IRS denies section 501(c)(3) exemption to a proposed religious sanctuary

Plain-English summary

The IRS denied tax-exempt status to an organization that planned to operate a religious sanctuary offering lodging, food, animal care, gardens, and produce sales. The organization did not describe structured religious or educational programs, and the IRS found that providing lodging to the public for a fee or free-will offering did not further an exempt purpose. The IRS also found substantial private-benefit concerns because two related directors would control the organization for life, set compensation, and control its assets and operations. The organization therefore failed the operational test under section 501(c)(3), and donors could not deduct contributions under section 170.

Ruling snapshot

• Question: Did the proposed sanctuary qualify for exemption under IRC section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 6104, and 6110; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), and 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 77-366, Rev. Rul. 77-430, and Rev. Rul. 79-18

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201236033 Contact Person:

Release Date: 9/7/2012
Identification Number:

Date: June 12, 2012
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.03-05; 501.03-20; 501.33-01; 501.36-01

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.

Since you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. 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.

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, you should follow the instructions in Notice 437. If you agree with
our deletions, you do not need to take any further action.

Letter 4038(CG) (11-2005)
Catalog Number 47632S

2

In accordance with Code section 6104(c), we will notify the appropriate State officials of
our determination by sending them a copy of this final letter and the proposed adverse
letter. You should contact your State officials if you have any questions about how this
determination may affect your State responsibilities and requirements.

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 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 Lerner
Director, Exempt Organizations

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

Letter 4038(CG) (11-2005)
Catalog Number 47632S

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: April 3, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: UIL:
501.03-05
B = individual 501.03-20
C = individual 501.33-01
D = state 501.36-01
E = date

f = dollar amount
g = dollar amount

Dear :

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

Issues
Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons
described below.

Facts

You were incorporated in D on E. Your Articles of Incorporation provide that you were
formed for religious, educational, and charitable purposes, within the meaning of
Section 501(c)(3) of the Internal Revenue Code.

Letter 4034 (CG) (11-2005)
Catalog Number 47628K

Your Articles of Incorporation further provide that your specific purpose is as follows:
“To declare and demonstrate the good news of Jesus’ dominion over all creation and to
train others to do the same, utilizing biblical methods of stewardship; encouraging
intimacy with Jesus; performing charitable acts to further these goals.”

Your incorporators, and only board members, are B and C. B and C are related through
marriage. You project B and C will be paid salaries; however, your application stated
you would suspend compensation until operations and income increased. You were
asked to expand your board of directors to ensure that compensation amounts could be
determined in an unbiased manner, but you were “unwilling to do so because at this
time no one shares in our vision’.

Your Bylaws state B and C shall serve on the board of directors for life or until
voluntarily resigning. Your Bylaws further provide that B and C must attend board
meetings to meet quorum and B and C are responsible for electing all other governing
board members. As long as B and C are acting board members, there will be no need to
fill vacated elected positions within your board.

The activity narrative submitted with your application stated the following:

Future activities of this organization will include establishing, managing &
maintaining gathering places for all who are weary, sanctuaries & havens for
rest & refreshment for man & animals (including birds & sealife). They will be
places of restoration & training for all who desire to declare the glory of God
through the establishment of creation’s rightful place w/man.

You clarified that you believe that the Presence of God will rest in and on your sanctuary
and that His presence will provide the rest needed by those staying in the sanctuary. You
stated that, “Without God’s presence, this sanctuary will not be different from any other
park, farm, retreat or like mannered facility.” For this reason you lack commercial
motivation.

B and C will establish, organize, maintain, and promote the sanctuaries. Your activities
will consist of caring for animals and cultivating property gardens.

Anyone may stay at your sanctuary for any length of time, much like stays at retreats or
hotels. Your fee structure is as follows:

Christians: $0 per night, with a free-will offering being requested
Non-Christians: g dollars per night

The narrative supplied with your application stated that you would provide biblical training
and art instruction; however, you subsequently stated that no such programs will be
provided. When asked, you indicated the services you will provide include transporting
luggage and doing laundry for your guests, as well as offering food once per day. Tours
of the facility will be offered and library facilities available. Guests are responsible for
cleaning their quarters.

