IRS revokes a church's exemption for private benefit and a circular flow of tithes back to its members

View official IRS release (PDF)

Plain-English summary

An organization recognized as a 501(c)(3) church was examined under the special church-audit rules of Internal Revenue Code section 7611, and the IRS revoked its exemption on three grounds. First, it operated for the private benefit of individual church members rather than for the public. Second, its net earnings inured to insiders through a "circular flow of funds": members gave tithes (which let them claim charitable deductions), and the church then paid money back out to those same members and to its pastor and youth pastor for personal use, with no supporting documentation. The pastor set his own salary with no governing-body approval, and church funds also paid personal credit-card charges of the pastor and his spouse. Third, the organization did not qualify as a "church" under sections 509(a)(1) and 170(b)(1)(A)(i); it failed the IRS's fourteen-criteria test and the associational test drawn from cases such as American Guidance Foundation and Church of Eternal Life and Liberty. Because a church audit's final report is itself treated as a final adverse determination under section 7611(g), the organization is treated as having exhausted its administrative remedies. The IRS revoked the exemption effective August 1, 20XX, and contributions to the organization are no longer deductible under section 170.

Ruling snapshot

• Question: Should the church's 501(c)(3) exemption be revoked for operating for members' private benefit and inurement, and does it even qualify as a "church"?
• Outcome: Revocation (exemption revoked effective August 1, 20XX; the original determination letter revoked; organization also held not to be a church)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(2), (d)(1)(ii); IRC §§ 509(a)(1), 170(b)(1)(A)(i); IRC § 7611; Church of World Peace, Inc. v. Commissioner, T.C. Memo. 1994-87; American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304 (D.D.C. 1980); Foundation of Human Understanding v. United States, 88 Fed. Cl. 203 (2009)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TEIGE EO Examinations
1106 Commerce Street MC 4920 DAL.
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: DEC 0 T 2B
DIVISION
UIL: 5041.03-00 Person to Contact:
Identification Number:
Telephone Number:
Number: 202149013 in Reply Refer to

Release Date: 12/10/2021 LAST DATR 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 (ERC). Our favorable determination letter to you dated January
11, 19X°X, is hereby revoked and you are no longer exempt under section 501{a), as an
organization described in section 501(¢)(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)-I(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)-I(c)(2) provides that an organization is not operated
exclusively for one or more exempt purposes if its net carnings inure in whale or
in part to the benefit of Individuals.

You are not a church within the meaning of LR.C. sections 509(a)(1) and
[illegible]

We have enclosed a copy of our report of examination explaining why we
believe a revocation of your tax-exempt status under section 50!(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 retums and assessment of any taxes due will not be delayed should
a petition for declaratory judginent Le filed unde: section 7428 of the Internal Revenue

Code.

If you decide to contest this determination in court, you must initiate 1 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 91" day after the
date this determination was mailed to you, Contact the clerk of the appropriate court for the
rules for initiating suites 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 bur 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 taxpayeradvacate irs. gov or call 1-877-777-4778

We will notify the appropriais 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

July 37, 20Xx;
20XX; 20XX;
ISSUES:

1. Whether failed lo operate exclusively for an exernpl 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 §
   [illegible]
   FACTS:
   incorporation
   ‘ ° is the pastor and founder of (“ *y. 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 I, Section |— 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 ll, 1, slates lhal ils activities will consist of lhe following:

Bible teaching — specific teaching fruit 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 Il, 2, states that the sources of financial support will be by, “donation of attending
persons.”

Part Il, 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

[Page 1]

July 31, 20Xx;
20XX; 20XX;
, Secretary
Part ll, 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 Ill, 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 ifalics) in the following
manner:

‘| 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.
3. 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?
    [Page 2]

July 31, 20XX;
20XX; 20XX;

No

lf 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 componsation paid to oach of them. If the minister or
    pastor is otherwise employed, indicate by whom employed, the nalure of the employment,
    and the hours devoted to that employment.

Pastor devotes 8-16 hrs per week — monthly compensation $0. tle is otherwise
self employed as a general contractor 20. 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 Entitles 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 rolummed 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.

