Final adverse determination: IRS denies exemption to a claimed church

Plain-English summary

The IRS finalized an adverse determination denying section 501(c)(3) exemption to a small religious organization that claimed church status. The organization had fewer than 20 members, held most worship meetings quarterly, funded mission travel for members and leaders, and provided informal financial assistance to selected individuals. The IRS found that the organization was not organized exclusively for exempt purposes, did not meet the church characteristics important to the analysis, and provided substantial private benefit to members and insiders. The determination also stated that the organization would not qualify as a public charity and would be subject to private-foundation rules if it were otherwise exempt.

Ruling snapshot

• Question: Does the organization qualify for section 501(c)(3) exemption and church or public-charity status?
• Outcome: Revocation or denial of exemption finalized after no timely protest was received.
• Key authorities: IRC §§ 501(c)(3), 170(b)(1)(A), 4941, 4942, 4945, 4946, 507, 509, 6110, and 7428; Rev. Ruls. 56-262, 56-304, 67-367; Treas. Reg. §§ 1.170A-9, 1.501(c)(3)-1, and 1.509(a)-3

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Release Number: 201235022 Contact Person:

Release Date: 8/31/2012

Date: June 8, 2012 Identification Number:

UIL: 501.03-00 Contact Number:

501.03-20

Employer Identification Number:
Form Required To Be Filed:
Tax Years:

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

You must file Federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file. File the returns in accordance
with their instructions, and do not send them to this office. Failure to file the returns timely may
result in a penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at

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1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Lois G. Lerner
Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: April 25, 2012 Contact Person:
Identification Number:
UIL: 501.03-00
501.03-20 Contact Number:
FAX Number:

Employer Identification Number:

University
X1

X2
Website

Dear

We have considered your application for recognition of exemption from Federal income tax
under § 501(a) of the Internal Revenue Code. Based on the information you provided in your
application and subsequent correspondence, we have concluded that you do not qualify for
exemption under § 501(c)(3). The basis for our conclusion is set forth below.

FACTS:

You are a not-for-profit corporation incorporated in State. You applied for recognition of tax
exempt status under section 501(c)(3) of the Internal Revenue Code (“Code”) and requested
public charity status as a church under section 170(b)(1)(A)(i) of the Code. Your letter on Date2
indicates, however, that you will accept exemption as a religious organization and public charity
status under 170(b)(1)(A)(vi) or 509(a)(2).

You believe that “each individual person or household is a church that God plants into the world.
Each family is a mission and a church within our Church structure. Accordingly, there are no
general worship or regularly scheduled worship services on Sundays other than the ones each
member conducts at home.” You have less than twenty members in fewer than five families
spread throughout the country. These families conduct services on their own, and seek advice

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via email from your pastor, who lives in Country. Your pastor and evangelist, who are both paid,
travel to the US four times a year. All of your members meet in one place two of those times,
while a majority of your members meet the other two. Each member pays his own way to the
site, which moved around to four different cities throughout year. Host members often provide
housing and food for the entire group during these visits. The schedule of activities for these
service meetings dedicates seven of sixteen waking hours to prayer and worship services with
the remainder of the time spent in social and dining activities. These quarterly worship services
constitute approximately twenty percent of your activities.

The narrative response provides that you, “seek to train [your] members to be intercessors for
Christ.” You later explain that an intercessor is someone who prays to God on someone else's
behalf. You go on to state that your main goal is prayer for unbelievers and that intercession is,
“a prayer where we bring ourselves to a place of a sinner and confess their sins on their behalf.”
You have sponsored mission trips to China, United Arab Emirates, Norway, Tibet, Mongolia,
and other parts of the world to minister and intercede for non-Christian sectors around the
globe. You intend to make such trips to every country in the world.

Your pastor and evangelists represent you on your mission trips, which last five to ten days
each. They are often accompanied by one of your members, different people on different trips.
The main activity taking place during these trips is a “Joshua Walk” where your members walk
around popular tourist locations and silently pray for the people in that locality. Your activities
depend on where the trip is going. For overseas trips where you are connected to cell groups,
the missionaries will provide ministry services for these groups that generally must remain
hidden due to the political climate in the area. Your missionary activities constitute
approximately sixty percent of your activities.

