Dissolution of a Church
By Richard R. Hammar, J.D., LL.M., CPA
© Copyright 1991, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m14
Unincorporated churches having no affiliation with a religious hierarchy are mere voluntary associations of persons and may dissolve on their own initiative by a vote of the membership, by abandonment of the church, or by withdrawal of all members from the church, assuming that all applicable provisions in the church's bylaws or other internal rules are followed. The property of unincorporated churches generally is in the name of trustees. The IRS maintains that an unincorporated church is not eligible for exemption from federal income taxes unless its organizational document stipulates that all assets held in trust for the use and benefit of the church will pass to another charitable, tax--exempt organization upon dissolution of the church. Obviously, neither the trustees nor former members have any personal claim to trust assets following the dissolution of a church. This requirement is based on the fact that the Internal Revenue Code prohibits tax--exempt status to any organization whose net earnings or assets are payable to or for the benefit of any private individual.1 If an unincorporated church has failed to include a provision in its organizational document providing for disposition of trust assets following dissolution of the church, a court may nonetheless direct that all trust assets pass to another charitable organization having similar purposes to those of the dissolved church. This power of the courts to determine the status of the trust assets of a dissolved church is known as the cy pres doctrine.
The dissolution of incorporated churches generally is regulated by state corporation law since the state alone has the authority to dissolve those organizations it has created.2 Corporate dissolutions may be either voluntary or involuntary. A voluntary corporate dissolution is accomplished by the corporation itself. Most state religious and nonprofit corporation laws contain a specific procedure for voluntary dissolution, which generally consists of the following elements:
1. The board of directors adopts a resolution recommending that the corporation be dissolved and directing that the question of dissolution be submitted to the church membership.
2. All voting members are notified in writing that the question of dissolution will be discussed at a special or general meeting of the members.
3. A resolution to dissolve the corporation is adopted if it receives at least two--thirds voter approval.
4. Notice of the dissolution is mailed to all creditors of the former corporation.
5. All corporate liabilities are paid. Any assets remaining after payment of liabilities are transferred to the organization or organizations, if any, prescribed in the dissolved corporation's charter or in the controlling rules of a church hierarchy, if any, with which the church is affiliated. If neither the charter nor controlling rules of a religious hierarchy specifies how corporate assets are to be distributed following dissolution, the assets are conveyed to one or more organizations engaged in activities substantially similar to those of the dissolving corporation.
6. The articles of dissolution are executed. The articles set forth the name of the corporation, the date of the meeting of members at which the resolution to dissolve was adopted, and an acknowledgment that a quorum was present, that the resolution was adopted by at least two--thirds of the members present at such meeting, that all debts of the corporation have been paid, and that all remaining assets of the corporation have been transferred to the organization specified in the corporation's charter, or, if no organization is specified, to an organization engaged in activities substantially similar to those of the dissolving corporation.
7. The articles of dissolution are filed with the secretary of state. If the articles of dissolution conform to all legal requirements, the secretary of state issues to a representative of the dissolved corporation a certificate of dissolution, which is recorded with the office of the recorder of deeds of the county in which the church had been located.1
It is important to recognize that the IRS maintains that every incorporated church must contain a provision in its charter ensuring that in the event of a dissolution the assets of the church will pass to a tax--exempt organization. The IRS has stated that the following provision will suffice:
Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by the Court of Common Pleas of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.2
A church of course may specify in its charter the tax--exempt organization to which its assets will pass upon dissolution. A dissolution clause is necessary in order to ensure the tax--exempt status of a church, since a church will not be considered entitled to tax--exempt status if any part of its net earnings or assets is payable to or for the benefit of any private individual.3 It is important to emphasize that the property of a dissolved church will be conveyed to a charitable organization having purposes and activities substantially similar to those of the dissolved church if neither the church charter nor controlling rules of an ecclesiastical hierarchy provide otherwise. Thus, the courts have held that the members of a dissolving church had no authority to distribute church assets to a theological seminary or a servicemen's center, since neither organization was substantially related in purpose or activity to the dissolving church.4
If a dissolving church is affiliated with a religious hierarchy whose internal rules require that the assets of a dissolving local church revert to the parent organization, the members of a dissolving church have no authority to distribute the church's assets to another organization.5
In addition to the procedures specified by state corporation law, church corporations also are bound by the procedural requirements of their own charters and bylaws, or the controlling rules of a parent ecclesiastical body, in a dissolution proceeding.6
The corporation law of many states provides that church corporations may be dissolved involuntarily by the attorney general upon the occurrence of one or more of several grounds, including failure to pay fees prescribed by law, failure to file an annual report, fraudulent solicitation of funds, and exceeding the authority conferred by state corporation law.7 Such laws typically permit church corporations to be dissolved involuntarily by a director or member if the directors are so deadlocked in the management of the corporation that irreparable injury to the corporation is being suffered; the acts of the directors are illegal, oppressive, or fraudulent; the corporation's assets are being wasted; or the corporation is unable to carry out its purposes.8 To illustrate, one court found that an involuntary dissolution of a church was warranted since dissension over the dismissal of one minister and the hiring of another was so bitter that the church could no longer conduct its operations.9 However, one court held that riots and violence within a church that lasted for only two weeks was not a frustration of the church's purposes and did not constitute an adequate basis for involuntary dissolution.10
Finally, if a church in the regular course of its affairs is unable to pay its debts and obligations as they come due, the nonprofit corporation laws of many states permit an incorporated church to be involuntarily dissolved by a creditor whose claims are unsatisfied.11
For related information on this topic see the following articles:Reporting Requirements for Churches
Church Officers, Directors, and Trustees