Family-run religious organization lost exemption for private benefit

Plain-English summary

A religious organization operated from a home garage, and its congregation consisted primarily of the founder-pastor’s immediate and extended family. The IRS found that members made tithes to the organization and then received disbursements or personal benefits through checks and payments of credit-card charges, without records establishing exempt uses. The pastor controlled the finances, set compensation, and did not provide minutes showing independent approval by a governing body. The IRS concluded that this circular flow of funds served private interests and caused net earnings to inure to members. It also found that the organization did not qualify as a church under the fourteen-criteria analysis or the associational test, and revoked section 501(c)(3) status effective on a redacted date.

Ruling snapshot

• Question: Did the organization operate exclusively for exempt purposes and qualify as a church under sections 509(a)(1) and 170(b)(1)(A)(i)?
• Outcome: revocation, because member benefits and inurement violated the operational test and the organization did not qualify as a church
• Key authorities: IRC §§ 170(b)(1)(A)(i), 501(c)(3), 509(a)(1), 4958, 7611; Treas. Reg. §§ 1.501(a)-1, 1.501(c)(3)-1; Rev. Proc. 2018-5

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES Date: DEC 07 2018
DIVISION
UIL: 501.03-00 Person to Contact:

Identification Number:
Telephone Number:
Number: 201921014 In Reply Refer to:

Release Date: 5/24/2019
LAST DATE FOR FILING A PETITION

THE TAX COURT:
CERTIFIED MAIL – Return Receipt Requested

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). Our favorable determination letter to you dated January
11, 19XX, is hereby revoked and you are no longer exempt under section 501(a), as an
organization described in section 501(c)(3) of the IRC, effective August 1, 20XX.

Our adverse determination was made for the following reasons:

You operated for the benefit of private interests of church members. Treas. Reg.
section 1.501(c)(3)-1(d)(ii) provides that an organization is not operated
exclusively for exempt purposes unless it serves a public rather than a private
interest.

Part of your earnings inured to the benefit of church members. Treas. Reg.
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 individuals.

You are not a church within the meaning of I.R.C. sections 509(a)(1) and

170(b)(1)(A)(i).

We have enclosed a copy of our report of examination explaining why we
believe a revocation of your tax-exempt status under section 501(c)(3) of the
Internal Revenue Code is necessary. Section 7611(g) provides that any final
report of an agent of the Internal Revenue Service shall be treated as a final
adverse determination under section 7428(a)(1), and any church receiving such a
report shall be treated for purposes of sections 7428 and 7430 as having
exhausted any administrative remedies available to it. Accordingly, section
7611(g) precludes the administrative appeal of any final report issued to a
church.


Contributions to your organization are no longer deductible under section 170 of the Code.

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending July 31, 20XX and for all years
thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should
a petition for declaratory judgment be filed under section 7428 of the Internal Revenue
Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Court of Federal Claims or the
District Court of the United States for the District of Columbia before the 91st day after the
date this determination was mailed to you. Contact the clerk of the appropriate court for the
rules for initiating suits for declaratory judgment. You may write to the courts at the
following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your taxpayer rights. We can offer you help if your tax problem is causing a
hardship, or you’ve tried but haven’t been able to resolve your problem with the IRS. If you
qualify for our assistance, which is always free, we will do everything possible to help you.
Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are

shown in the heading of this letter.
Sincerely yours,

Maria Hooke
Director, Exempt Organizations Examinations
Enclosures:

Form 4621-A


Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
ISSUES:

1. Whether failed to operate exclusively for an exempt purpose.
2. Whether the effective date of revocation of exempt status is August
1, 20XX.
3. Whether qualifies as a church under I.R.C. § 509(a)(1) and §
170(b)(1)(A)(i).
FACTS:
. ” is the pastor and founder of (“ "). On
September 24, 19XX, filed its articles of incorporation with the State of and is currently registered
as an , Domestic, Non-profit corporation (DNP).
Article V, 2 of Articles of Incorporation provides that, “The Corporation shall be managed by a
Council as provided by law, these Articles of Incorporation and the Bylaws.” Bylaws provides the
following:

Article 1, Section 1 — Membership: This corporation shall have no members but shall be
governed and managed by a Council.

Article II, Section 1 — Number: The Council of this corporation shall consist of not less
than three council members and not more than nine council members.

Schedule of Compensation for 19XX: Annual salary for Pastor: $0.

On September 15, 19XX, the Internal Revenue Service received filed Form 1023, Application for
Recognition of Exemption. reported the following on the Form 1023:

Part II, 1, states that its activities will consist of the following:

Bible teaching - specific teaching from the Bible, about the scriptures and
relationship to people today. 0% of activity time.

Praise and worship — songs, hymns and verbal exaltation of God. 0% of activity
time.

Prayer for individuals, corporate, etc. 0% of activity time.

All activities are participatory.

Part II, 2, states that the sources of financial support will be by, “donation of
attending persons.”

Part II, 4, a, indicates that it will be governed by council members. provided
a list of Council Members as follows:

, Chairman

, Council Member
, Council Member

, Council Member

, Council Member
, Council Member
, Council Member
, Secretary

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)


Schedule number or

Form 886-A Department of the Treasury — Internal Revenue Service exhibit

(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

Part II, 4, d, of the Form 1023, indicates, by checking box “no”, that there are no
disqualified persons with respect to (other than by reason of being a member of the
governing body) or have a business or family relationship with disqualified persons.

