IRS written determination 1310045: IRS denies exemption and church classification to a religious organization

Plain-English summary

The IRS issued a final adverse determination after a religious organization did not protest a proposed denial within 30 days. The organization described a ministry division, an affiliated church, an online religious education program, consulting activities, and merchandise sales. The IRS concluded that the organization's articles did not properly limit its purposes or dedicate its assets to exempt purposes, and that the organization had not provided enough detail about its activities and governance. The IRS also found that the consulting and merchandising activities appeared substantially commercial and that the family-dominated board and lack of formal control over the church raised private-benefit concerns. The organization therefore did not qualify under section 501(c)(3) and did not qualify as a church under section 170(b)(1)(A)(i).

Ruling snapshot

• Question: Whether the organization qualified for section 501(c)(3) exemption and classification as a church under section 170(b)(1)(A)(i).
• Outcome: Other adverse determination.
• Key authorities: IRC §§ 501(c)(3), 170(b)(1)(A)(i), and 509(a)(1); Treas. Reg. §§ 1.501(c)(3)-1 and 1.513-1.

Full text (IRS public release)

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Contact Person:

Number: 201310045
Release Date: 3/8/2013 Identification Number:

Contact Number:

Date: December 14, 2012

DEPARTMENT OF THE TREASURY
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Employer Identification Number:
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Form Required To Be Filed:

Tax Years:
UIL: 501.03-20; 509.02-04

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.

Because 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. 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

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,

Holly O. Paz
Director, Rulings and Agreements

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: July 16, 2012 Contact Person:

Identification Number:

Contact Number:

FAX Number:

Employer Identification Number:
UIL: 501.03-20; 509.02-04
LEGEND

Director 1
Director 2
Director 3
Date 1
Date 2

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Dear

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

FACTS

You state that you are a non-denominational Christian organization, and that your
purpose is to help Christians struggling to provide for their spiritual, fellowship, or
financial needs. You state that your mission is to insure that every person has a
relationship with Jesus Christ which they utilize on a daily basis, and that you strive to
make an impact in the lives of at least one person each day while displaying a Christ-like
manner and exemplifying Biblical principles.

Organization

You filed your Articles of Incorporation (the “Articles”) on Date 1 pursuant to the nonprofit
corporation statute of State. Your Articles do not contain a statement limiting your
purposes and activities to those described under § 501(c)(3), but you state that you will
amend your Articles to include such a provision if your application for tax exemption is
approved. Your Articles also do not contain a clause stating that your assets are
irrevocably dedicated to exempt purposes, but you state that you will amend your
Articles to include such a provision if your application for tax exemption is approved.

Operations

Your operations are divided into three “divisions.” You state that these divisions are
separately managed and engage in different activities, but that each division furthers
your religious beliefs and organizational purpose. The divisions of your organization are:
(1) the Ministry Division; (2) the Consulting Division; and (3) the Merchandising Division.

Ministry Division

You state that the Ministry Division is the center of the entire organization. Your
activities related to the Ministry-Division are carried out primarily through Church and
Website.

You made no mention of Church in your original application, but in subsequent
correspondence you told us that you “planted” Church on Date 2. You state that Church
is not an independently organized entity. Instead, you state that Church is a “ministry
element under [your] corporate structure” and that it is intended to permanently exist as
a part of your ministry efforts. You state that “[w]hile Church is subordinate to [you],
there is a corporate business relationship and spiritual partnership that helps the two
work together.”

Church has its own “constitution,” which states that Church is autonomous and is not
subject to the contro! of any external ecclesiastical body or board. You state that “the
Spiritual development of the church/day-to-day business is determined by its pastors,
elders, and body of believers.” You also state that “[you have] no control over Church
and/or its Board of Directors” that “there is nothing in writing giving [you] ‘authority’ over
Church” and that you “fully understand[ ] that Church could completely break-away from
[ylour corporation; become incorporated itself; and there’s nothing [you] can do about
that.” Despite your lack of formal control over Church, you state that Church is
prohibited from acting in a manner that would compromise or be in violation of your tax
exempt purpose, and you “fefel] that Church leadership/membership wi{ill] support any
corporate requirements levied upon them by [you].”

Church's Board of Elders functions as overseers of Church, and evaluates its
effectiveness and direction. The Elders “have final say in any and all matters concerning
the overall direction of [Church].” Church’s Senior Pastor is a permanent member of the
Board of Elders.

The Senior Pastor is the leader of Church. The Board of Elders may not terminate the
Senior Pastor. The Senior Pastor is accountable to the Pastor Accountability Team, a
group of individuals selected by the Senior Pastor and approved by the Board of Elders.

Members of the Pastor Accountability Team serve for an indefinite term, but must be
reaffirmed annually by the Board of Elders. Currently, Pastor serves as Senior Pastor of
Church. You state that “there is a lay-leader within Church that’s being mentored to
assume the role of pastor at a later date” but you did not specify who that individual is,
who is mentoring that individual, or the timeline for such a transition.

