Church Litigation

Update

2014 Conference Forum

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Disclaimer

The material in this update is provided

as general information and education.

It should not be construed as, and does not

constitute, legal advice nor accounting, tax,

or other professional advice or services on

any specific matter, nor does this message

create an attorney-client relationship.

Readers should consult with their counsel or

other professional advisor before acting on any

information contained in this presentation.

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Agenda

• Housing Allowance Litigation

• Form 990 Case

• “Church Plan” Challenges

• Affordable Care Act (ACA) Cases

— Tax Credits

— Contraceptives

— Other

Housing Allowance Litigation

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History of Exclusion

• Value of church-owned housing

excluded from clergy income since 1921 — §107(1) of Internal Revenue Code of 1986 (Code)

• Value of clergy-owned housing

excluded since 1954 — Code §107(2)

• Clergy Housing Allowance Clarification Act

of 2002 limited to “fair rental value” — Warren v. Commissioner case (2001–2002)

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Wisconsin Case

• Code §107(2) ruled unconstitutional

by Judge Barbara Crabb — Violates Establishment Clause of First Amendment

to U.S. Constitution

“Congress shall make no law respecting

an establishment of religion…”

• IRS enjoined from giving §107(2) effect

Court ruling did not affect §107(1) exclusion of value of parsonage

Plaintiffs lacked “standing” to challenge it

Freedom From Religion Foundation (FFRF) v. Lew

Western District, Wisconsin—November 21, 2013

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Procedural Posture

• Judge Crabb stayed the injunction

(i.e., effect of her ruling) until earlier of:

— All government appeals are exhausted; or

— Time for filing appeal expires (January 25, 2014)

• Government submitted Notice of Appeal

on January 24, 2014

— Keeps Judge Crabb’s stay of her ruling in effect

— Solicitor General decides whether to pursue appeal

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Appeal Process—2014

Notice of Appeal filed January 24

Government brief due April 2 (March 5)

Amici for Government April 9

FFRF brief due May 2

Government reply brief May 16

Oral arguments Spring/Summer

Decision/Opinion Summer/Autumn

Supreme Court appeal TBD

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Government’s Arguments

• Judge Crabb erred procedurally

• Plaintiffs (FFRF) lack standing to sue

• Plaintiffs could be “ministers of the gospel”

(atheism is a religion) under §107(2)

• §107(2) is constitutional — Does not “establish” religion

— §107(1) is “convenience of the employer”

like Code §119 (e.g., hotel manager, museum curator) §107(2) is “free exercise” accommodation of younger,

more mobile churches/denominations (without parsonages)

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Possible Outcomes

• Remand to district court on procedural issues

• Reverse—Find plaintiffs lack standing

• Reverse—Find §107(2) constitutional

• Uphold—Find §107(2) unconstitutional

— Ruling has effect in 7th Circuit

(Illinois, Indiana, Wisconsin)

— IRS could adopt 7th Circuit decision nationwide

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Church Alliance Efforts

• Intends to submit request to file amicus

(“friend of the court”) brief in 7th Circuit

— April 9, 2014

Government and FFRF have consented

— Professor Michael McConnell will co-author

First amendment scholar, former U.S. Appellate judge

• Legislative solutions (if necessary):

— Revise §107 to more closely track §119

“convenience of the employer” requirement

— Respond by amending SECA tax treatment of clergy

Form 990 Case

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Kentucky Atheists Case

Three atheist nonprofit organizations challenge:

• Church exemptions from Form 990 and Form 1023

• Church audit procedures of §7611

• Church housing exclusion under §107

• Special SECA tax treatment of ministers

American Atheists v. Shulman

Eastern District, Kentucky

Seek to declare unconstitutional:

All tax code provisions that treat churches differently

than other 501(c)(3) tax-exempt organizations

Church Plan Challenges

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Dignity Health Case

Plaintiffs claim:

Definition of “church plan” under Tax Code (§414(e)) should not

include defendant Catholic-affiliated hospital (Dignity Health)

Judge denied Dignity Health’s motion to dismiss

Disagreed with IRS interpretation and many other courts

Rollins v. Dignity Health, et al.