In addition to your quarterly congregations and missionary work you also provide financial
assistance to individuals. An attachment to your Form 1023 states that your members resolve
to provide for the needs of your members. In year1 and year2 you provided financial assistance
for a student studying at University. You provided no financial support until she arrived in the
US, and you provide the support because she is otherwise unable to work since she is here on a
student visa. You paid $x1 to this student in year2. You also paid $x2 to another individual in
China.

You consider funds provided by you to be scholarships. You grant such funding to members
and non-members “as God leads you.” You have no specific programs for financial aid but state
that you will grant scholarship funds only to individuals whose expenditures exceed their income
on a monthly basis. These individuals must also seek out further employment to increase their
income, and they must be self-sufficient within six to nine months. This requirement is removed
for students who are unable to gain employment for one reason or another. Scholarship
recipients are determined on a case-by-case basis with the amount dependent upon need and
your budget. You do not advertise your scholarship program or seek out scholarship applicants
and you have not received any applications. You represent that you do not provide
scholarships to anyone related to members of your board.

You state that, “all [your] funding comes from individual members of the church. [You do] not
receive any external contributions either from another Christian organization or government
support. Also [you do] not receive contributions from the general public. [Your] contribution
sources are [your] members and [you do] not solicit money from any other source or persons.”

In your description of your organization, you provide a statement of faith, and state that you,
“follow the traditional Christian form of worship.” You go on to provide more detail describing
services familiar to Christians. You provide a code of doctrine that follows mainstream
understandings of the Christian faith, especially amongst those who believe in a literal
interpretation of the Bible. In describing your distinct religious history, you provide an historical
account of the Presbyterian Church, in which your pastors are ordained, beginning with early
Christianity citing website as your source. You provide an organizational chart of your religious
hierarchy with Jesus at the top of the chart followed by those performing spiritual leadership
such as pastors.

You state that you have regularly scheduled religious services that are performed by each
individual family in their own homes. Additionally, your pastor conducts quarterly services with
all members in one location. The quarterly meetings rotate among the homes of various
members in different cities. These quarterly meetings consist of seven hours of prayer and
worship services a day. The remainder of the time spent together is social, often revolving
around meals.

You do not have an established place of worship, nor are you seeking one. Visits by the pastor
often take place in members’ homes. You do not have a school for the religious instruction of
the young. You do, however, conduct baptisms, weddings, funerals, etc. These ceremonial
services take place at the quarterly services with the pastor, when needed.

You have a process to accept new members if they were to find you, but you make no effort to
recruit new members. Your members may be associated with other denominations or churches.
Your Date2 letter indicates that no current members are currently associated with another
church, but that due to your format individuals are not discouraged from seeking ministry from
other churches on the weeks when they are not meeting.

Your Articles of Incorporation do not contain the required purpose and dissolution clauses, or a
prohibition of private benefit or inurement. You stated in your letter on Date1 that you are willing
to amend your Articles to include both the purposes clause found in your Bylaws and an
appropriate dissolution clause. In your Date2 letter you agreed to also include a clause
prohibiting inurement or private benefit.

Your Board of Directors consists of three, unrelated individuals. Your Form 1023 and Date1
letter state that a fourth board member was related to one of the current three, but has since
been removed. None of the board members are compensated and none of them is a pastor.
All board members are your regular members. The paid pastor and evangelist are unrelated to
each other or any of your board members or your members.

LAW:

Section 501(c)(3) of the Code provides that organizations may be exempted from tax if they are
organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes and “no part of the net earnings of which inures to the benefit
of any private shareholder or individual.”

Section 507(d)(2) provides that a substantial contributor means any person who contributed or

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bequeathed an aggregate amount of more than $5,000 to the private foundation, if such amount
is more than two percent of the total contributions and bequests received by the foundation.

Section 509(a)(2) provides public charity status for organizations that normally receive more
than one third of their support from gifts, grants, contributions, membership fees, and receipts
from related services while not receiving more than one third of their support from gross
investment income or excess in unrelated taxable income over the tax imposed on such.

