*921 Petitioner's principal activities include the operation of a library containing about 4,000 items, bimonthly meetings, the distribution of literature, the sale of merchandise, and the publication of a newsletter. The library is open to the public 2 nights per month for 2.5 hours per night. Petitioner states that appointments may be made by members of the public to use the library. The record does not indicate whether any such appointments were in fact made. The topics of petitioner's bimonthly meetings are sometimes listed in petitioner's newsletter, and have included political and economic debates, readings of libertarian poetry, and discussion of philosophical subjects.Petitioner's newsletter, published approximately 5 times per year, is distributed to roughly 150 recipients. It includes a calendar of events deemed of interest to its readers (usually notices of meetings of libertarian organizations, philosophical and political lectures, CELL meetings and related events), slogans, and short articles on issues of concern to or activities of CELL. *122 Petitioner's records indicate that sales of Simon Jester products generated revenues of between $ 300 and $ 400 per year, or roughly 1.5 percent of petitioner's annual revenues. The value of the assets of Simon Jester owned by petitioner is not made clear in the record.
Petitioner donated $ 200 in each of the years 1979 and 1980 to Hillsdale College for scholarship purposes, and has contributed funds to other organizations, including $ 400 to aid Southeast Asian refugees in Michigan, and $ 1,250 to the Cryonics Institute, of which Patrick Heller is a director and treasurer. In October of 1979, petitioner made a loan of $ 5,100 to Anna Bowling for the purchase of a car. This loan was charged to Patrick Heller personally who repaid it by the end of 1981. Petitioner has also distributed libertarian literature to various schools, universities, and libraries.
Petitioner has never filed a Form 1023, "Application for Recognition of Exemption." Pursuant to section 7605(c) of the Internal Revenue Code of 1954, respondent sent a written request for information to petitioner in April of 1981 to determine whether petitioner qualified for exemption from Federal income tax. On April 26, 1981, petitioner answered respondent's inquiries in a 44 page letter. Subsequent investigation led respondent on September 1, 1982, to mail petitioner a final adverse determination letter denying it exempt status under section 501(c)(3). Respondent concluded that:
You are not organized or operated exclusively for religious or any exempt purpose described in section 501(c)(3) of the Code. You are operated in such a manner that part of your net earnings inures to the benefit of certain individuals. In addition, you are operated for private rather than public interests and many of your activities are for non-exempt purposes; for example the publication of a newsletter and the purchase of a company called Simon Jester. We have also determined that you are not a church. As we have determined that you are not a church, even if you were to be recognized as exempt under section 501(c)(3) you would not be exempt because you have not satisfied the provisions of section 508(a).
It is on this record that petitioner seeks a declaratory judgment pursuant to section 7428.
OPINION
Section 508(a) requires an organization organized after October 9, 1969, to give notice to the Commissioner that it is applying for recognition of exempt status as an organization described in section 501(c)(3). *125 To satisfy this notice requirement, the organization must apply for recognition of its exempt status within 15 months after the end of the month of its formation. Sec. 1.508-1(a)(2), Income Tax Regs. If the organization fails to give proper notice within this 15-month limit, section 508 provides that the organization will not be treated as described in section 501(c)(3) for any period prior to the time it provides such notice. Sec. 508(a)(2); sec. 1.508-1(a)(ii), Income Tax Regs. Consequently, with some important exceptions provided by section 508(c), any organization failing to give proper notice cannot be treated as exempt from taxation under section 501(a) as an organization described in section 501(c)(3). See generally sec. 1.508-1(a)(3), Income Tax Regs.
The parties agree that petitioner has never filed a Form 1023, Application for Recognition of Exemption. Therefore, unless petitioner can establish that one of the exceptions provided by section 508(c) applies to it, petitioner does not qualify as an organization described in section 501(c)(3). Petitioner contends that it is a church, and thus, pursuant to section 508(c)(1)(A), it is not required to give the notice required by section 508(a). Alternatively, petitioner contends it is exempt from the provisions of section 508(a) as an organization described in section 508(c)(1)(B). For the reasons described below we find petitioner's claims to be without merit.
