Insurance Company Investigations

Many policies require churches to comply with investigations.

Richard R. Hammar, Attorney, CPA

Bio

State: New York

Church Law and Tax 1991-05-01 Recent Developments

Insurance

Richard R. Hammar, J.D., LL.M., CPA

• Liability insurance policies ordinarily require churches to cooperate with any investigations conducted by the insurance company into losses or accidents. This often comes as a surprise to churches. Occasionally, questions arise as to the extent of an insurance company’s right to investigate. Such was the case in a New York case. A church building and its contents were totally destroyed in a fire of suspicious origin. The loss was covered by a comprehensive insurance policy, and the church promptly filed a claim against the insurance company. The insurance company launched an investigation into the facts and circumstances surrounding the fire. It notified the church that it wanted numerous documents, including (1) a list of monthly expenses for the church, (2) a listing of all income of the church, including the names of donors and the amounts they individually contributed, (3) copies of tax returns filed by the church, (4) copies of tax returns filed by the directors and officers of the church, and (5) a list of the salaries of the directors and officers (from their secular employment). The basis for this request for information was a provision in the insurance policy specifying that the insurance company “may examine and audit the named insured’s books and records at any time during the policy period and extensions thereof and within three years after the final termination of this policy, as far as they relate to the subject matter of this insurance.” Despite being warned by the insurance company’s attorney that a refusal to provide the requested information might lead to a refusal to a denial of any coverage under the policy, the church refused to provide the requested information. A state appeals court ruled that the church had to provide the documents that were “material and relevant to the issue of [its] financial status at the time of the fire,” if the fire loss was to be covered under the insurance policy. However, the court emphasized that “the circumstances presented do not provide a basis for [the insurance company] to be granted access to personal financial information pertaining to [the church’s] board of directors and officers, or to the names of church donors ….” This case illustrates an important point—church insurance policies typically require churches to cooperate in insurance company investigations. Churches should be aware of this requirement, and understand that a failure to cooperate may result in the denial of insurance benefits. This case further illustrates that there are limits on the authority of an insurance company to investigate. If personal financial information pertaining to officers, directors, and donors is not “material and relevant” to a particular loss, then it is not discoverable by the insurance company. However, churches should never decline an insurance company’s request for information without the advice and consent of a local attorney. Church of St. Matthew v. Aetna Casualty and Surety Co., 554 N.Y.S.2d 563 (A.D. 1 Dept. 1990).

© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m50 c0391

Legal Developments

Government Inspection of Church Records

Certain records may be available for government inspection of alleged wrongdoing.

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Records

A New York state court ruled that a church's books and records were subject to government inspection as part of an investigation into alleged wrongdoing in soliciting contributions.

The state attorney general received reports that the church forced residents of its homeless shelter to "panhandle" contributions on the streets in exchange for room, board and 25% of the moneys collected. There also were allegations that most of the contributions were appropriated for the personal benefit of the church's founder. Accordingly, the attorney general issued a subpoena to the church, directing it to make available for inspection its

books and records,
leases and deeds,
minutes of its governing body and the names and addresses of all directors, officers, and trustees, and
copies of all materials used to solicit contributions. The church refused to respond to this subpoena on the ground that it violated its "religious rights."

In rejecting the church's claim, the court observed:

There is no doubt that the attorney general has a right to conduct investigations to determine if charitable solicitations are free from fraud and whether charitable assets are being properly used for the benefit of intended beneficiaries.

It makes no difference whether or not the organization soliciting the donations is a church or other religious organization, since

religious corporations … are still within the attorney general's subpoena power, and investigations by the attorney general of alleged fraudulent behavior may proceed based upon law and the public interest against fraudulent solicitations by so-called religious groups.

The court emphasized that the attorney general's investigation did not prevent the church or its members "from practicing their religious activity, nor is it disruptive to such activity."

The court concluded:

"At a time when there is acute sensitivity to the plight of the homeless, the public, the press and the courts must be acutely aware of the possibility that the unscrupulous might prey on the warm heartedness and generosity of the community, and attempt to profit from human misery. At the very least, when such allegations exist and have some degree of evidentiary support, we cannot close our eyes to the possibilities of abuse. The mere fact that a charitable group claims first amendment privileges cannot shield that group from the scrutiny of the attorney general." Abrams v. Temple of the Lost Sheep, Inc., 562 N.Y.S.2d 322 (Sup. Ct. 1990), Abrams v. New York Foundation for the Homeless, Inc., 562 N.Y.S.2d 325 (Sup. Ct. 1990).

Legal Developments

Charitable Contributions for a Specific Purpose

Court rules that donors may sue organization.