You also operate Website as a part of the Ministry Division. Website is under
development, but completed portions provide links to the Bible and specific selected
passages therein, list a daily devotional message, tell stories of encouragement, provide
links to blogs, and allow the user to submit a prayer request, among other content. You
further state that Church sermons will be uploaded to Website for broadcast and access
by the general public.

Website serves as the platform for Program, your internet-based religious education
program. You state that Program is under development, and that program-specific
information and/or content are not currently available. You state that Program will
provide online learning courses and weekly lessons roughly similar to a Sunday school
or small group Bible studies. You state that Program will utilize discussion boards and
real-time group chats to deliver coursework online to students.

Program will be administered by volunteers and will be open to the public. Program is
offered at no charge to students, but you state that outside, third-party organizations
may be charged a small fee ($ initial setup charge and$_ per year thereafter). You
state that any profits or proceeds from Program will be used to further your overall
ministry purpose.

Consulting and Merchandising Divisions

The Consulting Division and the Merchandising Division will be managed separately
from the Ministry Division. You state that the targeted audience is private, Christian
organizations (both for-profit and non-profit), specifically churches. However, you state
that the goal would be to “expand into the secular marketplace.”

The Consulting Division has three “branches.” The Education Branch provides seminars
and classes about team building, conflict resolution, and process improvement, all
incorporating Biblical principles into the corporate or church workplace. The Coaching
Branch provides executive and life-coaching services that incorporate Biblical truths.
The Recruitment Branch, which is in a conceptual phase, would connect Christian job-
seekers with Christian organizations, and you also would use this service to reach non-
Christian's with your ministry outreach.

The Merchandising Division “is for public awareness and advertising [your] overall
ministry efforts." To accomplish this goal, it focuses on producing and/or selling items
that promote the “brands” of you, Website, and Church (including pens, shirts, crosses,
hats, etc.). These items are affixed with logos and names, as well as Bible verses. You
believe that the public’s primary purpose for buying these items would be to help
generate funds to promote and support the ministry.

The Merchandising Division has three branches. The Marketing Branch seeks to
promote your organization and Website using traditional advertising mediums. The
Sales Branch is responsible for physically moving merchandise from production to the

consumer, and sells merchandise at trade shows, craft shows, and local fairs, among
other places. The Productions Branch is responsible for determining the most efficient
manner in which to produce merchandise that promotes you, Website, and Christian
awareness in general.

You intend to generate income from both your Merchandising Division and your
Consulting Division activities. You state that all income from these activities will be
“used for the overall organization that exists for a ministry purpose.”

Governance

Your Bylaws state that the organization will have a board of directors (collectively the
“Board” and individually the “Directors”). The Board currently has four members: Pastor,
Director 1; Director 2; and Director 3. Directors are appointed for life, but may be
removed with or without cause by a two-thirds vote of disinterested directors. The
organization has three officers: the President; the Secretary; and the Treasurer. Only
Directors are eligible to serve as officers.

Pastor serves as your Chief Executive Officer and President, and is responsible for all
ministry aspects of your organization. Pastor serves as pastor of both you and Church
“to insure [that] both remain committed and focused on God's work per Biblical principles
in a Spiritual role.” You state that neither you nor your Board “ha{s] any control over
Pastor in his role as Senior Pastor of Church.” You further state that “[t]here are no
corporate controls neither built into the design nor captured in writing anywhere” that
would enable you to govern Pastor’s conduct in his capacity as Senior Pastor of Church.

Director 1 serves as your Director of Education, and is responsible for the educational
aspects of your operations. Director 1 is married to Pastor. Director 2 serves as your
Director of Administration, and is responsible for administrative duties such as
scheduling and recording meetings and maintaining your records. Director 2 is the
great-nephew of Director 1 and Pastor. Director 3 serves as your Director of Marketing.
You did not indicate that Director 3 is related to the other Directors.

You adopted a conflict of interest policy to protect the organization's tax-exempt interests
when engaging in transactions or arrangements that may benefit the private interest of
an officer or director, or result in an excess benefit transaction.

Members

You state that your members consist of individuals no longer active in a church, as well
as people who are actively involved within a church but who seek to enhance or to
supplement their worship by way of their involvement with you. You did not provide
information about your membership, but you state that Church has | members. You
state that Website and Program further expand the membership of Church, but you were
not able to provide specific details about the roles of Website and Program in growing
Church.

Funding

You state that your operations are funded by donations from members of Church. You
state that you intend to generate additional funding through donations made on Website

and from the proceeds derived from Program, but to date neither source has generated
more than nominal income. You also will generate revenue from the Consulting and
Merchandising Divisions.

LAW

Section 501(a) exempts from federal income taxation organizations described in §
501(c).

Section 501(c)(3) describes organizations organized and operated exclusively for
charitable, religious, and other specified exempt purposes, no part of the net earnings of
which inures to the benefit of any private shareholder or individual.

Section 509(a)(1) provides that the term “private foundation” does not include an
organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii).

Section 170(b)(1)(A)(i) describes a church or convention or association of churches.

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

Section 1.501(c)(3)-1(b)(1)(i) states that an organization is “organized exclusively” for
one or more exempt purposes only if its articles of organization limit the purposes of the
organization to one or more exempt purposes and do not expressly empower the
organization to engage, other than as an insubstantial part of its activities, in activities
which are not in furtherance of one or more exempt purposes.