Part III, indicates that it is not a private foundation by checking box “a” indicating
that it qualifies as a church, within the meaning of sections 509(a)(1) and 170(b)(1)(A)(i)
of the Code.

On Schedule A of Form 1023, responded to the given questions (in italics) in the following
manner:

1. Provide a brief history of the development of the organization, including the
reasons for its formation.

The history of this organization is simply the coming together of a group of
people for the purpose of worshipping God. The reason for its formation is to
facilitate the sharing of this belief and form of worship with others.

2. Does the organization have a written creed or statement of faith? If “Yes,” attach
a copy.
checked “yes” but there appears to be no written creed or statement of faith
attached.
6. Are the services open to the public? If “Yes,” describe how the organization

publicizes its services and explain the criteria for admittance.
checked “yes” and provided the following statement:

There is no criteria of admittance — all are welcome. Publicity will be word of
mouth, telephone directory and a sign on location.

7. Explain how the organization attracts new members.
Word of mouth, telephone directory and a sign on location.

8a. How many active members are currently enrolled in the church?

8b. What is the average attendance at the worship service?

9. In addition to worship services, what other religious services (such as baptisms,
weddings, funerals, etc) does the organization conduct?

Baptisms, weddings, funerals, baby dedications.

11, Were the current deacons, minister, and/or pastor formally ordained after a
prescribed course of study?

No

12. Describe the organization’s religious hierarchy or ecclesiastical government.
Led by a Pastor, governed by a council.

13. Does the organization have an established place of worship?
No

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)


Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

If the organization has no regular place of worship, state where the services are held
and how the site is selected.

In home site. State of — meeting sites decided upon by oral agreement.

16. Show how many hours a week the minister/pastor and officers each devote to
church work and the amount of compensation paid to each of them. If the minister or
pastor is otherwise employed, indicate by whom employed, the nature of the
employment, and the hours devoted to that employment.

Pastor devotes 8-16 hrs per week — monthly compensation $0. He is otherwise
self employed as a general contractor 30-40 hrs a week.

17. Will any funds or property of the organization be used by any officer, director,
employee, minister, or pastor for his or her personal needs or convenience?

No

18. List any officers, directors, or trustees related by blood or marriage.
None

On January 11, 19XX, the IRS issued Determination Letter 947 granting exemption from federal
income tax under section 501(a) of the Code as an organization described under section 501(c)(3). The letter
also indicates that is not a private foundation within the meaning of section 509(a) of the Code because it
is an organization described under sections 509(a)(1) and 170(b)(1)(A)(i).

Section 7611 Examination

On September 12, 20XX, the Commissioner, Tax Exempt and Government Entities Division (“TE/GE
Commissioner”) personally approved the issuance of a Notice of Church Tax Inquiry (“NCTI”).

On September 14, 20XX, the IRS issued the NCTI and enclosed church inquiry questions to . It
was returned as undeliverable.

On October 20, 20XX, the IRS re-issued the NCTI with enclosed church inquiry questions to
This was not returned as undeliverable. On October 26, 20XX, the IRS received consent to suspend
the period to conduct a church tax inquiry. did not respond to the church inquiry questions.

On January 12, 20XX, the IRS issued a Notice of Church Tax Examination (“NCTE”).

On February 10, 20XX, the IRS issued an initial examination letter with Information Document Request
(IDR) #1. On March 27, 20XX, March 28, 20XX, and March 29, 20XX the IRS received a response to IDR #1
from

On April 12, 20XX, the IRS issued IDR #2. On June 20, 20XX, the IRS received a response to IDR #2
from

On July 25, 20XX and July 31, 20XX, the IRS issued IDR #3 and IDR #4, respectively. On September
15, 30XX, the IRS received responses to IDRs #3 and #4.

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)

Schedule number or

Department of the Treasury — Internal Revenue Service ee
exhibit

Explanation of Items
Tax Identification Number (last 4 digits)

Form 886-A
(May 2017)

Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

Name of taxpayer

On November 21, 20XX and December 5, 20XX, the IRS issued IDR #5 and IDR #6, respectively. The
IRS did not receive a response.

On April 2, 20XX, the IRS mailed a clarification letter to stating that the TE/GE Commissioner
approved the issuance of the NCTI. The IRS also provided another informal opportunity to resolve the issues.
The IRS did not receive a response.

Church Activities

operates from home garage. is the son of and

is stated to be the youth pastor of

membership primarily consists of and his immediate and extended family. The
table below provides a description of each church member and their known relationship to :

Approximate |Approximat
Number of e
Aduit Number of
M ember Name Relationship to Pastor & His M embers Children
( )& Self & (spouse)
& son of Pastor
& son of Pastor
& son of Pastor
& daughter of Pastor
& daughter of
Mother to {son-in-law )
Relative of
& is brother
( ) Son-in-law's sister
(_) Possible relative of
Son-in-law ‘s mother
Total Membership 0 0

On February 10, 20XX, the IRS issued Information Document Request (IDR) #1 to
answered IDR#1 on behalf of . Below is an excerpt from IDR#1 with answers (in italics):

9. Does have a recognized creed and form of worship? If so, please provide
a detailed description of this information or documentation that will demonstrate its
existence.

