IRS denies exemption to a religious trust that promoted polygamy

Plain-English summary

The IRS issued a final adverse determination denying a religious trust exemption under IRC § 501(d). The trust maintained a common treasury, operated businesses for the community, and required members to include their pro rata shares of its taxable income in gross income. The IRS concluded that the trust's religious practices promoted polygamy, which the determination described as illegal under the redacted state's law and contrary to federal public policy. Because the trust was not a valid religious or apostolic organization, it did not qualify for exemption under § 501(d).

Ruling snapshot

• Question: Does the religious trust qualify for exemption under IRC § 501(d)?
• Outcome: Denied, final adverse determination.
• Key authorities: IRC §§ 501(a), 501(d), and 6110(k)(3); Rev. Ruls. 58-66, 71-447, and 75-384; Reynolds v. United States, 98 U.S. 145 (1879); Bob Jones University v. United States, 461 U.S. 574 (1983).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Contact Person:

Number: 201310047
Release Date: 3/8/2013 Identification Number:

Date: December 11, 2012 Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
U.L.L. 501.26-00 No Third Party Contacts

Dear

This is our final determination that you do not qualify for exemption from Federal income tax
under Internal Revenue Code section 501(a) as an organization described in Code section
501(d).

We made this determination for the following reason(s): You are not a religious organization
described in § 501(d) because you advocate and engage in activities that are illegal and
contrary to public policies.

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 i
GOVERNMENT ENTITIES No Third Party Contacts
IVISION

Contact Person:
Identification Number:
Date: October 2, 2012 Contact Number:
FAX Number:
Employer Identification Number:

U.I.L. 501.26-00

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Dear

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

You were created on Date1 under the provisions of a document called Declaration of Trust of
the X. On Date 2, your trustees issued an Amended and Restated Declaration of Trust of X.
The trust instrument subscribes to the laws of State 1.

The preamble of the trust instrument states that you were formed as a religious trust. You exist
to preserve and advance the religious doctrines and goals of Y. You indicate that P is the
doctrine and law found in your holy books, which are the guiding tenets by which you operate.

-2-

Membership in your organization is limited to members of Y and is granted and revoked by your
Board of Trustees. In this regard, you state that the privilege to be a member in the organization
is intended to be limited to persons who share the same religious beliefs. Your membership
admission policy is also intended to limit residents in your facilities to persons who subscribe to
the doctrine, beliefs and practices of the organization.

You require consecration or unconditional dedication to you by accepted members of their
properties, time, talents, money and materials. Your members consecrate their real property to
you by deeds of conveyance.

Your members live in the facilities of your community and they work in the businesses you
operate. You represent that you maintain a common treasury in which profits generated by your
businesses are deposited and from which the expenses of the organization are paid. Your Trust
instrument provides that each year members must include in their gross income their pro rata
share of your taxable income, whether distributed or not.

In 20 , you reported income of $x received from business and $xx from consecration, and a
loan receipt of $xxx. You reported total expenses of $xxxx for payment primarily of expenses
classified as farm expenses, health care, members’ living provisions and expenses,
transportation, and utilities (excluding payment of property taxes of $xxx from above loan receipt
from one individual).

You operate eighteen (18) companies, most of which engage in components of the housing
construction industry. Some engage in other businesses that include software development,
mobile technology equipment service and repair, animal husbandry, furniture manufacturing and
sales and clothing. Four other companies manage your agriculture concerns, utility needs,
member labor, and the medical needs of members. All operated businesses, except one, are
formed as limited liability companies (LLCs). The other one is formed as a trust and solely to
manage your established businesses. The LLCs are all treated as disregarded entities with you
as the sole member.

You are governed by three Trustees who are also your officers and religious leaders. All three
are also officers and religious leaders of Q, which you described as a separate church entity
that is authorized to function regionally by Y.

All your officers, religious leaders and members are members of Y. Y follows the beliefs and
practices that were the original beliefs and practices of Z Church established and set forth by
Founder. When Z Church departed from many of these beliefs, practices and teachings of
Founder, some members separated from Z Church and established Y. You believe that Y is the
continuation of Z Church established by Founder and has authority of the true successor to the
divine authority of Founder.

These beliefs and practices include polygamy or plurality of wives. You stated that you “...have
a religious belief known as ‘Celestial Marriage’ which includes a plurality of wives.” You
describe “Celestial Marriage” as a private religious relationship between consenting parties of
legal age which is not recognized as a marriage by state authorities. You said that you do not
allow your members to seek multiple marriage certificates from state authorities, thus, you do
not believe that your religious practice “constitutes bigamy or multiple ‘state recognized’
marriages as defined under applicable state law.... “

A news article from Examiner.com on Date 3, reported that a court in your state found a leader
of Y with three wives under “celestial marriages” guilty of bigamy. We asked that you comment
on this article, but you did not respond.

