Religious Institutions Update: February 2013

by Holland & Knight LLP

Last February, at the request of Senate Finance Committee member Charles Grassley (R-Iowa), the Commission on Accountability and Policy for Religious Organizations was formed to address tax-related policy questions of import to non-profit and religious institutions. (See Holland & Knight’s February 2012 Religious Institutions Update.) In December 2012, the Commission released a report of its findings titled “Enhancing Accountability for the Religious and Broader Nonprofit Sector.” The Commission made recommendations in nine areas: Executive Compensation and Excess Benefit Transactions; Clergy Housing Exclusion; Churches, Accountability, and Donor Engagement; the IRS Advisory Committee for Religious Organizations; Independent Accreditation and ECFA’s Model; Religious Organization Examinations and Third-Party Oversight; Examinations of Church Leaders; Love Offerings; and Public Disclosure of Highly Sensitive Information.

In its Executive Compensation and Excess Benefit Transactions category, the Commission emphasized the duty of the nonprofit sector, and religious institutions specifically, to compensate leadership in a way that is “clearly reasonable under the circumstances.” By staying well within the zone of reasonableness, organizations encourage public trust of the nonprofit sector as a whole and can corporately reduce the threat of more onerous regulation. Included in the expectation of clearly reasonable compensation is the implementation of internal policies that govern such compensation and the free distribution of those policies to staff, leadership and donors. Furthermore, the largest organizations exempt from filing Form 990 should actively participate in compensation surveys to increase the body of publicly available information to the sector as a whole.

The Commission also recommended to both the Treasury Department and Congress that the rebuttable presumption of reasonableness standard of Section 4958, which applies to the benefits and compensation an organization provides, should be preserved. While the Commission recommended against making public disclosure of compensation studies mandatory, it did suggest that Form 990 could be revised to include whether an organization based its compensation comparability studies on the for-profit sector or not.

In its further recommendations to Congress, the Commission stated that if data becomes available that demonstrates organizations continually abuse the rebuttable presumption standard by relying for their compensation decisions on information from the for-profit sector, the standards could be revised to require that organizations wishing to rely on the rebuttable presumption may use only information from the nonprofit sector. Those organizations using information from the for-profit sector may permissibly do so, subject to an increased burden of demonstrating reasonableness.

Overall, the Commission expressed satisfaction with the status quo of compensation standards in the nonprofit sector. It concluded that, contrary to public perception, nonprofit institutions do not often engage in unreasonable compensation practices. Furthermore, the Commission found that the current legal framework for regulating and evaluating reasonableness of compensation and benefits is adequate and sufficient for its purposes.

In the remaining eight categories the Commission examined, it generally advocated for additional self-regulation and against the implementation of more legislation. In particular, the Commission encouraged legal education, effective administration of current laws and donor engagement, instead of additional legislation. For the text of the full report, see (Note: Holland & Knight served as joint Legal Counsel to the Commission.)

Key Cases

Public School Board Not Required to Provide Rehabilitation Act Services to Students Enrolled in Private School

In D.L. v. Baltimore City Bd. of Sch. Comm'rs, No. 11-2041, 2013 WL 164065 (4th Cir. Jan. 16, 2013), the court ruled that a public school board is not required to provide Rehabilitation Act services to students enrolled in a private school. The plaintiff student was an eighth grader diagnosed with Attention Deficit Hyperactivity Disorder and anxiety. Because Maryland law does not permit simultaneous dual enrollment in a private and public school, the school board informed his parents that it would not provide Section 504 services to him, unless he enrolled in a district public school. Deferring to the interpretation given Section 504 by the Department of Education's Office for Civil Rights, the court upheld the district's position and ruled that this was not in conflict with any constitutional parental rights. The court held, "The right to a religious education does not extend to a right to demand that public schools accommodate Appellants' educational preferences."