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Charitable Contributions

Church Law and Tax 1991-03-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• Can a charity that raises funds for a specified purpose be sued by donors if the funds are not spent for that purpose? Yes, concluded a New York court in an important decision. A group of donors to the Jewish National Fund (JNF) alleged that for 20 years the JNF had misrepresented in its advertisements that it allocated donated funds to projects in both Israel and the territories acquired during the Six Day War (including the West Bank and Gaza Strip), when in fact no contributions were ever allocated to the territories. The donors sued the JNF for fraud, misrepresentation, and false advertising, and also sought a court order permanently barring JNF from any further misrepresentations. A trial court awarded the donors part of the relief they requested, and the JNF appealed. A state appeals court ruled that the JNF could be sued by the donors. It began its opinion by noting that no law “insulates the fund raising activities of nonprofit organizations from the same prohibitions against committing dishonest or fraudulent acts that are applicable [to other groups].” On the contrary, as the United States Supreme Court recently observed, the “[states] need not sit idly by and allow their citizens to be defrauded.” The court concluded that “certainly, a donor to a charity should be fully informed with respect to the use to which the contribution is being put and should not be misled into believing that the funds will be applied for one purpose when, in reality, they are being utilized somewhere else.” Consequently, the donors, “having adequately established that JNF’s advertisements and brochures may be deceptive in some material respect, and as persons who have been misled by these practices, are authorized to maintain this lawsuit.” A dissenting judge argued that a charity “has no obligation to use its funds other than in accordance with its charter. There is no contention that the funds are not used for a purpose for which the [JNF] is organized.” This eccentric view was rejected by all of the other judges on the appeals court. Marcus v. Jewish National Fund, 557 N.Y.S.2d 886 (A.D. 1990).

Legal Developments

Privileged Communications

When does the clergy-penitent privilege apply?

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Confidential and Privileged Communications

Church Law and Tax 1991-01-01 Recent Developments

Confidential and Privileged Communications

Richard R. Hammar, J.D., LL.M., CPA

• A New York state court ruled that a priest’s testimony in a criminal hearing was not “privileged.” A criminal suspect was convicted on two counts of burglary, and he appealed his conviction. One basis for his appeal was that the trial court improperly considered the testimony of a priest with whom the defendant had spoken briefly. An appeals court rejected the defendant’s argument. It acknowledged that there was a difference of opinion as to why the defendant had spoken with the priest. The defendant claimed that he spoke with the priest solely to ask him to contact an attorney on his behalf. On the other hand, the priest testified that the defendant sought him out in order to apologize personally to him for burglarizing his home. The appeals court concluded that only those communications made to a minister while acting in his or her professional role as a spiritual advisor are privileged from disclosure in a court of law. Under either the defendant’s or the priest’s account of the communication, it was not privileged since the priest had not been sought out for spiritual counsel or advice. Accordingly, it was appropriate to admit the priest’s testimony over the defendant’s objection. People v. Schultz, 557 N.Y.S.2d 543 (N.Y. 1990).

Legal Developments

Zoning – Part 1

Church Law and Tax 1990-09-01 Recent Developments Zoning Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Property, Zoning

Church Law and Tax 1990-09-01 Recent Developments

Zoning

Richard R. Hammar, J.D., LL.M., CPA

• A federal appeals court ruled that a municipal zoning ordinance prohibiting churches in single-family residential areas without a conditional use permit did not violate the constitutional guaranty of religious freedom. The San Francisco City Code prohibits churches in residential districts unless a conditional use permit is granted. Before granting a permit, the city must determine that the proposed use is necessary, and compatible with the neighborhood, and will not be detrimental to the health, safety, convenience or general welfare of persons residing in the vicinity. A church desiring to establish a church in a single-family residence applied to the city for a permit. A group of 190 neighboring residents signed a petition in opposition to the permit, based on the following considerations: (1) there already are too many churches in the neighborhood; (2) the church would not maintain neighborhood characteristics; (3) there is a housing shortage in the neighborhood; (4) an additional church would create additional traffic that would create safety hazards for neighbors; (5) inadequate parking spaces; and (6) excessive noise. A city zoning commission denied the church’s permit request, and the church filed a lawsuit claiming that the city’s actions violated its constitutional rights. A federal district court ruled in favor of the city, and the church appealed. A federal appeals court also ruled in favor of the city. The appeals court based its decision on a 3-part test that it created. The court ruled that in evaluating whether a city’s denial of a church’s zoning permit application violates the constitutional guaranty of religious freedom, the following three factors must be considered: (1) the magnitude of the impact on the exercise of religious beliefs; (2) the existence of a compelling governmental interest justifying the burden on the exercise of religious belief; and (3) the extent to which recognition of an exemption from the permit procedure would interfere with the objectives sought to be advanced by the city. With regard to the first factor, the court rejected the church’s claim that the city’s denial of the permit exerted a significant impact on its religious beliefs. The court, noting that the church had been meeting in a rented hotel banquet room, observed that “it is difficult for us to find a significant burden on religious practice if the church had not previously been practicing home worship. The burden on religious practice is not great when the government action, in this case the denial of a use permit, does not restrict current religious practice but rather prevents a change in religious practice.” Further, the court emphasized that the city’s denial “did not prevent all home worship,” but rather a “denial to worship in this specific home. The burdens imposed by this action are therefore of convenience and expense, requiring [the church] to find another home or another forum for worship. We find that the burden on religious practice in this zoning scheme is minimal.” With regard to the second factor, the court observed that the city has an interest in protecting the interests of neighboring property owners, and that this interest is “particularly strong” when a church is applying for a nonresidential use in a residential neighborhood. With regard to the third factor, the court concluded that the “minimal” burden on the church’s religious practices and beliefs was clearly outweighed by the city’s “strong” interest in preserving the character and welfare of its neighborhoods. The court rejected the church’s contention that the city’s application of its zoning laws discriminated against churches generally, or that the city and the neighboring residents “conspired” to deprive the church of its constitutional rights. Christian Gospel Church, Inc. v. San Francisco, 896 F.2d 1221 (9th Cir. 1990).