Section 1.501(c)(3)-1(b)(1)(iii) states that an organization is not organized exclusively for
one or more exempt purposes if its articles of organization expressly empower it to carry
on, as more than an insubstantial part of its activities, activities which are not in
furtherance of one or more exempt purposes. Section 1.501(c)(3)-1(b)(1)(iv) further
provides that in no case shall an organization be considered to be organized exclusively
for one or more exempt purposes, if, by the terms of its articles, the purposes for which
such organization is created are broader than the purposes specified in § 501(c)(3).

Section 1.501(c)(3)-1(b)(4) states that an organization is not organized exclusively for
one or more exempt purposes unless its assets are dedicated to an exempt purpose.
An organization's assets will be considered dedicated to an exempt purpose, for
example, if, upon dissolution, such assets would, by reason of a provision in the
organization's articles or by operation of law, be distributed for one or more exempt
purposes, or to the Federal government, or to a State or local government, for a public
purpose, or would be distributed by a court to another organization to be used in such
manner as in the judgment of the court will best accomplish the general purposes for
which the dissolved organization was organized.

Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as “operated
exclusively” for one or more exempt purposes only if it engages primarily in activities that
accomplish one or more of such exempt purposes specified in § 501(c)(3) of the Code.

An organization will not be regarded as exempt 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, who are defined in § 1.501(a)-1(c) as persons having
a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest.
Thus, an organization must 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. Proc. 2012-9, 2012-2 I.R.B. 261, section 4.01, states that a favorable determination
letter or ruling will be issued to an organization only if its application and supporting
documents establish that it meets the particular requirements of the section under which
exemption from Federal income tax is claimed. Section 4.03 states that exempt status
may be recognized in advance of the organization’s operations if the proposed activities
are described in sufficient detail to permit a conclusion that the organization will clearly
meet the particular requirements for exemption pursuant to the section of the Code
under which exemption is claimed. The organization must fully describe all of the
activities in which it expects to engage, including the standards, criteria, procedures, or
other means adopted or planned for carrying out the activities, the anticipated sources of
receipts, and the nature of contemplated expenditures.

For an organization claiming the benefits of § 501(c)(3), “[t]ax exemptions are matters of
legislative grace and taxpayers have the burden of establishing their entitlement to
exemptions.” Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849,
854 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973). The applicant for tax exempt
status under § 501(c)(3) has the burden of showing it “comes squarely within the terms
of the law conferring the benefit sought.” Nelson v. Commissioner, 30 T.C. 1151, 1154
(1958).

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), involved an
organization operating a donor advised fund. The Service determined that the
organization was operated for personal rather than public benefit based on a review of
the organization’s promotional materials, operations, finances, and records of activities.
The court upheld the Service's denial of § 501(c)(3) status, emphasizing that the
taxpayer carries the burden of demonstrating entitlement to tax exemption, and that “[ilt
is well-accepted that, in initial qualification cases . .. , gaps in the administrative record
are resolved against the applicant. . . . [and] ‘courts can draw inferences adverse to a
taxpayer seeking exempt status where the taxpayer fails to provide evidence concerning
its operations, or where the evidence is vague or inconclusive.” Id. at 802 (citations
omitted).

Ohio Disability Association v. Commissioner, T.C. Memo 2009-261 (2009), involved an
organization that operated a pooled trust. One individual served as the organization's
sole director, officer, employee, and member, and thus, was vested with all of the
organization’s decision making power. The organization’s bylaws included meeting and
voting procedures. However, it had only one member. The organization had a stated

conflict of interest policy and its articles of incorporation contained a prohibition against
private inurement. However, there were no procedures in place to enforce the conflict of
interest policy, and there were no personnel in place to ensure that private inurement
would not occur. And although the organization stated that the sole member would not
receive compensation, its articles of incorporation expressly authorized payment for
services rendered to the corporation. The Service denied exemption to the organization
based on these factors, as well as the organization's failure to adequately respond to
various requests for additional information. The Tax Court upheld the Service's
determination, finding that the organization “provided only generalizations and
conclusory statements in response to repeated requests . . . for more detail regarding its
proposed activities.” Id. at 13. The court stated that such responses “d[id] not provide
sufficient detail to determine that [the organization would] be operated exclusively for
charitable purposes” and that “the record d[id] not demonstrate that there [was] oversight
to prevent the organization from being operated to benefit [its sole member].” Id. at 19,
21.

In Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531 (1980),
aff'd, 670 F.2d 104 (9th Cir. 1981), the Tax Court denied exemption to a small family
church. The court stated that meeting the taxpayer burden requires an “open and
candid disclosure of all facts bearing upon [the applicant’s] organization, operations, and
finances . . . [and if] such disclosure is not made, the logical inference is that the facts, if
disclosed, would show that [the applicant] fails to meet the requirements [for
exemption].” Id. at 534-35. The court found that the close family relationship of the
organization's only three board members, who also controlled 100% of the entity’s voting
rights, put them in a position to “without challenge, [ ] dictate [the organization's]
program[s] and operation{s], prepare its budget, and spend its funds, and [that they]
could continue to do so indefinitely.” Id. The court acknowledged that the presence of a
small, closely-related board alone was not enough to deny tax exemption. However,
when combined with the organization’s vague and uninformative responses to questions
about expenditures, membership, and activities, denial was appropriate, because the
organization failed to meet its burden of showing the absence of private benefit to its
individual members.

