Churches and State Law Considerations
A. CHURCH BYLAWS.
1. By far, the most important legal document of any church is its bylaws. At a minimum, in addition to standard provisions relating to corporate procedure and structure, liability limiting provisions, federal tax provisions, the handling of contributions, etc., every church's bylaws should contain the following unique provisions, either by express statement or incorporation by reference to another organic document of the church:
a. A statement of faith or a religious creed, stating with particularity the fundamental religious tenets of the organization.
b. Procedures for, and qualifications of, the ordination of clergy.
c. A statement of those ceremonies, rituals or practices considered to be sacramental (i.e., sacerdotal functions), and to what extent their exercise is restricted to ministers or other ordained persons.
2. Member discipline and/or removal provisions. It is common for nonprofit membership organizations to make provision for membership expulsion or termination, but churches often add some unique twists, usually related to religious/moral infractions. The legal consideration relates to the procedure by which termination is handled, rather than addressing the substantive bases for termination.
a. Examine whether religious offenses are spelled out with particularity [OK] and whether there is a written record of interpretation/construction of language defining the offense [better], or whether offenses are vaguely defined, i.e., "any unbecoming conduct" [avoid] or there is no written record of interpretation [worse yet].
b. Also examine whether members can be expelled based upon the mere determination of the minister [avoid] in his/her sole discretion [worse], or whether termination must be approved by a church committee [OK] or the governing board [better]. You may also insert a requirement that disciplinary hearings must be conducted in confidence and not broadcast to the church members or staff.
c. Examine any differences between the way ministers are disciplined, if at all, and the way members are disciplined. It is common for ministerial conduct to be reviewed by a body composed of other ministers, whereas member conduct may be reviewed by lay persons. This is fine, but both procedures should have similar (though not necessarily the same) safeguards (review by peers, opportunity to answer charges, appeal to higher tribunal, etc.).
3. Examine the church structure as it relates to the division between temporal (legal) authority vs. ecclesiastical (religious) authority. Make sure the bylaws clearly identify which persons have what kind of authority. If anything, churches tend to think more about who has religious authority than legal authority, and the latter often gets ignored. Also, watch for anything that deprives the governing board for temporal concerns from having the final say as to any temporal matter (such as an ad hoc committee which can override the board, or boards which are merely advisory and must have their decisions approved by someone else). Every church corporation must have some body which, legally speaking, is the board of directors (although churches often call them something else), and that body must as a matter of law have the final say over temporal matters, or the board has abdicated its responsibility. In other words, make sure you know who the legal fiduciaries of the church are, and make sure they know who they are, and what it means to be a fiduciary.
B. CORPORATION LAWS.
1. Church corporations are governed generally by the state Nonprofit Corporation Acts, as are other nonprofit corporations. However, other more specialized state laws may also apply, for example:
a. Church Trustee Corporation laws.
b. Ecclesiastical Corporation laws. Note: unlike general nonprofit corporations, which may be formed by one incorporator, ecclesiastical corporations are often required to have three (3) incorporators.
c. Many states have special (usually very old) statutes directed toward specific churches and/or denominations.
2. Church corporations often use specialized forms in connection with their Articles of Incorporation, such as in Michigan. California has a separate statute and forms for all religious corporations (not just churches). However, this is not true in all states.
3. Must a church corporation have voting members? The presumption may be yes, nonetheless many states allow a church to be formed as a directorship corporation.
C. PROPERTY TAX EXEMPTION.
1. Not all states have property tax exemption statutes specifically addressed to ecclesiastical organizations. For example, Michigan law provides exemptions for:
a. Property "owned and occupied by nonprofit charitable institutions incorporated under the laws of this state with the buildings and other property thereon while occupied by them solely for the purposes for which they were
incorporated." A charitable institution includes an ecclesiastical organization, so long as the other requirements of the statute are satisfied.
b. "Houses of public worship, with the land on which they stand, the furniture therein and all rights in the pews, and any parsonage owned by a religious society of this state and occupied as a parsonage are exempt." A religious society includes an ecclesiastical organization, but on the other hand, is not limited to a traditional church.
c. Note: Since neither of these exemptions is specifically directed towards ecclesiastical organizations, neither exemption is limited to organizations which hold themselves out to the public as a church. Thus, even the "house of public worship" exemption may be available to non-church ("para-church") religious organizations. Laws in other states will vary considerably.
