# Petition — Western Catholic Church v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1981
- **Citation:** 450 U.S. 981

## Text

60-1049

Dereme Court, U.S,

' FILED
No. . 17 1980
MICHAEL RODAK, JR., CLERK
In Tue

Supreme Court of the Anited States

Ocroser TERM, 1980

WESTERN CATHOLIC CHURCH,

Petitioner,

Vv.

COMMISSIONER OF INTERNAL REVENUE,
Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

EDWARD J. KIONKA
632 North Main Street
Columbia, Illinois 62236
(618) 281-7186

JOHN J. VASSEN

PATRICK B. MATHIS

JOHN J. VASSEN P.C.
1801 North Belt West
Belleville, Illinois 62223
(618) 277-8700

Attorneys for Petitioner
Western CaTHoLic CHURCH

Midwest Law Printing Co., Chicago 60601, Financial 6-3988

i

QUESTIONS PRESENTED FOR REVIEW

1. The principal issue is whether the Tax Court and
the Court of Appeals erred in determining that the
Western Catholic Church was not being “operated” for a
religious purpose when its principal activity was ac-
cumulating and investing funds in a budding fund for
the purpose of constructing a church building, one of the
purposes for which it was organized and for which its
exemption was initially approved.

2. A secondary issue is whether the Tax Court and
the Court of Appeals erred in determining that a part of
the “net earnings” of the Western Catholic Church in-
ured to the benefit of a private individual.

1 The parties to this promeoning in the Court of Appeals were
the same as those listed in the caption here.

ili
TABLE OF CONTENTS

QUESTIONS PRESENTED FOR REVIEW ................ i
LIST OF AUTHORITIES CITED ......WW 2... iv
REPORTS OF OPINIONS 1
GROUNDS FOR JURISDICTION OF UNITED

STATES SUPREME COURT W000. 2
STATUTES AND REGULATIONS INVOLVED ...... 2
STATEMENT OF THE CASE oe eeeeeeeeneceeeeeeeeee 3
REASONS FOR GRANTING THE WRIT:

1

The Decision Below Conflicts With The Majority
Of The Courts Of Appeals That Have Considered
This Question, And Also With The Decisions Of
This Court 9

2

The Decision Below Impermissibly Burdens New
Charities And Discriminates In Favor Of Those
Which Have Already Succeeded In Establishing
Their Programs 22

3

The Decision Below Erroneously Concluded That
Some Part Of The Net Earnings Of The Church
Inured To The Benefit Of A Private Individual .... 24

CONCLUSION 26

| PREVIOUS PAGE WAS BLANK \

iv
APPENDIX:

Section 501, Internal Revenue Code of 1954 (26
U.S.C. § 501) as

Section 504, Internal Sevieni Code of 1954 (re-
pealed 1969)

Section 511, Internal Revenue Code of 1954 (26
U.S.C. § 511)

Section 512, Internal Revenue Cude of 1954 (26
US.C. § 512)

Section 513, Internal Revenue Code of 1954 (26
—US.C. § 513)

45a

48a

58a

Excerpts from Treas. Reg. § 1.501(c)(3)-1 (1959) 63a

Architect’s Drawing

LIST OF AUTHORITIES CITED

Cases
Better Business Bureau v. United States, 326 U.S. 279

67a

(1945) - 12, 18, 17

Bomen v. Commissioner, 240 F.2d 767 (8th Cir. 1957)

C. F. Mueller Co. v. Contanlasiones: 190 F.2d 120 (3d Cir

13, 25

1951) 13, 14

Curt Teich Foundation v. Commissioner, 48 T.C. 963
(1967), aff’d per curiam, 407 F.2d 815 (7th Cir. 1969)

Danforth Foundation v. United States, 222 F. Supp.
761 (E.D. Mo. 1963)

Erie Endowment v. United States, 316 F.2d 151 (3d
Cir. 1963)

Golden Rule Church Association v. Commissioner, 41

20, 26

20

T.C. 719 (1964) 23, 24

Hulman Foundation, Ine. v. United States, 217 F.
Supp. 423 (S.D. Ind. 1962)

20

|

Vv

Huron Clinic Foundation v. United States, 212 F.
Supp. 847 (D.S.D. 1962), remanded by stipulation,

324 F.2d 43 (8th Cir. 1963) 9, 20, 25
Lichter Foundation v. Welch, 247 F.2d 431 (6th Cir.
RIE i datiaiinesbensedbanccnamtediedes 13
Ralph H. Eaton Foundation v. Commissioner, 219 F.
2d 527 (9th Cir. 1955) 13
Randall Foundation v. Riddell, 244 F.2d 803 (9th Cir.
TONED Nechsiniichebnyitiacentipcasia 11, 16, 17, 18, 19
Roche’s Beach, Ine. v. Commissioner, 96 F.2d 776 (2d
UUs RNUIED cajelelisecsiiceiodiadeane lca ticintnismspadiaiwecs 13, 14
Samuel Friedland Foundation v. United States, 144 F.
Supp. 74 (D.N.J. 1954) ........... 20
Stevens Bros. Foundation, Inc. v. Commissioner, 324
F.2d 633 (8th Cir. 1963) 20
Travis Smith v. Commissioner, 60 T.C. 988 (1973) ........ 10

Trinidad v. Sagrada Orden, 263 U.S. 578 (1924) .... 12,14, 17

United States v. Community Services, Inc., 189 F.2d 421
(4th Cir. 1961) ................. 13

Willingham v. Home Oil Mill, 181 F.2d 9 — Cir,
MU is hcilasik teieeiedaedaseasact

Other Authorities

Excerpts from Treas. Reg. § 1.501(¢)(3)-1 (1959) ....
ASSET NB DNASE Deen RICA DADA! DT oa .. 9, 10, 63a
Section 501, Internal Revenue Code of 1954 (26 U.S.C.
Lt BURT ST ot eRe AO 3, 9, 10, 11, 16, 18, 29a
Section 504, Internal Revenue Code of 1954 (repealed
TT Katinas wencekarisisdb chicane .... 16, 18, 20, 44a
Section 511, Internal Revenue Code of 1954 (26 U.S.C.
§ 511) skit sa hoa nals henibeecadses wapepaipiennalamhcadeoasereeaiatealadan pied 45a

§ 512) RRL CAN Ree ON eo Be SDN ER BEEN WES BO a I OE - 48a

“Do BEREAN ARATE OE Sa RE MEE _ 58a

7%

vi

Section 3814(3), Internal Revenue Code of 1939 ........ 16, 19
Corporate Excise Tax Act of 1909, 36 Stat. 112 (1909) .. 11
Income Tax Act of October 3, 1913, 38 Stat. 172 -....... 11, 12

26 U.S.C. § 7428(a) 3
28 U.S.C. § 1254 2
96 Cong. Rec. 13273 (1950) 14
Rev. Rul. 66-219, 1966-2 C.B. 208 ; 25, 26
Rev. Rul. 75-282 22, 23

Eliasberg, Charity and Commerce: I.R.C. §501(c)(3)—
How Much Unrelated Business Activity?, 21 Tax L.
Rev. 53 (1965) 14, 17, 18

Strong and Fields, Profitable Related Business Activ-
ities and Charitable Exemptions Under §501(c)(3),

44 Gro. Wasu. L. Rev. 270 (1976)

S. Rep. No. 2375, 81st Cong. 2d Sess. 28-9 (1950) ...... 14, 15

In Tue

Supreme Court of the Anited States

Ocroser Term, 1980

WESTERN CATHOLIC CHURCH,

Petitioner,

Vv.

COMMISSIONER OF INTERNAL REVENUE,
Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT

The petitioner Western Catholic Church respectfully
prays that a writ of certiorari issue to review the
judgment of the United States Court of Appeals for
the Seventh Circuit entered in this proceeding on
September 19, 1980.

REPORTS OF OPINIONS

The opinion of the Tax Court below is reported at 73
T.C. 196. The order of the United States Court of
Appeals for the Seventh Circuit, which merely adopted
the opinion of the Tax Court, is unreported.

jellies

GROUNDS FOR JURISDICTION
OF UNITED STATES SUPREME COURT

The order of the United States Court of Appeals for
the Seventh Circuit, affirming the decision of the Tax
Court, was entered September 19, 1980. No petition for
rehearing was filed.

This Court has jurisdiction to issue a writ of certiorari
in this case pursuant to 28 U.S.C. § 1254.

STATUTES AND REGULATIONS INVOLVED

The statutes and regulations involved are set forth in
the Appendix. They are:

Section 501, Internal Revenue Code of 1954 (26
U.S.C. § 501).

Section 504, Internal Revenue Code of 1954
(repealed 1969).

Section 511, Internal Revenue Code of 1954 (26
U.S.C. § 511).

Section 512, Internal Revenue Code of 1954 (26
U.S.C. § 512).

Section 513, Internal Revenue Code of 1954 (26
U.S.C. § 518).

Excerpts from Treas. Reg. § 1.501(cX3)-1 (1959).

mr an
STATEMENT OF THE CASE

The Western Catholic Church was incorporated for
religious purposes under the Illinois General Not For
Profit Corporation Act in 1971. That same year, it
applied for and was issued a determination by the Inter-
nal Revenue Service that it was exempt from federal in-
come tax under § 501(cX3) of the Internal Revenue Code.
me. 2%

The Internal Revenue Service conducted an audit of
the Church’s activities for the years 1972, 1973 and
1974. Following this audit, the Church was notified by
letter dated April 25, 1978 that the IRS had determined
to revoke its tax exempt status, retroactive to April 23,
1971, the date the Church was organized. The grounds
for the revocation were that (1) the Church was not, nor
had it ever been, “operated exclusively for religious. . .
purposes” and (2) a portion of the Church’s net earnings
had “inured to the benefit of private individuals,” both
in contravention of I.R.C. § 501(cX3).

Pursuant to 26 U.S.C. § 7428(aX1\A), the Church filed
a Petition for Declaratory Judgment in the United
States Tax Court, seeking its determination that the IRS
had erred in its determination. Following a hearing
before a judge of the Tax Court, the Court on October
31, 1979 issued its Order and Decision finding that the
Church did not qualify as a § 501(cX3) organization and
sustaining the IRS retroactive revocation of the Church’s
tax exempt status.

