A "church" organized as a for-profit LLC with a paid recruiting scheme is denied 501(c)(3) status

Plain-English summary

An organization applied for recognition as a tax-exempt religious charity but the IRS denied it under § 501(c)(3). Two problems doomed the application. First, it failed the organizational test: the group had reorganized as a for-profit limited liability company whose certificate allowed "any legal purpose," which negates the requirement that a charity be organized exclusively for exempt purposes with its assets dedicated to charity on dissolution. Second, it failed the operational test because it served the private interests of its president and members rather than the public. The president had full and total control over the organization's activities and finances, chose the board (which could not overrule him), served for life, hand-picked his successor by will, and was the only paid person. The organization also ran a tiered arrangement in which members ("Zs") recruited more members and received recurring per-member payments funded by member tithes, which the IRS viewed as substantial private benefit resembling a commercial recruiting scheme. Applying cases like Basic Bible Church, Bubbling Well Church, and New Dynamics Foundation (gaps in the record are resolved against the applicant, and the applicant bears a heavy burden), the IRS concluded the group was operated for private benefit. Because it did not protest within 30 days, the denial became final: no charitable deductions under § 170, and the organization must file income tax returns. The lesson: a religious label does not create exemption when one insider controls everything and the structure funnels money to founders and recruiters.

Ruling snapshot

• Question: Does a purported church, reorganized as a for-profit LLC and controlled by a president-for-life with a per-member payment structure, qualify for exemption under § 501(c)(3)?
• Outcome: Denied (final adverse determination; fails the organizational and operational tests and serves substantial private interests).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii), (b)(4), (c)(1), (d)(1)(ii); Rev. Rul. 69-175; Basic Bible Church, Bubbling Well Church, American Guidance Foundation, New Dynamics Foundation, Harding Hospital, Universal Life Church.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
IRS Cincinnati, OH 45201
Date: May 8, 2018

Employer ID number:

Number: 201831014
Release Date: 8/3/2018 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-30, 501.32-00, 501.32-01, 501.33-00

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) 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 the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.


If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501 (c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508
Cincinnati, OH 45201
Date: February 27, 2018
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

k dollars = $ 501.03-30
m dollars = $ —$ 501.32-00
N = Number 501.32-01
V = State 501.33-00
W = Date

X= Number

Y= State Agency
Z = Religious Person or Group

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issue:

Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.
Facts:

You were incorporated in the state of V on date W. Your Articles of Incorporation state your purposes are
charitable and religious. You attest that your organizing document was amended to meet the organizational
requirements of Section 501(c)(3). You have reorganized as a for-profit Limited Liability Company (LLC). A
copy of your Operating Agreement was not included with your Certificate of Organization as an LLC.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


2

You have X directors all of which are related through family relationships. Your directors are chosen by, and
serve at the will of, your president. Subsequent presidents will be chosen by your president through a legal will.
Your directors cannot overrule the authority of your president. Your president has full and total control over
your activities and finances. You represent that safeguards exist, but they are part of your private internal
workings. Your president is the only person currently receiving compensation. All other positions are voluntary
unpaid positions or positions that receive income based upon an individual's performance.

Your application states you operate (or will operate) in a foreign country or countries. Specifically, you state
you will operate worldwide in any country where your assistance is needed. You will engage in humanitarian
efforts. When asked about these foreign operations you stated, "...at this time to make issues less complicated
in this process, [we] have scaled back [our] objective to operate in other countries." You subsequently stated
that you do not have any plans to operate in a foreign country.

Your narrative description of activities states you are organized for religious and charity purposes. Through
your church, its members, and their contributions, you strive to educate and help your fellow man. You intend
to help out where allowed, which may include helping individuals who are less fortunate or suffered loss. The
assistance is provided on a case by case basis and may include donation of labor from your members, food,
goods and/or funds. You intend to donate funds you set aside to legally established charities or organizations.
However, in your response to our first information request you stated you will not be making/issuing any grants,
foreign or domestic.

You state that all your time and resources are devoted to building and adding to your activities. Specifically,
you conduct religious activities, sermons, education, and expansion. You provide weekly religious services.
Activities are conducted on the internet and will be conducted in person in the future when funds allow you the
ability to purchase brick and mortar establishments. Your religious activities, sermons and education entail a
group of like-minded individuals gathering to worship according to their beliefs and customs. Initially activities
are conducted at various public open spaces with plans to have a permanent location. You spend 80% to 90% of
your time on religious activities, sermons, education, and expansion activities. These activities are conducted
weekly at a predetermined time and place which will be posted to your website. Video recordings of services
will be available to active members.

You represent that you are a church recognized by the State of V. In response to our information request you
stated that "[we] believe that [we] have made adequate changes to conform to the criteria of [American
Guidance Foundation v. United States, infra.] If [not, we] will continue to make changes, as necessary, until
[we do] qualify." You state you have a distinct legal existence. That your creed and form of worship is all
creeds and forms of worship. You state your distinct ecclesiastical government is your directors and leader. That
your formal code of doctrine and discipline are all forms of doctrine and discipline. You state your religious
history spans back to the year in which you were formed. And that your literature will be the literature of all
religions around the world.