© Copyright 1990, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m82 m47 c0690

Legal Developments

Zoning

Church Law and Tax 1990-07-01 Recent Developments Zoning Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Property, Zoning

Church Law and Tax 1990-07-01 Recent Developments

Zoning

Richard R. Hammar, J.D., LL.M., CPA

• Can neighboring property owners prevent a church from operating a shelter for the homeless on its property? The was the issue before a New York court. In response to a citywide need for emergency shelters for thousands of homeless, an Episcopal church in New York City opened its doors to groups of 10 homeless men for temporary emergency shelter 3 nights each week. The church was part of a network of some 380 churches and synagogues in the city that provide more than 400,000 individual nights of temporary shelter annually. The city provides the churches and synagogues with beds, linens, clothing, toiletries, and cleaning supplies, and inspects shelters for compliance with health and safety regulations. Homeless men are transported to the church from a “drop-in center,” and arrive at 9:30 PM. They are picked up by bus the following morning at 6:00 AM. From the time of their arrival until their departure the next morning, the men are continually supervised and are not allowed to congregate in the street. The church’s minister asserted that sheltering the homeless is an important part of the church’s religious mission. Neighboring luxury condominium owners sought a court order preventing the church from continuing its homeless shelter. They complained that the shelter violated city zoning laws, and constituted a public nuisance. The court began its opinion by observing that the lawsuit “concerns the extent, if any, to which the court may or should be brought in as arbiter of a dispute involving the right of a church and its parishioners to exercise their religion and to practice Christian charity by temporarily sheltering the homeless and the rights of some adjacent property [owners] who fear crime, drug sales, prostitution and a [decrease] in their property values.” The court acknowledged that churches may only be used for religious and social purposes, but it noted that “it has long been held that a church or synagogue may be used for accessory uses and activities which go beyond just prayer and worship.” The court concluded that a church’s operation of a shelter for the homeless is a legitimate “accessory use” of a church, since it “is a use which is clearly incidental to, and customarily found in connection with,” a church. Therefore, a church’s operation of a homeless shelter did not violate the city’s zoning laws. Could the shelter be shut down on the ground that it constituted a nuisance? No, concluded the court. It observed that a nuisance involves an intentional, unreasonable, and substantial interference with another’s right to use and enjoy his property. The court concluded that the shelter was not a nuisance, since it was not an intentional, unreasonable, or substantial interference with neighboring landowners’ use or enjoyment of their properties. Greentree at Murray Hill Condominium v. Good Shepherd Episcopal Church, 550 N.Y.S.2d 981 (Sup. 1989).

Legal Developments

Officers, Directors, and Trustees

Can a civil court overturn a church’s election of trustees?

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Officers, Directors, and Trustees

Can a civil court overturn a church's election of trustees? That was the issue before a New York state court. Five of the church's original trustees filed a lawsuit asking a state court to declare "null and void" two elections of trustees and officers. The first election filled a vacancy that occurred when a trustee died, and the second election attempted to add new trustees to the church board. The five trustees claimed that

state religious corporation law specifies that vacancies in a church's board of trustees are to be filled by the remaining trustees, and not by the church membership in an election; and
state religious corporation law permits an increase in the number of trustees only if the church's charter (articles of incorporation) is amended. Since the charter was not amended, the election of additional trustees was improper.

A trial court agreed with the five trustees, and set aside the two church elections and ordered a new election. A state appeals court reversed this ruling. It acknowledged that state corporation law authorizes the civil courts to order new church elections "upon the petition of any member aggrieved by an election."

However, it pointed out that the law requires that "a proceeding against a body of officers must be commenced within four months after the determination to be reviewed becomes final and binding." Since the five trustees were seeking to overturn church elections that occurred at least two years previously, their lawsuit had to be dismissed.

In re Uranian 1st Gnostic Lyceum Temple, 547 N.Y.S.2d 63 (N.Y. App. 1989).

Legal Developments

Zoning – Part 2

Church Law and Tax 1990-05-01 Recent Developments Zoning Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Zoning

Church Law and Tax 1990-05-01 Recent Developments

Zoning

Richard R. Hammar, J.D., LL.M., CPA

• A New York court ruled that a city zoning board acted improperly in denying a homeowner’s application to use his home as a church. The court noted that “the inclusion of churches among uses permitted in the [residential] zoning district is tantamount to a legislative determination that the use is in harmony with the general zoning plan and will not be detrimental to the surrounding area. It is presumed that a religious use will have a beneficial effect in a residential area.” However, this presumption may be “rebutted with evidence of a significant impact on traffic congestion, property values, municipal services and the like.” The zoning board’s refusal to allow the homeowner to use his home as a church was improper since it was “based on conclusory findings and not upon substantial evidence of significant adverse effects.” Neddermeyer v. Ontario Planning Board, 548 N.Y.S.2d 951 (1989).