Applicable Law

Section 501(a) of the Code provides that an organization described in subsection (c) or (d) or
section 401(a) shall be exempt from federal income tax unless such exemption is denied under
section 502 or 503.

Section 501(d) of the Code provides that the following organizations are referred to in

subsection (a): Religious or apostolic associations or corporations, if such associations or

corporations have a common treasury or community treasury, even if such associations or

corporations engage in business for the common benefit of the members, but only if the

members thereof include (at the time of filing their returns) in their gross income their entire pro

rata shares, whether distributed or not, of the taxable income of the association or corporation

for such year. Any amount so included in the gross income of a member shall be treated as a
dividend received.

Rev. Rul. 75-384, 1975-2 C.B. 204 holds that an organization formed to promote world peace
that planned and sponsored protest demonstrations at which members were urged to commit
acts of civil disobedience did not qualify as tax exempt.

Rev. Rul. 71-447, 1971-2 C.B. 230, states that under common law, the term “charity”
encompasses all three major categories of religious, educational, and charitable purposes. All
charitable trusts, educational or otherwise, including religious trusts, are subject to the requirement
that the purpose of the trust may not be illegal or contrary to public policy. Citing Restatement
(Second), Trusts, (1959) Sec. 377, Comment c: “A Trust for a purpose the accomplishment of
which is contrary to public policy, although not forbidden by law, is invalid”.

Restatement (Second), of Trusts, Section 377 states that a charitable trust cannot be created
for a purpose which is illegal. The first comment illustrates the rule, indicating that where the
trust estate is to be used for a criminal purpose, the trust is invalid. Thus, “a trust for the
promotion of polygamy...is invalid.”

Rev. Rul. 58-66, 1958-1 C.B. 60, provides that the marital status of individuals as determined
under state law is recognized in the administration of the Federal income tax laws. Therefore, if
applicable state law recognizes common-law marriages, the status of individuals living in such
relationship that the state would treat them as husband and wife is, for Federal income tax
purposes, that of husband and wife.

Section 2.401(a)(2) of State 1 Family Code provides as proof of informal marriage when in a
judicial, administrative or other proceeding, a man and a woman agreed to be married and after
the agreement they lived together in this state as husband and wife and represented to others
that they were married.

Section 25.01(a) of State 1 Penal Code provides that an individual commits an offense of
bigamy if ---

(1) he is legally married and he:

(A) purports to marry or does marry a person other than his spouse in this state
under circumstances that would, but for the actor’s prior marriage, constitute a
marriage; or

(B) lives with a person other than his spouse in this state under the appearance
of being married.

Section 25.01(b) of State 1 Penal Code defines the term “under the appearance of being
married” to mean holding out that the parties are married with cohabitation and intent to be
married by either party.

In Reynolds v. United States, 98 U.S. 145 (1879), the Supreme Court held it is a law in the
United States that plural marriage shall not be allowed and indicated that such law is within the
legislative power of Congress, is constitutional and valid. After resolving the constitutionality
and validity of the anti-polygamy law, the court stated ---

This being so, the only question which remains is, whether those who make polygamy a
part of their religion are excepted from the operation of the statute. If they are, then
those who do not make polygamy a part of their religious belief may be found guilty and
punished, while those who do, must be acquitted and go free. This would be introducing
a new element into criminal law. Laws are made for the government of actions, and
while they cannot interfere with mere religious belief and opinions, they may with
practices.

In Potter v. Murray City, 585 F. Supp. 1126, (D. Utah 1984), the court indicated that the
landmark decision in the area of freedom of religion in connection with polygamy is Reynolds v.
United States, supra, in which the Supreme Court confirmed a conviction even though the
defendant believed that the practice of polygamy was his religious duty and of divine origin and
he had received permission from the authorities of his church to enter into the polygamist
marriages.