Yes. Our name comes from our desire to worship the Lord as a community. To
love Him with all our hearts and to worship Him in truth. John 4:24 “God is Spirit,
and those who worship Him must worship in spirit and truth.” Duet. 6:5-7 “You
shall love the Lord your God with all your heart, with all your soul, and with all
your strength. “And these words which I command you today shall be in your
heart.” “You shall teach them diligently to your children, and shall talk of them
when you sit in your house, when you walk by the way, when you lie down, and
when you rise up.” Matt. 22.37-40 “Jesus said to him, “You shall love the Lord
your God with all your heart, with all your soul, and with all your mind.’ “This is
the first and great commandment. “And the second is like it: ‘You shall love your
neighbor as your self.’ “On these two commandments hang all the Law and the
Prophets.”

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

- i Schedule number or

Form 886-A Department of the Treasury Internal Revenue Service exhibit

(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

10. Does have a definite and distinct ecclesiastical government? If so, please

provide a detailed description of this information or documentation that will demonstrate
its existence.

Yes. Eph. 5:21 “and be subject to one another in the fear of Christ” We have
pastors and elders, but everyone has a voice.

11. Does have a formal code of doctrine and discipline? If so, please provide a
detailed description of this information or documentation that will demonstrate its

existence.
N/A

12. Does have regular religious services? If so, please provide: (a) The days
and times that regular religious services are held; (b) A description and nature of those
services.

Yes

(a) Sunday- Meeting at p.m.
(1) Worship, Teaching

(b) Every other Tuesday- Youth Meeting at p.m.
(1) Worship, Teaching, Games

(c) Wednesday- Meeting at p.m.
(1) Worship, Teaching

(d) Friday — Men’s Bible Study - Meeting at a.m.
(1) Bible Study and Discussion

(e) Friday - Women’s Bible Study - Meeting at a.m.
(1) Worship, Teaching, Discussion

13. Does produce or distribute any literature, such as, but not limited to, a
church bulletin, newsletters, calendar of events?

N/A

14. Does have an established place of worship? If so, please provide the

following information for ALL places of worship: (a) The address. State specifically if
each place of worship is a personal residence; (b) A statement listing the owner(s) of the
property; (c) A list of all members who reside at each location; (d) A tour of each facility
will be necessary.

Yes
(a) Sunday, Wednesday, Tuesday Night Meetings

City,
(1) Property Owners- and
(2) Residents- , , ’

2 a s ’

(b) Friday, Men’s Bible Study Meetings

Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanation of items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
(1) Property Owners- and
(2) Residents- , ’ '
(c) Friday, Women’s Bibles Study Meetings
On a rotating home schedule

15. Does have an established congregation of members that regularly attend
the religious worship services? If so, please provide: (a) The number of members that
attend regularly; (b) The number of members that are part of Pastor family,

including but not limited to his immediate and extended family members; (c) Membership
directory for the accounting periods ending July 31, 20XX, 20XX, 20X and 20XX.

(a) 0
(b) 0

16. State the number of nonmembers and visitors that attend regularly.
N/A
17. With respect to new members, please provide: (a) A description of the activities

conducts in attracting new members and indicate the frequency such activities were
conducted over the past 3 years; (b) The number of new members that have joined

over the past 3 years; (c) A statement where advertises its services to the public.
Word of mouth

18. A statement whether has conducted any baptisms, weddings, funerals or

any other religious ceremony? If so, please provide: (a) The number of each ceremony
listed above over the past 3 years; (b) Describe how each ceremony is recorded in
permanent records; (c) Have available all records specific to each ceremony for the
period ending July 31, 20XX.

Yes
(a) 1 Wedding
(b) Recorded with the state

19. Does employ ordained ministers only after they have completed a
prescribed course of study? If so, please provide: (a) A copy of each minister's license
or other credentials demonstrating the completion of a prescribed course of study; (b)
State the specific school or seminary each minister/pastor attended for the prescribed
course of study. Also include the contact information of each school or seminary; (c) If
Pastor has not completed a prescribed course of study, please explain in
detail under what authority is he licensed as an ordained minister.

No

(a) N/A

(b) N/A

(c) Pastor Training

Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)

Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
(1) Worked as lay pastor at church for many years,
led marriage enrichment classes for several years
(2) Ran men’s bible study group for two years
(3) In charge of prayer ministry for 0 services each weekend, training and
mentoring

20. Minutes of Board of Directors, officers, Officials or the equivalent for the

period covering August 1, 20XX through July 31, 20XX._ If minutes are not
contemporaneously recorded, please state the reasons.

Board Meetings - No Records

21. Copies of all employment contracts including but limited to Pastor A.

Copies of Employment Contracts- N/A

Revenue
Overall, does not maintain any electronic accounting system to record revenues and expenses
but rather uses a manual, bank-issued check register. wife, is primarily the

person who manually records all entries into the check register. The examiner identified one checking account
from one bank.

received its revenue solely from tithes and offerings from members’. No other revenue sources
were identified. received tithes on a regular basis throughout the week where each tithe was recorded by
hand into a spiral notebook. There were no records provided that would identify any offerings received. Tithes
are recorded, by date, name of contributor and the amount of the contribution. The notebook entries are then
recorded onto an electronic data base to generate an annual statement for each contributor for their use in
preparing their respective charitable contribution deduction when preparing and filing their Form 1040 each
year.

In determining the amount of revenue received by , had bank records, a tithing notebook,
computer generated tithing records, and annual contribution statements issued to donors.