Section 4941(d)(1) defines self-dealing as the furnishing of goods, services, or facilities between
a disqualified person and a private foundation as well as the payment of compensation by a
private foundation to a disqualified person.

Section 4942(j)(3)(A) states that an “operating foundation” means any organization which
makes distributions directly for the active conduct for purposes constituting the exempt function
of the organization equal to its minimum investment income.

Section 4945(d) defines a taxable expenditure as any amount paid or incurred by a private
foundation as a grant to an individual for travel, study, or other similar purposes by such
individual, unless such grant satisfies the requirements of subsection (g).

Section 4945(g) provides that (d)(3) shall not apply to an individual grant awarded on an
objective and nondiscriminatory basis pursuant to a procedure approved in advance by the
Secretary.

Section 4946(a)(1) provides that a “disqualified person,” with respect to a private foundation,
includes a substantial contributor, as defined under section 507(d)(2), a foundation director or
officer, and any spouse, ancestor, child, grandchild, great grandchild, and any spouse of a child,
grandchild, or great grandchild of that contributor, director, or officer.

Section 1.170A-9(f)(6) of the Income Tax regulations (“regulations”) states that contributions by
any individual, trust, or corporation shall be taken into account only to the extent that the total
amount of the contributions by any such individual does not exceed two percent of the
organization’s total support. In applying the two percent limitation all contributions made by a
donor and by any person or persons considered in the donor’s family for purposes of section
4946 shall be treated as made by one person.

Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt under section 501(c)(3) of the
Code, an organization must be both organized and operated exclusively for one or more of the
exempt purposes specified in that section.

Section 1.501(c)(3)-1(c)(1) states an organization will be regarded as operated exclusively for
one or more exempt purposes only if it engages primarily in activities which accomplish one or
more of such exempt purposes. An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or
more exempt purposes if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.

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Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private
interest. To meet the requirement of this subsection, the burden of proof is on the organization
to show that it is not organized or operated for the benefit of private interests, such as
designated individuals, the creator or his family, shareholders of the organization, or persons
controlled, directly or indirectly, by such private interests.

Section 1.509(a)-3(f)(1) states that for determining whether an organization receives more then
one-third of its support from permitted sources, all “gifts” and “contributions” from permitted
sources, are includable in the numerator of the support fraction.

Rev. Rul. 56-262, 1956-1 C.B. 131, provides that an organization qualifies as a church only if its
principal purpose or function is that of a church. An organization, whose activities include the
conducting of religious services and/or the ministration to the sick or mentally retarded, may
have characteristics of a church and a hospital, and an educational institution, but where the
principal purpose or function of such an organization is not that of a church or association of
churches, or an educational organization, or a hospital, it will not qualify under any of the
classes of organizations set forth in section 170(b)(1)(A)(i), (ii) or (iii).

Rev. Rul. 56-304, 1956-2 C.B. 306, provides that an organization that is privately funded and
operated can make distributions to individuals but that such an organization must maintain
adequate records and case histories to show the name and address of each recipient of aid; the
amount distributed to each; the purpose for which the aid was given; the manner in which the
recipient was selected and the relationship, if any, between the recipient and (1) members,
officers, or trustees of the organization, (2) a grantor or substantial contributor to the
organization or a member of the family of either, and (3) a corporation controlled by a grantor or
substantial contributor, in order that any or all distributions made to individuals can be
substantiated upon request by the Internal Revenue Service.

Rev. Rul. 67-367, 1967-2 C.B. 188, holds that a nonprofit organization whose sole activity is the
operation of a scholarship plan for making payments to pre-selected, specifically named
individuals does not qualify for exemption from Federal income tax under section 501(c)(3).

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 283 (1945), the
court determines that, “the presence of a single . . . [non-exempt] purpose, if substantial in
nature, will destroy the exemption regardless of the number or importance of truly . . . [exempt]
purposes.”

In Davis v. US, 495 US 472 (1990), the court denies the deduction as a charitable contribution
payments from individuals to their children who are on mission trips for a recognized church.
Payments to these children is not “for the use of” the church as the church has no control over the
funds.