You have not yet acquired a facility, but you desire approximately 14 acres (with water).
You intend to grow fruits and vegetables, as well as care for livestock on the property.
Any food produced would be used on the premises, donated to local facilities, and/or sold
at local farmers markets (or at the facility if sufficient traffic were to make the option
feasible). The sale of produce was intended to be an income-producing activity. Your
board members would be responsible for the care and upkeep of the crops, with
residents being permitted to volunteer their assistance. The care and upkeep of the crops
and livestock would be on a volunteer basis; however, your financial data indicates that
you intend to compensate one individual f dollars per year.

You have stated your financial goal for your first four years will focus on raising funds for
property purchase, state fees and taxes. By your third year, per budgeted data, you
project over $200,000 for the purchase and renovation of your property. You will support
this from a small percentage of fees and contributions, with an ‘unknown’ amount of
product sales. The remainder of your anticipated expenses consist of equipment
purchases, gardening/livestock upkeep, one individual’s salary, and administrative
expenses. You also project expending up to $5,000 annually on publicity.

Law

Section 1.501(c)(3)-1(a)(1) of the Regulations states that in order to qualify under
section 501(c)(3) of the Code, an organization must be both organized and operated
exclusively for one or more exempt purposes. If an organization fails to meet either the
organizational or operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations provides that 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
specified in section 501(c)(3) of the Code. 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) of the Income Tax Regulations 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.

Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations states 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. Thus, to meet the requirement of this
subdivision, it is necessary for an organization to establish 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.

Rev. Rul. 77-366, 1977-2 C.B. 192, held that a nonprofit organization that arranges and
conducts winter-time ocean cruises during which activities to further religious and
educational purposes are provided in addition to extensive social and recreational
activities is not operated exclusively for exempt purposes and does not qualify for
exemption.

Rev. Rul. 77-430, 1977-2 C.B. 194, held that an otherwise qualifying nonprofit
organization that conducts weekend religious retreats, open to individuals of diverse
Christian denominations, at a rural lakeshore site at which the participants may enjoy
the recreational facilities in their limited amount of free time and that charges no fees
qualifies for exemption as operated exclusively for religious purposes.

Rev. Rul. 79-18, 1979-1 CB 194, held a nonprofit organization that provides specially
designed housing to elderly persons at the lowest feasible cost and maintains in residence
those tenants who subsequently become unable to pay its monthly fees is an organization
operated exclusively for charitable purposes within the meaning of section 501(c)(3) of the
Code.

In The Schoger Foundation v. Commissioner, 76 T.C. 380, 1981, a not-for-profit
corporation owns and operates a mountain lodge that it characterizes as a religious
retreat facility. The lodge makes available to its guests numerous activities, religious,
recreational, and social, none of which are regularly scheduled or required. The
religious activities revolve around individual prayer and contemplation, with optional
daily devotions and occasional Sunday services available to the guests. The
recreational and social activities are those of the usual vacation resort. The record does
not show the extent to which the guests participated in any of the activities, religious or
otherwise. It was held that the organization did not meet its burden to establish that it
was operated exclusively for religious or other exempt purposes within the meaning of
sec. 501(c)(3).

In Salvation Navy Inc vs Commissioner T.C. Memo. 2002-275, 2002, the organization
failed to meet operational test for tax-free organization, since it did not show that it was
not operated for benefit of a private individual, its founder, sole director, and officer;
affairs of organization were irretrievably intertwined with its founder such that benefits
would inure to him, recipients of individual's services were not members of charitable
class, and fees charged by the organization provided a source of income to the
individual.

Letter 4034(CG) (11-2005) 4
Catalog Number 47628K

In Airlie Foundation v. IRS, No. 02-0785 (D. D.C. 9/24/2003), the court held Airlie did
not meet the requirements to be recognized as an organization described in IRC
501(c)(3), because its operation of a conference facility was a commercial activity. The
court identified the following factors in assessing commerciality:

• Competition with for-profit commercial entities;
• Extent and degree of below cost services provided;
• Pricing policies;
• Reasonableness of financial reserves;
• Use of advertising; and
• Receipt of charitable donations.

Application of Law

You fail the operational test as described in Section 1.501(c)(3)-1(a)(1) of the
Regulations as you are not operated for exclusive 501(c)(3) purposes and you failed to
establish private benefit will not occur. You do not provide any religious activities,
therefore, you do not further a religious purpose. Providing lodging to the public for a
fee, or a free will offering, furthers no exempt purpose. Based on Treas. Reg. 501(c)(3)-
1(c)(1), you do not qualify because more than an insubstantial part of your activities are
not in furtherance of an exempt purpose. Since more than substantial parts of your
activities are devoted to simply providing housing for a fee, you are not exclusively
religious.