Tithing was done in cash and, in the majority, in checks. Due to lack of proper bookkeeping for
cash tithes, the revenue agent was only able to examine the checks received. The table below provides the
tithing in checks received from each member from 20XX through 20XX. Of all tithes received, 0% were
from and his “Family Members”:

1 Tithes are distinguished from offerings in that, tithes are contribution made by [redacted] members that represent 10% of their
income. Whereas offerings are separate, contributions stated to benefit other [redacted] members as they had need.

2 For the purposes of this table, “Family Members” is defined as [redacted], his wife, his five children and their
spouses, and his known grandchildren. Also included is [redacted], a for-profit construction business where the founder
and president is [redacted], youth pastor, (http://www.[redacted].com/about/).

[Redacted tithing table]

The table below illustrates the [redacted] deposit summary from 20XX through 20XX, comparing the net
deposits to [redacted] bank account to the tithing activity recorded in [redacted] tithing records. The table
demonstrates that bank deposits consistently exceeded tithes:

[Redacted deposit summary table]

Expenses / Disbursements

All monies deposited into checking account are disbursed in the following manner: (a) Checks
issued to pastors and as compensation; (b) Checks issued to members;
(c) Electronic payments pay for charges made on the -owned American Express card; or (d) Electronic
payments pay for charges made on the personal Chase credit card of and . Below is a
detailed description of the activity conducted with respect to the monies deposited into checking account.

A. Disbursements to Pastors

issued checks made to or for compensation with respect to
position as pastor. stated that his compensation is $0 per week. He also added
that there is no board to approve salaries and that he sets the amount of his own salary, including bonuses. In
subsequent correspondence, stated that his salary is approved and agreed upon by the
body. No documents were provided to demonstrate any type of governance or approval by a governing body
with respect to salary.

also issued checks made payable to or for compensation with respect to
position as youth pastor. received $0 per month as compensation for this service.

For clarification of the facts with respect to daily ministerial activities, IDR#6 requested
that provide: (a) a detailed, daily schedule of pastoral activities for an “average” two-
week period; (b) Church bulletins, newsletters, etc.; and (c) Legible and logically organized, hand written or
typed statements of the specific tasks conducted by on a day-to-day basis. did not
provide a response.

Regarding pastoral compensation, did not issue Forms W-2 to Pastors and

. Instead, issued Forms 1099 to both, reporting compensation as non-employee
compensation. The table below illustrates Form 1099 amounts issued to and

from 20XX through 20XX:

TABLE DELETED

B. Disbursements to Members

made disbursements to its members to be used at their discretion. does not maintain
supporting documentation showing the purpose or nature of the disbursements.

The table below demonstrates the total amount of disbursements made by , including
compensation paid to and . Also attached as Exhibit A is a detailed account

Catalog Number 20810W Page 9 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A
(May 2017)

Department of the Treasury — Internal Revenue Service

Explanation of Items

Schedule number or
exhibit

Name of taxpayer

Tax Identification

Number (last 4 digits)

Year/Period ended

July 31, 20XX;
20XX; 20XX;
20XX
of the disbursements by name, amount and check number. The table also demonstrates that disbursements to
and his “Family Members” represented 0% of all disbursements by from 20XX through 20XX:
[Redacted disbursement table]

C. Electronic Payments — American Express Card

3 For the purposes of this table, “Family Members” is defined as [redacted], his wife, his children and their
spouses, and his known grandchildren. Also included is [redacted], a for-profit construction business where the founder
and president is [redacted], youth pastor, (http://www.[redacted].com/about/).
Catalog Number 20810W Page 10 www.irs.gov Form 886-A (Rev. 5-

2017)


Department of the Treasury — Internal Revenue Service Schedule number or exhibit

Form 886-A
Explanation of Items

(May 2017)

Name of taxpayer Tax Identification Number (/ast 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

has an American Express credit card where only and his wife, '

are authorized users. American Express credit card statements were provided for review. See Exhibit B.

Types of vendors for which charges were made are listed below. These charges appear to be personal
expenses. Further, stated that because does not have a facility to conduct its activities,
did not have significant expenses. The list includes trips to , , , , numerous
restaurants, and specialty merchandise vendors:

[Vendor names redacted]

does not maintain, and could not provide, supporting documentation such as receipts or invoices
that would indicate the nature of these charges.

The table below illustrates the total amount charged to American Express credit card from 20XX

through 20XX:
American Express
20XX 20XX 20XX 20XX Total
Charges| 0.00
Fees 0.00
Interest} 0.00
Total 0.00 0.00 0.00 0.00 0.00

Electronic payments are made from checking account to pay for charges made on
American Express credit card account. The table below provides a reconciliation of the amount charged and
the amount paid through the checking account from 20XX through 20XX. The difference indicates that
American Express charges were generally paid with revenues:

Catalog Number 20810W
2017)

Page 11 Form 886-A (Rev. 5-


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
Reconciliation:
American Express Charges & Checking Account Payments
20XX 20XX 20XX 20XX Total
Charges 0.00
Payments 0.00
Difference 0.00 0.00 0.00 0.00 0.00
Catalog Number 20810W Page 12 www.irs.gov Form 886-A (Rev. 5-2017)


Department of the Treasury — Internal Revenue Service Schedule number or exhibit
Form 886-A
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
D. Electronic Payments — Personal Chase Account
According to bank statements, electronic payments were made directly to a and
personal Chase banking account. did not provide any information with respect to the
nature of these electronic payments.
The table below provides the total payments from bank account to and
personal Chase account from 20XX through 20XX:
Chase
20XX 20XX 20XX 20XX Total
Electronic Payment 0.00
E. Summary of Total Deposits and Expenses / Disbursements
The following table provides a summary of total deposits from tithes to bank account and the
amount paid out in checks to individuals and to credit card charges:

TABLE DELETED

The majority of net deposits were disbursed. As discussed above, was unable to provide

documents demonstrating the nature of these disbursements.