In National Association of American Churches v. Commissioner, 82 T.C. 18, 34 (1984),
the Tax Court held that the combination of unfavorable facts and circumstances and the
applicant's failure to provide “full and complete information from which {the Service
could] make a well-informed determination” was sufficient to deny exemption. In so
holding, the court emphasized the need for open and candid disclosure by organizations
applying for exemption.

In Church by Mail, Inc. v. Commissioner, T.C. Memo 1984-349, affd, 765 F.2d 1387 (9th
Cir. 1985), an organization sought § 501(c)(3) exemption and claimed it was a church
where its main activity was mailing literature that focused on the ministry of one of its
reverends. That reverend served as an officer of the church along with another
reverend. In addition, the two reverends were the sole shareholders of an ad agency
through which the church mailings were obtained. The two reverends received
commissions on each order placed through the agency. The two reverends also were
the sole shareholders of a computer services business, which, through the ad agency,
provided services to the church. The ad agency marked up the cost of the computer
services and then billed the church at the increased rate. Finally, the two reverends
operated another ministry that was very similar to but nevertheless distinct from the

applicant-church. The church, the ministry, and the ad agency all shared office space,
and the two reverends carried out effectively all responsibilities associated with the
various entities. Furthermore, several family members of the reverends received
payments from these entities. The church received over $3 million in “contributions” in
one tax year, but after taking deductions for its mailings and other expenses, it reported
anet loss. The Tax Court held that the business relationships between the church and
the outside entities facilitated the flow of private financial benefits to the two reverends,
their outside entities, and their families. The court gave particular attention to the
substance of the relationships between the various entities and individuals, and focused
on the potential for the enablement of “current as well as potential abuse through
manipulation of the arrangements between those entities.” Id. at *34.

In Better Business Bureau of Washinaton, D.C., Inc. v. United States, 326 U.S. 279
(1945), the Supreme Court held that a trade association did not qualify for exemption,
because it had an underlying commercial motive that distinguished its educational
program from the type provided by a university. In so holding, the Court ruled that the
presence of a single non-exempt purpose, if substantial in nature, destroys an
organization’s basis for tax exemption, regardless of the number or importance of that
organization’s truly exempt purposes.

In American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304 (D.D.C.
1980), the court held that a religious organization exempt under § 501(c)(3) was not a
church described in § 170(b)(1)(A)(i). The court discussed the “14 criteria” developed by
the Service to aid in the evaluation of applications for church foundation status. Those
criteria 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/a complete
organization of ordained ministers ministering to their congregations; (8) ordained
ministers selected after completing prescribed courses of study; (9) literature of its own;
(10) established places of worship; (11) regular congregations; (12) regular religious
services; (13) Sunday schools for the religious instruction of the young; and (14) schools
for the preparation of its ministers. Id. at 306. The court stated that “[ajt a minimum, a
church includes a body of believers or communicants that assembles regularly in order
to worship” and reasoned that certain criteria are of central importance in distinguishing
a "church" from other forms of religious organizations —namely the existence of an
established congregation served by an organized ministry, the provision of regular
religious services and religious education for the young, and the dissemination ofa
doctrinal code. Id. With respect to the existence of a regular congregation, the court
held that a congregation consisting of the organization’s organizer and his immediate
family members “d[id] not constitute a ‘congregation’ within the ordinary meaning of the
word.” Id. at 306-07.

In Church of Eternal Life and Liberty, Inc. v. Commissioner, 86 T.C. 916, 924 (1986), the
Tax Court said that “although fundamental to determining whether an organization is a
church, religious purposes alone do not serve to establish it as a church. Equally
important are the means by which its religious purposes are accomplished.” The court
then defined a “church” for purposes of § 170(b)(1)(A)(i) as “a coherent group of
individuals and families that join together to accomplish the religious purposes of
mutually held beliefs.” The court further stated that “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.” Id.

In Spiritual Outreach Society v. Commissioner, 927 F.2d 335 (8th Cir. 1991), the Eighth
Circuit upheld a Tax Court decision denying church status to an organization because it
failed to meet the factual requirements of being a church under § 501(c)(3). The court
cited the 14 criteria, and gave particular emphasis to the facts that the organization did
not regularly provide religious services or religious education for the young and did not
disseminate a doctrinal code. Moreover, the court found that the organization lacked an
established congregation, because "nothing indicates that the participants considered
[the organization] to be their church." Id. at 339.