Also, the court indicated that a long line of decisions beginning with Reynolds, supra, had either
expressly approved statutes forbidding the practice of plural marriage, or approved them in
other contexts as subsisting authority in the area of the free exercise clause of the First
Amendment. See, e.g., Miles v. United States, 103 U.S. 304, 26 L. Ed. 481 (1881); Cannon v.
United States, 116 U.S. 55, 6 S. Ct. 278, 29 L. Ed. 561 (1885); Snow v. United States, 118 U.S.
346, 6 S. Ct. 1059, 30 L. Ed. 207 (1886); Davis v. Beason, 133 U.S. 333, 10 S. Ct. 299, 33 L.
Ed. 637 (1890); Late Corporation of Latter-Day Saints v. United States, 136 U.S. 1, 10 S. Ct.
792, 34 L. Ed. 478 (1890); State v. Hendrickson, 67 Utah 15, 245 P. 375 (1926); Lovell v. City of
Griffin, 303 U.S. 444, 449, 58 S. Ct. 666, 668, 82 L. Ed. 949 (1938); Cantwell v. Connecticut,
310 U.S. 296, 60 S. Ct. 900, 84 L. Ed. 1213 (1940); State v. Barlow, 107 Utah 292, 153 P.2d
647 (1944), appeal dismissed for want of substantial federal question, 324 U.S. 829, 65 S. Ct.
916, 89 L. Ed. 1396 (1945), reh’g. denied, 324 U.S. 891, 65 S. Ct. 1026, 89 L. Ed. 1438 (1945);

Cleveland v. United States, 146 F.2d 730 (10th Cir.1945); State v. Musser, 110 Utah 534, 175
P.2d 724 (1946); Cleveland v. United States, 329 U.S. 14, 67 S. Ct. 13, 91 L. Ed. 12 (1946); In
re State in Interest of Black, 3 Utah 2d 315, 283 P.2d 887 (1955); Braunfeld v. Brown, 366 U.S.
599, 81 S. Ct. 1144, 6 L. Ed. 2d 563 (1961); Wisconsin v. Yoder, 406 U.S. 205, 92 S. Ct. 1526,
32 L. Ed. 2d 15 (1972); Paris Adult Theatre I v. Slaton, 413 U.S. 49, 93 S. Ct. 2628, 37 L. Ed. 2d
446 (1973); United States v. Carroll, 567 F.2d 955 (10th Cir.1977); United States v. Ogle, 613
F.2d 233 (10th Cir.1979); United States v. Lee, 455 U.S. 252, 102 S. Ct. 1051, 71 L. Ed. 2d 127
(1982); Bob Jones University v. United States, 461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d 157
(1983). Id. Further, at no time has Reynolds, supra, been overturned by the Supreme Court. Id.

Bronson v. Swensen, 394 F. Supp. 2d 1329 (2005) indicated that the court in Potter v. Murray
City, supra, analyzed the continuing validity of Reynolds v. United States, supra, by stating that
Reynolds continued to be cited with approval by the Supreme Court in subsequent decisions,
including Potter, as clear evidence that it was still the law of the land on the illegality of
polygamy.

In Bob Jones University v. United States, 461 US 574 (1982), the Supreme Court upheld the
Service’s revocation of the tax exempt status of two schools because of their racially
discriminatory policies. In reaching its decision, the Court indicated that entitlement to tax
exemption depends on meeting certain common law standards of charity, namely, that an
institution seeking tax-exempt status must serve a public purpose and not be contrary to
established public policy. If an organization engages in activities in direct contravention of public
policy, it may not be seen as providing a public benefit and cannot qualify as charitable, and
therefore not exempt. Moreover, the Court agreed that IRS was correct in its position that it
would be wholly incompatible with the concepts underlying tax exemption to grant tax-exempt
status to an organization with purposes or policies contrary to established public policy,
whatever may be the rationale of such organization. In that case, a private school’s racial
discrimination in education was held contrary to public policy.

In Twin Oaks Community v. CIR, 87 T.C. 1233 (1986) discussed the legislative history and
purpose of section 501(d) to provide tax relief by eliminating the corporate level of taxation and
leaving a single tier of individual tax. The Tax Court quoted an opinion of the Ninth Circuit that
the only requirements for the exemption are that there be a common treasury, that the members
of the organization include pro rata shares of organization income when reporting taxable
income and, implicitly, that the organization have a religious or apostolic character.

(Kleinsasser v. U.S., 707 F.2d 1024, 1029 (9th Cir 1983.))

Analysis

You have applied for exemption under section 501(a) of the Code as an organization described
in section 501(d) which applies to a religious or apostolic organization. To be described in
section 501(d), an organization must be created and operated for religious or apostolic
purposes, and must have a common treasury, and if it engages in business for the common
benefit of the members, the members must include in their individual tax returns their pro-rata
share, whether distributed or not, of the taxable income of the association or corporation. The
requirement that the organization be religious or apostolic is implicit, created by the title of
section 501(d) and supported by legislative history. See, Kleinsasser v. U.S., supra.