Legal Developments

Charitable Contributions – Part 1

Church Law and Tax 1990-05-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Charitable Contributions

Church Law and Tax 1990-05-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• A New York state appeals court addressed the subject of “benevolence funds” in an important ruling. Here are the facts. An 8-year-old girl was reported missing by her parents, and a massive search for the girl was conducted. Four days later, the girl’s body was found in a wooded area 200 yards from her home. She had been sexually assaulted and murdered. The crime received extensive media coverage. Shortly after the body was found, various newspapers, television and radio stations reported that neighbors of the victim’s family had started a memorial fund at local bank because they were concerned that the family did not have sufficient funds for funeral and burial expenses. The response of the public was overwhelming, and in a short time some 742 donors contributed a total of $12,428. The funds were deposited in a bank account in the names of the victim’s parents. The funeral expenses and burial plot were donated, and miscellaneous expenses of $2,039 were paid out of the fund leaving a balance of $10,389. Concerned about the disposition of the balance remaining in the memorial fund, the bank asked a state court to determine how the funds should be distributed. The court promptly sent a questionnaire to every known donor, and published a notice in local newspapers in an attempt to reach anonymous donors. The questionnaire sought the suggestions of the donors themselves regarding disposition of the funds. Of the 45 donors who responded, 23 wanted the funds to go to the victim’s family, 3 wanted a permanent memorial fund established, 11 wanted the funds to go to other charities, 2 suggested that a reward fund be created to find the murderer, 4 wanted the money to go the victim’s sisters, and 2 wanted their money back. The court began its opinion by noting that the donors’ intention was controlling. If the donors intended to make gifts “to a needy family which had suffered a tragic loss,” then the surplus belonged to the family “for whatever private purpose they deem appropriate.” If, on the other hand, the donors intended “to establish a private trust fund for the funeral and burial of [the victim],” then the memorial fund “had exhausted its purpose” and the court was “obligated to disburse the surplus to most effectively accomplish the general charitable purposes intended by the contributors.” The court readily acknowledged that there was “scant evidence of what specific plea the 742 donors heeded when they generously opened their hearts and purses to the fund.” It concluded, based on the small sample of 45 donors, that persons contributed to the memorial fund for variety of reasons. Accordingly, it issued an order disposing of the funds as follows: (1) refund the contributions of the two donors who requested a refund; (2) half of the balance was paid to the victim’s parents “to reflect the donative intent of many contributors that contributions were made to assist the family without restriction”; and (3) the other half was paid to a local nonprofit organization that assisted abused youth and victims of domestic violence. The court lamented the fact that “only three reported opinions in the whole United States have been found which discuss situations at all similar” to this one. It urged the state legislature to “consider enactment of some rules to follow in cases of public solicitation and collection of funds so that fund founders, fund contributors and fund administrators … will be afforded future guidance.” The court expressed the hope that any state regulations, if adopted, would “not dampen the great public spirit and sense of compassion which underlie such efforts.” This case will be of interest to churches that solicit funds for benevolent and charitable purposes. Application of Troy Savings Bank, 549 N.Y.S.2d 910 (1989).

Legal Developments

Church Property – Part 1

Church Law and Tax 1990-05-01 Recent Developments Church Property Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Property

Church Law and Tax 1990-05-01 Recent Developments

Church Property

Richard R. Hammar, J.D., LL.M., CPA

• A New York court ruled that a local church had the authority to withdraw from a Methodist conference. A Korean congregation was organized in New York City in 1972 as an independent church. In 1985, the church agreed to join the New York Annual Conference of the Methodist Church. A “joinder agreement” was signed that gave the local church the right to withdraw from the conference and retain title to its properties “if in three years there is unhappiness with being a United Methodist Church.” Soon after the agreement was signed, dissension broke out among church members and the church voted by a two-thirds majority to withdraw from the conference. The conference dismissed the pastor of the congregation, and demanded that the church turn over all property to the conference. It then filed a lawsuit seeking a legal determination of the rights of the parties. A state appellate court ruled that the joinder agreement was a valid legal document that gave the local congregation the right to withdraw from the conference within three years and retain its properties. The court further ruled that whether or not the right to withdraw from the conference was properly exercised would be determined by that section of the state religious corporations law that governs independent churches (and not the Methodist Church), since “for the purpose of exercising its contractual right to withdraw [the local church] must be considered an [independent] church.” New York Annual Conference of the Methodist Church v. Nam Un Cho, 548 N.Y.S.2d 577 (1989).

Legal Developments

Freedom of Religion

Church Law and Tax 1990-03-01 Recent Developments Freedom of Religion Richard R. Hammar, J.D., LL.M.,

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Freedom of Religion, Schools

Church Law and Tax 1990-03-01 Recent Developments

Freedom of Religion

Richard R. Hammar, J.D., LL.M., CPA

• Does a state law requiring all primary and secondary school students to receive instruction regarding “AIDS” and drug abuse violate the constitutional rights of parents who are opposed to such instruction on the basis of their religious belief? No, concluded a New York state appeals court. The parents who challenged the law were members of the Plymouth Brethren, a devoutly religious group dedicated to strict adherence to Biblical teachings and separation from evil influences. Recognizing the sensitive nature of the curriculum, the law permits parents to exempt their children from in-class AIDS instruction by applying for an exemption and agreeing to provide suitable home instruction. Further, the law allows a child to be excused generally from the study of health and hygiene upon a verified petition by an authorized religious representative asserting that such study conflicts with the religion of the pupil’s parents. The parents found these protections inadequate and demanded a total and unconditional exemption. In rejecting the parents’ claim, the court observed that the constitutional right to freely exercise one’s religion may be restricted if the government “is advancing a compelling interest which is essential to the accomplishment of an overriding governmental purpose.” The court concluded that “there can be little doubt that education regarding the dangers of drug and alcohol abuse constitutes a compelling state interest, and the prevention of AIDS transmission has itself been defined as a substantial and compelling state interest.” Accordingly, the state can require AIDS and drug abuse instruction in the public schools even though such instruction may impinge upon the religious rights and sensibilities of some students. The court rejected the parents’ claim that their pious religious existence will better protect their children from the plagues of AIDS and drug abuse. It noted that “the Brethren is not an isolated community … immune from the known hazards of AIDS.” On the contrary, some of its members stray from its rigorous precepts, and such persons are then integrated into society at large ignorant of AIDS and its methods of transmission and prevention. Such persons, the court concluded, “will surely be at risk and will, undeniably, if infected, constitute a potentially grave risk to all with whom they come into intimate contact.” Ware v. Valley Stream High School District, 545 N.Y.S.2d 316 (1989).