An organization's net earnings may inure to the benefit of private individuals in ways other than
by the actual distribution of dividends or payment of excessive salaries. Founding Church of
Scientology v. United States, 188 Ct. Cl. 490 (Ct. Cl. 1969), 412 F.2d 1197 (1969), cert. denied,
397 U.S. 1009 (1970).

In American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304 (D.D.C. 1980) aff'd

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in an unpublished opinion (D.C. Cir. 1981), the court upheld the IRS’s determination that a
nonprofit corporation failed to qualify as a “church” for purposes of exemption under section
501(c)(3). "Faced with the difficult task of determining whether or not religious organizations are
in fact churches,” the court explained, “the IRS has developed fourteen criteria which it applies
on an ad hoc basis to individual organizations.” That is, in applying the analysis to determine
whether a religious organization may properly be characterized as a church, the Service
considers whether the organization has the following characteristics:

(1) a distinct legal existence
(2) a recognized creed and form of worship
(3) a definite and distinct ecclesiastical government
(4) a formal code of doctrine and discipline
(5) a distinct religious history
(6) a membership not associated with any other church or denomination
(7) an organization of ordained ministers
(8) ordained ministers selected after completing prescribed studies
(9) a literature of its own
(10) established places of worship
(11) regular congregations
(12) regular religious services
(13) schools for the religious instruction of the young
(14) schools for the preparation of its ministers

The court added that no single factor is controlling in making this determination, although some
are “relatively minor” in importance while others are of “central importance,” including the
existence of an established congregation served by an organized ministry, the religious
education of the young, the dissemination of a doctrinal code, and the provision of regular
religious services. At a minimum, the court concluded, a church includes a body of believers or
communicants that assembles regularly in order to worship.

Church by Mail v. Commissioner, 765 F.2d 1387 (9th Cir. 1985), aff'g 48 T.C.M. (CCH) 471
(1984), the Tax Court found it unnecessary to consider the reasonableness of payments made by
the applicant to a business owned by its officers. The 9th Circuit Court of Appeals, in affirming
the Tax Court's decision, stated: “The critical inquiry is not whether particular contractual
payments to a related for-profit organization are reasonable or excessive, but instead whether
the entire enterprise is carried on in such a manner that the for-profit organization benefits
substantially from the operation of the Church.”

In New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), the court, in denying an
organization tax exempt status under § 501(c)(3), found that the organization was operated for
personal rather than public benefits after reviewing the organization’s promotional materials,
actions, finances, and records of activities. The court, in reviewing whether the taxpayer had
modified its activities, noted that gaps in the record may be resolved against the taxpayer since
the burden is on the taxpayer to provide evidence that it meets the requirements of section
501(c)(3).

In Foundation of Human Understanding v. United States, 88 Fed. Cl. 203 (Fed. Cl. 2009), the
court stated that the “associational test” is a threshold standard that a religious organization must
satisfy in order to obtain church status. The court went on to determine

The extent to which Foundation brings people together to worship is incidental to its
main function which consists of a dissemination of its religious message through radio
and internet broadcasts, coupled with written publications. When bringing people
together for worship is only an incidental part of the activities of a religious organization,
those limited activities are insufficient to label the entire organization a church.

In Ginsberg v. Commissioner, 46 T.C. 47 (1966), the court determined that an organization was
formed for private benefit where it was controlled and contributed to solely by those deriving
direct benefit from its dredging of a river the benefits of which go predominantly to the property
owners on the river.

Chapman v. Commissioner, 48 T.C. 358 (1967), held that an organization of dentist
missionaries formed to spread the Gospel and improve dental care in foreign countries was not a
church, where the organization was not affiliated with any church, drew its members from
various Christian denominations, and did not attempt to promote membership in any particular
Christian denomination. A concurring opinion notes that the organization failed to bring people
together as the principal means of accomplishing its religious purpose.

In Church in Boston v. Commissioner, 71 T.C. 102 (1978), the court denied exemption to an
organization for failure to develop criteria for disbursements of grants or to keep adequate
records of each recipient. Such failures were determined to potentially lead to abuse thus
representing a non-exempt purpose.