Pursuant to 26 U.S.C. § 7428(a), the Church appealed
to the United States Court of Appeals for the Seventh
Circuit. In a brief order entered September 19, 1980, the

a om

Court of Appeals affirmed the decision of the Tax Court
and adopted its opinion.

The Western Catholic Church was formed and incor-
porated by S. Dean Slough, his wife Laura, and his
daughter, Deana L. Hron. It is located in Quincy, Ii-
linois.

The purpose or purposes for which the Church was
organized were set forth in the By-Laws (Ad.Rec.Ex.6-
F) and stated in Article V of the Articles of Incorpora-
tion as follows:

To establish a church to embrace persons of all
faith, color and creed. To join for a common cause
the betterment of man, by helping God in spreading
the Gospel. To recruit evangalists, to build, operate
and maintain churches, hospitals, nursing homes,
schools and to establish missionarys and missions
wherever they are needed in the World. We believed
the Bible to be the verbally inspired Word of God;
the only infallible rule of faith and practice. We
believe in the eternal Deity of our Lord Jesus
Christ; in his virgin birth; in his substitutionary
death on Calvary for our sins; in His bearing of our
afflictions and in His bodily reserrection from the
grave. We believed in salvation by faith through the
shed blood of Jesus Christ. We believe that the true
church is com of all those who have been born
again. We believe in the present working and mov-
ing of the Holy Spirit in the lives of men, women,
children; we believe in carrying out the Great Com-
mission. To evangelize is a vital part of our Chris-
tian responsibility. We believe all men are lost
apart from the saving grace of Jesus Christ. We
believe in the return of Jesus Christ, God’s only
begotten, Son, to this earth. A.7. |

The Articles of Incorporation also provided that the
Church, as a means of accomplishing the stated pur-
poses of the organization, had among other powers, the
following:

i

ae

3. To borrow money, and, from time to time, to
make, accept, endorse, execute and issue bonds,
debentures, promissory notes, bills of exchange, and
other obligations of the Corporation for moneys
borrowed or in payment for property acquired or
for any of the other purposes of the Corporation,
and to secure the payment of any such obligations

4. To invest and reinvest its funds in such stock,
common or preferred, bonds, debentures, mort-
gages, or in such other securities and property,
real and personal, as it shall deem advisable, sub-
ject to the limitations and conditions contained in
any bequest, devise, grant or gift, provided such
limitation and conditions are not in conflict with the
provisions of Section 501(c\3) of the Internal
Revenue Code and applicable Regulations, as they
re exist or as they may hereafter be amended.

8.

During the period in question, 1972-74—the formative
years of the Church’s existence—Dean Slough, its
founder, served as its president, general superintendent,
and only minister. He also was its principal donor. Dur-
ing those three years, he made cash contributions to the
Church totalling almost $100,000. A. 49-51. (Two other
donors contributed $1,000. Tr. 69-70.)

The main focus of this case is the activities of Dean
Slough, which represent the activities of the Church.
The primary issue is whether those activities were in
furtherance of the religious purposes for which the ex-
emption was granted.

There was some activity that was not related to the
building fund. As would be expected, it was develop-
mental. It consisted primarily of “one-on-one” prose-
lytizing or “missionary” work by Dean Slough in
which he sought new members and counseled them. He

ie

estimated that this took ten to twelve hours per month.
These efforts had resulted in obtaining about forty
members for the Church. (Slough declined to disclose
the names of the members, other than his wife and
daughter, for privacy reasons. However, the government
has so far never contended that no such members ex-
isted.) The Church, through Slough, made minor cash
gifts to needy converts or potential converts totalling ap-
priximately $5,000. Slough testified that he considered
the practice of his faith to be a twenty-four hour per day
project, limited by the time requirements of his
businesses.”

The principal activity of the Church was the creation
of a building fund for the purpose of constructing a
church building.

In 1971, an architect designed a building for the
Church. See Appendix for a drawing. The projected cost
for the entire complex was estimated at four to five
million dollars, but it was not contemplated that the en-
tire complex would be constructed at once. Slough
believed that the primary function of the Church was to
obtain more members, and he felt that the construction
of a church building would be important to this end. It
was agreed that at least $500,000 should be raised
before initiating any construction. At the time of trial,
March 14, 1979, the Church had accumulated assets of
approximately $190,000 towards this goal. Slough es-
timated that it would take approximately ten to fifteen
years to put the Church into full operation.

2 During the years in question Slough owned 100% of the
stock and was president of Credit Control Services (a collec-
tion service) and Business Management Corporation, which
managed real estate.

‘esis

To accumulate the required capital for the building
fund, Slough undertook an investment program, using
the contributions to the Church and bank loans obtained
by the Church on its own credit. The Church thus ac-
quired certificates of deposit, bought and sold common
stocks, and purchased a parcel of real estate. This was a
commercial building which the Church leased to Credit
Control Services. It was undisputed that this lease was
favorable to the Church, was at least at full market
value, and provided the Church with a 25% return on its
investment. (All maintenance, repair, and other costs
and taxes were to be paid by Credit Control Services.)

The Church also purchased two automobiles that were
to be used as compensation for two fund raisers who
were to be employed by the Church to raise money.
When the Church later decided not to employ these in-
dividuals, the automobiles were sold to Credit Control
Services for an amount in excess of the purchase price,
so that the Church netted approximately $3,000 on this
transaction.

As noted, the Church borrowed money on bank loans
to help finance its investments. As the bank had a
$75,0C -per-borrower loan limit, it was sometimes
necessary for Slough or his Business Management Cor-
poration to borrow additional funds which were then in
turn loaned to the Church. However, Slough was careful
to insure that the terms of these re-loans were such that
their benefit inured entirely to the Church, and neither
Slough nor his corporation benefited in any way from
them.

A question was raised concerning a check from the
Church to Deana Hron (Slough’s daughter) issued in
May, 1974, in the amount of $1,600. However, the
evidence demonstrated that this represented funds from

~ a

the sale of Mrs. Hron’s mobile home which had been
used to purchase Colt Industries stock, and that stock
had been inadvertently comingled with the Church’s
stock holdings in the same company. When this error
was discovered, upon the sale of such stock, the proceeds
attributable to Mrs. Hron’s investment were returned to
her by that check.

In January, 1975, the Church became a creditor of
Slough when it paid his $12,000 bank loan and took his
note in that amount at the same rate of interest.

No wages or other compensation were ever received
by Slough, his wife or daughter, or any of his businesses
from the Church.

<i
REASONS FOR GRANTING THE WRIT

1

THE DECISION BELOW CONFLICTS WITH THE
MAJORITY OF THE COURTS OF APPEALS THAT
HAVE CONSIDERED THIS QUESTION, AND ALSO
WITH THE DECISIONS OF THIS COURT.

Generally, in order for an organization to be entitled
to exemption from federal income taxation under the
provisions of I.R.C. §50l(a) and §501(cX3), [all
references are to the Internal Revenue Code of 1954, un-
less otherwise indicated], the organization must show
“(1) that it was organized exclusively for charitable pur-
poses, (2) that it is operated exclusively for charitable
purposes, (3) that no part of its net earnings inured to
the benefit of any private shareholder or individual, and
(4) that no substantial part of its activities consist of
carrying on propaganda or otherwise attempting to in-
fluence legislation . . .” Huron Clinic Foundation v. Un-
ited States, 212 F. Supp. 847, 850 (D.S.D. 1962), remand-
ed by stipulation, 324 F.2d 43 (8th Cir. 1963).

In the instant case, it is undisputed that the Church
was “organized” for religious purposes. The primary
issue is whether, during its first three years of operation
(1972-74), it was “operated” exclusively for religious pur-
poses.

Treas. Reg. § 1.501(cX3)-1(a) provides that in order to
be exempt as an organization described in § 501(cX3), an
organization must be “operated exclusively for one or
more of the purposes specified in such section.” Tres.
Reg. § 1.501(cX3)-1(cX1) elaborates on this by providing
“an organization will be regarded as ‘operated exclusive-
ly’ for one or more exempt purposes only if it engages

—10—

primarily in activities which accomplish one or more
such exempt purposes specified in § 501(cX3). An
organization will not be so regarded if more than an in-
substantial part of its activities is not in furtherance of
an exempt purpose.” Treas. Reg. § 1.501(cX3)-1(dX1Xi)
specifies “An organization may be exempt... if it is
organized and operated exclusively for one or more of
the following purposes: (a) Religious, (b) charitable. . .”
The definition of “charitable” found in Treas. Reg.
§ 1.501(cX3)-1(d\(2) specifically includes “advancement of
religion,” “erection or maintenance of public buildings”
and “relief of the poor and distressed.”

The Tax Court and the Court of Appeals concluded
that the Church was not operated exclusively for exempt
purposes because “No activities were conducted ...
which accomplished the petitioner’s stated purpose.”
This overlooks entirely the fact that the Church engaged
in no activities except activities that were directed
toward the primary purposes of any new church—the
acquisition of members and the creation of a building
fund leading to the erection of a church building.

The Tax Court and the Court of Appeals apparently
discounted Slough’s one-to-one missionary work, despite
the fact that it resulted in some forty converts to
membership. It is manifest that such activity relates
directly to an exempt purpose. Cf. Travis Smith v. Com-
missioner, 60 T.C. 988 (1973). At the very least, it cannot
support a finding of operation for non-religious pur-
poses, as the statute requires to deny an exemption.

Aside from this, however, it appears that the Tax
Court (and therefore the Court of Appeals) based its
determination to deny the exemption primarily on its
view that the investment activity of the Church was not
in furtherance of an exempt purpose. While this might

per ee

be true if the investment activity was an end in itself,
that is not the case here. It was beyond dispute that the
accumulation and investment of funds was for the pur-
pose of a building fund for a church building. Clearly,
the erection of a church building is a proper exempt
purpose. How, then, can the Church be denied the only
means available to it to accomplish that purpose? The
holding of the Tax Court takes an impermissibly narrow
view of the Church’s activity, and if generalized to other
exempt organizations, could destroy these organizations
before they had a chance to get off the ground.