[Page 3]

on . exhibit
July 31, 20Xx;
20XX; 20XX;

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 tho issuance of the NCTI. The IRS also provided another informal opportunity to resolve the issucs.
The IRS did not receive a response.

Church Activities

operates from
is atated to he the youth pastor of

home garage. is the son of and

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

Member Name

Relationship to Pastor

& His Childr

Adult
Members

Number of
Children

(_ )&

Self &

{spouse)

&

son of Pastor

&

son of Pastor

&

son of Pastor

&
&

daughter of Pastor

daughter of

Mother to

Relative of

& is

{ ) Son-in-law 's sister
( ) Possible relative of
Son-in-law 's mother
Total Membership 3) 0

{son-in-law }

brother

On February 10, 20XX, lhe IRS issued Information Document Request (IDR) #1 lo
answered IDR#1 on behalf of Below is an excarpt from IDR#1 with answers {in ifalics):

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 | command you today shail be in your heart.”
“You shall teach them diligently to your children, and shail 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.”

[Page 4]

. exhibit
July 31, 20XX;
20XX; 20XX;

10. Does have a definite and distinct ecclesiastical government? If so, please
    provide a detailed description of this information or dacumentation that will demonstrate
    ils 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. Loes have a formal code of doctrine and discipline’? If so, please provide a
    detailed descriplion of this information of documentation that will demonstrate ils
    exislence.

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, oalendar of events?
    NWA

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 Owrets- and
(2) Residents-

s 3 2 ca

? ? 3

(b) Friday, Men’s Bible Study Meetings

[Page 5]

July 31, 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; (h) The number of mambers 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) O
(b) 0

16. State the number of nonmembers and visitors that attend regularly.
    NMA
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 campletion 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
(1) Worked as fay pastor at church for many years,
led marriage enrichment classes for several years

[Page 6]

July 31, 20XX;
20XX; 20XX;

(2) Ran men’s bible study group for two years
(3) In charge of prayer ministry for 0 services each weekend, training and
mretitority

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 bul limited lo Pastor A.
    Copies of Linployment 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 lhe majority, In checks. Due lo lack of proper bookkeeping for
cash tithes, the revenue agent was only able ta examine the checks received The table helow provides the
tithing In checks recelved from each member from 20XX through 20XX. Of all tithes recelved, 0% were
from and his “Family Members”:

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

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

[Page 7]

Department of the Treasury — Internal Revenue Service

exhibit

Tax Identification Number (last 4 digits)

Year/Period ended

July 31, 20XX;
20XX; 20XX;

Tithe Summary
Family
Member

• Family Family | Percentag

Member |Donor ZOXX 20XK 2OXX 20XX otal. =| Member e

[Table data cells are redacted to $0/0% in the IRS release and are not legibly reconstructable from the scan; the column headers and zero totals are shown.]

Total 0 0 0 0 0 0 0%

The table below illustrates the

deposits to bank account to the tithing activity recorded in

deposit summary from 20XX through 20XX, comparing the net

that bank deposits consistently exceeded tithes:

tithing records. The table demonstrates

[Page 8]

www. irs.gov

July 37, 20XX;
20XX; 20XX;
Net Deposits 0
Tilhies 0
Difference 0
Expenses / Disbursements
All monies daposited into checking account are dishursed in the following manner: (a) Checks
issued to pastors and as compensation; (b) Checks issued ta members;
(c) Flectronic payments pay for charges made on the -awned card; or (d) Flectronic
payments pay for charges made on the personal credit card of and . Below is a
delalled descripllon of the actlvily conducled wilh respect to lhe monles deposited Into checklng 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 respect to daily ministerial activities, IDR#6 requested
thal provide: (a) a detailed, daily schedule of pasloral activilies 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 from a day-to-day basis. did not
provide a response.