Legal Developments

Constitutions, Bylaws and Charters

Should proxy voting be recognized in congregational business meetings?

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Business Meetings

Should proxy voting be recognized in congregational business meetings?

That was the issue before a New York state appeals court. A Jewish congregation called a special business meeting to determine whether or not to retain its rabbi. The congregation, by a vote of 23 to 21, voted to submit the dispute to a panel of 3 orthodox rabbis for a final decision. The minority challenged this vote on the ground that 4 proxy votes (which were not counted at the business meeting and which agreed with the minority) were improperly disregarded at the meeting. Had they been counted, the vote would have been 25 to 23 against submitting the dispute to an arbitration panel.

The court observed that the state "Religious Corporations Law" requires proxy voting only in a few instances not relevant to this case (e.g., voting to sell, mortgage, or lease property, and certain elections of officers), but that the state "Not-For-Profit Corporation Law" (which applies unless in conflict with the Religious Corporations Law) permits proxy voting unless prohibited by the corporation's charter or bylaws. The court found no conflict between these two provisions, and accordingly concluded that the Not-For-Profit Corporations Law applied—meaning that proxy voting should be permitted unless specifically prohibited by the corporation's charter or bylaws.

The court noted that the bylaws adopted "Robert's Rules or Order," and that section 44 of Robert's Rules of Order disallows proxy voting: "Proxy voting is not permitted in ordinary deliberative assemblies unless the laws of the state in which the society is incorporated require it, or the charter or bylaws of the organization provide for it.

Ordinarily, it should neither be allowed nor required, because proxy voting is incompatible with the essential characteristics of a deliberative assembly in which membership is individual, personal, and non-transferable."

The court concluded that this case perfectly illustrated the reason why proxy voting is discouraged: "IT is obvious from the tenor of the membership meeting … that the congregation was split almost evenly among those members who 'loved' [the rabbi] or 'disliked' him vociferously. Such a meeting, by its nature, would call for extensive deliberation. Who can tell how many congregants were swayed to vote one way or the other based upon the arguments presented at the meeting?" Frankel v. Kissena Jewish Center, 544 N.Y.S.2d 955 (1989).

Legal Developments

Confidential and Privileged Communications

Church Law and Tax 1990-03-01 Recent Developments Confidential and Privileged Communications Richard R. Hammar, J.D.,

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Confidential and Privileged Communications

Church Law and Tax 1990-03-01 Recent Developments

Confidential and Privileged Communications

Richard R. Hammar, J.D., LL.M., CPA

• A New York state appeals court addressed the issue of privileged communications to clergy in an important decision. Here are the facts. An individual entered an office building in New York City, pulled a gun and ordered several people to lie on the floor, and fired at least one shot. He later left the building and went to a nearby Catholic church. The church secretary informed the priest that there was a man in the office who wanted to see him. The priest met the individual in the church sanctuary a short time later. The individual appeared very distraught, and informed the priest that his mother was a member of the parish and that she was a saint, and that he had done something very bad. Upon further questioning by the priest, the individual disclosed the actions he had taken earlier in the day. The priest advised the individual that if he had not hurt anyone he “would be better off” turning himself in to the police. The individual rejected this advice and stated that he wanted to pray. A short time later, the priest slipped outside and ran to a police headquarters a block away. On his way, he yelled to several police officers that there was a man in the church with a gun. The officers went into the church, removed the gun from the individual and placed him under arrest. The individual was later indicted on 24 counts by a grand jury which based its decision in part on the conversation that occurred between the priest and the accused in the church. The individual sought a court order dismissing the indictment on the ground that it was based on privileged communications between himself and the priest. New York law provides that “unless the person confessing or confiding waives the privilege, a clergyman … or minister of any religion … shall not be allowed to disclose a confession or confidence made to him in his professional character as a spiritual advisor.” The court observed that “not every communication between a clergyman and a penitent is considered privileged.” To be a privileged communication (i.e., not admissible in court) the communication made to the clergyman must have been made to him in his or her professional character as a spiritual advisor.” For example, the court cited an earlier case in which a letter written to a priest was not privileged since it contained no hint “that its contents were to be kept secret, or that its purpose was to obtain religious or other counsel, advice, solace, absolution or ministration.” In the present case, however, the individual with the gun “was seeking some type of spiritual advice from [the priest] and had the reasonable expectation that his conversation with the priest was to be kept secret. Therefore, [the priest] was not at liberty to testify before the grand jury as to his conversation with [the accused].” People v. Reyes, 545 N.Y.S.2d 653 (1989).