The Tax Court relied on Randall Foundation v.
Riddell, 244 F.2d 803 (9th Cir. 1957), as the sole authori-
ty for its conclusion. But apart from factual distinctions,
the Randall Foundation case must be rejected because
(1) it does not consider present statutory provisions for
dealing with business income of exempt organizations,
and (2) it reflects the minority view of the Ninth Circuit
Court of Appeals rejecting the “destination of income”
test applied in other circuits and derived from the deci-
sion of this Court.

A partial review of the history of the tax exempt
provisions now embodied in § 501 is useful in under-
standing the statutory scheme for dealing with the issues
raised in this case and why Randall Foundation should
not be deemed applicable.

The exemption for charitable organizations originated
in the Corporate Excise Tax Act of 1909 which ex-
empted “. .. any corporation or association organized
and operated exclusively for religious, charitable, or
educational purposes, no part of the net income of which
inures to the benefit of any private stockholder or in-
dividual.” § 38, 36 Stat. 112 (1909). This language was
carried over as part of the Income Tax Act of October 3,

pan,

1913, 38 Stat. 172, 180. This Court considered the effect
of business and investment income on an organization’s
tax exempt status in Trinidad v. Sagrada Orden, 263
U.S. 578 (1924). That case involved a religious order
that derived approximately 35% of its income from rents
and 59% from dividends and interest on investments.
The Court rejected the contention that the organization
was not operated exclusively for exempt purposes
because of its investment and business activities observ-
ing:
“Whether the contention is well taken turns
oe ae geed on the meaning of the excepting clause,
fore quoted from the taxing act. Two matters ap-
parent on the face of the clause go far towards settl-
ing its meaning. First, it recognizes that a corpora-
tion may be organized and operated exclusively for
religious, charitable, scientific or educational pur-
poses, and yet have a net income. Next, it says
nothing about the source of the income, but makes
the destination the ultimate test of exception.

“Evidently the exception is made in recognition of
the benefit which the public derives from corporate
activities of the class named, and it intended to aid
them when not conducted for private gain. Such ac-
tivities cannot be carried on without money; and it
is common knowledge that they are largely carried
on with income received from properties dedicated
to their pursuit. This is particularly true of many
charitable, scientific and educational corporations
and is measurably true of some religious cor-
porations. Making such properties productive to the
end that the income may be thus used does not alter
or enlarge the purpose for which the corporation is
created and conducted.” 263 U.S. at 581.

This Court again applied the destination of income
test in Better Business Bureau v. United States, 326 U.S.
279 (1945), where, in considering the exemption of the
BBB from social security taxes under an identical

a)

statutory provision, the Court focused not on the nature
of the organization’s income but upon the ultimate non-
exempt purpose of promoting private business interests.

Following the Supreme Court’s decision in Trinidad, a
split developed among the Circuit Courts of Appeals
concerning the proper meaning of the language quoted
above. The majority of the courts adopted what is
referred to as the “destination of income” test and held
that there was virtually no limit on the permissible in-
come producing activities of tax exempt organizations so
long as the income would ultimately be used for a tax
exempt purpose. See, e.g., Roche’s Beach, Inc. v. Com-
missioner, 96 F.2d 776 (2d Cir. 1938); C. F. Mueller Co.
v. Commissioner, 190 F.2d 120 (3d Cir. 1951);
Willingham v. Home Oil Mill, 181 F.2d 9 (5th Cir. 1950);
Lichter Foundation v. Welch, 247 F.2d 481 (6th Cir.
1957); Bomen v. Commissioner, 240 F.2d 767 (8th Cir.
1957).

On the other hand, the Ninth and Fourth Circuits
adopted a much more restrictive view of the effect of
business income upon the ability of an organization to
meet the requirement that it be operated exclusively for
exempt purposes. Those courts indicated that tax ex-
emption should not be allowed for an organization all of
whose income arose from conduct of a trade or business
and which arrried on no active charitable activities. See,
e.g., United States v. Community Services, Inc., 189 F.2d
421 (4th Cir. 1951); Rolph H. Eaton Foundation v. Com-
missioner, 219 F.2d 527 (9th Cir. 1955).

Commentators who have considered the issue have
almost universally reached the conclusion that the ma-
jority destination of income test is the correct view
because it correctly interprets the opinion of the
Supreme Court in Trinidad and Better Business Bureau,

-*

=i

it is consistent with the wording of § 501, and it is more
realistic. See, e.g., Eliasberg, Charity and Commerce:
ILR.C. § 501(c)(3)-. How Much Unrelated Business Ac-
tivity?, 21 Tax L. Rev. 53, 73-4 (1965); Strong and
Fields, Profitable Related Business Activities and
Charitable Exemption Under I.R.C. § 501(c)(3), 44 Geo.
Wash. L. Rev. 270, 275-76 (1976).

In the wake of this Court’s decision in Trinidad and
adoption of the “destination of income” test by a majori-
ty of the Circuit Court of Appeals, numerous exempt
organizations began operating trades and businesses in
direct competition with private enterprise. See e.g.
Roche’s Beach, Inc. v. Commissioner, supra (operation of
public bathing beach and related concessions); C. F.
Mueller Co. v. Commissioner, supra, (operation of food
manufacturer). By 1950, the business activities of
charitable organizations had reached such proportions
that Congress felt it was necessary to amend the Inter-
nal Revenue Code to “eliminate the unfair competition
which exists when a tax-exempt organization engages in
competition with taxpaying business.” Remarks of
Senator George at 96 Cong. Rec. 13273 (1950), S. Rep.
No. 2375, 81st Cong. 2d Sess. 28-9 (1950).

The Revenue Act of 1950 included two changes that
are relevant to the present case. First, the predecessors
of §§ 511-513 were added to the Code to provide for
a tax on “unrelated business income” of exempt organi-
zations. Second, a provision was added denying tax
exempt status to § 502(cX3) organizations for, among
other things, unreasonably accumulating income. These
changes provided a statutory system to deai with
business activities of exempt organizations.

The primary means by which Congress chose to
eliminate the unfair advantage enjoyed by tax exempt

—~1§—

organizations in competition with private business is by
taxing income resulting from an exempt organization’s
conduct of a trade or business unless such business ac-
tivity directly accomplishes an exempt purpose. I.R.C.
§§ 511-518 provide a detailed explanation of when an ex-
empt organization’s income producing activities will be
subject to the tax. There has been no allegation that the
Church’s income from investments in securities falls
within the statutory definition of unrelated business in-
come. Also, it is extremely important to note that when
Congress considered the problems arising from the
destination of income test which allowed tax exempt
organizations to engage in trades and businesses un-
related to their charitable goals, the solution it provided
was not the denial of an organization’s status as a tax
exempt organization but merely to impose a tax upon in-
come from the conduct of an unrelated business. As
noted in the Senate Report on §§ 511-513:

“In neither the House bill nor your committee’s
bill does the provision deny the exemption where
the organizations are carrying on related active
business enterprises, nor require that they dispose
of such business. Both provisions merely impose the
same tax on income derived from an unrelated
trade or business as is borne by their competitors.
In fact it is not intended that the tax imposed on
unrelated business income will have any effect on
the tax-exempt status of any organization. An
organization which is exempt prior to the enact-
ment of this bill, if continuing the same activities,
would still be exempt after this bill becomes law.”
S. Rep. No. 2375, 81st Cong., 2d Sess. 28-29 (1950).

In spite of lengthy Code sections dealing with the tax
on unrelated business income, no provision was included
that prohibits an exempt organization from engaging in
business activities or that attempts to limit the scope of

74%

~10~-

those activities. Taxation, not prohibition of business ac-
tivities, was the remedy provided by Congress.

In the Revenue Act of 1950, Congress also provided a
means for dealing with unreasonable accumulations of
income by organizations exempt from tax under the
predecessor of § 501(cX3). Here, however, Congress
chose the harsher remedy of denial of exemption rather
than merely providing for a tax on the prohibited ac-
cumulations. Section 3814 was added to the Internal
Revenue Code of 1939. That section provided that an ex-
empt organization would be denied exempt status for
any taxable year in which it had accumulated income
that 1) was unreasonable in amount or duration in order
to carry out the organization’s exempt purpose, 2) was
used to substantial degree to carry out a nonexempt pur-
pose or 3) was invested in a manner that jeopardized the
carrying out of the organization’s exempt purposes. Sec-
tion 3814 was carried over in the Internal Revenue Code
of 1954 as § 504. However, the section was repealed by
the Tax Reform Act of 1969.

Against this background it can be seen that the
holding of Randall Foundation v. Ridell, supra, is in-
applicable to this case. In the Randall Foundatwn case,
Paul Randall formed the Foundation in 1950 as a
California non-profit corporation. The corporate articles
provided its purpose was “the promotion and advance-
ment of charitable, religious and educational projects on
a non-profit basis.” 244 F.2d at 805. Randal! donated ap-
proximately $20,000 worth of stock to the Foundation
and loaned it an additional $155,200 at 2% per cent in-
terest. During 1950 and 1951, the Foundation used these
funds to engage in short term trading of highly
speculative oil stocks. On September 12, 1951, the Foun-
dation was notified that its application for tax exempt

a ae

status had been denied. Over one year later, the Founda-
tion amended its articles to provide a specific charitable
purpose of establishing a home for underprivileged boys.
Income taxes were collected from the Foundation for its
1951 and 1952 tax years and the Foundation sued for a
refund. The Randall Foundation opinion affirms the
District Court’s judgment in favor of the District Direc-
tor of Revenue.