Congregation Did Not Violate Mandatory Child Abuse Reporting Law by Terminating Rabbi

In Ballaban v. Bloomington Jewish Community, Inc., No. 53A01-1207-CT-315, 2013 WL 177927 (Ind.App. Jan. 17, 2013), the court affirmed the grant of summary judgment to a Jewish congregation against its former rabbi's claim that he was improperly terminated and retaliated against for reporting suspected child abuse. The trial court concluded, "[I]t seems likely that Indiana law would prohibit a discharge in retaliation for reporting child abuse." Without deciding whether the ministerial exception doctrine prevents the court from deciding such a claim, the court ruled that the congregation did not violate mandatory child abuse reporting laws when it terminated the rabbi, as there were other reasons given by the congregation for the termination. Among these reasons were that the rabbi was unable or unwilling to fulfill the expectations for rabbinic behavior, the rabbi had knowingly and intentionally placed the tax exempt status of the institution at risk by accepting a donation intended for a single recipient and the board had received complaints concerning the rabbi's alleged angry outbursts and hostile behavior.

Parental Prior Consent Requirement Affecting Jewish Circumcision Procedure Upheld

In Central Rabbinical Congress of the USA & Canada v. N.Y. City Dep't of Health & Mental Hygiene, No. 12 Civ. 7590 (NRB), 2013 WL 126399 (S.D.N.Y. Jan. 10, 2013), the court upheld against the plaintiffs' free exercise and free speech challenge a health code section amended to prohibit any person from performing a circumcision that involves direct oral suction without first obtaining the written consent of one of the infant's parents on a form warning parents that direct oral suction exposes children to the risk of herpes simplex virus type I (HSV-1) infection, which may result in brain damage or death. The defendants acknowledged that the only instance they are aware of in which oral suction during circumcision occurs is metzitzah b'peh (MBP), a practice among some observant Jews conducted by a ritual circumciser, or mohel.

The court ruled that the law does not facially compel speech by mohels; they are not required either to provide the consent form or to discuss the risk of HSV-1 transmission. They are required to "obtain[]" a signed consent form prior to performing MBP, return a copy to a parent and keep the form for a year after the circumcision. The court also ruled that the law is neutral and generally applicable, and serves the legitimate government interest of safeguarding children's health. It found no discriminatory object against religion in general or Judaism in particular. Furthermore, the court observed that the "mohels' free exercise interest is inherently circumscribed by parents' right to decide whether MBP is performed on their child or not." Even under New York's free exercise clause and balancing test, the court found that the government's interests outweighed the "relatively minor burden on the free exercise of religion" inasmuch as the law "does not ban MBP, does not compel mohels to communicate anything to parents, and does not regulate how MPB is performed...."

Establishment Clause Challenge to Federal Funding for Human Trafficking Services Moot

In ACLU v. U.S. Conference of Catholic Bishops, Case Nos. 12-1466, 12-1658, 2013 WL 150321 (1st Cir. Jan. 15, 2013), the court ruled that this Establishment Clause challenge to a Department of Health and Human Services contract to provide funding to a Catholic organization to contract with third parties to provide services to human trafficking victims was moot. The contract stated that neither the Catholic organization nor its subcontractors would use funding to counsel or provide abortions or contraceptive services and prescriptions to trafficking victims. HHS awarded approximately $16 million under the contract over five and a half years, then announced in May 2011 that it would return to a grant-based model to fulfill the victim services mandate and give a strong preference to applicants willing to offer "the full range of legally permissible gynecological and obstetric care." The court ruled the case moot because any use of taxpayer funds authorized by the contract, whether constitutional or not, has now ended and expired according to the contract's own terms. The court found that this is not a case of voluntary cessation and that there is no reasonable expectation of recurrence in light of the change in the funding mechanism. Both would have been exceptions to mootness.

Closely Held For-Profit Companies and Owners Unlikely to Succeed against Contraceptive Mandate

In Conestoga Wood Specialties Corp. v. Sebelius, No. 12-6744, 2013 WL 140110 (E.D. Pa. Jan. 11, 2013), the court ruled that a closely-held for-profit corporation lacks free exercise rights and that its owners were unable to demonstrate a likelihood of success on the merits of their First Amendment and Religious Freedom Restoration Act (RFRA) challenge to the contraceptive mandate of the Patient Protection and Affordable Care Act (the Act). The company, which manufactures wood cabinets and wood specialty products, has roughly 950 full-time employees. Its owners and operators are practicing Mennonite Christians who adopted "The Hahn Family Statement on the Sanctity of Human Life," pursuant to which the company offers a health plan excluding coverage for contraceptive prescription drugs and drugs used to abort a pregnancy.

