Timely Topics

As we head toward the 2010 midterm elections in November, tax-exempt organizations must be aware of the limitations regarding lobbying and political activity. The vast majority of religious institutions, including colleges, universities and hospitals, are tax-exempt nonprofit corporations categorized under IRC 501(c)(3) of the Internal Revenue Code (the “Code”). While most 501(c)(3) organizations are permitted to engage in some “lobbying,” they are explicitly prohibited form engaging in “political activity.” Therefore, it is important to understand the distinction between these terms of art — “lobbying” and “political activity” — as used in the Code.

The Code explains that “political activity” includes participating in, or intervening in (including publishing or distributing statements), any political campaign on behalf of (or in opposition to) any candidate for public office. The Service has discretion to immediately revoke the tax-exempt status of a 501(c)(3) organization or impose an excise tax on such organization for engaging in political activities. A separate excise tax may be imposed on the managers (officers, directors, employees) of the organization as well. Therefore, 501(c)(3) organizations should carefully analyze whether a particular activity may be considered “political activity” prior to engaging in the activity or agreeing to the expense.

By contrast, “lobbying” is defined as the “carrying on propaganda, or otherwise attempting to influence legislation.” Examples of lobbying include urging the organization’s members, employees or the public to contact legislative bodies (Congress, state legislatures, local council members, etc.) to propose, support or oppose specific legislation, or to advocate the adoption or rejection of specific legislation. While some 501(c)(3) organizations are permitted to engage in ‘insubstantial’ lobbying activities, too much of this activity can jeopardize the organization’s exempt status. If an organization decides to engage in ‘substantial’ lobbying activities, it must make an election under the Code and pay any excise that is due for exceeding the lobbying activity limits established under the Code. Hospitals and educational institutions are permitted to make such an election under the Code. However, churches, auxiliaries of churches, conventions and associations of churches are prohibited from making the election to engage in substantial lobbying.

Thus, it is important that your organization’s board, officers and directors understand the special rules and limitations established under the Code regarding lobbying and political activity.

Key Cases

Medi-Share Deemed a Contract for Insurance in Kentucky

Medi-Share is a program operated by the American Evangelistic Association and the Christian Share Ministry. Members are eligible to receive donations from other members to help pay for their own medical expenses in exchange for annual and monthly fees which vary depending on actuarial risk and claim history. They agree to abide by rules and regulations, including that the applicant be a Christian, live by Biblical standards, attend church regularly, not use tobacco or illegal drugs, and refrain from abusing legal substances such as alcohol. Each member’s payments are poured into individual trust accounts after administrative expenses are subtracted. When the company receives requests to cover health expenses, it decides whether the expenses are covered and at what rate (depending upon whether the member utilizes a preferred provider), then chooses the accounts at its discretion from which to take the money to satisfy the request. Members whose accounts are tapped are required to pray for the recipient. All members are advised in writing that the company is not liable for the payment of any medical bills, that they remain personally liable for them, and that the program is not “insurance.” The Commonwealth of Kentucky disagreed and filed suit, alleging that the company was engaged in the unauthorized sale of insurance.

The court agreed with Kentucky in Commonwealth of Kentucky v. Reinhold, Case No. 2008-SC-000839-DG, 2010 WL 3374232 (Ky. Aug. 26, 2010). The court observed: “This process clearly shifts the risk of payment for medical expenses from the individual member to the pool of sub-accounts.” Under conventional health insurance plans, members also remain personally liable to the medical provider for payment. As a fallback, the company argued that it qualified for the religious publication exception from state insurance regulation. The court disagreed, because of the requirement that the program pay “for the subscribers’ financial or medical needs by payments directly from one subscriber to another.” The court considered Medi-Share an intermediary, determining which needs are paid, how they are paid, and when they are paid. Dissenting, two justices found the arrangement was not insurance, because “a true insurance company takes on risks and the company itself bears those risks, not the individually insured policy holders.” Additionally, the dissent would have applied the religious publication exception on the grounds that the company was acting like a conduit, trustee, bank, attorney or agent, rather than an intermediary.

Condemnation Action against Church-Owned Cemetery Succeeds

The City of Chicago brought a condemnation action to obtain title to cemetery property in the course of expanding O’Hare International Airport. The church that owned the cemetery site and two parishioners intervened and sought to prevent the condemnation as a violation of their right to free exercise of religion. Other parties with property interests in or loved ones buried at the cemetery also intervened or filed a consolidated injunctive relief action of their own against the condemnation. But in City of Chicago v. St. John’s United Church of Christ, Case No. 2-10-0131, 2010 WL 3623613 (Ill. App. 2 Dist. Sept. 16, 2010), the court held that res judicata prevented any of these claims from proceeding after resolution of similar constitutional claims by two of the plaintiffs/intervenors in federal court. The doctrine of res judicata applies under Illinois law when three tests are met: (1) there is a final judgment on the merits, rendered by a court of competent jurisdiction, (2) there is an identity of causes of action, and (3) there is an identity of parties or their privies. The court found the first two prongs easily met. Regarding identity of the parties, the church and a single intervenor parishioner were also parties to the federal action. The remaining intervenors and plaintiffs were not parties in the federal action, but the court held that they were, nonetheless, privies of the plaintiffs in the federal action on the grounds that their interests were “exactly the same” as the parishioners’. The church and its congregants shared ‘a core religious belief’ that the cemetery ‘is holy and sacred ground,’ where ‘the bodies of the deceased Members and relatives are committed to the ground at the conclusion of the Rite of Burial ceremony.’” They believed that disturbing the bodies “would be a desecration of holy ground.” Because all believed alike, the court concluded that the trial court did not err in applying res judicata to all of the living relatives who intervened or sought injunctive relief. The court considered irrelevant their claim that the cemetery property was no longer needed for the project.