The Ninth Circuit Court of Appeals in Randall Foun-
dation chose to adhere to its minority view and express-
ly rejected the “destination of income” test favored by
the majority of the Circuit Courts of Appeals. 244 F.2d
at 807. As discussed supra, the minority view fails to
reflect the decisions of this Court in the Trinidad and
Better Business Bureau cases and is not supported by
any statutory language. In addition, language used by
the Court points up the unrealistic nature of the minori-
ty test. The Court observes:

“An individual who engages in business and in-
tends to give all his gains to charity receives ex-
emption only upon certain gifts in a taxable year. If
he continues in the same business but incorporates
as Paul Randall did here, he should have not better
standing .. .” 244 F.2d at 808.

However, as one commentator has noted regarding
this aspect of the minority test:

“On reflection, the majority approach to this
problem appears more realistic. In a situation
where X voluntarily obligated himself to pay his en-
tire salary to Y, the minority would say that X has
two purposes—to earn his salary, and to turn it over
to Y. The majority would say that X’s purpose is to
confer a benefit upon Y, and his labors are the
vehicle through which he accomplished his Fol
pose. The minority would break the thought off too
abruptly. It is not a realistic view of human nature

—19—

to say that a man works to work and then pursuant
to a completely separate intellectual mandate, turns
over his work product to someone else. The two ac-
tions are part and parcel of the continuous pur-
pose.” Eliasberg, supra at 74.

Perhaps more importantly, when Congress considered
the problems caused by the business activities of exempt
organizations its solution was not a limitation or prohibi-
tion on the activities but was only to tax unrelated
business income while allowing the organization to re-
tain its exempt status.

Thus, the view of the Ninth Circuit expressed in Ran-
dall Foundation should not be applied to deny exempt
status to the Church because it engaged in investment
activities to raise money to build a church building. The
correct view is the majority’s “destination of income”
test which would allow income producing activities so
long as the ultimate destination of the income was an ex-
empt purpose. The Church’s members had clearly in-
dicated their intent to use the funds for a church, and
the Church’s corporate articles and by-laws unequivocal-
ly commit all funds to charitable purposes. Even if the
Church should prove unsuccessful and be forced to liq-
uidate, the articles require all assets to be distributed
to another § 501(cX3) organization where they will be
used for an exempt purpose.

Although it seems the reasonableness of accumulations
should not be a factor in determining an organization’s
exempt status subsequent to repeal of § 504, the Tax
Court seemed concerned with what it viewed as the
remote prospect of the Church accumulating the funds it
needs to construct a church in the foreseeable future.
Preliminarily it must be noted that the Tax Court based
its evaluation of the Church’s prospects on faulty
assumptions. It apparently considered the entire four to

—19-—

five million dollars as the goal of the accumulations.
However, the Church’s voting members on two occasions
indicated their intent to start construction as soon as at
least $500,000 was accumulated. A glance at the
architect’s drawing reveals that the $4-5 million dollar
estimate covered the eventual cost of a multibuilding
complex. Secondly, the Tax Court refers to the fact that
the Church raised only about $190,000 after seven years
of existence. However, it must be remembered that the
great bulk of this sum was accumulated in 1973 and
1974. The uncertainty surrounding the Church’s tax ex-
empt status made fundraising impractical in subsequent
years.

Randall Foundation also involved the accumulation
issue. The Revenue Act of 1950 was effective for only the
second of the two years involved in that case and the
court did not refer to § 3814 of the Internal Revenue
Code of 1939 in its opinion. However, the tests applied
closely parallel those found in the statute. Thus, the
court stressed the highly speculative nature of the Foun-
dation’s investments which endangered the charitable
purpose. Compare § 3814(3), Internal Revenue Code of
1939. More in point, the court held that:

“It is not our intention to say that a case can
never be made out on the facts of a particular situa-
tion for aggregation of funds by a corporation for
ultimate disposition to a charitable purpose. But a
corporation which in its inception engages in trade,
business or s lation, and only has a vague

charitable design, does not in our opinion come
within the terms of the statute.” 244 F.2d 808.

The Church does not contend that the decision of the
Randall Foundation case on this issue was based on an

erroneous view of the law as it existed between the
Revenue Act of 1950 and the Tax Reform Act of 1969.

— =

The Foundation in that case had no specific use for its
funds at the time they were accumulated. Its charter
stated its exempt purposes only in broad, vague terms.
It was not until a subsequent year, after denial of ex-
empt status that the Foundation’s articles were amended
to provide a specific charitable purpose. A number of
other cases also concluded that accumulation of funds
without some program for their use was an un-
reasonable accumulation within the meaning of § 504
and thus fatal to the organization’s exempt status for
taxable years in which it held such accumulations. E.g.,
Curt Teich Foundation v. Commissioner, 48 T.C. 963
(1967), affd per curiam, 407 F.2d 815 (7th Cir. 1969);
Stevens Bros. Foundation, Inc. v. Commissioner, 324
F.2d 633 (8th Cir. 1963); Danforth Foundation v. United
States, 222 F. Supp. 761 (E.D. Mo. 1963). It was also
held that “the program must be prospective and not oc-
cur to the organization only after the Commissioner’s
shadow becomes visible. ‘After-thoughts will not suf-
fice.” Erie Endowment v. United States, 316 F.2d 151
(8d Cir. 1968).

On the other hand, it seems equally clear that even
before repeal of § 504, an organization was allowed to
accumulate income for a specific project without losing
its exempt status. E.g., Huron Clinic Foundation v. Un-
ited States, 212 F. Supp. 847 (D.J.D. 1962), remanded by
stipulation, 324 F.2d 43 (8th Cir. 1963) (income ac-
cumulated to construct medical clinic building); Hulman
Foundation, Inc. v. United States, 217 F. Supp. 423 (S.D.
Ind. 1962) (accumulation of over $1-1% million over 14
year period to finance construction of civic center);
Samuel Friedland Foundation v. United States, 144 F.
Supp. 74 (D.N.J. 1954) (accumulation of income to con-
struct medical research facility). In this case, the
Church accumulated income to accomplish a specific ex-

=

empt purpose, construction of a church building. The
evidence clearly indicates this plan was adopted well
before the Commissioner’s shadow became visible. Thus,
even under the pre-1969 Tax Reform Act Standards, the
Church’s accumulation of funds to construct a church
building would not have affected its tax exempt status.

More importantly, repeal of § 504 by the Tax Reform
Act of 1969 indicates a decision by Congress that ac-
cumulation of income should no longer cause the loss of
an organization’s tax exempt status.

The position urged by the government and adopted by
the Tax Court takes far too narrow of view of the ac-
tivities in question, and arbitrarily and unreasonably ig-
nores the ultimate purpose of those activities. It also
overlooks the fact that there was no activity that was
shown not to be for a proper tax exempt purpose. Could
the Tax Court’s conclusion be justified if the Church’s
charter had stated as one of its purposes, “the accumula-
tion of funds for the purpose of constructing a church
building”? Yet is not that implicit in the stated purpose
to construct such a building?

The decision below, in effect, prevents the vital ac-
quisition of funds for the stated purpose, since without
a tax exemption contributions will be impossible to obtain
and accumulations, burdened by income taxes, will be
slowed to a pace which cannot even hope to match the
inflationary spiral.

In short, the decision below cannot be justified under
the existing tax laws, the decisions of this Court and the
better-reasoned decisions of the Courts of Appeals, or
the policies underlying the tax exemption. While the ex-
emption may be a matter of legislative grace, it cannot
be arbitrarily and discriminatorily applied by the
courts.

—22—

It will be time enough to revoke, retroactively, the
Church’s tax exemption if it ever happens that the funds
in question are improperly used, or are used for a non-
exempt purpose. Until that time, the Church ought to be
entitled to pursue its purposes in the manner dictated by
the good faith exercise of its own judgment.

2.

THE DECISION BELOW IMPERMISSIBLY BUR-
DENS NEW CHARITIES AND DISCRIMINATES IN
FAVOR OF THOSE WHICH HAVE ALREADY SUC-
CEEDED IN ESTABLISHING THEIR PROGRAMS.

The decision below amounts to a determination that a
new charity must proceed with its activities in accord-
ance with the preconceived ideas of the particular
courts that review those activities, and must have
succeeded according to the standards of those courts,
upon penalty of losing its tax exemption—which
amounts to capital punishment. Apart from the manifest
injustice of this approach, it raises serious issues concern-
ing, and impinges upon, the rights guaranteed to its
members by the First Amendment to the United States
Constitution.

There seems to be no doubt that an established
religious organization could have engaged in exactly the
same activities as the Church without endangering its
tax exempt status. See Rev. Rul. 75-282 and discussion
supra. However, here the Tax Court looked to the
number of members and the absence of regular religious
services as “relevant factors” in deciding whether the
Church would be afforded tax exempt status. This ap-
proach focuses not upon the fact of whether the Church
is organized and operated to accomplish genuine
religious purposes but upon the methods by which the
Church seeks to accomplish its purposes and by the ease

_

with which others can be persuaded to accept its tenets.
If the Church was under the control of an established
church, if it had adopted tenets that would rapidly at-
tract large numbers of followers or if it had chosen to
conduct services prior to construction of a church
building, the Tax Court’s opinion and Rev. Rul. 75-282
indicate the Church would more likely have been allow-
ed to retain its tax exempt status.

Here, the Tax Court did not base its opinion on the use
planned for the Church’s funds or the exclusive purposes
of the Church’s existence, but instead relied on its sub-
jective appraisal of the methods by which the Church
undertook accomplishment of its admittedly exempt
goals and the court’s subjective appraisal of whether its
stated goals were realistic. Such insistence upon conform-
ing to its views of the proper mode of operating a
religious organization effectively discriminates against
new organizations and favors established religious
organizations. The Tax Court’s approach would force the
Church to prematurely undertake activities which would
dissipate the funds necessary to construct the church
building, which the Church believes is essential to its
ability to compete with established religious sects for
members, while allowing those associated with an es-
tablished sect free rein in accumulating funds with
which to expand and build new churches.