The court rejected the owners' argument that a closely held corporation may act as their alter ego for purposes of exercising free exercise or RFRA rights. The court ruled, "It would be entirely inconsistent to allow the Hahns to enjoy the benefits of incorporation, while simultaneously piercing the corporate veil for the limited purpose of challenging these regulations." It also rejected the owners' free exercise challenge to the mandate on the grounds that the Act is a neutral, generally applicable law; their RFRA challenge because any burden on their religious exercise is too "indirect and attenuated" to count as a "substantial burden," inasmuch as the burden arises only as the result of their employees' healthcare decisions; and their free speech challenge because the Act affects what employers do, allegedly not what they say. In addition, the court held the religious employer exemption in the Act consistent with the Establishment Clause as a legitimate accommodation of religion.

In Annex Medical, Inc. v. Sebelius, Case No. 12-2804 (DSD/SER), 2013 WL 101927 (D. Minn. Jan. 8, 2013), the court ruled that a closely-held for-profit corporation failed to establish a substantial likelihood of proving a substantial burden on its religious exercise by virtue of the contraceptive coverage mandate because the impact is allegedly too indirect and attenuated. The company manufactures medical devices. It strives to do so in a manner "pleasing to God and faithful to Biblical principles and values." In his operation of the company, the owner "strives to adhere to the teachings of the Catholic faith," including its pro-life perspective. Denying the company's request for an injunction, the court observed, "RFRA was not designed to 'protect against the slight burden on religious exercise that arises when one's money circuitously flows to support the conduct of other free-exercise-wielding individuals who hold religious beliefs that differ from one's own.'" Furthermore, inasmuch as the company's health plan has inadvertently provided for contraceptive services until terminated recently, the court was not persuaded that plaintiff's alleged irreparable harm outweighs the government's interest in providing for the health of women and children. The court declined to reach the question of whether the company is capable of exercising religion.

In Grote Indus., LLC v. Sebelius, No. 4:12-cv-00134-SEB-DML, 2013 WL 53736 (S.D. Ind. Jan. 3, 2013), the court denied the plaintiffs' motion for rehearing and request that it recognize a for-profit company's right to exercise religion in light of Korte v. Sebelius, No. 12-3841 (7th Cir. Dec. 28, 2012). It conceded factual similarities between the cases, but stated that it was not bound by the Korte ruling because it was not a plenary decision of the court on the merits but a grant of emergency relief, and because the relief the plaintiffs requested exceeded the relief approved in the decision.

Religious Institutions' Challenges to Contraceptive Mandate Dismissed

In Persico v. Sebelius, No. 1:12-cv-123-SJM, 2013 WL 228200 (W.D. Pa. Jan. 22, 2013), the court dismissed the plaintiffs' First Amendment, RFRA and Administrative Procedures Act challenge to the contraception mandate as not ripe for judicial review. The plaintiffs included the Roman Catholic Diocese of Erie; St. Martin Center, Inc., a nonprofit affiliate of Catholic Charities providing resources to needy families; Prince of Peace Center, Inc., another such affiliate of Catholic Charities; and clergy. The court ruled that the government has already announced plans to broaden and make permanent its temporary enforcement safe harbor and not to prosecute the mandate in its current form, rendering plaintiffs' claims speculative and premature. It said the plaintiffs "face no realistic scenario of imminent injury resulting from enforcement of the [m]andate as it currently exists" and treated their claim that they must already bear costs of coming into compliance as "[m]ere economic uncertainty."

In Catholic Diocese of Peoria v. Sebelius, No. 12-1276, 2013 WL 74240 (C.D. Ill. Jan. 4, 2013), the court dismissed the Catholic Diocese of Peoria's challenge to the contraception mandate as not ripe for judicial review. The plaintiff's self-insured and self-funded health plan was grandfathered, albeit subject to losing that status in the event of substantial changes. The court ruled that the grandfathering rendered the case premature, as did the government's assurances that it will broaden and make permanent the temporary enforcement safe harbor.