LAW:
Church Status Qualification

Section 170(b)(1)(A)(i) describes a church or a convention or association of churches. Section
509(a)(1) of the Code generally provides that the term "private foundation" means a domestic or foreign
organization described in section 501(c)(3) other than an organization described in section 170(b)(1)(A).

In Foundation of Human Understanding v. United States, 88 Fed.Cl. 203 (Fed. Cl. 2009), the Court
identified the IRS’s Fourteen Criteria approach and the Associational Test to evaluate whether an organization
qualifies for church status pursuant to I.R.C. § 170(b)(1)(A). In applying these two approaches, the Court
reached the conclusion that the organization failed to meet most of the fourteen criteria and failed to satisfy the
threshold criteria of communal activity necessary for a church.

In Spiritual Outreach Society v. Commissioner, 927 F.2d 335 (8th Cir. 1991) and Church of Visible
Intelligence that Governs the Universe v. United States, 4. Cl.Ct. 55 (1983) the courts adopted the IRS's
fourteen criteria standard in deciding whether an organization is a church: (1) a distinct legal existence; (2) a
recognized creed and form of worship; (3) a definite and distinct ecclesiastical government; (4) a formal code
of doctrine and discipline; (5) a distinct religious history; (6) a membership not associated with any other
church or denomination; (7) an organization of ordained ministers; (8) ordained ministers selected after
completing prescribed studies; (9) a literature of its own; (10) established places of worship; (11) regular
congregations; (12) regular religious services; (13) Sunday schools for religious instruction of the young; and
(14) schools for the preparation of its ministers.

Catalog Number 20810W Page 13 www.irs.gov Form 886-A (Rev. 5-
2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or

(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

In American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304 (D.D.C. 1980) the Court
ruled that at a minimum, a church includes a body of believers or communicants that assembles regularly in
order to worship. This is referred to as the Associational Test. Unless the organization is reasonably
available to the public in its conduct of worship, its educational instruction, and its promulgation of doctrine, it
cannot fulfill this associational role. Mr. Seyfried and his wife prayed together in the physical solitude of their
home. They did not constitute a “congregation” within the ordinary meaning of the word. American Guidance
Foundation made no real effort to convert others or to extend its membership beyond the immediate Seyfried
family. Its “conduct of religious worship” did not extend beyond the family dwelling, which is used primarily for
non-religious purposes. Rather than ministering to a society of believers, plaintiff was engaged in a
quintessentially private religious enterprise.

In The Church of Eternal Life and Liberty, Inc. v. Commissioner, 86 T.C. 916 (1986), the Court ruled
that to qualify as a church, an organization must serve an associational role in accomplishing its religious
purposes. The petitioner had only two members since its formation and the petitioner seemed to have
intentionally pursued a policy that discouraged additional membership. Although petitioner generally held bi-
monthly meetings, the record was void of evidence of the nature or conduct of these meetings other than
listings in petitioner's newsletter of topics for certain meetings, generally involving discussion of libertarian,
economic or social issues. The record failed to establish that petitioner served any associational role for
purposes of worship. Therefore, the Court held that petitioner was not a church within the meaning of section
508(c)(1)(A).

Exemption

Section 501(a) provides that an organization described in subsection (c) or (d) shall be exempt from
taxation under this subtitle unless such exemption is denied under section 502 or 503.

Section 501(c)(3) generally includes corporations organized and operated exclusively for purposes that
include religious, educational or charitable purposes, and which no part of the net earnings inures to the benefit
of any private shareholder or individual.

Treas. Reg. § 1.501(a)-1(c) of the Regulations defines a private shareholder or individual in section 501
as persons having a personal and private interest in the activities of the organization.

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

Treas. Reg. § 1.501(c)(3)-1(c)(1) states 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). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. § 1.501(c)(3)-1(c)(2) states 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.
For the definition of the words private shareholder or individual, see paragraph (c) of § 1.501(a)—1.

Treas. Reg. § 1.501(c)(3)-1(d)(ii) states that an organization is not organized or operated exclusively for
one or more of the purposes specified in subdivision (i) of this subparagraph 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

Catalog Number 20810W Page 14 www.irs.gov Form 886-A (Rev. 5-
2017)

Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

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.

Treas. Reg. § 1.501(c)(3)-1(f)(2) of the Regulations states:

(i) In general. Regardless of whether a particular transaction is subject to excise taxes
under section 4958, the substantive requirements for tax exemption under section
501(c)(3) still apply to an applicable tax-exempt organization (as defined in section
4958(e) and § 53.4958-2) described in section 501(c)(3) whose disqualified persons
or organization managers are subject to excise taxes under section 4958.
Accordingly, an organization will no longer meet the requirements for tax-exempt
status under section 501(c)(3) if the organization fails to satisfy the requirements of
paragraph (b), (c) or (d) of this section. See § 53.4958—8(a).