Reyardiny pastoral cormpensatlon, did tot Issue Forins W-2 lo Paslors and

. Instead, issued Forms 1099 to both, reporting compensation as nan-emplayee
culnpensallon. {he table below illustrates Form 1099 amounts issued lo and

from 20XX through 20XxX:

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

of the disbursements by name, amount and check number. The table also demonstrates that disbursements to

[Page 9]

July 31, 20XX;
20XX; 20XX;

and his “Family Members”? represented 0% of all disbursements by from 20XX through
20XX:

ects Check Disbursements to or on behalf ofindividuals

Talal to Parcenlago

*~Family Family of total
Member] Name 20XX 20xXX Z20xX 20xX Total | Members | Disbursements

[Table data cells are redacted to $0/0% in the IRS release and are not legibly reconstructable from the scan; the column headers and zero grand total are shown.]

Grand Total pald to Individuals fi) Q 0 ts] 0 0.00%
C. Electronic Payments — Card
3 For the purposes of this table, “Family Members’ is defined as , his wife, his — children and their
spouses, and his known grandchildren. Also included is , a for-profit business where the founder
and president is youth pastor, (http:/Awww. .com/about/).
[Page 10]

July 31, 20XX;
20XX; 20XX;
has an credit card where only and his wife, '
are authorized users. 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 actlvitles,

did not have significant expenses. The list includes trips to
numerous restaurants, and specialty merchandise vendors:

[List of vendor names redacted in the IRS release.]

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 credit card from 20XX
through 20XX:
2OXX 20XX 20XX 2OXX otal
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

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 charges were generally paid with revenues:
[Page 11]

Department of the Treasury — Internal Revenue Service

exhibit

Tax Identification Number (last 4 digits)

Year/Period ended

July 31, 20XX;
20XX; 20XX;

Reconciliation:

Charges & Checking Account Payments

20XX 20XX

Tatal

2OXX
Charges 0.00
Payments 0.00
Difference 0.00 0.00 0.00 0.00 0.00
[Page 12]

July 37, 20XX;
20XX; 20XX;
D. Electronic Payments — Personal Account
According to bank statements, electronic payments were made directly to a and
personal 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 account from 20XX through 20XX:
2Z0XX 20XX 20XX 20XX Total
Flectronic 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:
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 tarm "private foundation” means a domestic or foreign
organizallon described In section 501(¢)(3) olher than an organization described tn sectlon 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; (&) 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.

[Page 13]

July 31, 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. Unlose the organization le roasonably
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
faintly. [ts “conducl of religious worship” did nol extend beyond the farnily dwelling, which Is used primarily for
non-religious purposos. Rather lhan minislering to a society of believers, plaintiff was engaged in a
quinlessentlally privale religious enterprise.

In The Church of Eternal Life and Liberty, Inc. v. Commissioner, 86 T.C. 916 (1986), the Courl rulod
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
[illegible]

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. Rag. § 1.501(a)-1(c) of the Regulations defines a private sharcholder or individual in section 601
as persons having a personal and privale Interest In the activides of the organizallon

Treas. Reg. § 1.501(c)(3)-1(a)(1) slates thal in order lo be exernpl 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

[Page 14]

July 31, 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
privale Interests.

Treas. Rey. § 1.50 1(c)(3)- 1(f)(2) of the Regulalloris 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 disquallfled persons
or organization managers are subject to excise taxes under section 4958. Accordingly,
an organization will no longer meet the requirements for tax-exernpl slatus 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-
exempi 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 lransaclion 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
lransaclions wilh one or more persons,

(f?} Whether the organization has implemented safeguards that are reasonahly
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
by the Commissioner, by itself, is never a sufficient basis for continuing to recognize
exemption.

[Page 15]

orm . . exhibit

July 31, 20XX;
20XX; 20XX;

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 Josus Christ, inc. v. Cornmissionor, T.C. Metnu 1988 665, 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. Cornmissioner, 670 F.2d 104 (8th Cir. 1981), the
church was unable lo supply evidence showing lial payimerts lo its controlling merribers were reasonable. As
a result, Ure circuit court ruled Ural the church was unable to dermonslrale thal ft ts entitled to section 50 I (c)
exernpllon

GOVERNMENTS POSITION:
I. ISSUE 1: PRIVATE BENEFII

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 netltloner 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:

[Page 16]

Department of the Treasury — Internal Revenue Service

July 31, 20XX;
20XX; 20XX;
Tithe Summary
Family
Member
*_ Family Family | Percentag
Member |Donor 20XX 20XX 20XX 20XX Total Member 6

[Table data cells are redacted to $0/0% in the IRS release and are not legibly reconstructable from the scan; the column headers and zero totals are shown.]