Only active members may participate in your activities. Active members are required to tithe approximately

k dollars per month. Members are required to be at least 18 years of age, submit a membership application and
remain a full tithe payer. You will acquire members by word of mouth and by referring individuals to your
website.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

3

You will have both and online and physical presence. Your website is currently a beta version and constantly
changing. You state the only people or agencies that know of your websites existence are your directors, the
Internal Revenue Service, and Y.

Your website mentions humanitarian efforts. Our information request asked about your humanitarian efforts.
You explain that your website is continually evolving and that the website no longer mentions that excerpt.
However, your intent is to help individuals in need with funds or goods, which includes donating goods or funds
to a reputable organization conducting humanitarian efforts.

Your website states that you are in need of people in every community across the country to be a Z. Zs try to
find new members in their community, look after and mentor those members to become a Z with a flock of their
own. You may compensate Zs for the service they provide to their flocks.

Z is also a title bestowed upon an active member. Z is a “paid-voluntary” service of monitoring the welfare of
members & Zs whom you have placed under them for guiding. Zs strive to keep in regular contact with and
monitor each member. Zs sign a membership agreement and are responsible for their determining their own
schedule, working, hours, and taxes. Zs receive payments of approximately m dollars per member per month.
The maximum members under each Z is approximately N. You state no members are receiving compensation.
Compensation will begin once tax exempt status is obtained. All of your revenue is from member tithing and all
of your expenses will be used to pay compensation.

Members are required to sign a contract/agreement. The contract explains that members are volunteers and as a
volunteer the individual is self-employed and determines for themselves when they work and the number of
hours they work. Zs are compensated based on the service to their flock. Members are subject to
entrepreneurial and financial risk and are solely responsible for losses they incur. Members must obtain and
pay for their own insurance and obtain a federal employer identification number, if required. Members must
agree that they are responsible for all costs and expenses incurred. Members acknowledge that they are not an
employee of you and they are not a professional fundraiser and except as permitted are not authorized to act on
behalf of you.

The contract holder must agree to arbitration in the event of any disputes with you and must indemnify you.
The contract states you have a limitation of liability in regard to damages, including loss of profits, arising from
a breach of contract.

All members are encouraged to continually locate like-minded persons who are interested in joining and direct
them to your website where they may become a member. New members are placed at your sole discretion.
Members must pay a recurring monthly tithe of approximately k dollars monthly. A member must pay the
recurring tithe to receive any compensation earned. Payment must be made on a designated day each month via
electronic bill pay or money transfer along with the individual's member identification number. Members agree
to pay any service or transfer charges. Earnings are mailed via check to the member’s address on record.

Adult members are permitted to have multiple contracts/accounts which may be gifted at a later date. Members
may cancel their tithes/contributions at any time. Members can be removed at any time for any reason.
Canceling the contract and membership results in the member forfeiting any earnings they may have received.
Tithes are not refundable even if a member forgets to cancel their automatic bill pay.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Law:

Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii) provides that an organization is not organized exclusively for one or more
exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its
activities, activities that are not in furtherance of one or more exempt purposes.

Treas. Reg. § 1.501(c)(3)-1(b)(4) provides that 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 be distributed for one or more exempt purposes.

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) of the Code. An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(i) lists the purposes under Section 501(c)(3) which are exempt. Said purposes
are: religious, charitable, scientific, testing for public safety, literary, educational and the prevention of cruelty
to children or animals.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for
one or more exempt purposes unless it serves a public rather than a private interest. Thus, to meet the
requirement of this subsection, 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.

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization which was formed by parents of pupils
attending a private school. The organization provided bus transportation to and from the school for those
children whose parents belong to the organization. The organization did not qualify for exemption under
Section 501(c)(3) of the Code because it served a private rather than public interest.

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974), the court held that an organization
seeking a ruling as to recognition of its exempt status has the heavy burden of proving that it satisfies the
requirements of the particular exemption statute.

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that “one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status.”

Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), the Tax Court found that although the organization
did serve religious and charitable purposes, it existed to serve the private benefit of its founders, and thus failed
the operational test of Section 501(c)(3). Control of over financial affairs by the founder created an opportunity
for abuse and thus the need to be open and candid, which the applicant failed to do.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

5

Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531 (1980). In an action for
declaratory judgment pursuant to Section 7428(a), the Tax Court considered an adverse ruling by the IRS on an
application for exempt status as a church. The applicant had declined to furnish some information, and made
answers to other inquiries that were vague and uninformative. On the basis of the record, the Court held that
the applicant had not shown that petitioner was not operated for the private benefit of its founders.

In American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304, (D.D.C. 1980) the court stated:
“Faced with the difficult task of determining whether or not religious organizations are in fact churches, the IRS
has developed fourteen criteria with which it applies on an ad hoc basis to individual organizations.” Said
criteria includes:

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 place of worship

11) regular congregation

12) regular religious services

13) Sunday schools for religious instruction of the young

14) schools for the preparation of its ministers.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization's
request for tax-exempt status was reasonable.