Est. of Hawaii v. Commissioner, 71 T.C. 1067 (1979), the Tax Court held that compensation
need not be unreasonable or exceed fair market value to be private benefit, stating “[N]or can we
agree with petitioner that the critical inquiry is whether the payments made to International were
reasonable or excessive. Regardless of whether the payments made by petitioner to International
were excessive, International and Est. Inc., benefited substantially from the operation of
petitioner.”

In Bubbling Well Church of Universal Love v. Commissioner, 74 T.C. 531, 534 (1980) aff'd, 670
F.2d 104 (9th Cir. 1980), the Tax Court explained that an organization that is closely-controlled by
related individuals must clearly demonstrate that private interests will not be served and that net
earnings will not inure to the benefit of insiders. Given the control over the petitioner
organization by related individuals, the court could not conclude “from the information in the
administrative record that part of the net earnings did not inure to the benefit of the [controlling]
family or, stated another way, that petitioner was not operated for the [family’s] private benefit.”
In reaching this conclusion, the court noted that the situation:

. calls for open and candid disclosure of all facts bearing upon petitioner's
organization, operations, and finances so that the Court, should it uphold the
claimed exemption, can be assured that it is not sanctioning an abuse of the
revenue laws. If such disclosure is not made, the logical inference is that the facts,
if disclosed, would show that petitioner fails to meet the requirements of section
501(c)(3).

74 T.C. at 535.

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In The Church of Eternal Life and Liberty, Inc. v. Commissioner, 86 T.C. 916 (1986), an
organization with only two members that pursued a policy discouraging membership was held to
not be a church since it failed to serve any associational role for purposes of worship. The court
also denies exemption due to the private benefit of the church saying, “Prohibited inurement is
strong[ly] suggested where an individual or small group is the principal contributor to an
organization and the principal recipient of the distributions of the organization, and that
individual or small group has exclusive control over the management of the organization’s
funds.” Id. at 927.

In Carrie A. Maxwell Trust, Pasadena Methodist Foundation v. Commissioner, 2 T.C.M. (CCH)
905 (1943), a trust established for the benefit of an aged clergyman and his wife was a private
trust and not an exempt activity despite the fact that the two individuals served were needy.

In Wendy Parker Rehabilitation Foundation, Inc. v. Commissioner, 52 T.C.M. (CCH) 51 (1986),
the organization was created by the Parker family to aid an open-ended class of “victims of
coma.” However, the organization stated that it anticipated spending 30 percent of its income
for the benefit of Wendy Parker, significant contributions were made to the organization by the
Parker family, and the Parker family controlled the organization. Wendy's selection as a
substantial recipient of funds substantially benefited the Parker family by assisting with the
economic burden of caring for her. The benefit did not flow primarily to the general public as
required under section 1.501(c)(3)-1(d)(1)(ii) of the Regulations. Therefore, the Foundation was
not exempt from federal income tax under section 501(c)(3).

First Church of In Theo v. Commissioner, 56 T.C.M. (CCH) 1045 (1989), held that an
organization was not a church where its principal activity was publishing religious literature and
it had no plans for membership, although it conducted some religious services. The
organization did not have a formal creed, other than the Bible and a belief that God dwells in all
people, no sacerdotal functions, no membership unassociated with other churches, no regular
congregations or services, no established place of worship, no organized ministry for ministering
to the congregation and no youth instruction. It was uncontested, however, that petitioner was
an exempt religious organization.

ANALYSIS:

Organizations may be exempted from federal income tax if they are organized and operated
exclusively for religious, among other, purposes. Section 501(c)(3). You are not currently
organized exclusively for exempt purposes. Your Articles of Incorporation do not limit your
purposes to one or more exempt purposes and do not dedicate your assets to an exempt
purpose upon your dissolution. Sections 1.501(c)(3)-1(b)(1), (b)(4). However, you have stated
that you are willing to add any necessary language upon request to do so.

In order to be recognized as exempt, an organization must also operate exclusively for exempt
purposes. This means engaging in activities recognized as exempt, such as religious activities.
The activities must benefit a charitable class of people or the public. Section 1.501(c)(3)-
1(d)(1)(ii). An exempt organization must not be operated for the benefit of a specific or
designated few, even if such individuals are needy. See Carrie A. Maxwell Trust, 2 T.C.M.
(CCH) 905; Wendy Parker, 52 T.C.M. (CCH) 51.

