Legal Issues for Churches: Confidentiality, Tax-Exempt Status, and Insurance

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All churches must comply with state and federal laws on many issues, although they enjoy religious exemptions in some cases concerning legal issues for churches. Running afoul of these laws can lead to costly legal trouble for churches, so being aware of these laws and their requirements can help you avoid problems in the future.

Legal Issues for Churches: Maintaining Confidentiality

A primary role of the clergy of any faith is to listen to members of their congregations, offer them counsel, and keep sensitive information confidential. In some cases, this information could result in severe repercussions if the clergy were to disclose it to others.

Different faiths establish different internal rules and policies about clergy confidentiality. However, state law also recognizes the need for confidentiality in this situation through the rules of evidence. California Evid. Code §§ 1030-1034 generally establishes clergy penitent privilege, which prevents clergy from testifying in criminal or civil cases about confidential information that members confessed to or otherwise confided in them in many cases. There may be situations in which clergy privilege may or may not apply, so getting legal advice about your options in this situation can be critical.

Legal Issues for Churches: Maintaining Tax-Exempt Status

Many churches are tax-exempt entities under the Internal Revenue Code. However, churches must take specific steps and comply with certain requirements to maintain their tax-exempt status.

For instance, churches may lose their tax-exempt status if they intervene in political campaigns related to elections for public office. In addition, engaging in lobbying or devoting a substantial part of their activities to influencing legislation can result in the loss of tax-exempt status.

Churches also must maintain records and still have regular reporting requirements, even if they are tax-exempt. For example, churches generally must file IRS Form 990 – Return of Organization Exempt from Income Tax each year or, in some cases, the corresponding electronic notice of the form. California state law also may require churches to file one or more tax forms each year.

Maintaining tax-exempt status also requires churches to ensure that their net earnings do not inure any private shareholder or individual. Examples of inurement that could jeopardize tax-exempt status include paying unreasonable compensation to a minister or transferring land for less than its fair market value to a board member.

Finally, a tax-exempt organization’s activities may not serve the private interests of any individual or organization. Its activities must be directed exclusively toward a charitable, educational, religious, or similar purpose. Therefore, if a church bestows a substantial private benefit on an individual, even if that person is just a member of the congregation or community, it could call its tax-exempt status into question.

Legal Issues for Churches: Maintaining Insurance Coverage

Insurance costs can be substantial for churches, but these costs often are essential to managing risk. These costs can include property insurance to protect property that the church owns and other types of insurance.

For example, churches sometimes purchase directors and officers (D&O) insurance, which is designed to protect the personal assets of individuals in leadership positions if the church is facing certain types of lawsuits. These lawsuits might include allegations related to the transaction that could jeopardize the church’s tax-exempt status or failure to maintain financial oversight of accounts. Although state law limits the liability of church leaders in many instances, people still are free to file lawsuits, even if they have little or no merit. These lawsuits can be costly to defend, and a D&O policy can provide coverage of legal costs for individuals sued in these types of cases.

Allow Us to Meet Your Legal Needs

Church Law Center dedicates its efforts to the legal matters that nonprofit organizations, religious organizations, and churches face daily. Call us today at (949) 245-3177 and set up a time to talk to us about your case. Get your questions answered and learn more about how we can help.

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