In National Association of American Churches v. Commissioner, 82 T.C. 18 (1984), the Tax Court denied a
petition for declaratory judgment that the organization qualified for exempt status as a church. In addition to
evidence of a pattern of tax-avoidance in its operations, the court noted that the organization had failed to
respond completely and candidly to IRS during administrative processing of its application for exemption. An
organization may not declare what information or questions are relevant in the determination process. It cited a
number of declaratory relief actions that upheld adverse rulings by the Service because of the failure of the
applicants to provide full and complete information on which the Service could make an informed decision.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service's denial, stated "It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant." The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Ohio Disability Association v. Commissioner, T.C. Memo 2009-261, states denial is justified because responses
to requests for additional information failed to supplement the initial application or clarify purposes and
activities, and generalizations did not provide sufficient detail to determine that the organization would be
operated exclusively for exempt purposes.

Application of Law:

You are not organized exclusively for religious, charitable or other purposes as specified in the statute under
Section 501(c)(3) of the Code.

Subsequent information you furnished indicates you are organized as a for-profit LLC. This contradicts the
provisions in Treas. Regs. §§ 1.501(c)(3)-1(b)(1)(iii) and 1.501(c)(3)-1(b)(4) which require a Section 501(c)(3)
organization to be organized to further an exempt purpose and its assets to be distributed, upon dissolution, for
one or more exempt purposes. Stating in your Certificate of Organization that the purpose for your creation is
for “any legal purpose” negates any exempt purpose you previously held.

You do not meet the operational test under Treas. Reg. § 1.501(c)(3)-1(c)(1) because you are not operated for
an exempt purpose. While your activities consist, in part, of furthering a religious purpose, other activities such
as your president choosing your board of directors, subsequent presidents being chosen by the current
president’s legal will, and the president having full and total control over your activities and finances, show that
you are furthering a non-exempt purpose more than insubstantially.

You state your directors serve at the will of your president and that they cannot overrule him. Your president
also is the only individual who is currently compensated. Other positions in your organization may receive
income based on their individual performance. Because of the control your president exerts on your
organization, you are not operated for an exempt purpose.

The payments you make to Z promotes the private interests of members these payments are substantial in
nature. For this reason, you are not operating exclusively for exempt purposes (Treas. Reg. § 1.501(c)(3)-
1(c)(1)). Thus, you do not satisfy the operational test requirement to be recognized as exempt under Section
501(c)(3) of the Code, and are not as described in Section 501(c)(3).

You are not as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(1 )(ii) because you are operating for the private
interest of your President and the President’s family. The president serves as president for life and cannot be
removed. This is substantial in nature and cannot be dismissed as being merely incidental to accomplishing an
exempt purpose.

The group of parents in Revenue Ruling 67-175 provided a cooperative service for themselves and thus served
their own private interests. Like that organization, you were formed to provide benefits to your members and
your president. In your case, a substantial portion of your activities consists of expansion activities in which Zs
are receiving between m dollars monthly per member in their flock. These payments promote the private
interests of Z. You serve private rather than a public interest. Section 1.501(c)(3)-1(d)(1 )(ii) of the Regulations
states that an organization is not operated exclusively for one or more exempt purposes unless it serves a public
rather than a private interest.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


You are similar to the ruling in the court cases New Dynamics and Bubbling Well Church of Universal Love,
consistent with the cited cases, you were formed for the private benefit of your president and Zs through the
planned revenue based payments to your president and Zs. Further, your president has full and total control
over your activities and finances.

While you appear to meet some of the requirements under American Guidance Foundation, your overall
operations benefit your president and your members of Z to such an extent that exemption under Section
501(c)(3) of the Code is precluded.

You are similar to the ruling in the court cases Basic Bible Church v. Commissioner and National Association
of American Churches v. Commissioner. Consistent with these cited cases, you were formed for the private
benefit of your president and members of Z. Your intent, based upon information submitted and your budget, is
to expand membership to pay funds to the Zs. Your purposes further the interests of your president and your
members of Z.

In La Verdad, and New Dynamics, it was established that an organization must establish, through its
administrative record, that it meets the requirements for exemption. You have not established that you meet the
requirements for exemption under Section 501 (c)(3) of the Code. As provided in New Dynamics, any gaps in
the administrative record will be resolved against the applicant. Similarly, in Ohio Disability Association, the
court found that even when additional information was provided, but it contained generalizations and failed to
clarify purposes, denial is justified.

As in Harding Hospital and Universal Life Church, you have the heavy burden of establishing that you qualify
for tax exemption. You not proven to us that you are organized and operating in a manner appropriate under
Section 501(c)(3) of the Code.

Conclusion:

Based on the above facts and analysis, you do not qualify for exemption under Section 501(c)(3) of the Code.
You are not organized and operated exclusively for a 501(c)(3) purpose. You further the interests of your
president and members which serves private interests. Therefore, you do not qualify for exemption under
Section 501 (c)(3).

If you don't agree

You have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone number
• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:

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

For authorized representatives:

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

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven't provided a basis
for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

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

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


9

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201
You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.
If you agree:
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your

income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W