(ii) Determination of whether revocation of tax-exempt status is appropriate when
section 4958 excise taxes also apply. In determining whether to continue to
recognize the tax-exempt status of an applicable tax-exempt organization (as defined
in section 4958(e) and § 53.4958-2) described in section 501(c)(3) that engages in
one or more excess benefit transactions (as defined in section 4958(c) and §
53.4958-4) that violate the prohibition on inurement under section 501(c)(3), the
Commissioner will consider all relevant facts and circumstances, including, but not
limited to, the following—

(A) The size and scope of the organization's regular and ongoing activities that
further exempt purposes before and after the excess benefit transaction or
transactions occurred;

(B) The size and scope of the excess benefit transaction or transactions
(collectively, if more than one) in relation to the size and scope of the
organization's regular and ongoing activities that further exempt purposes;

(C) Whether the organization has been involved in multiple excess benefit
transactions with one or more persons;

(D) Whether the organization has implemented safeguards that are reasonably
calculated to prevent excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the
meaning of section 4958(f)(6) and § 53.4958-7), or the organization has
made good faith efforts to seek correction from the disqualified person(s) who
benefited from the excess benefit transaction.

(iii) All factors will be considered in combination with each other. Depending on the
particular situation, the Commissioner may assign greater or lesser weight to some
factors than to others. The factors listed in paragraphs (f)(2)(ii)(D) and (E) of this
section will weigh more heavily in favor of continuing to recognize exemption where
the organization discovers the excess benefit transaction or transactions and takes
action before the Commissioner discovers the excess benefit transaction or
transactions. Further, with respect to the factor listed in paragraph (f)(2)(ii)(E) of this
section, correction after the excess benefit transaction or transactions are discovered

Catalog Number 20810W Page 15 www.irs.gov Form 886-A (Rev. 5-
2017)


Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (/ast 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

by the Commissioner, by itself, is never a sufficient basis for continuing to recognize
exemption.
In Unitary Mission Church of Long Island v. Commissioner, 74 T.C. 507 (1980), the Tax Court ruled that

the petitioner was not entitled to exemption from Federal taxation under sections 501(a) and 501(c)(3),
because a part of its net earnings inured to the benefit of its founder and other ministers.

In Universal Church of Jesus Christ, Inc. v. Commissioner, T.C. Memo 1988-65, the Tax Court decided
that the petitioner operated four commercial activities as departments that were all primarily commercial in
nature. As a result, it was ruled that the petitioner did not operate exclusively for one or more exempt
purposes.

In Bubbling Well Church of Universal Love, Inc. v. Commissioner, 670 F.2d 104 (9th Cir. 1981), the
church was unable to supply evidence showing that payments to its controlling members were reasonable. As
a result, the circuit court ruled that the church was unable to demonstrate that it is entitled to section 501(c)
exemption.

GOVERNMENT’S POSITION:
I. ISSUE 1: PRIVATE BENEFIT

failed to operate exclusively for exempt purposes by operating for the private benefit of individual
church members. The grounds supporting revocation include: (1) circular flow of funds; and (2)
inurement.

A. Circular Flow of Funds

Section 61(a) states that except as otherwise provided in this subtitle, gross income means all income
from whatever source derived. Section 170(b)(1)(A)(i) provides for a deduction of charitable contributions made
by individuals to a church or a convention or association of churches. A charitable contribution is a transfer of
money or property without adequate consideration. United States v. American Bar Endowment, 477 U.S. 105
(1986).

In Church of World Peace, Inc. v. Commissioner, T.C. Memo. 1994-87, the petitioner granted charters
to parishes, allowing the use of its name, status, and tax identification number, and designated individuals as
ministers. In return, the petitioner requested a donation, without other qualification. Ministers deducted
contributions to petitioner's bank account, then the ministers would withdraw the same amount for use for
personal expenses. These withdrawn amounts were not reported as income, but instead characterized as tax-
free under section 107 housing allowances or reimbursement of church expenses. The Tax Court ruled that
this circular flow of funds was in contravention of the petitioner operating exclusively for religious purposes
within the meaning of section 501(c)(3) and that operations benefited private individuals.

As in Church of World Peace, accepted tithes from its members, facilitating members claiming
charitable contribution deductions. would then return the funds back its members for personal use. The
table below demonstrates the total tithing received from members from 20XX through 20XX:

Catalog Number 20810W Page 16 www.irs.gov Form 886-A (Rev. 5-
2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
Tithe Summary

[Redacted tithing table]

As shown, 0% of all tithing received were from [redacted] and his “Family Members”.
4 For the purposes of this table, “Family Members” is defined as [redacted], his wife, his zero children and their
spouses, and his known grandchildren. Also included is [redacted], a for-profit construction business where the founder
and president is [redacted], youth pastor, (http://www.[redacted].com/about/).
Catalog Number 20810W Page 17 www.irs.gov Form 886-A (Rev. 5-
2017)


Department of the Treasury — Internal Revenue Service Schedule number or

Form 886-A exhibit

(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

The table below demonstrates the distributions back to its members. As shown, 0% of

disbursements were to its members:

[Redacted disbursement table]

These two tables demonstrate the circular flow of funds where donations received by in the form
of tithes were eventually returned to its members for their personal use. As a result, is not operating

exclusively for exempt purposes as required under section 501(c)(3) and its operations benefited private
individuals— members.