In Golden Rule Church Association v. Commissioner,
41 T.C. 719 (1964) the Tax Court considered the
problems inherent in denying tax exempt status to
religious organizations that engaged extensively in
business activities. The Tax Court observed:

“As we stated in United School of Christianity, [4
B.T.A. 61 (1926)] at 70:

—24—

In considering whether a corporation is
religious, charitable or educational we must
always be guided by the character of the
organization and its activities. Religion is not
confined to a sect or a ritual. The symbols of
religion to one are anathema to another. What
one may regard as charity another may scorn
as foolish waste, and even education today is
not free from divergence of view as to its
validity. Congress left open the door of tax ex-
emption to all corporations meeting the test,
the restriction being not as to the species of
religion, charity, science or education under
which they may operate, but as to the use of its
profits and the exclusive purpose of its exemp-
tion.

We have grave doubts that a contrary decision
would be permissible under the Constitution of
the United States. It is a violation of the first
amendment to discrimate between religious organi-
zations. Although tax benefits such as exemptions
may be matters of legislative grace, nevertheless, a
denial of such benefits granted to others of essenti-
ally the same class may well rise to the level of an
unconstitutional discrimination.” [Citations omitted]
41 T.C. at 729.

3.

THE DECISION BELOW ERRONEOUSLY CON-
CLUDED THAT SOME PART OF THE NET EARN-
INGS OF THE CHURCH INURED TO THE BENEFIT
OF A PRIVATE INDIVIDUAL.

As an alternative ground for its decision, the Tax
Court concluded that the Church had failed to show that
it was not operated for the private benefit of Slough and
that no net earnings had inured to private individuals.
The court expressly stated: “No single factor or com-
bination thereof controls our conclusion. Rather, these

~i5~

factors, taken in the aggregate, require the conclusion
we reach.”

We believe that a detailed analysis of these factors is
beyond the scope of this petition. However, we submit
that this conclusion was essentially makeweight and is
manifestly not supported by the record. All of the
evidence was that in the transactions between Slough
and his businesses and the Church, scrupulous care was
taken to insure that no benefit inured to Slough or his
businesses and that the advantage, if any, was the
Church’s. If this record demonstrates a private benefit,
then no charity’s tax exemption is safe. Every charity
must engage in business transactions with “private in-
dividuals,” including its own officers and members at
times. Presumably, these transactions will usually in-
volve some mutual benefit. If that part of the benefit
that inures to the private person results in the loss of the
charity’s tax exemption, how can the charity function
and still retain its exemption? Any such rule would be
absurd, and yet this very rule is implicit in the decision
below. That decision is without precedent. Huron Clinic
Foundation v. United States, 212 F. Supp. 847 (D.S.D.
1962), remanded by stipulation, 324 F.2d 48 (8th Cir.
1963); Bomen v. Commissioner, 240 F.2d 767 (8th Cir.
1957).

The government’s position is not aided by the fact that
the Church is predominately the vehicle of its founder,
Dean Slough. The same may be said of the vast majority
of churches during their formative years. They have,
historically, been the result of the vision and views of
some founder. Indeed, even the Internal Revenue Ser-
vice has indicated that personal control of an organiza-
tion by its founder will not alone constitute grounds for
denial of tax exempt status. Rev. Rul. 66-219, 1966-2

_— =

C.B. 208; see also, Curt Teich Foundation v. Com-
missioner, 48 T.C. 963 (1967), aff'd per curiam, 407 F.2d
815 (7th Cir. 1969). ~

The record in the instant case will demonstrate that
the benefit that flowed from Slough to the Church far
outweighed any incidental benefit to Slough or his
businesses, or to any other private individual. It will also
demonstrate that that benefit was no different from the
benefit that normally accrues to anyone who deals with
a charity. The “facts” relied upon by the court will not
support any rational analysis based upon the meaning
and purpose of this part of the exemption requirements.

CONCLUSION

For these reasons, a writ of certiorari should issue to
review the judgment of the United States Court of
Appeals for the Seventh Circuit.

Respectfully submitted,

EDWARD J. KIONKA
632 North Main Street
Columbia, Illinois 62236
(618) 2&1-7186

JOHN J. VASSEN

PATRICK B. MATHIS

JOHN J. VASSEN P.C.
1801 North Belt West
Belleville, Illinois 62223
(618) 277-8700

Attorneys for Petitioner
Western Catuouric CourcH

—jla—

APPENDIX

UNITED STATES COURT OF APPEALS
For the Seventh Circuit
Chicago, Illinois 60604

Argued: September 15, 1980
September 19, 1980

Before

Hon. Harlington Wood, Jr., Circuit Judge
Hon. Richard D. Cudahy, Circuit Judge
Hon. William J. Campbell,* Senior Judge

Western Catholic Church,
Petitioner-Appellant.
No. 80-1083 vs.
Commissioner of Internal Revenue,
Respondent-Appellee.

Appeal from the United States Tax Court
No. 8709-78X—Judge William M. Drennen

ORDER
(Unpublished Order Not To Be Cited Per Circuit Rule 35]

After having reviewed the briefs and heard
arguments from the Appellant, the Court is of the opin-
ion that the judgment of the Tax Court should be AF-
FIRMED. The opinion of the Tax Court is adopted as the
opinion of this Court.

* Honorable William J. ama. Senior United States Dis-
vie Judge for the Northern District of Illinois is sitting by
esignation. )

—2Ja—

UNITED STATES TAX COURT
Washington
WESTERN CATHOLIC CHURCH,
Petitioner,
No. 8709-78X v.
COMMISSIONER OF INTERNAL REVENUE,

Respondent.
ORDER AND DECISION

Pursuant to the determination of this Court, as set
forth in its Findings of Fact and Opinion filed October
31, 1979, it is

DECLARED, ADJUDGED and DECIDED: That petitioner
does not qualify as an organization described in section
501(cX3), I.R.C. 1954, as amended. Respondent’s retroac-
tive revocation of his ruling that petitioner was exempt
under section 501(cX3), I.R.C. 1954, is hereby sustained.

/s/ WILLIAM M. DRENNEN
JUDGE

Entered: October 31, 1979

aliltinse

73 T.C. No. 19

UNITED STATES TAX COURT

WESTERN CATHOLIC CHURCH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8709-78X Filed October 31, 1979

Petitioner was organized in 1971 for religious pur-
poses. However, it had no place of worship and con-
ducted no public religious services during the years
1972-74. Its only activities, aside from investment ac-
tivities, were some one-to-one ministry conducted by its
founder with individuals who had problems, and dis-
tribution of a few grants to needy individuals chosen by
the founder. Petitioner’s capital was derived primarily
from contributions by its founder who, with his wife and
daughter, constituted the board of directors of
petitioner. Petitioner’s primary activity during 1972-74
was the passive investment of its funds, which it ac-
cumulated to build a church when it had at least $500,-
000. Held: Petitioner was not operated exclusively for
an exempt purpose and it has not shown that no part of
its net earnings inured to the benefit of private in-
dividuals. Respondent’s retroactive revocation of his rul-
ing that petitioner was exempt under sec. 501(cX3) is
sustained

John J. Vassen and James R. Kalish, for the petitioner.
Judith M. Picken, for respondent.

DENNEN, Judge: This is an action for declaratory
judgment pursuant to section 7428(a), I.R.C. 1954.1

Respondent issued a final adverse determination to
petitioner on April 25, 1978, in which petitioner’s
previously granted tax-exempt status under section

1_ All section references are to the Internal Revenue Code of
1954, as amended and in effect in the years in issue, unless
otherwise specified.

—4da—

501(cX3) was retroactively revoked. The revocation was
effective as of April 23, 1971, the date petitioner was
organized. Based upon an examination of petitioner’s ac-
tivities during the 1972, 1973, and 1974 calendar years,
pat gps determined that (1) petitioner was not, nor
had it ever been, operated exclusively for any of the pur-
poses enumerated in section 501(cX3); and (2) a portion
of petitioner’s net earnings had inured to the benefit of
private individuals. Petitioner challenges respondent’s
determination and it has properly invoked the jurisdic-
tion of this Court for a declaratory judgment relating to
its qualification as an organization described in section
501(cX3).?

The issues presented are whether petitioner was
operated exclusively for a religious purpose’ and
whether a portion of petitioner’s net earnings inured to
the benefit of private individuals.

FINDINGS OF FACT

Some of the facts were stipulated and are so found.
The stipulation of facts and the exhibits attached thereto
are incorporated herein by this reference.‘

Western Catholic Church’ (hereinafter referred to as
petitioner), was incorporated on April 23, 1971, pur-

2 Petitioner has satisfied the following prerequisites for a
declaratory judgment: It exhausted its administrative
remedies, sec. 7428(b\2); it filed the petition and_ its
qualifications are at issue, sec. 742&(b\1); and it mailed its
petition before the 91st day after respondent mailed his
adverse determination in this matter, sec. 7428(b\3). See also
Rule 210(c), Tax Court Rules of Practice and Procedure.

8 Petitioner does not claim that it was operated for any of the
other purposes mentioned in sec. 501(cX3).

* In a declaratory judgment action concerning a revocation
of a tax-exempt status, the Court may make findings of fact
which differ from the administrative record. Rule B17(bX 1),
Tax Court Rules of Practice and Procedure.

5 The term “Catholic” was used in petitioner’s name to mean

“universal,” rather than any affiliation with the Roman

ew Church or any other organization which uses the
rm

sii

suant to the General Not for Profit Corporation Act of
Illinois by S. Dean Slough (hereinafter referred to as
Slough), Laura R. Slough, and Deana L. Hron. Laura R.
Slough and Deana L. Hron are, respectively, the wife
and daughter of Slough. These three individuals also
comprised petitioner’s board of directors. Petitioner’s
principal office, at all times relevant herein, was located
in Quincy, IIl.