Northern District, California

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Dignity Health Case

Ruling: Plan sponsored by Dignity Health

cannot be “church plan” as a matter of law

• Must be “established by a church”

(or convention or association of churches); and

• Be maintained by a church (or convention/association

of churches) or denominational pension/benefit board

* PBGC: Pension Benefit Guaranty Corporation

Result: Dignity Health plan is subject to ERISA

(funding rules, notice requirements, PBGC*, etc.)

Appeal likely (9th Circuit Court of Appeals)

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Other “Church Plan” Cases

Overall v. Ascension Health et al. Eastern District, Michigan

Chavies et al. v. Catholic Health East et al. Eastern District, Pennsylvania

Medina v. Catholic Health Initiatives et al. Colorado District Court

Kaplan v. St. Peter’s Healthcare System et al. New Jersey District Court

ACA Cases

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Tax Credit Cases

Challenges to premium tax credits (PTCs) through

federally-facilitated exchange/marketplace (FFE)

• ACA §1311: “[e]ach State shall...establish

an American Health Benefit Exchange...for the State.”

• ACA §1321: “the [HHS] Secretary shall...establish

and operate such Exchange within the State…”

* Kathleen Sebelius: Secretary, U.S. Department of Health

and Human Services (HHS)

Halbig v. Sebelius*

King v. Sebelius*

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Tax Credit Cases

• Code §36B(b)(2)(A) limits availability of PTCs

to only taxpayers who enroll in exchange

“established by a state”

• IRS Final Rule authorized PTCs from FFE

• D.C. District and E. Virginia District Courts ruled

for the government

1. Statute is clear: Tax credits were intended

for the federally-facilitated exchanges

2. Even if statute were ambiguous: Agency ruling

“reasonable”; should be upheld

(i.e., not second-guessed by courts)

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For-Profit Contraceptive Cases

• Challenging contraceptive mandate under: — Religious Freedom Restoration Act (RFRA)

— First Amendment

• Supreme Court argument: March 2013

• Do corporations have a soul? Are they “persons”

with religious conscience rights?

• Is RFRA constitutional?

Sebelius v. Hobby Lobby

Conestoga Wood Specialties Corp. v. Sebelius

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Tax-Exempt Contraceptive Cases

• ACA exemption

— “Houses of worship”

— “Integrated auxiliaries” that are religious organizations

• ACA “accommodation”

— Other tax-exempt organizations

“associated with or controlled by” churches

Sign attestation form (EBSA Form 700);

provide to employees and insurer or TPA*

Insurer or TPA arranges for

no-cost contraceptive coverage for employees

* TPA: Third-party administrator

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Tax-Exempt Contraceptive Cases

• Tax-exempts argue that Form 700 requirement

violates religious conscience

— Complicit in provision of objectionable contraceptives

• Little Sisters of the Poor v. Sebelius—Lead case

— Nearly 30 cases in federal courts

• Claim under RFRA—Government is not using

“least restrictive means” to implement mandate

• Supreme Court issued stay of enforcement

December 31, 2013

— Wait for 10th Circuit Court of Appeals ruling on merits

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Origination Clause Cases

• Sissel v. U.S. Department of HHS

• Hotze v. Sebelius (HHS)

• Pacific Legal Foundation v. Salazar

— Article I, Section 7 of the Constitution

(commonly referred to as “Origination Clause”)

generally requires that “all revenue raising bills”

(e.g., tax bills) originate in House of Representatives

• Challengers claim that ACA originated

in the Senate

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Origination Clause

D.C. District Court rejected plaintiff’s argument

• ACA “originated” in House (Senate substitute

for House-originated tax bill H.R. 3590) — Original bill covered housing taxes for veterans

• Not a bill purely for “raising revenue”

• Justiciability question — Supreme Court tends to avoid fights about

Congress’ own rules

— House “blue slip” practice

Will Supreme Court really go there again?

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Employer Mandate

• Renewed Commerce Clause challenge

to Employer Shared Responsibility Rule

• 4th Circuit Court of Appeals rejected

Liberty University’s claims

• Supreme Court denied writ of certiori

December 2, 2013

Liberty University v. Lew

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© 2014 General Board of Pension and Health Benefits

of The United Methodist Church, Incorporated in Illinois.

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