Total 4) is] 0 it] 0 9) 0%

As shown, 0% of all tithing received were from

4 For the purposes of this table, “Family Members” is defined as

spouses, and his known grandchildren. Also included is
youth pastor,

and president is

?

(http:/Avww.

and his “Family Members”.

[Page 17]

, his wife, his children and their
a for-profit business where the founder
.com/about/).

Department of the Treasury — Internal Revenue Service

exhibit

Tax Identification Number (last 4 digits)

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

The table below demonstrates the

disbursements were to its members:

distributions back to its members.

As shown, 0% of

Check Disburseme

ntstooron

behalf ofindividuats

*~Family

Tatal ts

FPereentaga

Family of total
Member] Name 20XX 20XX 20xXx 20Xx Total Members | Disbursements

[Table data cells are redacted to $0/0% in the IRS release and are not legibly reconstructable from the scan; the column headers and zero grand total are shown.]

Grand Total paid to individuats

[illegible]

0.00%

These two tables demonstrate the circular flow of funds where donations received by

of tithes were eventually returned to its members for their personal use. As a result,
exclusively for exempt purposes as required under section 501{c)(3) and its operations benefited private

individuals——-

members.

in the form
is not operating

[Page 18]

Www.irs.gov

July 31, 20XX;
20XX; 20XX;

B. Inurement

failed to operate exclusively for an exempt purpose because its net earnings inured to the benefit
of privale individuals. Under Treas. Reg. § 1.50 1(c)(3)-1(¢)(2) an organization is nol 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. Curther, Treas. Reg. § 1.501(c)(3)-1(d)(ii) provides that an
organization is not organized or operated exclusively for one or more of lhe exempl purposes specifled, unless
it serves a public ralhier lhan a privale interest. Thus, to meet the requirernentl 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 cage, 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, owned an 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 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

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

5 See table on page 12.
§ See table on page 10.

[Page 19]

. hibit

July 31, 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:

Calandar Year Information
[ 20XX 2OXX 2OXX 20XX Total Percentage
Revenue:
[Deposits Q 0%
Disbursements:
Checks to or on behalf of ALL members 0 0.0%
:attributable to 0 0.0%
rattributable ta 0 0.0%
total Amount Pald to or on bebalfofmembers. id] Q 0 Q @) 0.0%
and authorized church disbursements to personally benefit themselves and to
Inermbers., disburses 0% of Ils revetiue to Ils inernbers for thelr 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, 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.

Il. 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, stale lhe grounds on which Ue determination loller is being revoked or inodified 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.

II. 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 EFqundation 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 IDR responses, the IRS considers the following:
[Page 20]

. hibit

July 31, 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 thal oullines a formal statement thal church members embrace and adhere lo.

3. A definite and distinct ecclesiastical government:

Is controlled by Asoording to , he has complete contral 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 preseribed 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.

[Page 21]

orm 886-A . exhibit
July 31, 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 O 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 a congregation.

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

maintain a record of Its rellglous 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 preparalion of ils 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
crealing the associational standard, lhe Uniled States District Court for the District of Columbla 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 Atnetigan Guldance Foundallon In flnding thal a “church” may be
distinguished fram other religious organizations by fulfillment of an “associational role”: The means by which an
avowedly rellyious purpose is accoinplished separates a “church” from olher forms of religious enterprise. Ala
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, isa
[Page 22]

July 31, 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
lest.
For these reasons, does not quallfy as a church williin the rneaning of sectlors 509(a){ 1) atid

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

TAXPAYER’S POSITION:
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. Asa
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).

[Page 23]