2. Caveat: In many states, when any real property exempt from taxation is leased or used by a private individual, association, or corporation for a for-profit business purpose, the lessees or users of this real property shall be subject to taxation in the same amount and to the same extent as though the lessee or user were the owner of this real property. In other words, mere ownership of property by a religious organization is often not enough to make the property tax exempt - it must also be used for a tax exempt purpose.
3. Caveat: The determination of whether property is used for an exempt purpose for property tax purposes is often made independent of federal tax exempt status. Why? Because property tax exemptions are governed by state law, determined by state bodies, and decided based on state case precedent, etc. Do not think that federal tax exemption by itself will go very far in establishing a state property tax exemption.
D. UNEMPLOYMENT COMPENSATION.
E. SALES TAXES.
1. "Employment" for purposes of many state acts includes service performed by an individual in the employ of a religious, charitable, educational, or other organization exempt from tax under IRC §501(c)(3).
2. However, in most states, "employment" does not include service performed either:
a. "In the employ of a church or a convention or association of churches or an organization that is operated primarily for religious purposes and is operated, supervised, controlled, or principally supported by a church or a convention or association of churches"; or
b. "By an ordained, commissioned, or licensed minister of a church in the exercise of the ministry or by a member of a religious order in the exercise of duties required by the order."
c. A notable exception is New York, which covers all religious organization employees under its unemployment compensation act.
3. Definitions of terms. In keeping with federal precedents:
a. Church, convention of churches, and association of churches are interchangeable terms denoting that every ecclesiastical organization is intended to be included, regardless of the form of its ecclesiastical structure.
b. Church controlled organizations, such as a church camp or church school, can qualify for treatment as a church.
c. Ordained, commissioned and licensed are interchangeable terms denoting that every minister is to be treated equally, regardless of the ecclesiastical form of recognition as a minister.
d. A member of a religious order is treated the same as a minister, even though he/she is not a "minister," and even though a religious order is not the same as a church. [There are more religious orders in existence than you might think.]
1. In many states, purchases of tangible personal property by an ecclesiastical organization may be exempt from sales tax either as:
a. a regularly organized church or house of religious worship; or
b. a recognized IRC §501(c)(3) or §501(c)(4) organization.
c. A notable exception is California, which does not base its sales tax exemptions on the nature or character of the organization at all, but exempts only certain kinds of transactions. In other words, there is no blanket exemption for religious organizations.
2. In states where religious organizations are exempted, normally sales tax exemptions do not apply to:
a. activities that are mainly commercial enterprises (including UBIT or unrelated business income generating activities); or
b. purchases of certain kinds of vehicles.
3. Ecclesiastical organizations are normally not exempt from charging sales tax on retail sales to others - but again, this will vary considerably from state to state.
1. Churches are exempt in most states from needing to obtain the consent of the Attorney General in the event of a dissolution. However, in a few states it is still advisable to get a letter from the AG's office stating its consent is not required (just to keep in your file).
2. Churches are not exempt from needing to file a Certificate of Dissolution and/or to receive a Certificate of Tax Clearance from the appropriate state agencies.
G. CHARITABLE SOLICITATIONS ACT.
1. In nearly every state, the Charitable Solicitations Act does not apply to "duly constituted religious organizations or a group affiliated with and forming an integral part of a religious organization no part of the net income of which inures to the direct benefit of any individual if it has received a declaration of current tax exempt status from the United States" or equivalent language.
2. Every ecclesiastical organization should satisfy the definition in the preceding paragraph. But query: What about a church which has not "received a declaration of current tax exempt status from the United States" because it is mandatorily exempted from having to do so?