B and C are shareholders because they have a personal and private interest in your
activities. B and C will both have unlimited control over your operations and finances.
This allows for the potential for excess benefit through compensation as well as the use
of the facility and other assets. With complete control for life over your governance, B
and C will be able set their own compensation amounts and you have not shown that
they will not directly benefit from your earnings. (Treas. Reg. 1.501(c)(3)-1(c)(2))

By placing complete control in the hands of B and C whom you intend to compensate
once income increases, you have not shown how you operate for public, rather than
private interests. Providing B and C with a position for life serves a private, rather than a
public, interest and does not further an exempt purpose. By operating for the benefit of
private parties, you are similar to the organization described in Salvation Navy Inc. You
also do not meet the qualification set forth under Section 1.501(c)(3)-1(d)(1)(ii) of the
Income Tax regulations

Your activities are similar to those of the organization described in Rev. Rul. 77-366 and
in The Schoger Foundation. In your response, you referred to your facility as being no
different than a retreat. You allow individuals to stay at your facility for non-religious

Letter 4034(CG) (11-2005) 5
Catalog Number 47628K

purposes. You have no activities for residents and they can make use of your facilities
at their leisure.

You are dissimilar to the organization described in Rev. Rul. 77-430 because you do not
provide any structured programs or religious activities. By providing no religious
programs or events, you have not shown that your activities are exclusively religious in
nature.

You are not as described in Revenue Ruling 79-18. Where housing for the poor,
distressed or elderly may qualify under 501(c)(3), you are distinguished as there is no
limitation as to who may stay at your facility. Neither your purposes nor your housing
activities are limited to the low income or needy, rather, you operate for the much
broader reason of providing a sanctuary.

You are operating like the organization in Airlie Foundation v. Commissioner because
your purpose is similar to those operating commercial entities in the same manner. by
setting fees above cost which are comparable to those of similar for-profits, by operating
at a significant surplus, and by spending significant resources on publicity, you are
operated in a commercial manner. In addition, you have not shown how your
livestock/produce sales are not commercial in nature. Further, you have admittedly no
activities that can be deemed educational in nature for guests that would distinguish you
or demonstrate an exclusively educational or charitable purpose.

Applicant’s Position

It is your position that because your sanctuary is based on the Bible, it cannot be
anything other than religious in nature. It is your view that an individual’s experience at
the sanctuary is in itself a religious experience and, therefore, you are exclusively
religious in nature.

Service Response to Applicant’s Position

You have no structured programs or activities, as described in the preceding facts and
analysis. Your goal is raising funds for the purchase of property to renovate and/or
construct a sanctuary at which anyone can stay for an offering or fee. B and C wholly
control your operations and make all decisions regarding compensation, property
acquisition, residents and guests. B and C will establish, maintain and promote the
sanctuary. Food grown on site will feed guests and will be sold to the public. You have
failed to establish B and C will not benefit from your operations through compensation,
residency and product sales.

Conclusion

Based on the facts presented above, we hold that you are not exclusively educational or
religious within the meaning of section 501(c)(3) of the Code. You have no structured
activities and serve no 501(c)(3) purpose. You operate for the benefit of your directors

Letter 4034(CG) (11-2005) 6
Catalog Number 47628K

who hold control over all of your operations. Accordingly, you serve a private rather than
public purpose. We conclude you fail the operational test and do not qualify for
exemption under IRC section 501(c)(3).

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 that information affects our determination.
If your statement does not provide a basis to reconsider our determination, we will
forward your case to our Appeals Office. You can find more information about the role
of the Appeals Office in Publication 892, Exempt Organization Appeal Procedures for
Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. The statement of facts
(item 4) must be declared true under penalties of perjury. This may be done by adding
to the appeal the following signed declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to
the best of my knowledge and belief, they are true, correct, and complete.”

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be
included stating that the representative prepared the appeal and accompanying
documents; and whether the representative knows personally that the statements of
facts contained in the appeal and accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the appeal process. To be
represented during the appeal process, you must file a proper power of attorney, Form
2848, Power of Attorney and Declaration of Representative, if you have not already
done 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 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 to you. That letter will provide information about filing tax returns
and other matters.

Letter 4034(CG) (11-2005) 7
Catalog Number 47628K

Please send your protest statement, Form 2848 and any supporting documents to the
applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201
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

Enclosure, Publication 892

Letter 4034(CG) (11-2005) 8
Catalog Number 47628K