Legal Developments

Confidentiality and Privileged Communications

Church Law and Tax 1990-01-01 Recent Developments Confidentiality and Privileged Communications Richard R. Hammar, J.D.,

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Confidential and Privileged Communications

Church Law and Tax 1990-01-01 Recent Developments

Confidentiality and Privileged Communications

Richard R. Hammar, J.D., LL.M., CPA

• Can the delivery of a gun to a minister constitute a “privileged communication” that is not admissible in court? Yes, concluded a New York appeals court. A New York City police officer also served as assistant pastor of a local church. One evening, while off duty and presiding over a church function (in civilian clothes), the minister stepped outside momentarily. While on the front steps of the church, he was approached by an elderly gentleman who addressed the minister by name and stated that he had something at home that he wanted to give the minister. A few minutes later, the individual returned, and was escorted into an office where he handed the minister a plastic bag containing a .38 caliber revolver. Not wanting to the leave the gun on church premises overnight, the minister flagged a patrol car that was passing by the church, and handed the gun to the officer driving the vehicle. A few months later, the minister was accused of violating several police department regulations in the proper disposition of the gun. The minister claimed that the incident could not give rise to any disciplinary action since it was a “privileged communication” under New York law and therefore could not be used in any legal proceeding. A trial judge found the minister guilty of all charges, and concluded that the “privileged communication” defense was not available since the gun had been delivered to the minister in his capacity as a police officer rather than a clergyman. A state appeals court reversed this ruling, and dismissed the charges. The appeals court concluded that the gun had been delivered to the minister in his capacity as a minister, and that the manner in which the gun was delivered constituted a “confidential” nonverbal communication. The court found it significant that the elderly gentleman had gone to the church with the gun rather than to a police facility, and that the minister was wearing civilian clothes. The ruling illustrates that the concept of “privileged communications” made to clergy is not necessarily restricted to verbal communications, but in some cases can extend to conduct that is intended to communicate some message. Of course, the conduct must be confidential. Since the plastic bag was presented to the minister in the privacy of a church office, this requirement was satisfied. Lewis v. New York City Housing Authority, 542 N.Y.Y.2d 165 (1989).

Legal Developments

Clergy – Part 6

Legal Authority

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Contracts

Church Law and Tax 1990-01-01 Recent Developments

Clergy – Legal Authority

Richard R. Hammar, J.D., LL.M., CPA

• A New York court addressed the issue of a minister’s authority to enter into a lease on behalf of his employing church. The minister signed a 10-year lease in 1983 allowing a local charity to use the ground floor of the church for a child care center. The lease provided that all costs of renovating the building to accommodate the child care center would be paid by the lessee. At the time he signed the lease in 1983, the minister was acting without authorization from his bishop (as required by his denomination) and without approval from a civil court (as required by New York law for any church lease of 5 years or more). In reliance upon the lease, the charity incurred substantial costs ($50,000) and began operating the child care center. The minister did not obtain approval from his bishop to enter into a lease until 1985, at which time he began negotiating once again for a lease with the same charity with which he signed the 1983 lease. The new negotiations failed to produce a lease, and the church terminated the old lease in 1986. This action prompted the charity to file a lawsuit seeking judicial enforcement of the 1983 10-year lease. In response, the church argued that the 1983 lease was invalid since it had never been properly authorized by either the bishop or a civil court. The court agreed with the church that the 1983 lease was invalid because the minister’s signature was unauthorized. However, it also ruled that the lessee was entitled to the value of the renovations it made to the property in reliance on the minister’s authority to enter into the lease. New York law is unique in requiring various church property transactions to receive preliminary approval from a state court. The rationale for this requirement “is to protect members of the religious corporation … from loss through unwise bargains and from perversion of the use of the property.” This case illustrates the important principle that churches can incur some liability even for unauthorized property transactions. Soho Center for Arts and Education v. Church of Saint Anthony, 541 N.Y.S.2d 396 (Sup. Ct. 1989).

Legal Developments

Taxation

Sales

Richard R. Hammar, Attorney, CPA

Bio

State: New York

Church Law and Tax 1989-11-01 Recent Developments

Taxation – Sales

Richard R. Hammar, J.D., LL.M., CPA

• The United States Supreme Court ruled that a Texas law exempting religious periodicals from state sales tax violated the first amendment’s “nonestablishment of religion” clause. From 1984 until 1987, Texas law imposed a sales tax upon all periodicals except those “published or distributed by a religious faith and that consist wholly of writings sacred to a religious faith.” This law was challenged by a secular publisher, and the United States Supreme Court agreed that the Texas law violated the first amendment. The Court’s ruling is significant, since it probed the meaning of the first amendment’s language prohibiting the establishment of a religion. The Court noted that the first amendment nonestablishment of religion clause “prohibits, at the very least, legislation that constitutes an endorsement of one or another set of religious beliefs or of religion generally.” It observed that the “core notion” underlying the first amendment is that the government “may not place its prestige, coercive authority, or resources behind a single religious faith or behind religious faith n general, compelling nonadherents to support the practices or proselytizing of favored religious organizations and conveying the message that those who do not contribute gladly are less than full members of the community.” The Court was quick to add that government policies that are designed to implement a broad secular purpose are not invalid merely because they incidentally benefit religion. For example, the Court noted that it had previously upheld a New York property tax exemption law because it exempted a wide variety of charitable organizations including churches. The Court concluded: “Every tax exemption constitutes a subsidy that affects nonqualifying taxpayers, forcing them to become indirect and vicarious donors. Insofar as that subsidy is conferred upon a wide array of nonsectarian groups as well as religious organizations in pursuit of some legitimate secular end, the fact that religious groups benefit incidentally” does not [violate the first amendment]. However, when government directs a subsidy exclusively to religious organizations … and that either burdens nonbeneficiaries markedly or cannot reasonably be seen as removing a significant state-imposed deterrent to the free exercise of religion, as Texas has done, it provides unjustifiable awards of assistance to religious organizations and cannot but convey a message of endorsement to slighted members of the community. This is particularly true where, as here, the subsidy is targeted at writings that promulgate the teachings of religious faith. It is difficult to view Texas’ narrow exemption as anything but state sponsorship of religious belief ….” The Court emphasized that if Texas chose to grant a tax exemption to “all groups that contributed to the community’s cultural, intellectual, and moral betterment, then the exemption for religious publications could be retained.” The Court specifically ruled that a statute exempting organizations created for “religious, educational, or charitable purposes” from the payment of state sales tax would be a “model” exemption statute. Texas Monthly, Inc. v. Bullock, 109 S. Ct. 890 (1989).