You require members to consecrate or unconditionally dedicate to you their property, time,
talents, money and materials. Members live in the facilities of your community and they work in
the businesses you operate. You maintain a common treasury that includes the assets
consecrated by your members and the income generated by your businesses from which the
expenses of the community and member benefits are paid. Your trust document provides that
your members must include in their gross income their entire pro rata share of your taxable
income. Thus, you meet certain requirements of section 501(d).

We next consider the requirement that the organization be religious or apostolic. Your trust
instrument indicates that you were formed as religious trust in preserving and advancing the
religious doctrines and goals of Y, which, among other things, advocates the practice of
polygamy or plurality of wives. Your members are limited to members of Y. You and your
members follow the belief and practice of polygamy.

In the administration of federal income tax laws, the marital status of individuals is determined
under state law pursuant to Rev. Rul. 58-66. . Your state civil law provides that proof of informal
(or what is also known as common-law) marriage in any proceeding is shown when a man and a
woman agreed to be married, then lived together as husband and wife in the state, and
represented themselves as such to others. See State 1 Family Code §2.401(a)(2). Your state
criminal law provides that an individual commits bigamy if he is legally married and purports to
marry or does marry another person other than his spouse; or lives with a person other than his
spouse in the state under the appearance of being married. Your state defines the term “the
appearance of being married” as holding out that the parties are married with cohabitation and
intent to be married by either party. See State1 Penal Code sections 25.01(a)(1), and 25.01(b).
Thus, for federal income tax purposes, we must consider polygamous marriage as bigamy, and
therefore, illegal in your state.

Moreover, the legality of polygamy has been litigated in federal and state courts for one hundred
and thirty years. Federal and state courts have consistently held that polygamy is contrary to
federal public policy, and that even the constitutional protection for freedom of religion does not
prevent a state from proscribing it.

You affirm the practice polygamy or plurality of wives through “Celestial Marriage”, which you
indicate is your religious belief on plurality of wives. The “Celestial Marriage” proceedings
appear to create informal or common-law marriages as defined by your state law. The religious
ceremony shows intent to marry, and the parties thereafter live together and hold themselves
out to the community as married. When undertaken with multiple partners, the proceedings and
subsequent actions appear to constitute bigamy and violate your state penal code. See State 1
Penal Code sections 25.01(a)(1)(A), 25.01(a)(1)(B) and 25.01(b). Thus, you are promoting
illegal acts under your state laws.

You claim, however, that because you tell your members not to obtain multiple marriage
certificates, they do not violate your state bigamy law. It appears that the absence of state-
issued certificate for your proceedings does not affect their recognition as informal or common-
law marriages under your state laws and persons who are party to such marriages commit
bigamy under your state laws. Also, a State 1 court recently confirmed that a man who had
been married by your ceremony of “celestial marriage” to multiple wives and lived with them was
guilty of bigamy under the law of State 1.

The practice of polygamy is also contrary to federal policy. In 1879, the Supreme Court held in
Reynolds v. United States, supra, that the law ruling polygamy illegal was constitutional and
valid. Further, the Court held that persons who practice polygamy as part of their religious belief
cannot be relieved of the consequences of committing a crime proscribed by the law.
Subsequent court decisions have unanimously followed and applied Reynolds, although there is
no longer a federal statute forbidding polygamy. See Potter v. Murray City, other court cases
cited therein, and Bronson v. Swensen.

The common law of trusts specifies that a charitable trust cannot be created for an illegal
purpose. See Restatement (Second) of Trusts, section 377. In fact, Restatement specifically
identifies promotion of polygamy as an illegal purpose in comments to that section. Because
you advocate and engage in activities that contravene state laws and state and federal public
policy, you cannot be a valid religious trust. Because you are not a valid religious trust, you
cannot be recognized as a religious or apostolic association under 501(d) of the Code,
notwithstanding that you have a common treasury and engage in business for the common
benefit of members.
You also fail to meet the common law standards for charitable organizations. Although section
501(d) does not require explicit proof of charitable purposes, as does section 501(c), courts
have found an implicit requirement. See Kleinsasser v. U.S., supra. Similar to the organization
described in Bob Jones University v. United States, you also fail to meet the common law
standards of charity that an institution seeking tax-exempt status must serve a public purpose
and not be contrary to established public policy. See also Rev. Rul. 75-384, and Rev. Rul. 71-
447.

Accordingly, we conclude that you are not exempt from federal income tax under section 501(a)
as an organization described in section 501(d).

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 protest 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 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.

-8-

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.

This letter supersedes our letter dated June 21, 2012.

Sincerely,

Holly O. Paz
Director, Rulings and Agreements