United States: Religious Institutions Update: March 2013

Nathan A. Adams, IV is a Partner in our Tallahassee office and Laura Atherstone an Associate in our Chicago office

Timely Topics

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 At the beginning of this year, a different provision known as the "Pease" provision, repealed as part of President Bush's tax cuts, once again became the law, although its impact is likely to be blunted due to other income tax changes.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."

Religious Institutions in the News

Pope Benedict XVI became the first pope in 600 years voluntarily to leave office; he is now "pope emeritus." Pope Francis, the first Jesuit and the first from Latin America (Argentina) to hold this position, has replaced him. http://www.nytimes.com/2013/02/28/world/europe/pope-benedict-XVI-final-general-audience.html?_r=0 ; http://online.wsj.com/article/SB10001424127887324077704578357872695335776.html?KEYWORDS=pope+Francis; http://online.wsj.com/article/SB10001424127887324662404578331822581430246.html?KEYWORDS=pope+benedict

Most large churches expect to meet their budgets in the current fiscal year and report higher giving than last year. http://articles.washingtonpost.com/2013-02-19/national/37175546_1_church-leaders-megachurches-largest-churches

The director of the White House Office of Faith-Based and Neighborhood Partnerships has left his post. http://www.nytimes.com/2013/02/08/us/politics/white-house-director-of-faith-based-initiatives-will-step-down.html; http://articles.washingtonpost.com/2013-02-07/national/36967151_1_national-prayer-breakfast-neighborhood-partnerships-president-obama

Catholic bishops rejected the latest proposed contraceptive mandate exception, saying it does not offer adequate safeguards for religious hospitals, colleges and charities. http://www.nytimes.com/2013/02/08/health/bishops-reject-white-house-proposal-on-contraceptive-coverage.html; http://www.foxnews.com/politics/2013/02/08/bishops-press-for-broader-birth-control-exemption/

Justin Welby was confirmed as the new Archbishop of Canterbury. http://www.bbc.co.uk/news/uk-21315054; http://www.nytimes.com/2012/11/10/world/europe/bishop-of-durham-appointed-as-archbishop-of-canterbury.html

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