You provided financial support to a foreign exchange student who is counted amongst your

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members and to another student in Country. You do not currently have plans to provide support
to any other individuals. In Wendy Parker, 52 T.C.M. (CCH) 51, the organization had plans to
provide support to coma victims in general, but a large portion of its support was directed to a
single individual. The organization in Wendy Parker was deemed to not serve public interests
despite this planned funding to a larger group. Similarly, your efforts, though theoretically open
to others, are predominantly provided to a small, private group.

Additionally, you do not have a formal program to provide such support. The guidelines by
which you determine to extend scholarships require that recipients’ parents have an income
lower than that of the tuition, room, and board and that the recipient is unable to work. These
stated guidelines are not sufficient, because they are not formal, objective, written guidelines by
which a third party might judge the grant that was rewarded. The organization in Church in
Boston, 71 T.C. 102, argued that its grants assisted the poor who were in need of food, clothing,
shelter, and medical attention. The organization, however, was unable to furnish any
documented criteria which would demonstrate the process of selecting a deserving recipient,
the reason for specific amounts given, or the purpose of the grant. The organization's inability
to provide these criteria led to the conclusion that the organization was operated for a
substantial non-exempt purpose. The requirement for records and formal criteria for third party
review is especially necessary for organizations that are operated and funded by a small group of
individuals. Rev. Rul. 56-304, supra. This reasoning combined with the fact that any gaps in the
record are construed against the taxpayer, New Dynamics, 70 Fed. Cl. 782, indicates that your
grants represent a non-exempt purpose.

You also conduct mission trips whereby you pay for your pastor, evangelical, and certain
members to go to international locales in order to intercede on the behalf of others. The
individuals on the mission trip accomplish this task by visiting popular tourist destinations,
walking around, and praying silently for the forgiveness of the sins of those around them.
Mission activity is a long accepted religious activity. However, excessive private benefit is
highly suggested when the same few persons are the principal contributors, and recipients of
distributions of an organization, and especially when the same persons have exclusive control
over the organization's funds. Church of Eternal Life, 86 T.C. at 927; Ginsberg, 46 T.C. 47. In
these situations the organization must clearly show that private interests are not being served.
Bubbling Well Church, 74 T.C. at 534. The critical question in such cases is not whether any
payments are excessive, but whether the manner in which the organization is operated is
carried on for the private benefit of a select group of individuals. See Church by Mail, 765 F.2d
1387; Est. of Hawaii, 71 T.C. 1067. Given that you are governed by your members, all of your
funds derive from your members, your members are small in number, you are not seeking extra
members, and only your members and pastors benefit, through international and domestic trips,
a substantial portion of your activities provide private benefit to your members, who are all
disqualified persons. Section 4946(a)(1). The fact that these benefits go substantially to members
who are your contributors also makes these payments similar to the scholarship payments to
children of contributors found in Rev. Rul. 67-367, supra, that were deemed to be private benefit
to a selected group of individuals. See also, Basic Bible Church v. Commissioner, 74 T.C. 846,
857 (1980). Payments for the benefit of contributors’ children or payments for the travel
expenses of contributors, as in your case, provide a substantial private benefit, rather than the
public benefit required for organizations described in § 501(c)(3).

Some amount of private benefit is inevitable, and it is acceptable if an organization is operated
primarily for public benefit. However, a substantial private benefit will prevent exemption. See

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Better Business Bureau, 326 U.S. at 283. Here, your scholarships thus far constitute just over
five percent of your funds, but this may rise as you have no guidelines capping expenditure
amounts for such activities. Additionally, your operations consist of missionary trips to
international destinations, including popular tourist destinations, for which you provide travel
funds for your members, pastor, and evangelical. You are governed by a small, related board of
persons who financially benefit from your activities. You have neither an independent board,
nor the oversight of a church hierarchy. With the combination of these activities, your non-
exempt activities appear to be substantial in nature, thus you have not met your burden of
establishing that you will be operated for public, rather than private, interests.