In its articles of incorporation and its by-laws, the
following is set forth as the purpose of petitioner:

To establish a church to embrace persons of all
faith[s], color{s], and creed[s], to join for a common
cause the betterment of man, by helping God in
spreading the Gospel. To recuit [sic] evangalists
[sic], to build, operate and maintain churches,
hospitals, nursing homes, schools and to establish
missionarys [sic] and missions whereever [sic] they
are needed in the World. We believed [sic] the Bible
to be the verbally inspired Word of God; the only in-
fallible rule of faith and practice. We believe in the
eternal Deity of Our Lord Jesus Chirst; in His
virgin birth; in His substitutionary death on
Calvary for our sins; in His bearing of our afflic-
tions and in His bodily reserrection [sic] from the
grave. We believed in salvation by faith through the
shed blood of Jesus Christ. We believe that the true
church is composed of all those who have been born
again. We believe in the present working and mov-
ing of the Holy Spirit in the lives of men, women,
children; we believe in carry{ing] out the Great
Commission. To evangelize is a vital part of our
Christian responsibility. We believe all men are lost
apart from the saving grace of Jesus Christ. We
believe in the return of Jesus Christ, God’s only
begotten, Son, to this earth.

It was also provided that upon petitioner’s dissolution,
all assets would be paid to an organization exempt un-
der section 501(cX3). To accomplish its stated purposes,
the articles of incorporation provided that petitioner had
the power, inter ala, to buy, sell, mortgage, and lease

cecil

real and personal property, to borrow money, and to in-
vest in stocks and bonds.

On or about May 18, 1971, petitioner filed an applica-
tion for recognition as a religious organization described
in section 501(cX3) and as exempt from taxation under
section 501(a). Petitioner’s stated purpose was “to
further religion and benefit mankind.” In the applica-
tion petitioner described its proposed activities as in-
cluding the building of churches, colleges, nursing
homes, and a hospital. Petitioner noted that it had not
engaged in any of these activities as of the time it filed
its application. Funds were to be raised by donations.

Following an interchange of letters between petitioner
and the District Director, St. Louis, Mo., in which it was
suggested to petitioner that it amend its articles of in-
corporation and its by-laws in certain respects,® which
suggestions petitioner adopted, the District Director
determined by letter dated October 31, 1971, that
petitioner was exempt from Federal income tax under
section 501(cX3). The exemption was based on informa-
tion supplied by petitioner and it was conditioned on the
assumption that petitioner’s operations would be as
stated in the application for exemption. Petitioner was
also informed that it had to report any change in its
purposes, character, or method of operation. The letter
also specifically stated that no determination was made
as to whether any of petitioner’s proposed activities
would give rise to unrelated business income subject to
tax under section 511.

By letter dated July 10, 1974, the Regional Com-
missioner notified petitioner that an examination would
be conducted in order to establish petitioner’s continuing
qualification as an exempt organization. The examina-
tion was commenced on August 20, 1974, and it covered
the calendar years 1972, 1973, and 1974. As a result of

8 One letter advised petitioner that its pro activities of
“building additional churches, a college, a hospita! and nur-
sing homes” would aa separate exemption applications
inasmuch as each would be considered separate entities.

—T7a—

this examination respondent revoked petitioner’s tax-
exempt status.

Prior to petitioner’s incorporation and during the
years in question, Slough was president and owned 100
percent of the stock of both Credit Control Services, Inc.,
and Business Management Corp. Credit Control Services
was in the business of collecting bad accounts. Business
Management Corp. had some real estate holdings.
Slough was also involved in a number of other business
enterprises. Slough devoted full time to his business
enterprises.

Slough decided to organize petitioner for two reasons:
(1) In order to help other people; and (2) to have an
organization in which Slough could be active and dictate
some of the policies. Slough estimated it would take 10
to 15 years to get the program into operation.

During the years under examination, petitioner
neither conducted religious services nor performed
religious functions on a group basis.’ Slough was
petitioner’s only minister, having been ordained by ac-
tion of the voting members at the annual meeting held
on May 15, 1972.8 He had no theological training prior
to that time or between then and the time of trial. No
other minister was hired by petitioner, Slough prefer-
ring to retain petitioner’s money in its building fund.

7 In 1975 7 made arrangements with a church in
Ohatchee, Ala., hold group services for petitioner. The
piston. of this church was a former business partner of

8 At the same meeting the members of the board of directors
present were Slough, his wife, and his daughter. These in-
ividuals voted themselves into the following offices:

Slough — _ president
Diana Hron — vice-president
Laura Slough — secretary
Slough — treasurer

_In its application for recognition as a tax-exempt organiza-
tion, petitioner stated that no proposed member of the be
or officers would be related, inter alia, by blood or marriage.

—8a—

Although petitioner did not conduct services, Slough
claimed he met on a one-to-one basis with individuals he
knew in Quincy, IIl., and he attempted to get these in-
dividuals to commit themselves to become members of
petitioner. He also counselled individuals with personal
problems.’ Slough believed that the growth of petitioner
could be better accomplished by talking to people on a
one-to-one basis than by holding religious services which
were not well attended. Only Slough engaged in this
one-to-one activity. He spent approximately 10-12 hours
od month engaged in petitioner’s activities. Although

lough claimed that there were 40 members of
petitioner, only Slough, his wife and daughter, and two
other individuals, one of whom was a former employee
of Slough and the other of whom knew Slough prior to
the incorporation of petitioner, have been identified as
members. All it took to become a member was to accept
the principles of petitioner and to agree to attend ser-
vices when held in the future. Slough refused to divulge
any list of petitioner’s members, claiming such a divul-
sion would be an invasion of privacy. With the exception
of Slough’s wife’s and daughter’s participation in
petitioner’s annual meetings, evidence was not in-
troduced to indicate that any individual other than
Slough performed any activity for petitioner.

Slough has never received any salary or other form of
compensation from petitioner and neither has Slough’s
wife, daughter, or businesses.

During 1972 Slough wrote checks to cash totaling $5,-
200 on petitioner’s checking account. The principal
evidence of the disposition of this money was Slough’s
testimony that the money was donated to individuals
known to Slough and whom Slough personally deter-
mined to be in need of money. The individuals to whom
the payments were made did not apply to petitioner for

® Slough also testified that he performed wedding
ceremonies. Altho it is not clear when these ceremonies
were conducted, it not been established that they were
conducted during 1972-1974.

a

money. Slough considered these payments as a function
of petitioner. The revenue agent who conducted the ex-
amination of petitioner was able to contact only one of
the identified recipients. This individual verified that he
received money from petitioner.

Petitioner stopped donating money following the ad-
vice of a certified public accountant to the effect that
petitioner’s inability to document what happened to the
money would be troublesome if petitioner was audited.
Slough chose to discontinue making payments rather
than set up a bookkeeping procedure which he con-
sidered unnecessary for an organization that was not re-
quired to file tax returns.

For the taxable year ending December 31, 1972,
Slough filed a joint return with his wife on which ad-
justed gross income of $61,258 was reported. From this
amount itemized deductions of $34,536 were subtracted,
of which amount $29,975 represented contributions to
petitioner. For the taxable year ending December 31,
1973, a joint return was filed on which was reported ad-
justed gross income of $126,990.17. From this amount
itemized deductions of $73,064.37 were subtracted, of
which amount $63,495 represented contributions to
petitioner."° For the taxable year ending December 31,
1974, a joint return was filed on which was reported ad-
justed Dy - income of $64,945. From this amount
itemi deductions of $18,006 were subtracted, of
which amount $6,370 represented charitable con-
tributions."

The parties stipulated that during 1972, 1973, and
1974, petitioner received the following amounts from

Slough in the form of cash or checks deposited to
petitioner’s checking account:

0 Although contributions totaled $69,705, the sec. 170(bX1)
rcentage limitation reduced the allowable charitable con-
ibution deduction to $63,495.

Of the charitable contribution deduction, $6,210 is the
carryover of excess contributions from the preceding taxable
year.

—10a—

Year Amount
1972 $7,000
1973 78,830
1974 12,150

Total for 3 years $97,980

No explanation was provided concerning the
difference between the amounts deducted on the joint
returns as charitable contributions to petitioner and the
amounts which the parties stipulated were given by
Slough to petitioner. Only two other individuals were
identified as having contributed to petitioner, each hav-
ing contributed $500. One of these individuals was a
previous recipient of funds from petitioner.

It was represented in petitioner’s application for ex-
emption that petitioner would not receive 10 percent or
more of its assets from any single organization or group
of affiliated organizations or from any individual or
members of a family group. Of petitioner’s accumulated
assets, estimated at approximately $190,000 as of the
time of trial, Slough’s contributions for the years under
examination totaled $97,980.

In 1971 petitioner requested John A _ Benya, an
architect, to design a church building. Mr. Benya work-
ed without charge in his spare time and he completed a
preliminary drawing of an elaborate church. The cost of
the building, as conceptualized by Mr. Benya, was es-
timated to be $4-$5 million. As of the time of trial,!* this
estimate was considered low due to inflation. Plans to
build a church never went beyond this preliminary
drawing stage. The minutes of petitioner’s annual
meeting of voting members on May 15, 1973, reflect that
it was agreed that at least $500,000 should be collected
before any building project was started. This decision

12 No evidence was introduced concerning Slough’s con-
tributions to petitioner for years subsequent to those under ex-
amination. Apparently a part of the accumulated assets
represented gain on petitioner’s securities transactions and
dividends and interest received on its investments.

18 Trial was held in this case on Mar. 14, 1979.

—lla—

was reaffirmed at the annual meeting held on May 15,
1974.4 Slough thought the overall success of the
organization would come more quickly if a large church
building was constructed.

During the years under examination, petitioner’s
primary activity has been one of making passive in-
vestments in order to accumulate money for the building
fund. These investments were principally in certificates
of deposit, stocks, and real estate. Petitioner borrowed
considerable amounts of money from banks in order to
finance its investment activity. At times either Slough
individually or one of his businesses would borrow
money for petitioner. Slough or one of his businesses also
provided the collateral for some of petitioner’s bank
loans. There was conflicting testimony as to whether
petitioner repaid all amounts borrowed on its behalf,
and it cannot be determined from the documentary
evidence whether all repayments were made. Neither
Slough nor his businesses charged petitioner for any
amount in excess of what the bank charged them when
loans were obtained for petitioner’s benefit.