Catalog Number 20810W Page 18 www.irs.gov Form 886-A (Rev. 5-
2017)


Form 886-A Department of the Treasury — Internal Revenue Service Scheae number or

(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

B. Inurement

failed to operate exclusively for an exempt purpose because its net earnings inured to the benefit
of private individuals. Under Treas. Reg. § 1.501(c)(3)-1(c)(2) 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.

Treas. Reg. § 1.501(a)-1(c) defines a “private shareholder or individual” as one having a personal and
private interest in the activities of the organization. Further, Treas. Reg. § 1.501(c)(3)-1(d)(ii) provides that an
organization is not organized or operated exclusively for one or more of the exempt purposes specified, 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.

In this case, is the pastor and founder of . The members of consist
primarily of his immediate and extended family. Therefore, and his family are persons who
have a private and personal interest in the activities of

received all its revenue from its members in the form of tithes. and have
complete control over bank account as well as the overall financial affairs of . They have the ability
to issue church disbursements at their discretion, including pastoral compensation.
stated to the examiner that there was no organizing body of with authority to govern the affairs of ;
but that all authority is held by him. stated in subsequent correspondence that members
agreed to his compensation. However, members are primarily related to , therefore the
independence of membership appears to be impaired. In addition, could not provide any
contemporaneous documentation, such as minutes, demonstrating any meeting of members.

Of all the disbursements issued by , 0% was disbursed to members’; 0% was disbursed to
and his “Family Members”; and 0% was paid directly to and/or at their discretion, of
which, only 0% was stated to be compensation:

TABLE DELETED

In addition to the disbursements, has an American Express card where and
were the sole authorized users. The types of charges included airline fees, hotel fees, jewelry purchases,
grocery purchases, and home remodel purchases. Then payments to the American Express account were

electronically paid from checking account. was unable to provide documentation showing the
nature of charges were church-related expenses. Charges to the church credit card therefore appear to be for
the private benefit of and

It was also shown that electronic payments were made from checking account to the personal
Chase credit card of and . was unable to provide any records on the nature of
these payments.

To help illustrate the amount paid to or on behalf of members who received an economic benefit,
the table below shows the total deposits received by and compares them to the various disbursements

° See table on page 12.
° See table on page 10.

Catalog Number 20810W Page 19 www.irs.gov Form 886-A (Rev. 5-
2017)


Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

made through checks and credit cards. The table then shows that 0% of its revenue is disbursed to
members for their personal benefit:

Calendar Year Information

[Redacted summary table]

[Redacted] and [redacted] authorized church disbursements to personally benefit themselves and to
members. disburses 0% of its revenue to its members for their personal benefit, which is a substantial
non-exempt purpose within the meaning of Treas. Reg. § 1.501(c)(3)-1(c)(1). As a result, ’s net earnings

have inured to the benefit of private individuals within the meaning of section 501(c)(3) of the Code and Treas.
Reg. § 1.501(c)(3)-1(c)(2).

Based on these facts, fails the operational test within the meaning of Treas. Reg. § 1.501(c)(3)-
1(a)(1) because its net earnings inured to the benefit of private individuals.

II. ISSUE 2: DATE OF REVOCATION

Section 12.03 of Revenue Procedure 2018-5 states that the revocation of a determination letter may be
retroactive if: (1) there has been a change in the applicable law; (2) the organization omitted or misstated
material information. A misstatement of material information includes an incorrect representation or attestation
as to the organization's organizational documents, the organization's exempt purpose, the organization's
conduct of prohibited and restricted activities, or the organization's eligibility to file Form 1023-EZ; (3) the
organization operated in a manner materially different from that originally represented in an application for
recognition of exemption; or (4) in the case of an organization to which § 503 applies, the organization
engaged in a prohibited transaction with the purpose of diverting corpus or income of the organization from its
exempt purpose and such transaction involved a substantial part of the corpus or income of such organization.
If a determination letter is revoked or modified by a letter with retroactive effect, the letter will, except in fraud
cases, state the grounds on which the determination letter is being revoked or modified and explain the
reasons why it is being revoked or modified retroactively.

As described above, operated for the private benefit of its members through a circular flow of
funds and inurement. As a result, it has operated in a manner materially different from that originally
represented in its Form 1023 and the effective date of revocation of exempt status is August 1, 20XX.

Hl. ISSUE 3: CHURCH QUALIFICATION

In the absence of Congressional guidance, courts have applied the IRS’ Fourteen Criteria and the
Associational Test to determine whether a taxpayer qualifies as a “church” for purposes of section
170(b)(1)(A)(i). See Foundation of Human Understanding, 88 Fed.Cl. at 218. As described below, fails
to meet both standards.

A. The IRS's Fourteen Criteria
Courts have used the IRS’ 14 criteria to help ascertain whether an organization qualifies as a church

under section 170(b)(1)(A)(i). Based on ’s IDR responses, the IRS considers the following:
Catalog Number 20810W Page 20 www.irs.gov Form 886-A (Rev. 5-

2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or

(May 2017) Explanation of Items

Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX

1. A distinct legal existence:
is organized as an , non-profit corporation.
2. A recognized creed and form of worship:

indicated on its Form 1023 application, Schedule A, that it has a written creed or statement of
faith.