CHURCH STATUS

Even if you were exempt, you would not qualify as a church as you initially requested. Religious
purposes alone are not enough to establish an organization as a church. Church of Eternal Life,
86 T.C. at 924. In determining whether a taxpayer qualifies as a church, the IRS applies a 14
part test, which was upheld in American Guidance Foundation, 490 F. Supp. 304. The
characteristics reviewed in making the determination of whether a religious organization is a
church are:

(1) a distinct legal existence
(2) a recognized creed and form of worship
(3) a definite and distinct ecclesiastical government
(4) a formal code of doctrine and discipline
(5) a distinct religious history
(6) a membership not associated with any other church or denomination
(7) an organization of ordained ministers
(8) ordained ministers selected after completing prescribed studies
(9) a literature of its own
(10) established places of worship
(11) regular congregations
(12) regular religious services
(13) schools for the religious instruction of the young
(14) schools for the preparation of its ministers

In reviewing these characteristics, no single factor is controlling although some are “relatively
minor” in importance while others are of “central importance.” Id. at 306. “A church’s principal
means of accomplishing its religious purposes must be to assemble regularly a group of
individuals related by common worship and faith.” Church of Eternal Life, 86 T.C. at 924. “At a
minimum, a church includes a body of believers or communicants that assembles regularly in
order to worship.” American Guidance Foundation, 490 F. Supp. at 306; see also Church of
Eternal Life, 86 T.C. at 924; Chapman, 48 T.C. at 367 (Tannenwald, J., concurring).

To be sure, you meet several of the characteristics of a church. Meeting these criteria is not
sufficient to establish you as a church within the meaning of § 170(b)(1)(A)(i), however. Despite
these factors you do not meet the more important criteria for being a church. You do not
assemble as a whole regularly, but meet quarterly with a majority of your membership. You
also lack a place of worship, do not discourage members from maintaining membership in other
churches, do not ordain ministers, do not have regular congregations or services, and do not
have schools for religious instruction. Additionally, similar to the organization in Church of

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Eternal Life, 86 T.C. 916, you do not seek out new members. You do have a process by which
you will accept new members, but you make no effort to encourage or recruit additional
members. A large majority of your “associational” activities are conducted amongst single
families or through email. As such, you are not a church under § 170(b)(1)(A)(i).

FOUNDATION STATUS

Exempt organizations are divided into two categories, according to the source of their revenue.
Public charities are supported by a broad section of the public either through donations or fees
(such as hospitals or universities). Private foundations are funded by a small group of people,
often a family. When a small group has control over an organization and its money such as is
the case for you, abuses are more likely. Therefore, Congress requires private foundations to
follow some additional regulations.

Every organization that qualifies for tax exemption as an organization described in § 501(c)(3) is
a private foundation unless it falls into one of the categories specifically excluded from the
definition of that term. Churches are a specifically excluded category, but your failure to meet
church status means you would have to qualify as a public charity through demonstration of
broad public support. The test used to determine public support assures that an organization
has at least a minimum percentage of broad-based public support. Sections 1.509(a)-3(f);
1.170A-9(f). Because all of your financial support comes from a limited number of people, most
of whom are either directors or related to directors, even if exempt, you would have to comply
with some of the private foundation regulations found in Chapter 42 of the Internal Revenue
Code. These regulations may prevent you from conducting your activities in the manner you
have described.

CONCLUSION:

You do not qualify for exemption since you are operated for private rather than public benefit.
Even if you were to be an exempt organization you would not be a church or a public charity of
any other nature. As a private foundation you would be subject to excise taxes that limit the
types of activities you have stated you will perform.

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, I declare that I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done

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so. For more information about representation, see Publication 947, Practice before the IRS
and Power of Attorney. All forms and publications mentioned in this letter can be found at
www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment because the Internal Revenue Service (IRS) will consider the failure to protest
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to this address:
Internal Revenue Service
1111 Constitution Ave, N.W.
Washington, DC 20224
You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm

that he or she received your fax.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Lois G. Lerner
Director, Exempt Organizations