In Roman Catholic Archbishop of Washington v. Sebelius, No. 12-0815, 2013 WL 285599 (D.D.C. Jan. 25, 2013), the court dismissed the five Catholic non-profit organizations' challenge to the contraception mandate for the same reason and found "unconvincing" their argument that they will suffer hardship during the period of regulatory uncertainty before final regulations are issued because they must plan for the possibility that they must change their health insurance plans.

In Colorado Christian Univ. v. Sebelius, No. 11-cv-03350-CMA-BNB, 2013 WL 93188 (D. Colo. Jan. 7, 2013), the court dismissed a Christian university's challenge to the contraception mandate for the same reason. The court considered especially important that the government had already initiated rulemaking to amend its interim final rule. The court observed, "CCU's present planning for future eventualities 'do[es] not demonstrate a 'direct and immediate' effect on plaintiff's 'day-to-day business' with 'serious penalties attached to noncompliance,' as required to establish hardship.'"

Fourth Circuit Announces Its RLUIPA Substantial Burden Standard

In Bethel World Outreach Ministries v. Montgomery Cnty. Council, Case No. 11-2176 (4th Cir. Jan. 31, 2013), the court affirmed in part and reversed in part the trial court's grant of summary judgment to the defendant in relation to a church's Religious Land Use and Institutionalized Persons Act (RLUIPA) and constitutional claims. The church sought to construct a larger facility for its growing congregation. Reversing the trial court, the court of appeal ruled that the trial court should not have applied in the land use context the substantial burden standard applicable in the institutionalized person's context. The court ruled that in the land use context, a plaintiff can succeed on a substantial burden claim by establishing that a government regulation "puts substantial pressure on it to modify its behavior," rather than proving the regulation forces it to violate its beliefs.

The trial court also erred when it required the church to show that the defendant "targeted" it in order to succeed on its substantial burden claim, as opposed to an RLUIPA nondiscrimination claim. Applying the correct standard, the court found that the church raised a material question of fact whether it had a reasonable expectation of being able to build a church when it bought the land and presented considerable evidence that its current facilities inadequately served its needs. On the other hand, the court ruled that the county had failed to present evidence that its interest in preserving the integrity of the rural density transfer zone could not be served by less restrictive means. The court was especially struck by the fact that the county had prevented Bethel from building any church on its property, instead of imposing size limitations.

The court affirmed the trial court to the extent that it granted summary judgment to the county on the church's RLUIPA religious discrimination claim and unreasonable limitation claim. Also, it ruled that Bethel did not produce evidence that it was left without a reasonable opportunity to build anywhere else in the county. In addition, the court affirmed the trial court's grant of summary judgment on the plaintiff's equal protection and free exercise claims, the latter because the zoning law was a neutral, generally applicable law and the county had a legitimate reason to limit development in the vicinity.

Zoning and Environmental Ordinance May Violate RLUIPA and First and Fourteenth Amendments

In Congregation Rabbinical College of Tartikov, Inc. v. Village of Pomona, Case No. 07-cv-6304, 2013 WL 66473 (S.D. N.Y. Jan. 4, 2013), the court ruled that the plaintiff's facial challenge to zoning and environmental ordinances were ripe under the Equal Protection, Free Exercise and Free Speech Clauses, as well as RLUIPA and the Fair Housing Act, but not their as-applied challenge, because of their failure to submit a single formal application for approval.

The plaintiffs, Hasidic Jews, claim that the village adopted a wetlands protection ordinance requiring a 100-foot buffer around wetlands to prevent them from constructing a rabbinical college while exempting nearly every other lot in the village. They further allege that the village amended its definition of educational institution shortly after their purchase of the property to require that a qualifying institution be accredited by the New York State Department of Education and otherwise amended the code to discriminate against them. In addition, they allege community hostility, that the mayor and others were elected based on a campaign promise to fight their development, and discriminatory public comments about them. The court agreed that the plaintiffs sufficiently alleged discriminatory purpose (animus) and effect, a substantial burden on their religious exercise, a religious "gerrymander" sufficient to implicate an RLUIPA equal terms claim, religious discrimination and even an outright exclusion. The court denied the plaintiffs' free association challenge.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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