It is important to note at the outset that an examination of what constitutes a "church" for purposes of applicable provisions of the tax code does not require consideration of whether an organization's beliefs and practices represent a "religion" within the purview of the First Amendment to the Constitution. See Chapman v. Commissioner, 48 T.C. 358">48 T.C. 358, 361 (1967). We are not required in this case to reach the difficult question of whether the organization's purposes are religious or nonreligious. *127
Although fundamental to determining whether an organization is a church, religious purposes alone do not serve to establish it as a church. Equally important are the means by which its religious purposes are accomplished. Chapman v. Commissioner, supra at 367 (Tannenwald, J., concurring); American Guidance Foundation, Inc. v. United States, 490 F. Supp. 304">490 F. Supp. 304, 306 (D. D.C. 1980) affd. without published opinion (D.C. Cir., July 10, 1981)". A church is a coherent group of individuals and families that join together to accomplish the religious purposes of mutually held beliefs. In other words, a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith. As stated by Tannenwald, J., concurring in Chapman:
The word "church" implies that an otherwise qualified organization bring people together as the principal means of accomplishing its purpose. The objects of such gatherings need not be conversion to a particular faith or segment of a faith nor the propagation of the views of a particular denomination or sect. The permissible purpose may be accomplished individually and privately * * * but it may not be accomplished in physical solitude. * * * [48 T.C. at 367; emphasis in original.]
To qualify as a church, an organization must serve an associational role in accomplishing its religious purposes.
In the present case petitioner fails this threshold test. Petitioner has had only two members since its formation in 1976. While incipient churches may have only "two or three gathered together," a church's membership will grow well beyond those small numbers given the vitality of its associational role. Petitioner, by contrast, seems to have intentionally pursued a policy that discouraged membership for reasons, we believe, that served the private purposes of its founder. Although petitioner generally held bimonthly meetings, the record is 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 fails to establish that petitioner serves any associational role for purposes of worship. Therefore, we hold that petitioner is not a church within the meaning of section 508(c)(1)(A).
Petitioner argues in the alternative that it is an organization described in section 508(c)(1)(B). However, an organization that normally receives more than $ 5,000 in gross receipts in a taxable year is not an organization described in section 508(c)(1)(B). For an organization in existence at least 3 years, this limitation applies when the aggregate gross receipts of the organization for the preceding 2 taxable years plus those of the current year exceed $ 15,000. Sec. 1.508-1(a)(3)(ii)(c), Income Tax Regs. Petitioner's records show gross receipts from contributions for the taxable years 1979 and 1980 totaling $ 30,784.09, a figure well in excess of the 3-year, $ 15,000 limitation of respondent's regulations. Petitioner is thus not an organization described in section 508(c)(1)(B).
Since petitioner is not an organization described in section 508(c), it must satisfy the notice requirements of section 508(a) if it is to be treated as an organization described in section 501(c)(3). These notice requirements are fulfilled by submitting the information required by Form 1023. Sec. 1.508-1(a)(2)(ii), Income Tax Regs.
During the course of respondent's investigation of petitioner's exempt status pursuant to section 7605(c), petitioner submitted information to respondent on its structure, purposes, and organization. We find that petitioner submitted the information required by Form 1023 sufficient to satisfy the requirements of section 508(a). Sec. 1.508-1(a)(2)(ii), Income Tax Regs. Since this information was submitted on April 26, 1981, more than 15 months after the end of the month of its formation, petitioner cannot be treated as an organization described in section 501(c)(3) for any period prior to April 26, 1981. However, we are required to address the issue of petitioner's status as an organization described in section 501(c)(3) for the subsequent period before us in the record -- through the end of taxable year 1982.
An organization described in section 501(c)(3) is exempt from Federal income taxation pursuant to section 501(a). *132 Two tests must each be satisfied to meet the requirements of section 501(c)(3) -- an operational test and an organizational test. Sec. 1.501(c)(3)-1(a)(1), Income Tax Regs. See, e.g., Church in Boston v. Commissioner, 71 T.C. 102">71 T.C. 102, 106 (1978).