During the examination, simply provided citations of certain scripture verses and did not provide
any document that outlines a formal statement that church members embrace and adhere to.

3. A definite and distinct ecclesiastical government:

is controlled by . According to , he has complete control over the
affairs of and there is no governing body with authority to govern in religious, doctrinal,
financial, or any other church matter. also does not maintain minutes of any meeting that may

have occurred.

4. A formal code of doctrine and discipline:
stated “n/a’.

5. A distinct religious history:

formed in September 19XX. was unable to provide details of its religious activities.

6. A membership not associated with any church or denomination:
In its Form 1023, Schedule A, indicated that it does not require prospective members to renounce

other religious beliefs or their membership in other churches or religious orders to become members.

7. An organization of ordained ministers:
is neither licensed nor ordained.
8. Ordained ministers selected after completing prescribed studies:
did not complete any prescribed course of study.
9. A literature of its own:

does not produce any literature of its own that would provide information to prospective members
of general beliefs.

10. Established places of worship:

alleged that it meets every Sunday in garage. is the son of
does not advertise its place of worship to the public. Therefore, the “place of worship” is only
known to the members of

11. Regular congregations:

is primarily made up of and his immediate and extended family. reported
on its Form 1023 that it would attract new members by word of mouth and by the signage in front of
. However, during the examination, revealed that it did not have an application

process for new members or maintain any signage.

Catalog Number 20810W Page 21 www.irs.gov Form 886-A (Rev. 5-


Department of the Treasury — Internal Revenue Service Schedule number or
Form 886-A exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
also reported on its Form 1023, Schedule A, that it had 0 members and 0 individuals who
attended the worship services. During the audit provided a list of 0 members, all of
whom appear to be related to each other, and over half are related to himself. Also 0
of the listed individuals appeared to be children.
As a result, has not demonstrated that it is congregation.

12. Regular religious services:
On its Form 1023, stated that it would conduct baptisms, weddings, funerals, child dedications.
However, during the years under examination, conducted one wedding. did not

maintain a record of its religious services.

13. Sunday schools for the religious instruction of the young:

stated that it conducted a youth meeting every other Tuesday. was unable to provide any
proof of the existence of these Sunday schools.

14. Schools for the preparation of its ministers:
did not provide any documents.

In weighing the 14 criteria discussed above, would not qualify as a church within the meaning of
sections 509(a)(1) and 170(b)(1)(A)(i).

B. Associational Test

To qualify as a church, “an organization must serve an associational role in accomplishing its religious
purpose.” Church of Eternal Life and Liberty, Inc. v. Commissioner, 86 T.C. 916, 924 (1986). The associational
test is a “threshold” standard which religious organizations must satisfy in order to obtain church status. In
creating the associational standard, the United States District Court for the District of Columbia stated that
demonstrating associational aspects is the “minimum” requirement necessary for a religious organization to
gain church status. American Guidance Foundation, Inc. v. United States, 490 F.Supp. 304, 306 (D.D.C.
1980).

Courts have also followed American Guidance Foundation in finding that a “church” may be
distinguished from other religious organizations by fulfillment of an “associational role’: The means by which an
avowedly religious purpose is accomplished separates a “church” from other forms of religious enterprise. At a
minimum, a church includes a body of believers or communicants that assembles regularly in order to worship.
Unless the organization is reasonably available to the public in its conduct of worship, its educational
instruction, and its promulgation of doctrine, it cannot fulfill this associational role. See Foundation of Human
Understanding, 88 Fed. Cl. at 221.

In American Guidance Foundation, the American Guidance Foundation (“AGF”) consisted of Robert
Seyfried and at most five members of his immediate family. The District Court ruled that AGF was not a
congregation because Mr. Seyfried and his wife prayed together in the physical solitude of their home, AGF
made no real effort to convert others or to extend its membership beyond the immediate family, its “religious
instruction” consisted of a father preaching to his son, its organized ministry was a single, self-appointed
clergyman, and its “conduct of religious worship” did not extend beyond the family dwelling.

The facts in are comparable to that of American Guidance Foundation: membership
consisted primarily of and his immediate and extended family members, met at
home, was unable to demonstrate any real effort to convert others, “religious
instruction” consisted of preaching to his immediate and extended family, is a

Catalog Number 20810W Page 22 www.irs.gov Form 886-A (Rev. 5-
2017)


- i Schedule number or
Form 886-A Department of the Treasury Internal Revenue Service exhibit
(May 2017) Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
July 31, 20XX;
20XX; 20XX;
20XX
self-appointed pastor who was not formally ordained, and “conduct of religious worship” did not extend
beyond home. As a result, is not a congregation and does not satisfy the associational
test.
For these reasons, does not qualify as a church within the meaning of sections 509(a)(1) and

170(b)(1)(A)(i) of the Code.

TAXPAYER’S POSITION:

[Redacted] has not provided a position.

CONCLUSION:

failed to operate exclusively for an exempt purpose because it operated for the private benefit of
individual church members, and because its net earnings inured to the benefit of private individuals. As a
result, the effective date of revocation of exempt status is August 1, 20XX. In addition, failed to
qualify as a church within the meaning of I.R.C. §§ 509(a)(1) and 170(b)(1)(A)(i).

Catalog Number 20810W Page 23 www.irs.gov Form 886-A (Rev. 5-
2017)