Petitioner had no assets at the time of filing its
application for exemption. The only records maintained
by petitioner for the period 1972 through 1974 were
check stubs and minutes of annual meetings.'® Initial
contributions to petitioner were made by Slough. At the
beginning of 1972, petitioner’s only assets were the
following three certificates of deposit:

Certificate of Issuance Market
deposit number date value
5330 Oct. 15, 1971 $ 5,000
5348 Nov. 26, 1971 6,000
5354 Dec. 21, 1971 10,000

14 The minutes do not identify an r “voting members” as be-
ing present other than the three directors.

6 As a result, it was often difficult to retrace petitioner’s
financial dealings. This difficulty was compounded b
aie one ay practice of applying checks received from its stoc
rokerage account directly against outstanding loans without
first depositing the checks into petitioner’s checking account.

—12a—

Said certificates had 12-month maturity periods and 5%
percent interest rates.

During the period under examination petitioner ac-
quired four certificates of deposit and a single time-
savings certificate with a total market value of $42,500.
Two of the certificates of deposit, with a total market
value of $15,000, were transferred to petitioner from
Credit Control Services.

During 1972, 1973, and 1974, petitioner transacted the
following loans at 7%-percent and 8-percent interest
rates:

Loan No Date Amount Type
1 Oct. 12, 1972 $7,000 Commercial
2 Dec. 15, 1972 7,000 Commercial
3 Dec. 15, 1972 7.500 Commercial
4 May 2, 1973 20,000 Business
5 May 3, 1973 §2,000 Commercial
6 Aug. 17, 1973 32,500 Commercial
7 Oct. 9, 1973 13,000 Commercial
& Nov. 16, 1973 32,000 Commercial
9 Dec. 3, 1973 20,500 Commercial
10 Feb. 8, 1974 7,150 Commercial
11 Feb. 26, 1974 28,600 Commercial
12 Mar. 15, 1974 32,500 Real Estate

6 For purposes of clarity, se uential numbers were sub-
stituted for the actual loan numbers.

Loan No. Actual No.

—_
COOAIMOS CON
rr"
2
iw)
—_

Be
tr)
SS

—13a—

With the exception of Loan number 4, petitioner ob-
tained the loans from the South Side Bank of Quincy,
Ill. (subsequently the Town & Country Bank). Loan
number 4 was obtained from Lewistown State Bank,
Lewistown, Mo.

With the exception of the proceeds from loan numbers
1, 2, 7, and 12, the ultimate use of the loan proceeds was
not disclosed. Most of these loan proceeds were deposited
in petitioner’s checking account.’

The proceeds of loan number 1 were used by
petitioner to purchase a new 1973 Lincoln Continental 2-
door coupe for a total sales price of $7,080.49 on October
12, 1972. No sales tax was paid. Two of petitioner’s cer-
tificates of deposit were assigned as security for the
loan. This loan was repaid by petitioner on December
11, 1972.

The proceeds of loan number 2 were used by
petitioner to purchase a new 1973 Lincoln Tour Car 4-
door sedan for a total sales price of $7,556.92 on
December 14, 1972. No sales tax was paid.

The two automobiles were purchased in anticipation of
two fund raisers being hired to work for petitioner. The
automobiles were to be a part of the fund raisers’ com-
pensation. Subsequent to the purchase of the
automobiles, however, Slough decided not to hire the
two individuals. Both automobiles were then sold to
Credit Control Services on January 5, 1973, for a total
price of $17,749.66.18 The terms of the sale required
Credit Control Services to assume petitioner’s $14,500

7 Evidence was also introduced that an employee of Credit
Control Services, Ben Fresno, without authorization, secured
a loan and opened a stock brokerage account in _petitioner’s
name. Fresno was not connected with petitioner in any way,
and he did not have authority to use petitioner’s name.
Petitioner did not repay the loan nor did it benefit from the
loan proceeds or the stock brokerage account.

18 No evidence was introduced as to petitioner’s use of the
automobiles between the time of their purchase and their sale.

—l4a—

liability under loan numbers 2 and 39 and to execute a
demand note at 7% percent interest for the $3,249.66
balance. Loan numbers 2 and 8 were repaid in 1973 by
Credit Control Services. As of December 31, 1974,
neither the demand note nor any interest thereon had
been paid. Credit Control Service claimed depreciation
deductions for the two automobiles as a business ex-
pense.

Slough obtained a loan of $55,000 which was applied
to petitioner’s loan number 5 ($62,000), and Business
Management Corp. obtained a loan of $10,000 of which
$7,000 was applied to petitioner’s loan number 5.

The proceeds from petitioner’s loan number 7 were
used to repay Slough and Business Management Corp.
in part for their payments on petitioner’s loan number 5.
Of the $13,000 loan proceeds, $10,000 was paid to
Business Management Corp., which was $3,000 more
than petitioner owed Business Management Corp. The
remaining $3,000 was applied against Slough’s personal
loan of $55,000. Slough thereafter paid off the balance of
his personal loan as follows: (1) Petitioner’s interest in-
come check of $3,333.60; (2) petitioner’s check of $44,-
154.98 received from its stock brokerage account at
Lamson Bros. & Co. on October 2, 1973, infra; and (8) a
$4,511.47 check written on petitioner’s checking account.

Proceeds from loan number 12 were used in March
1974 to purchase an office building for $45,000.29 The
difference between the purchase price and the $32,500
loan was given to petitioner by Credit Control Services
and treated as advance rentals by Credit Control Ser-
vices. The building was purchased because of its invest-

19 Evidence was not presented concerning petitioner’s use of
the proceeds of loan number 3.

20 The purchase price of the building was stipulated by the
parties to be $45,000. Other evidence was introduced which
indicates that the purchase price was $45,500. This latter
amount was also the sum of the loan and the advanced rentals
received by ge panes The $500 difference is not important to
resolution of this case, however.

—15a—

ment potential and because Credit Control Services
needed more office space. Under the terms of the lease,
Credit Control Services leased the entire building, ex-
cept for two rooms, at a monthly rental of $1,000. Credit
Control Services was also required to pay all real estate
taxes, maintenance, and insurance. The rent paid by
Credit Control Services was reasonable. One of the
rooms in the building could have been used for religious
services.

On or about January 29, 1974, petitioner made a pay-
ment of $12,000 to Town & Country Bank (formerly the
South Side Bank of Quincy) which was applied to
Slough’s loan account at the bank. Slough signed a note
payable to petitioner evidencing the $10,000 loan.

In May 1973 petitioner opened an account with Lam-
son Bros. & Co. stock brokerage firm. A second account
was opened in October 1974. Slough made the invest-
ment decisions for petitioner. Neither Slough, his fami-
ly, nor any of his businesses had a stock brokerage ac-
count with Lamson Bros. & Co. During 1973 petitioner
purchased 21,300 shares of stock in 24 separate transac-
tions for a total cost of $379,361.69. In 9 transactions
petitioner sold 11,000 shares of stock for a profit of $25,-
569.59. As of December 31, 1973, petitioner had 10,300
shares in its account at a total cost of $182,812.30. Dur-
ing 1974 petitioner purchased 30,800 shares of stock in
20 separate transactions for a total cost of $239,845. In
20 transactions petitioner sold 14,500 share of stock for a
og of $25,885.18. As of December 31, 1974, petitioner

ad 27,9007! shares of its accounts at a total cost of
$175,670.01.

In May 1974 a cashier’s check in the amount of $1,600
was issued to Deana Hron. The source of the funds for

21 The parties stipulated to the number of shares vine
solc, and retained by petitioner. No explanation is provi ed
for the difference between the number of shares stipulated as
being held by petitioner as of Dec. 31, 1974, and the
remainder arrived at by subtracting the total shares sold
from the total shares purchased.

—16a—

this check was a check from Lamson Bros. & Co.
payable to petitioner.

By letter dated June 9, 1976, petitioner was informed
by the District Director, St. Louis, Mo., that respondent
proposed to revoke petitioner’s tax-exempt status. A
copy of the revenue agent’s examination report was at-
tached to the letter and it set forth the reasons for the
proposed revocation, including the failure of petitioner
to meet the operational test and the inurement of net
earnings to the benefit of private individuals. As
previously noted, respondent issued a final adverse
determination on April 25, 1978.

OPINION

Section 7428(a) permits this Court under certain cir-
cumstances to make a declaration with respect to a final
determination by respondent that a corporation is not an
organization described in section 501(c\3) and therefore,
not exempt from tax under section 501(a).% The term
“determination” includes a_ revocation of an
organization’s tax-exempt status. Sec. 7428(a). The
burden of proof is on petitioner to overcome the grounds
for revocation of the exemption set forth in respondent’s

2 Sec. 7428(a) provides in pertinent part:

(a) Creation of Remedy.—In a case of actual controver-
sy involving—
(1) a determination by the Secretary—
(A) with respect to the initial qualification or con-
tinuing qualification of an organization as an organiza-
tion described in section 501(cX3) which is exempt from

tax under section 50l(a)* ** .
** *

upon the filing of an appropriate pleading, the United
States Tax Court * * * may make a declaration with
respect to such initial qualification or continuing
Fcc war * * * Any such declaration shall have the
orce and effect of a decision of the Tax Court * * * and
shall be reviewable as such. * * *

—17a—

determination. Rule 217(cX2\i), Tax Court Rules of
Practice and Procedure.”

Section 501(a) and section 501(cX3)* provide an ex-
emption from Federal income tax for an organization
if three conjunctive requirements are met: (1) The or-
mayne must be organized and operated exclusively
or an exempt purpose; (2) no part of the net earnings of
the organization can inure to the benefit of any private
shareholder or individual; and (3) no substantial part of
the activities of the organization includes carrying on
propaganda, otherwise attempting to influence legisla-
tion, or participating or intervening in any political
campaign. Failure to satisfy any of these requirements
results in a denial of tax-exempt status. Hancock
Academy of Savannah, Inc. v. Commissioner, 69 T.C.
488, 492 (1977); Harding Hospital, Inc. v. United States,
505 F. 2d 1068 (6th Cir. 1974). Respondent based his

23 Hancock Academy of Savannah, Inc. v. Commissioner, 69
T.C. 488, 492 (1977).

% Sec. 501. Exemption From Tax on Corporations, Certain
Trusts, Etc.