Colorado Court Decides RLUIPA and Constitutional Claims Against Church

In Grace Church of Roaring Fork Valley v. Bd. of County Comm’rs of Pitkin County, Case No. 05-cv-01673-RPM, 2010 WL 3777286 (D. Colo. Sept. 20, 2010), the court granted summary judgment against the church plaintiffs’ claims under a provision of the Religious Land Use and Institutionalized Persons Act (RLUIPA), granting governments the opportunity to avoid judicial enforcement of the statute by eliminating the violation. The section states: “A government may avoid the preemptive force of any provision of this chapter by changing the policy or practice that results in a substantial burden on religious exercise, by retaining the policy or practice and exempting the substantially burdened religious exercise, by providing exemptions from the policy or practice for applications that substantially burden religious exercise, or by any other means that eliminates the substantial burden.” 42 U.S.C. § 2000cc-3(e). The county defendants argued that they fell within this exemption, because they entered into a written settlement agreement on the eve of trial, resolving the church’s claims for declaratory and injunctive relief under RLUIPA and claims of constitutional violations brought under 42 U.S.C. § 1983. The settlement agreement permitted construction and use of church facilities and awarded $295,000 in attorneys’ fees and costs, but excluded claims for damages from the release. The church plaintiffs disagreed with the county that the exception applied and argued that they should not be precluded from recovering consequential damages caused by the delay in their opportunity to make religious use of the property.

Although the court sided with the county defendants, it went on to examine the merits of the church plaintiffs’ RLUIPA claim that denial of their application for a special review use of its property imposed a substantial burden on religious exercise, treated the church on less than equal terms with nonreligious assemblies, discriminated against the church on the basis of religion, or imposed unreasonable limitations. The court disagreed on all counts. The court held that the church defendants were not substantially burdened, because the only effect of the denial “was that the church could not use this particular property for its religious purposes.” The court also found that the church failed to offer similarly-situated comparators, so that there was no evidence of unequal treatment. The court also would not attribute certain comments of the Planning and Zoning Commission to the county defendants and considered other statements innocuous, rather than evidence of religious animus. Last, the court held that the church defendants failed to prove that the county’s land use regulations, as applied, deprived religious institutions of reasonable opportunities to practice their religion. The court said the high cost of property in the county was not the fault of local government. The court also found no violations of the First Amendment, Equal Protection Clause, hybrid rights, or Takings Clause, and no basis for individual liability against county commissioners under section 1983.

Obese Would-Be Ordained Minister Fails to State a Claim for Disability Discrimination

In McNeil v. Missouri Annual Conf. of the United Methodist Church, Case No. 2-10-CV-04154-NKL, 2010 WL 3732191 (W.D. Mo. Sept. 20, 2010), the court held that a seminary student who was morbidly obese failed to state a claim for disability discrimination against church defendants. She alleged that the church defendants discriminated against her because of a history of disabilities relating to diabetes, episodic cellulitis, and surgeries and treatments, resulting in a negative attitude toward her and treatment consistent with the plaintiff having a substantially limiting impairment. Allegedly, District Superintendents told her that she would not receive a church appointment because of her health, and that the Conference would not take her on because “you’re going to cost the Conference too much in health care on down the road.” Nevertheless, the court found that the plaintiff, who appeared pro se, did not allege that her physical or mental condition substantially limited her in any major life activity, or that she had a record of such impairment, or that the church defendants regarded her as having such an impairment. The court added that even if she had made out a plausible discrimination claim, “’the ministerial exception’ prevents the court from second-guessing the hiring decisions made by religious institutions.” The court held that the doctrine applied, because: (1) the employer was a religious institution, and (2) the employee was seeking appointment as an ordained minister. The court found that the plaintiff’s retaliation claim was not adequately stated and dismissed the action.

Religious Institutions in the News

A Tampa, Florida jury returned a $4.75 million award against Idlewild Baptist Church over a church ski trip that left a then-teenager with severe injuries. See http://www2.tbo.com/content/2010/sep/30/na-jury-says-church-must-pay-475m/

A judge dismissed a lawsuit challenging the engravings of “In God We Trust” and the Pledge of Allegiance at the Capitol Visitor Center on the grounds the plaintiff lacked standing. See http://www.christianpost.com/article/20101002/challenge-against-in-god-we-trust-display-thrown-out/

Church-related shootings happened in Youngstown, Ohio and Garland, Texas. See http://www.huffingtonpost.com/2010/09/28/church-shootings-in-ohio-_n_742586.html

The pastor at the center of the proposed Quran burning may be asked to pay $200,000 for policing costs. See http://www.witn.com/news/headlines/103229199.html

The definition of the family is reportedly shifting in the popular consciousness. See http://pewforum.org/Religion-News/RNS-Definition-of-family-shifting-scholar-says.aspx

IHOP, the restaurant, is suing IHOP, the church, for trademark infringement. See http://www.kansascity.com/2010/09/14/2224629/ihop-the-pancake-maker-sues-ihop.html