In Foundation of Human Understanding v. United States, 614 F.3d 1383 (Fed. Cir.
2010), cert. denied, 131 S. Ct. 1676 (Mar. 21. 2011), the Court of Appeals for the
Federal Circuit affirmed a decision by the Court of Federal Claims denying an
organization church status under § 170. The court rejected the organization's
argument that “a religious organization should be treated as a church under § 170 as
long as ‘there is a body of followers beyond the scope of a “family church” . . . [who]
seek the teachings of the organization and express or acknowledge an affiliation with
its religious tenets.” Id. at 1389. The court held that “more than mere affiliation by a
number of people with an organization espousing a particular belief system” is
necessary to qualify as a church within the meaning of § 170. Id. Instead, “a
religious organization must create, as part of its religious activities, the opportunity
for members to develop a fellowship by worshipping together.” Id.

ANALYSIS

1. Qualification as an Organization Described in § 501(c)(3)

To qualify for exemption as an organization described in § 501(c)(3), an applicant must
be both organized and operated exclusively for one or more of the purposes specified in
that section. § 1.501(c)(3)-1(a). A favorable determination letter will not be issued to an
organization unless its application and supporting documents establish that it meets the
particular requirements of the section under which it claims tax exemption. Rev. Proc.
2012-9, supra.

“Tax exemptions are matters of legislative grace and taxpayers have the burden of
establishing their entitlement to exemptions.” Christian Echoes, 470 F.2d at 854; see
also Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. Ohio 1974)
(“An exemption is an exception to the norm of taxation. An organization which seeks to
obtain tax exempt status, therefore, bears a heavy burden to prove that it satisfies all the
requirements of the exemption statute. The Supreme Court repeatedly has said that
exemptions from taxation are not granted by implication. The Tax Court has stated
consistently that ‘[a] statute creating an exemption must be strictly construed and any
doubt must be resolved in favor of the taxing power.”). Meeting this burden requires an
“open and candid disclosure of all facts bearing upon [the applicant's] organization,
operations, and finances . . . [and if] such disclosure is not made, the logical inference is
that the facts, if disclosed, would show that [the applicant] fails to meet the requirements
[for exemption].” Bubbling Well, 74 T.C. at 535.

You have not met your burden of proving that you qualify for tax exemption as an
organization described under § 501(c)(3), because your application and your responses

10

to our requests for additional information do not establish that you meet the particular
requirements for exemption under that section. See Rev. Proc. 2012-9, supra; Christian
Echoes National Ministry, 470 F.2d at 854; Nelson, 30 T.C. at 1154. You have not
established that you are organized exclusively for one or more exempt purposes. §
1.501(c)(3)-1(b)(1)(i). You likewise have not met your burden of proving that you will
operate exclusively for one or more exempt purposes, and that you will not operate for
the benefit of private individuals or shareholders. §§ 1.501(c)(3)-1(c)(1), (¢)(2), (d)(1)(ii).
Accordingly, you do not qualify for exemption from Federal income tax as an
organization described under § 501(c)(3).

A. Organizational Test

An organization is “organized exclusively” for one or more exempt purposes only if its
articles of organization limit the purposes of the organization to one or more exempt
purposes, and do not expressly empower the organization to engage (other than
insubstantially) in activities which are not in furtherance of one or more exempt
purposes. § 1.501(c)(3)-1(b)(1)(i).

Your Articles do not contain a purpose clause that properly limits your activities to those
described in § 501(c)(3). § 1.501(c)(3)-1(b)(1). Your Articles also lack a sufficient
dissolution clause. § 1.513-1(b)(4). Although, you state that you will amend your Articles
to include the required purpose and dissolution clauses, you have yet to make such
amendments.

Accordingly, you do not satisfy the organizational test under § 1.501(c)(3)-1(b).

B. Operational Test

An organization is “operated exclusively” for one or more exempt purposes only if it
engages primarily in activities that accomplish one or more of the exempt purposes
specified in § 501(c)(3), and if not more than an insubstantial part of its activities furthers
a non-exempt purpose. § 1.501(c)(3)-1(c)(1); see also Better Business Bureau, 326 U.S.
at 283 (construing a similar provision of the Social Security Act such that “(t]he presence
of a single [non-exempt] purpose . . . [that is] substantial in nature[ ] will destroy the
exemption”). An organization will not be regarded as operated exclusively for exempt
purposes if its net earnings inure in whole or in part to the benefit of private shareholders
or individuals, or if it serves a private rather than a public interest. §§ 1.501(c)(3)-1(c)(2),

(d)(1)(ii).

1. Failure to Adequately Describe Activities That Accomplish Exempt Purposes

You have not provided clear and unambiguous descriptions of your activities sufficient to
meet your burden of proving qualification for § 501(c)(3) status, and we are unable to
conclude that you meet the requirements for exemption under that section. Rev. Proc.
2012-9, supra; New Dynamics Foundation, 70 Fed. Cl. 782.

Although you recently “planted” Church, you did not provide sufficient detail about the
relationship between its activities and your overall operations. Specifically, you did not
explain how you will maintain adequate control over the activities and operations of
Church given its general independence from you and your Board, and you did not
demonstrate that Church actually operates as a component of you —as opposed to

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operating as an entirely independent entity that is related to you merely because you
claim that it is a part of your Ministry Division.