© Copyright 1989, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m72 m47 c0689

Legal Developments

Officers, Directors and Trustees – Part 1

Church Law and Tax 1989-11-01 Recent Developments Officers, Directors, and Trustees Richard R. Hammar, J.D.,

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Officers, Directors, and Trustees

Church Law and Tax 1989-11-01 Recent Developments

Officers, Directors, and Trustees

Richard R. Hammar, J.D., LL.M., CPA

• Can the officers and directors of a church or other nonprofit organization be personally liable for the amount of payroll taxes that are not withheld or paid over to the government? Yes, concluded a federal district court in New York in a significant ruling. A church-operated charitable organization failed to pay over to the IRS withheld income taxes and the employer’s and employees’ share of FICA taxes for a number of quarters in both 1984 and 1985. Accordingly, the IRS assessed a penalty in the amount of 100% of the unpaid taxes ($230,245.86) against each of the four officers of the organization pursuant to section 6672 of the Internal Revenue Code, which specifies that “any person required to collect … and pay over any [FICA or income] tax who willfully fails to collect such tax … or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.” The officers challenged the validity of the IRS actions. The court observed that federal law requires employers to withhold FICA and income taxes from the wages of their employees, and to hold the withheld taxes as a “special trust fund” for the benefit of the United States government until paid or deposited. If an employer fails to make the required payments, “the government may actually suffer a loss because the employees are given credit for the amount of the taxes withheld regardless of whether the employer ever pays the money to the government.” Accordingly, “section 6672 of the Code supplies an alternative method for collecting the withheld taxes. Pursuant to this section, the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so.” The court observed that a person is liable for the full amount of taxes under section 6672 if “(1) he or she was under a duty to collect, account for, and pay over the taxes (i.e., a ‘responsible person’), and (2) the failure to pay the taxes was ‘willful.'” The court concluded that the four officers of the church-related charitable organization satisfied both requirements, and accordingly that they were personally liable for the unpaid taxes under section 6672. The officers were “responsible persons” since (1) they were directors as well as officers, (2) they had the authority to sign checks (including payroll checks), and (3) they were involved in “routine business concerns such as corporate funding, bookkeeping, salaries, and hiring and firing.” The fact that a nonprofit organization was involved, and that the officers donated their services without compensation, did not relieve them of liability. The court also ruled that the officers acted “willfully” and accordingly met the second requirement of section 6672. It defined “willful action” as “voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the government.” There need not be “an evil motive or an intent to defraud.” The court specifically held that “the failure to investigate or to correct mismanagement after having notice that withheld taxes have not been remitted to the government is deemed to be willful conduct.” Further, the court concluded that payment of employee wages and other debts with the knowledge that the payment of payroll taxes is “late” constitutes willful conduct. What is the relevance of this case to churches and church leaders? It demonstrates that church officers and directors can be personally liable for the payment of income taxes and FICA taxes that they fail to withhold, account for, or pay to the government. It does not matter that they serve without compensation, so long as they satisfy the definition of a “responsible person” and act willfully. Many church officers and directors will satisfy the definition of a “responsible person,” and such persons can be personally liable for unpaid payroll taxes if they act under the liberal definition of “willfully” described above. Clearly, church leaders must be knowledgeable regarding a church’s payroll tax obligations, and insure that such obligations are satisfied. Carter v. United States, 89-2 USTC para. 9446 (S.D.N.Y. 1989).