The operational test requires that an organization engage in activities which accomplish one or more of the exempt purposes specified in section 501(c)(3). Sec. 1.501(c)(3)-1(c)(1), Income Tax Regs. An organization is not operated for exempt purposes unless it serves a public rather than a private interest. Sec. 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs. Further, no part of the net earnings of an organization may inure to the private benefit of any individual. Sec. 1.501(c)(3)-1(c)(2), Income Tax Regs. The payment of reasonable salaries does not constitute prohibited inurement, but the payment of excessive salaries does result in the inurement of private benefit to the recipient. The question of the reasonableness of compensation provided is one of fact. Unitary Mission Church v. Commissioner, 74 T.C. 507">74 T.C. 507, 514 (1980), affd. by court order 647 F.2d 163">647 F.2d 163 (2d Cir. 1981); Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531">74 T.C. 531, 537-538 (1980), affd. 670 F.2d 104">670 F.2d 104 (9th Cir. 1981).
Prohibited inurement is strongly suggested where an individual or small group is the principal contributor to an organization and the principal recipient of the distributions of the organization, and that individual or small group has exclusive control over the management of the organization's funds. See Basic Bible Church v. Commissioner, 74 T.C. 846">74 T.C. 846, 857 (1980); Church of the Transfiguring Spirit v. Commissioner, 76 T.C. 1">76 T.C. 1, 7 (1981). For the reasons discussed below, we find that living expenses paid by petitioner on Patrick Heller's behalf constitute unreasonable compensation and impermissible private inurement.
Patrick Heller is one of only two members of petitioner, and has been the sole representative at petitioner's membership meetings at which the organization's directors were elected. He has exclusive control over petitioner's assets and the distribution of its funds, most of which he himself contributed to petitioner. Since it was formed, petitioner paid all rental, utility, and other living expenses on Patrick Heller's behalf for apartments occupied by Heller prior to the purchase of the house in Oak Park. Petitioner liquidated certain of its own assets to finance the downpayment on the Oak Park house purchased in Patrick Heller's name in 1980. Petitioner also paid all mortgage, utility, maintenance, and other costs associated with the Oak Park house. Though petitioner alleges Heller no longer resided at the Oak Park house after May of 1981, it continued to record payment of living expenses for that year equivalent to that of previous years.
Petitioner argues that the living expenses it paid on Patrick Heller's behalf are reasonable, asserting that Heller worked over 3,000 hours for petitioner from 1978 to 1980. Log sheets for the months of December 1979 and June 1980 record that the overwhelming majority of Heller's time was spent on mail sorting, correspondence, and moving. Petitioner provides no other evidence of the nature or scope of Heller's services as petitioner's minister. Further, petitioner fails to correlate the compensation paid to Heller with the hours worked by Heller. For example, petitioner's recorded minister-housing expenses paid on Patrick Heller's behalf rose 37 percent between 1978 and 1979, yet recorded hours spent by Heller working for petitioner declined 17 percent during the same period. See Unitary Mission Church v. Commissioner, supra at 513-514.
We find on this basis that the living expenses paid by petitioner on Patrick Heller's behalf constitute excessive compensation to Heller. As such, the net earnings of the organization inured to the private benefit of Heller.
Moreover, petitioner contributed $ 1,250 to the Cryonics Institute, a nonexempt organization for which Heller was a director and treasurer, and provided a loan of $ 5,100 to Anna Bowling. Petitioner has failed to establish that these transactions furthered any exempt purposes. We find that these transactions also constitute prohibited inurement to the private benefit of Heller.
From the facts before, us we conclude that a substantial element of petitioner's assets were used for the private benefit of Patrick Heller. Petitioner therefore is not operated for exempt purposes since it serves a private rather than a public interest -- namely, that of its founder, Patrick Heller. See Bubbling Well Church of Universal Love v. Commissioner, supra;Unitary Mission Church v. Commissioner, supra;Southern Church of Universal Brotherhood Assembled, Inc. v. Commissioner, 74 T.C. 1223">74 T.C. 1223 (1980). For these reasons we hold that petitioner is not an organization described in section 501(c)(3).
To reflect the foregoing,
Decision will be entered for the respondent.
Document Info
Docket Number： Docket No. 27487-82X
Citation Numbers： 86 T.C. 916, 1986 U.S. Tax Ct. LEXIS 112, 86 T.C. No. 54
Judges： Williams
Filed Date： 4/29/1986
Precedential Status： Precedential
Modified Date： 11/14/2024