Moreover, you failed to provide sufficient explanations of your activities associated with
the operation of Website and your Merchandising and Consulting Divisions. You also
did not explain how these aspects of your operations are related to and help to
accomplish your exempt purpose (other than through the generation of income).
Instead, you merely state that all income from these activities “is used for the overall
organization that exists for a ministry purpose.” Such “generalizations and conclusory
statements in response to [our] repeated requests . . . for more detail regarding [your]
proposed activities” are not sufficient to establish qualification for tax exemption. Ohio
Disability Association, T.C. Memo 2009-261, at *13.

Thus, you failed to provide “full and complete information from which [we could] make a
well-informed determination” regarding your application for tax exemption. National
Association of American Churches, 82 T.C. at 34. As the court stated in New Dynamics
Foundation, 70 Fed. Cl. at 802, “gaps in the administrative record are resolved against
the applicant. . . . [and] inferences adverse to a taxpayer seeking exempt status [can be
drawn] where the [applicant] fails to provide evidence concerning its operations, or
where the evidence is vague or inconclusive.” See also Ohio Disability Association, T.C.
Memo 2009-261, at *13.

We expressly stated our specific areas of concern and you had multiple opportunities to
provide the information needed for us to make a determination on your application. Your
responses to our inquiries generally were broad and uninformative, and lacked the
specificity needed to support an application for tax exemption. See Bubbling Well, 74
T.C. 531; National Association of American Churches, 82 T.C. 18. To continue
proceeding in this manner “would be to encourage [you] to play a tight-lipped form of ‘cat
and mouse’ with [our] information requests.” New Dynamics Foundation, 70 Fed. Cl. at
802.

Because you did not provide us with enough information to gain a complete
understanding of the relationship between you and Church, it is unclear how Church fits
within your overall organizational and administrative structure. As a result, we cannot
assess how, if at all, the activities of Church should be evaluated in the context of your
qualification for tax exempt status. Moreover, because you did not clearly and
unambiguously explain the nature and extent of your activities conducted through
Website, the Merchandising Division, and the Consulting Division, we cannot determine
whether these largely commercial activities will be, as you suggest, a minor part of your
overall operations.

Accordingly, you have not satisfied your burden of proving qualification for tax exempt
status under § 501(c)(3).

2. Substantial Part of Activities Not in Furtherance of Exempt Purposes
   Based on the information you have provided it appears that more than an insubstantial

part of your activities are or will be devoted to furthering non-exempt purposes. §
1.501(c)(3)-1(c)(1).

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Your Church-related activities represent the only aspect of your operations that are
directed toward a clearly exempt purpose. As described above, it is unclear how Church
fits within the overall structure of your operations, and we are unable to determine
whether the operation of Church constitutes your primary activity. And since “Church
could completely break-away from [your corporation; become incorporated itself; and
there’s nothing [you] can do about that” it is possible that you would continue to function
in such an event without any true exempt purpose. In addition, you refer to the “Church
brand” and the “Taxpayer brand” in a manner that suggests Church could serve as a
mere conduit through which to promote and expand your other, more commercial,
activities. Thus, we cannot conclude that you are operated exclusively for one or more
of the exempt purposes described in § 501(c)(3).

Even if we were to assume that the operation of Church constitutes a substantial part of
your overall activities, and that this aspect of your operations is devoted primarily to the
achievement of one or more exempt purposes, it nevertheless appears that more than
an insubstantial part of your overall activities furthers non-exempt purposes. For
example, your sale of pens, caps, shirt, and so forth, albeit affixed with your name and
perhaps also religious themes or messages, appears to be directed primarily toward
advertising the “brands” of Taxpayer, Church, and Website, and the generation of
income to fund your operations. In fact, you admitted as much in your responses to our
inquiries about the relationship between these activities and the accomplishment of your
exempt purpose. In addition to your frequent references to Taxpayer, Church, and
Website as “brands,” you described the majority of your activities in the context of
business models, supply chains, marketing strategies, and other, typically business-
oriented approaches. Moreover, you plan to engage in these activities on a continuous
basis via Website, and even if such activities are a small part of your operations at the
present time, your responses suggest that they will be expanded and that more time will
be devoted to them in the future.

Specifically, it appears that the Merchandising and Consulting Divisions will be operated
primarily for commercial purposes. Although you provided an organizational chart
summarizing the operation of these Divisions within the overall context of your
organization, you provided only general descriptions of the types of activities in which
they will engage. Nevertheless, even these vague descriptions clearly indicate the
commercial character of your intended activities.

Your Consulting Division would operate in both religious and corporate settings, and the
executive training and life-coaching services it provides closely resemble similar services
offered by for-profit entities. And even though the Recruitment Branch is in a conceptual
phase, the description you provided suggests that it would function similar to an online
job placement service, such as Monster.com or Linkedin.com. This view is supported by
the fact that you intend to use this service to reach non-Christian’s, and while you state
that you would do so to enhance your ministry outreach, you provided no information to
explain how you will incorporate your religious message and ministry outreach into this
service.