Legal Developments

Denominations

Legal Liability

Richard R. Hammar, Attorney, CPA

Bio

State: New York

Church Law and Tax 1989-09-01 Recent Developments

Denominations – Legal Liability

Richard R. Hammar, J.D., LL.M., CPA

• A New York state court ruled that two Catholic archdioceses and the “Catholic Charities” organization could not be sued for the alleged misconduct of the “Catholic Home Bureau.” A mother left her infant child with the Catholic Home Bureau for adoption, and the child was temporarily placed in a foster home. The mother later revoked her consent to any adoption, and demanded the return of her child. When the foster parents refused to relinquish custody, the mother obtained a court order forcing the foster parents to return the child. The mother then sued the Catholic Home Bureau for “wrongful deprivation of the custody of her infant child” and for social work malpractice. She also named the Catholic Charities and two Archdioceses as defendants on the basis of their alleged failure to adequately supervise the activities of the Catholic Home Bureau. In support of her claim against the Catholic Charities, the mother relied upon a publication of the Catholic Charities that described itself as a corporation which “coordinates and supervises all charitable activities of the Archdiocese of New York” and that listed the Catholic Home Bureau as one of 16 “affiliated child welfare agencies.” The court, in rejecting the mother’s lawsuit against the Catholic Charities, relied exclusively upon the affidavit of the executive director of the Catholic Home Bureau in which she emphatically denied that Catholic Charities exercised any supervisory authority over the activities of Catholic Home Bureau. The lawsuit against the two archdioceses was similarly dismissed. This case is significant in that it recognizes that the statements of religious leaders are entitled to considerable if not controlling weight in determining whether or not a denominational agency should be legally accountable for the alleged misconduct of an affiliated church or organization. Accordingly, it may be helpful for denominations and denominational agencies that exercise little if any supervision or control over the activities of affiliated churches or organizations to immediately prepare an appropriate affidavit by a high ranking officer in the event that the denomination is sued as a result of the alleged misconduct of an affiliated church or organization. Dunn v. Catholic Home Bureau for Dependent Children, 537 N.Y.S.2d 742 (N.Y. 1989).

See also Child abuse, Dunn v. Gracia, 768 P.2d 419 (Ore. App. 1989).

Legal Developments

Church Records

A New York state court ruled that the constitutional guaranty of religious freedom did not

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Church Records

A New York state court ruled that the constitutional guaranty of religious freedom did not excuse a church from producing its records in response to a grand jury subpoena.

During a tax investigation, the state attorney general subpoenaed several records and documents from a church (including general ledgers, accounts payable and receivable journals, 941 and W-2 forms, cash receipts and disbursement journals, bank statements, cancelled checks, postal shipment records, employee travel expense records, telephone bills, the corporate charter, minutes of board meetings, and credit card statements). The church challenged the validity of the subpoena on the ground that disclosure of the documents would violate the constitutional rights of the church and its members.

The court noted that the church had to "make at least some showing that production of the information sought would impair their first amendment rights" and that "once such a showing is made, the prosecution has the burden of establishing that the infringement is outweighed by a compelling state interest to which the information sought is substantially related, and that the state's ends may not be achieved by less restrictive means." Church representatives argued that disclosure of the records would reveal the identities of contributors to the church in violation of the church's belief (based on Matthew 6:1-4) that "charity should be given in secrecy."

The court rejected the church's claim that disclosure of many of the requested records would violate the church's right to religious freedom. For example, the court observed that "it is hard to conceive that release of charge or credit account records, or records of employees' travel expense accounts, would have any likelihood whatsoever" of violating any religious beliefs or tenets of the church. The court agreed that the church "sufficiently substantiated" that disclosure of some records would violate contributor's constitutional guaranty of religious freedom. It cited cash receipts records and bank statements. The court further agreed that disclosure of records revealing the charitable recipients of church funds (e.g., cancelled checks and bank statements) also might violate the church's rights.

The court emphasized that "the fact that disclosure of the items would directly violate the denominational belief that church contributions should be kept secret is only the beginning, however, and not the end of the inquiry." The church would be required to disclose the constitutionally protected records if the state could establish that the alleged violation of the church's rights was outweighed by a "compelling state interest to which the information sought is substantially related" and that the "state's ends may not be achieved by less restrictive means." The court concluded that such was the case here, since the church's records were sought in connection with an investigation into tax-related offenses including underreporting of compensation paid to officers and employees and diversion of church funds to nonreligious purposes, and "it is by now well settled that enforcement of a state's revenue laws constitutes a compelling governmental interest."

The court also concluded that there "was no less restrictive means for obtaining the relevant evidence of the violations of law under investigation," and therefore the church's "first amendment objections to the subpoenas are unavailing." The court did acknowledge that the subpoenas "did not seek either general membership lists or general lists of contributors to or charitable donees of the [church]," and that "disclosure of the identities of specific contributors was incidental to the effort to uncover the flow of money and property in and out of the [church], and indispensable part of the grand jury's investigation." In other words, since general membership or contributor lists were not relevant to the grand jury's inquiry, they may have been protected from disclosure had they been specifically sought by the attorney general.

This case is significant because it is one of the few published opinions to discuss the validity of a church's objections to attempts to subpoena its records. Many churches assume that their records enjoy a mantle of secrecy and are immune from the subpoena power. The New York case recognizes that this assumption is flawed, even with respect to records whose disclosure would admittedly violate the church's religious beliefs. Full Gospel Tabernacle, Inc. v. Attorney General, 536 N.Y.S.2d 201 (1988).

Legal Developments

Internal Revenue Service – Part 1

Administration

Richard R. Hammar, Attorney, CPA

Bio

State: Alaska

Church Law and Tax 1989-05-01 Recent Developments

Internal Revenue Service – Administration

Richard R. Hammar, J.D., LL.M., CPA

• The IRS “Annual Report” for fiscal year 1988 contains some interesting information. Only 1.03% of personal income tax returns filed in fiscal year 1988 were audited (down from 1.09% in 1987). However, the actual audit rate varied significantly depending on the IRS district involved and the amount of income reported. For example, the audit rate was 1.45% in Anchorage, Alaska, 1.44% in San Francisco, and 1.36% in Manhattan, New York, but only 0.55% (i.e., about half of a percent) in Boston and Newark. For returns reporting income of at least $50,000 (none on Schedule C), the audit rate was 2.32%. The audit rate jumped to 4.2% for taxpayers reporting income of at least $100,000 on Schedule C.