving
this year. But watch for discussion of deduction caps and limits on tax
benefits to continue.
Income
tax exemption for a religious institution is never guaranteed. The institution
must avoid, among other things, unrelated business income, which involves a
trade or business regularly carried on that is not substantially related (in
the manner the money is earned rather than spent) to furthering the
organization's exempt purposes. Avoiding pitfalls and staying abreast of
changes in the tax code and enforcement affecting nonprofits and their
supporters with the assistance of tax planning and legal professionals can help
religious institutions avoid tax controversies and unexpected reductions in
financial support from donors.
Key
Cases
Court
Upholds Permitting, Licensing and Zoning Regulation of Spiritual Counselors
In
Moore-King v. County of Chesterfield, No. 11-2183, 2013 WL 680683 (4th Cir.
Feb. 2, 2013), the court affirmed summary judgment for the county on a
self-described "spiritual counselor's" constitutional and statutory
challenge to the county's (1) fortune teller permit ordinance, which requires
all persons seeking a business license to practice as a fortune teller within
the county to apply for and obtain a permit from the chief of police; (2)
business license tax ordinance, applicable to all persons doing business in the
county; and (3) zoning ordinance, limiting fortune telling to particular zoning
districts. The plaintiff alleged that this regulatory scheme violated her free
speech, free exercise and equal protection rights and substantially burdened
her religious exercise in violation of the Religious Land Use and
Institutionalized Persons Act (RLUIPA).
The
court rejected the county's argument that fortune telling is inherently
deceptive speech outside the scope of the First Amendment. Nevertheless, the
court ruled that the county was within its rights to license her activities
under the professional speech doctrine. The relevant inquiry to determine
whether to apply this doctrine is whether the speaker is providing personalized
advice in a private setting to a paying client or instead engages in public
discussion and commentary. In this case, the court ruled that the fortune
teller was doing the former; therefore, the county's regulations do not abridge
the plaintiff's freedom of speech. The court also ruled that the plaintiff's
set of beliefs including "a strong belief in the 'words and teachings of
Jesus ... which [she] believe[s] are incorporated into tarot cards" is not
a religion protected by the Establishment Clause, but a "way of life"
unprotected by constitutional and statutory religion protections. The court
also rejected her equal protection claim under the rational basis test on the
grounds that she did not negate every conceivable basis which might support the
county's zoning and licensing ordinances.
Non-Liturgical
Navy Chaplains Denied Injunctive Relief for Statistical Imbalance in Promotions
In
In re Navy Chaplaincy, No. 1:07-mc-269 (GK), 2013 WL 753232 (D.D.C. Feb. 28,
2013), the court ruled that current and former non-liturgical Protestant
chaplains, representing Southern Baptist, Christian Church, Pentecostal and
other non-liturgical Christian faith groups, were not entitled to injunctive
relief on their claim that the defendants discriminated against them on the
basis of religion when making personnel decisions by delegating authority over
personnel decisions to chaplains who sat on chaplain selection boards. The
plaintiffs presented statistical evidence showing that the Navy's selection
board process results in denominational favoritism that advantages Catholic and
liturgical chaplains over them. Specifically, the plaintiffs showed, inter alia,
that when candidates considered for promotion to Commander were of the same
denomination as a selection board member, roughly 10 percent more candidates
succeeded than when they were of a different denomination. The court ruled that
this statistical evidence did not show intentional discrimination as ordinarily
necessary to prove an Establishment Clause violation or demonstrate a stark
enough disparity to excuse the requirement of intentional discrimination. The
court found that invidious discrimination in contravention of the First and
Fifth Amendments requires pleading and proving that the defendant acted with
discriminatory purpose.
Municipal
Sign Ordinance Ruled Constitutional
In
Reed v. Town of Gilbert, No. 11-15588, 2013 WL 474515 (9th Cir. Feb. 8, 2013),
the court affirmed summary judgment against Good News Community Church and its
pastor with respect to the town's Temporary Directional Signs Ordinance, which
limited (1) the size of the signs to six feet by six feet; (2) the duration of
their display up to 12 hours before, during and one hour after the qualifying
event ends; (3) their location at grade level on private property excluding
public rights of way; and (4) the number of signs that may be displayed on a
single property. The plaintiffs argued that the ordinance infringed their free
speech and equal protection rights.
But
the court ruled that the sign ordinance is not a content-based regulation,
notwithstanding that it requires government officials to review sign content to
distinguish it from political signs and ideological signs, which may be larger
and are not subject to the same limitations. Instead, the court found that that
each classification and its restrictions are based on objective factors
relevant to the town's creation of the specific exemption from the permit
requirement and do not otherwise consider the substance of the sign.
In
addition, the court held that the sign code, as a content-neutral, reasonable
time, place and manner restriction, is narrowly tailored to further the town's
significant safety and aesthetic interests, and leaves open ample alternative
channels of communication. It noted that the number of temporary signs would be
reduced if there were not exemptions for political and ideological signs, but
indicated that there need only be a reasonable fit between the town's interests
and the regulations.
The
court likewise ruled that the ordinance does not substantially burden the
exercise of the plaintiff's religious beliefs, inasmuch as the church did not
show that its religious tenets require that the church spread the Gospel in any
particular way. But the court found that the town's amendment to the ordinances
during litigation limiting the Temporary Directional Sign exemption to events
held within the town was subject to further litigation first in the district
court. The dissent (by Judge Paul Watford) argued the ruling unconstitutionally
favors certain categories of non-commercial speech over others.
