On December 16, 2013 the Tenth Circuit Court of Appeals overturned a bankruptcy court’s decision and ruled that a church had to turn over to a bankruptcy trustee the tithes and offerings it received from a couple because they filed for bankruptcy. Shortly after the couple filed for bankruptcy, the trustee in charge of the bankruptcy went after the church to which the couple had given their tithes for the previous two years. The trustee claimed that the law, under 11 USC 548(a)(1)(B), authorized him to recover all the contributions made by the couple to the church in 2008 and 2009 because the couple contributed more than 15% of their gross annual income to the church (Word of Life Christian Center). The church agreed that the couple gave more than 15% but also held that the law protected the church from having to forfeit 100% of the contributions to the trustee. The church cited section 548(a)(2) and claimed that it was required to return only the portion of the contributions that exceeded 15% of the couple’s gross annual income. The court disagreed with the church. It ruled that the language of the law was plain; that even if the contributions exceeded 15% of the couple’s annual gross income by just one cent, the church would have to forfeit to the trustee all of the contributions it had received from the couple. Most churches in America do not know that the law allows bankruptcy trustees to render void the tithes that churches receive from its members if the member later files for bankruptcy if the members tithes and offerings combined is greater than 15% of their income. We will teach what a church should do to avoid the potential consequences of this law at our conferences.
How the courts calculate gross annual income
In this case, the court had to figure out whether the couple gave to the church more than 15% of their gross annual income. To make that determination the court examined the following:
In 2008, the couple earned $28,836.00, of which $22,036.00 came from Social Security benefits. The couple donated $3,478.00 to the church. That amounted to approximately 12% of their income.
In 2009, the couple earned $30,651.00, of which $23,164.00 came from Social Security benefits. The couple donated to the church $1,280.00, which amounted to approximately 4% of their income.
When you average out the two previous years, the couple gave approximately 7% of their income.
It appears that the couple never gave more than 15% to the church, yet the court said that the couple did give more than 15% because it ruled that income from Social Security benefits could not be counted as gross annual income under section 548 in calculating the couple’s gross annual income.
Tithes and offerings received are not always safe
This court case reminds us that the current bankruptcy laws leave open the possibility that a court-appointed trustee can recover offerings received by the church if the donor files for bankruptcy. This can cause severe financial disruptions to a church in cases of large donors that end up filing for bankruptcy.
Congress passes law to protect churches, but falls short
In 1998, Congress passed the Religious Liberty and Charitable Donation Protection Act. This law was designed to protect churches that have received tithes and offerings from members who later file for bankruptcy protection. Before this law, appointed trustees would go after churches, seeking to recover all of the tithes and offerings they had been given (by members now in bankruptcy) in the past. This caused a lot of grief and pain to churches. When the Religious Liberty and Charitable Donation Protection Act was passed it provided protection because it says that the giving of up to 15% of gross annual income is safe from bankruptcy trustees. Congress added this provision because many people tithe and also give additional funds to churches for building campaigns, missions, and other church programs. Yet the law falls short on two provisions, as shown below.
1. The law failed to clearly define what would happen if a person gave more than 15%. It just protected someone who gave less than 15%. Now the court has interpreted that if a person gives one cent more than 15%, the bankruptcy trustee can confiscate the entire amount of the contributions given to the church.
2. The law never defined gross annual income (GAI). In determining the definition of gross income for the purposes of section 548, the court leaned on current bankruptcy laws and ruled that Social Security income does not count as gross income. This leaves a gaping hole in the law. If a person tithes whose sole source of income comes from Social Security benefits, then 100% of his/her giving to a church is subject to confiscation if he/she files for bankruptcy.
The court went on to say that “the statute establishes a bright-line rule-donations not exceeding 15% of GAI are protected; donations exceeding 15% are not. While the statute may place a burden on churches and other religious and charitable organizations which may be faced with potentially having to turn over donations they receive to a trustee” . . . “its remedy lies with Congress, not this court.”
The defense argued “voiding entire transfers above 15% of a debtor’s gross annual income would place an undue burden upon churches. If the entire donation amount is voided churches would be obligated to investigate a donor’s financial background in order to use funds within two years of receipt.”