You state that the purpose of your Merchandising Division “is for public awareness and
advertising [your] overall ministry efforts," but to achieve this end, the Division will focus
on producing and/or selling items that promote the “brands” of Taxpayer, Website, and

Church. There is nothing inherently religious about the majority of items you described
(such as pens, shirts, and hats), and you admittedly would engage in your

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Merchandising Division activities primarily as a means for generating revenue. As its
name would imply, the activities of the Merchandising Division are primarily commercial
in nature. Moreover, you intend to use Website to enhance these activities and to
devote a greater portion of your time to the operation of this Division in the future. Thus,
it appears the primary purpose of this aspect of your organization is to engage in non-
exempt, commercially driven activities.

Furthermore, you did not provide sufficient information to demonstrate that Program is
not operated primarily for commercial purposes. Such information is particularly
important under the circumstances, due to the predominantly commercial hue of your
Merchandising and Consulting Division activities.

The information you provided indicates that more than an insubstantial part of your
operations will be devoted to non-exempt and largely commercial activities that are
unrelated to the accomplishment of your stated § 501(c)(3) purpose. See Better
Business Bureau, 326 U.S. at 283-84 (ruling that the presence of a single non-exempt
purpose, if substantial in nature, destroys an organization's basis for tax exemption,
regardless of the number or importance of that organization's truly exempt purposes);
see also § 513(a) (stating in relevant part that an organization is engaged in an
“unrelated trade or business” where the conduct of such activities is not substantially
related to the exercise or performance of that organization’s exempt purpose, other than
from its need for income or funds or the use it will make of the profits it derives); § 1.513-
1(d)(2) (stating in relevant part that a trade or business is “related” to exempt purposes
only where the conduct of the business activities has a causal relationship to the
achievement of exempt purposes (other than through the production of income), and that
such trade or business is “substantially related” only if the causal relationship is a
substantial one). Accordingly, you do not satisfy the operational test. § 1.501(c)(3)-

1(c)(1).

3. Potential for Inurement and Private Benefit

Based on the information you submitted we cannot conclude that no part of your
earnings will inure to the benefit of private shareholders or individuals. § 1.501(c)(3)-
1(c)(2). Moreover, you have not established that you are not operated for the benefit of
private interests such as designated individuals, the creator or his family, or persons
controlled, directly or indirectly, by such private interests. § 1.501 (c)(3)-1(d)(1)(ii).

Despite the fact that you consider it to be a part of your Ministry Division, Church is
authorized to operate independent of you, and is structured such that nothing would
prevent it from operating in a manner that is inconsistent with your exempt purposes.
You state that the “constitution” of Church restricts any activities or conduct that would
jeopardize your tax exempt status, but since you and your Board “ha[ve] no control over
Church and/or its Board of Directors” nor “over Pastor in his role as Senior Pastor of
Church” you effectively have no means for enforcing such a restriction. Although you
state that you “fe[el] that Church leadership/membership wiill] support any corporate
requirements levied upon them by [you]” a mere feeling alone is not a replacement for
formal, structured procedures that are put in place to maintain adequate control over an
organization and to ensure that no individual or entity impermissibly benefits from its
operations. See Ohio Disability Association, T.C. Memo 2009-261 at *19, 21 (finding that
there were no procedures in place to enforce the organization’s conflict of interest policy
and that there were no personnel in place to ensure that private inurement would not

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occur, and thus, the applicant “d[id] not demonstrate that there [was] oversight to prevent
the organization from being operated to benefit [its sole member]”). Id. at *19, 21.

Like the organization in Bubbling Well, 74 T.C. 531, you are controlled by a small, family
dominated board. Control of your operations is exercised by four directors, three of
whom are blood relatives (Pastor, Director 1, and Director 2). Neither the congregants
nor the governing members of Church have any control over you or the Board. Thus,
your Board is in a position to “without challenge, [] dictate [the organization's]
program[s] and operation[s], prepare its budget, and spend its funds . . . indefinitely.” Id.
at 534-35. ;

Although you adopted a conflict of interest policy, your small, family-controlled Board
severely undermines its effectiveness. As such, you are structured in a manner that
could facilitate “current as well as potential [future] abuse” of tax exempt status. Church
by Mail, T.C. Memo 1984-349 at *34.

Accordingly, you do not qualify for tax exemption, because you have not met your
burden of proving that no part of your net earnings will inure to the benefit of private
shareholders or individuals as set forth in § 1.501(c)(3)-1(c)(2) and that your activities
will not serve to benefit private interests as set forth in § 1.501(c)(3)-1(d)(1)(ii).

2. Qualification as a “Church” Under § 170(b)(1)(A)(i) of the Code

You request classification as a church under §§ 509(a)(1) and 170(b)(1)(A)(i). To be
classified as a church, you must first be recognized as an organization that is organized
and operated for religious purposes within the meaning of § 501(c)(3). Above, we
determined that you do not qualify as an organization described in § 501(c)(3). But even
if we had determined that you qualified as an organization described in § 501(c)(3), you
still would not have qualified as a church described in § 170(b)(1)(A)(i), because you do
not satisfy the associational test and the 14 criteria that guide this determination.