School
District Contract with Religious School for Alternative School Services May
Violate the Establishment Clause
In
Kucera v. Jefferson Cnty. Bd. of Sch. Com'rs, No. 3:03-cv-593, 2013 WL 654922
(E.D. Tenn. Feb. 21, 2013), the court ruled that the plaintiffs, former
teachers at the Jefferson County Alternative School, stated a claim for relief
when they asserted that the defendant violated the Establishment Clause by
contracting with Kingswood School, Inc. to provide alternative school services
to students. The plaintiffs asserted that Kingswood is a religious organization.
The defendants insisted that Kingswood has two identities: (1) a day program
that provides secular educational services, and (2) a residential program that
imparts religious teachings. The court denied the defendants' motion for
summary judgment after finding that it is unclear whether the day program is
actually a distinct enterprise. The court ruled that if it accepts that there
is no meaningful distinction between the admittedly religious residential
program and the day program, then the delegation of governmental function to
Kingswood would violate the Establishment Clause. The court denied the
defendants' motion for summary judgment.
Congregant
Arrested for Trespassing Fails to State a Claim against Police Officers
In
Lye v. City of Lacey, No. 3:11-cv-05983-RBL, 2013 WL 499815 (W.D. Wash. Feb. 8,
2013), the court granted summary judgment to the city against the plaintiff's
claims that police officers violated her First and Fourth Amendment rights and
committed torts such as battery, false arrest, false imprisonment and outrage
when they arrested her for trespassing during Mass. Sacred Heart Catholic
Church issued a "no trespass" order to the plaintiff after she
protested that the church was not celebrating its Mass in Korean and disrupted
services. The court ruled that because it was unlawful for Lye to be on church
property when she was arrested, no reasonable jury could return a verdict in
her favor on her various claims. The court also found that the officers'
conduct did not violate a "clearly established" right.
Court
Reinstates Indian Tribe's "Unjust Enrichment" Suit against the
Catholic Church
In
Northern Cheyenne Tribe v. Roman Catholic Church, No. DA 12-0010, 2013 WL
433180 (Mont. Feb. 5, 2013), in which the tribe objected to the church using
photographs of conditions on the reservation to raise funds for one of its
schools, the court reversed the district court's grant of summary judgment to
the diocese and its school. It did so based on the Northern Cheyenne Indian
Tribe's claim of unjust enrichment and effort to impose a constructive trust on
funds raised by the school. The court found that the law does not require that
the tribe prove that the school committed a wrongful act in retaining the
funds. Instead, it said the tribe only had to show a benefit conferred upon the
school by third-party donors moved by the plight of tribe members, an
appreciation or knowledge of the benefit by the school, and the acceptance or
retention of the benefit by the school under such circumstances that would make
it inequitable for the school to retain the benefit without payment of its
value.
In
determining the running of the three-year statute of limitations, the court
ruled that the trial court should determine when the tribe received notice that
the school had asserted an adverse interest as to the funds. The court
recognized that there was an acrimonious history between the parties, one
marked by discord, recriminations and threats, and a history of mutual
give-and-take reflecting two competing yet cooperative visions of the role of
the school's fundraising efforts and the appropriate distribution of those
funds. The court found that the tribe's mere knowledge that the school was
raising funds using images of tribal poverty was not sufficient to trigger the
statute. The court remanded the matter to the district court for further
proceedings consistent with its ruling.
Court
Dismisses Two Contraceptive Coverage Challenges to the ACA
In
Roman Catholic Diocese of Dallas v. Sebelius, No. 3:12-CV-1589-B, 2013 WL
687080 (N.D. Tex. Feb. 26, 2013), the court dismissed the plaintiff's challenge
to the contraceptive coverage mandate of the Patient Protection and Affordable
Care Act (the Act). The complaint alleged various constitutional and statutory
violations including of the Religious Freedom Restoration Act (RFRA) and
Administrative Procedure Act (APA). The plaintiff operates 74 parishes and
quasi-parishes, 38 elementary and secondary schools, and other charitable
enterprises. Its self-insured healthcare plan does not cover the use of
"abortion-inducing drugs," "the facilitation of sterilization
services," "contraception" or related counseling services. The
plan is not grandfathered. The court ruled that the plaintiff had standing to
state a claim, because, among other reasons, the plaintiff contends that it may
not qualify as an exempt religious employer inasmuch as it hires and serves
non-Catholics, the government would not stipulate otherwise, and the plaintiff
showed an imminent injury to its First Amendment rights. But the court also
ruled that plaintiff's claim was not ripe or procedurally fit for review in
light of the temporary enforcement safe harbor and more recent "Advance Notice
of Proposed Rulemaking" (ANPRM) proposing to amend the final regulations
of the ACA. 78 Fed. Reg. 8456 (Feb. 6, 2013).
In
Conlon v. Sebelius, No. 12-cv-3932, 2013 WL 500835 (N.D. Ill. Feb. 8, 2013),
the court dismissed for lack of standing and ripeness the Bishop of the Roman
Catholic Diocese of Joliet's and other Catholic entities' claim that the
contraceptive coverage mandate violates their sincerely held religious beliefs.
The court ruled before the ANPRM that "[w]ith an amendment to the final
regulations forthcoming, the plaintiffs' alleged injuries regarding the
enforcement of the current regulations are not 'certainly impending.'" The
court added that "any present injuries incurred by plaintiffs as a result
of their planning for the future, in response to regulations they know will be
amended, are of their own making." It also found that the challenged
regulations are not "'sufficiently final' and, therefore, plaintiffs'
claims are not ripe for judicial review."