A. The Associational Test

In American Guidance, 490 F. Supp. at 306, the court stated that “[a]t a minimum, a
church includes a body of believers or communicants that assembles regularly in order
to worship.” This associational role, the court reasoned, is what “separates a ‘church’
from other forms of religious enterprise.” Id. at 306; see also Church of Eternal Life, 86
T.C. at 924 (“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’).
Thus, if an organization does not serve this associational role, it fails to achieve the
minimum characteristics of a “church,” and instead must be viewed simply as a “religious
organization” subject to the filing requirements of § 6033.

initially, you resembled the organization that was denied recognition as a church in
Foundation of Human Understanding, 614 F.3d 1383, because you planned to engage
primarily in internet-based religious activities. Such activities, standing alone, amount to
the same type of “mere affiliation by a number of people with an organization espousing
a particular belief system” that the court in Foundation of Human Understanding deemed
insufficient for church classification under § 170. However, you “immediately discovered
that [you] would need a traditional church structure and support group to help [you]

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deliver all the products and services the online ministry requires.” Therefore, you
“planted” Church on Date 2.

As explained above, we cannot conclude that the activities of Church should be deemed
a part of your operations under these circumstances. You state that Church is operated
as a part of your Ministry Division. Nevertheless, Church has its own “constitution,” its
own operational and governance procedures, and its own controlling members.
Moreover, you state that “Taxpayer has no control over Church and/or its Board of
Directors” that “the Spiritual development of the church/day-to-day business is
determined by its pastors, elders, and body of believers” and that you “fully understand[ ]
that Church could completely break-away from [you]; become incorporated itself; and
there’s nothing [you] can do about that.” Consequently, it appears that Church more
closely resembles a separate entity than it does a subordinate part of your organization.
This is problematic under the circumstances, because the activities of Church represent
the only aspect of your operations that physically brings people together in order to
worship. Moreover, it appears that your operation of Website, Program, and the
Merchandising and Consulting Divisions easily could overshadow the operation of 50-
member Church, thus trivializing its role in the context of your operations as a whole.

Thus, even with the presence of Church, you continue to resemble the organization in
Foundation of Human Understanding, 614 F.3d 1383. There the court concluded that
the organization failed the associational test because its role in bringing together people
to worship was incidental to its main function of disseminating its religious message
through radio and internet broadcasts and written publications. Likewise, it appears that
the activities associated with Church are (or will be) secondary to your main function of
operating Website and Program, and your activities associated with the Merchandising
and Consulting Divisions. In other words, the operation of Church appears to be
separate from and incidental to your other functions. See also De La Salle Institute v.
United States, 195 F. Supp. 891, 901 (D.C. Cal. 1961) (finding that the organization's
“operation of... chapels [wals incidental to [its] principal activities. . . . [and that t]he tail
cannot be permitted to wag the dog. The incidental activities of [an organization] cannot
make [it] a church’).

As the court stated in Foundation of Human Understanding, 614 F.3d 1383, the
associational test is the minimum standard an organization must satisfy to obtain status
as a “church” under § 170. You do not satisfy this minimum standard. Accordingly, you
are not a “church” within the meaning of § 170(b)(1)(A)(i).

B. The 14 Criteria

if an organization satisfies the associational test, the analysis then moves to the total
facts and circumstances embodied within the 14 criteria. See American Guidance, 490
F. Supp. 304; Spiritual Outreach, 927 F.2d 335. Even if the activities carried out by
Church were sufficient to satisfy the associational test, the balance of the 14 criteria
weighs against classification as a church under these circumstances.

You have a distinct and independent legal existence under the laws of State, and you
have a written creed, statement of faith, or summary of beliefs, as well as a formal code
of doctrine and discipline. However, you state that you do not have a distinct religious
history. You also state that you do not have schools for the preparation of ordained

ministers or religious leaders, and that you do not ordain, commission, or license such

16

individuals. Moreover, you state that you do not have any literature of your own (other
than the posting of devotionals and messages on Website, at least some of which is the
republication of religious text available from or through other sources).

Furthermore, our inability to determine whether Church should be considered a part of
your operations or instead viewed as a separate and independent entity clouds the
analysis of the 14 criteria. For example, if Church is justifiably considered a part of you,
then you would satisfy the criterion of an “established place of worship.” However, if
Church is, as it appears, a separate and distinct entity from you, then you would not
satisfy this important factor. Likewise, if Church is not a part of you, you would not have
“regular congregations” or “regular religious services.” And although Church has a
“definite and distinct ecclesiastical government,” your Board operates using a more
business-like governance structure.

Thus, you do not satisfy the majority of the 14 criteria used by the Service to determine
qualification for “church” status under § 170(b)(1)(A)(i).

CONCLUSION

In light of the foregoing, we have determined that you do not qualify for exemption from
Federal income tax under § 501(a) as an organization described in § 501(c)(3), and that
you do not qualify for classification as a “church” under § 170(b)(1)(A)(i).

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, | declare that | 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 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 in court because the Internal Revenue Service will consider the failure to

protest as a failure to exhaust available administrative remedies. Section 7428(b)(2) of
the Code 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

17

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 Internal Revenue Service.

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
Attn:

1111 Constitution Ave NW
Washington DC 20224-0002

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