(a) Exemption From Taxation—An organization
described in subsection (c) * * * shall be exempt from tax-
ation under this subtitle unless such exemption is denied
under section 502 or 503.

** *

(c) List of Exempt Organizations.—The following
organizations are referred to in subsection (a):
** *

(3) Corporations * * * organized and operated ex-
clusively for religious, charitable, scientific, testing for
public safety, literary, or educational purposes, * * * no
part of the net earnings of which inures to the benefit of
any private shareholder or individual, no substantial
part of the activities of which is carrying on propagan-

a, or otherwise attempting, to influence legislation
(except as otherwise provided in subsection | ), and
which does not oe in, or intervene in (including
the publishing or distributing of statements), any
2 mg campaign on behalf of any candidate for public
office.

—18a—

determination on the grounds that petitioner failed to
satisfy requirements (1) and (2) above.

Respondent concluded that petitioner failed the
“operated exclusively for a religious purpose” test
because (1) petitioner did not actively engage in any
religious-type functions in furtherance of its stated pur-
pose; (2) petitioner’s primary activity was the making of
passive investments and accumulating income
therefrom, which activity was not in furtherance of an
exempt purpose and did not qualify it for tax-exempt
status; and (3) some of petitioner’s financial activities
were for the benefit of private interests. Respondent’s
conclusion that petitioner had also failed the “inurement
of net earnings” test is based on the assertion that
petitioner has failed to establish that net earnings did
not inure to the benefit of a private shareholder. In sup-
port of this assertion respondent principally points to
petitioner’s inability to definitively document its finan-
cial dealings due to petitioner’s inadequate records.

Petitioner asserts that its primary activities were the
conversion of members through one-to-one missionary
work by Slough and the accumulation of a fund for the
construction of a church building, both of which were in
furtherance of an exempt purpose. Petitioner further
argues that the absence of any statutory or regulatory
guidelines concerning minimum religious functions
pec the denial of exempt status on those grounds.

etitioner further contends that, in the absence of any
statutory guidelines as to minimum activities, the main
thrust of section 501(cX3) is to prohibit organizations
whose activities inure to the private benefit of
shareholders from attaining tax-exempt status.
Petitioner attempts to establish that it has factually
satisfied the “inurement of net earnings” test by showing
that all the transactions entered into by petitioner were
for the financial benefit of petitioner.

Section 1.501(cX3)-1(cX1), Income Tax Regs., provides
that an organization is not operated exclusively for an
exempt purpose if more than an insubstantial part of its

—19a—

activities is not in furtherance of an exempt purpose.”
Section 1.501(cX3)-1(dX1), Income Tax Regs., further
—— that an organization is not operated exclusively
or an exempt purpose if it serves a private rather than
a public interest.% Section 1.501(cX3)-1(cX2), Income
Tax Regs., provides that an organization is not operated
exclusively for an exempt purpose if its net earnings in
whole or in part inure to the benefit of a private in-
dividual.?’

2% Sec. 1.501(cX3)-1(cX1), Income Tax Regs., states:

An organization will be regarded as “operated exclusive-
ly” 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(cX3). An
——r will not be so regarded if more than an in-
substantial part of its activities is not in furtherance of an
exempt purpose.

2% Sec. 1.501(cX3)-1(dX1Xi) and (ii), Income Tax Regs., states:
i) An organization a? be exempt as an organization
escribed in section 1(cX3) if it is organized and

operated exclusively for one or more of the following pur-
poses:

a) Religious

b) Charitable,

Scientific,
) Testing for public safety,

e) Literary,

Educational, or
) Prevention of cruelty to children or animals.

(ii) An organization is not organized or operated ex-
clusively for one or more of the pur 3 specified in sub-
division (i) of this subparagraph unless it serves a public
rather than a private interest. Thus, to meet the require-
ment of this subdivision, it is necessary for an i aye
tion 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 indirectiy, by such
private interests.

27 Sec. 1.501(cX3)-1(cX2) states:

An organization is not operated exclusively for one or
more exempt purposes if its net earnings inure in whole
(Footnote continued on following page)

—20a—

The Supreme Court, in interpreting section 811(bX8)
of the Social Security Act, 49 Stat. 620, 639 (1935),
which provided an exemption for corporations organized
and operated exclusively for educational purposes, said
~ oo Bureau v. United States, 326 U.S. 279,

83 (1 :

[Ijn order to fall within the claimed exemption, an
organization must be devoted to educational pur-
poses exclusively. This plainly means that the
presence of a single non-educational purpose, if sub-
stantial in nature, will destroy the exemption
regardless of the number or importance of truely
educational purposes. * * *

The quotation from Better Business Bureau relates to
“purpose” while section 1.501(c\3)-1(cX1), Income Tax
Regs., relates more to “activities.” In Christian Manner
International, Inc. v. Commissioner, 71 T.C. 661, 668
(1979), it was stated:

Under the rationale of Better Business Bureau the
existence of a substantial nonexempt purpose for a
corporation’s organization and existence would
appear to defeat the exemption. But under the
regulation, even if there was no nonexempt purpose
for the organization and existence of the entity, it
must actually engage primarily in activities which
accomplish one of the exempt purposes, and if more
than an insubstantial part of its activities do not
further such exempt purpose, the entity is not ex-
empt. It has been recognized, however, that an

27 continued
or in part to the benefit of private shareholders or in-
dividuals. For the definition of the words “private
a or individual”, see paragraph (c) of §1.501(a)-

This prohibition against private inurement of net earnings
ppears che mrngeent since _ a benefit —— be a
with operating exclusively for an exempt pu ’
Hospital Association v. aniaton, 56 ™C 850, 857, fn.
je ty B.H.W. age Foundation, Inc. v. Commissioner,

—2la—

organization engaged in a single activity may have
more than one purpose in conducting the activity.
B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352,
357 (1978). So we must be concerned with both the
actual as well as the stated purposes for the ex-
istence of the organization and the activities it
engages in to accomplish those purposes. What
those purposes are and what purposes the activity
or activities engaged in support are questions of
ma Resource v. Commissioner, 70 T.C. 594
1978).

There is no question that, based on its articles of in-
corporation, petitioner was organized for a religious pur-
pose. No activities were conducted, however, which ac-
complished the stated purpose.

Petitioner argues that it conducted two activities in
furtherance of its exempt purpose: (1) One-to-one mis-
sionary work by Slough; and (2) accumulation of a
building fund. For the reasons set forth below, we con-
clude that these activities are not in furtherance of
petitioner’s stated purpose.”

During the years under examination, petitioner did
not conduct religious services.”

8 Although Slough testified that he considered the money he
allegedly distributed to needy individuals a function of
petitioner, it was not cited by petitioner as an activity in sup-
port of its stated purpose. Considering that this activity was
conducted for only a short time in 1972, it would not aid
petitioner’s case. Furthermore, it has been held under similar
circumstances that grants made on a personal basis rather
than in an objective and nondiscriminatory manner do not
constitute an activity in furtherance of an a Pur ;
Church In Boston v. Commissioner, 71 T.C. 102, 107 (1978).

29 Respondent cites the absence of any such services as
evidence that petitioner was not operated exclusively for tax-
exempt purposes. Petitioner argues that the absence of any
statutory or regulatory guidelines concerning minimum
religious functions precludes the denial of exempt status on
those grounds; that to deny petitioner tax-exempt status solely
because it failed to conduct religious services would run afoul
(Footnote continued on following page)

—22a—

In addition to Slough, his wife, and his daughter,
positive evidence was introduced to identify only two
other individuals as members of petitioner. Slough
claimed that petitioner had 40 members, but he refused
to reveal their identities claiming it would be an inva-
sion of privacy.

Objective evidence of the number of petitioner’s
members is certainly relevant to our inquiry concerning
the nature of the activities of petitioner and whether it
was operated exclusively for religious purposes. Bronner
v. Commissioner, 72 T.C. 368 (1979). Since petitioner
bears the burden of proving that it is entitled to tax-
exempt status, and in the absence of objective evidence
indicating a greater number, the Court must proceed as
if petitioner had only 5 members. This is not to say that
an organization of such small dimensions cannot qualify
for tax-exempt status. It is certainly relevant, however,
in determining the extent of Slough’s one-to-one ac-
tivities, which petitioner claims as one of its religious ac-
tivities.

The only evidence of Slough’s one-to-one activity was
the generalized testimony of Slough and the testimony of
two other witnesses to whom Slough had talked. Both of
the other witnesses were acquaintances of Slough’s prior
to the formation of petitioner. While they both agreed to
become members of petitioner, there is no evidence that
they actually did become members or that they par-

2 continued

of the First Amendment guarantee of freedom of religion; and
that any attempt to set forth guidelines concerning the of
religious activity necessary to qualify for tax-exempt status
would be constitutionally suspect. Nonetheless, the type of ac-
tivities engaged in by an organization is central to our inquiry
as to whether that organization is operated exclusively for
tax-exempt pu . Had petitioner conducted services, it
certainly would have been a factor to consider. Its not doing
so, however, while not a ceaeee factor per se, is somethi
which must be considered given the stated purpose 0
petitioner to build churches in which, presumably, religious
services would be held.

8 See Blake v. Commissioner, T.C. Memo 1970-117.

—23a—

ticipated in any way in religious functions with
titioner. The evidence indicates that all it took to
me members of petitioner was to accept petitioner’s
general tenets and agree to attend future services. One
of these witnesses was the recipient of a grant from
petitioner, and both apparently had some personal
problems that Slough discussed with them. The amount
of time spent by Slough on such discussions was
minimal, and we believe Slough’s efforts were motivated
more by personal reasons than in preaching the gospel.
At best Slough’s ministeries were directed to the
problems of private individuals rather than to the public
at large. See Callaway Family Association v. Com-
missioner, 71 T.C. 340 (1978). Petitioner has failed to
convince us that this one-to-one activity of Slough was a
religious activity conducted in behalf of petitioner. And
the evidence indicates that no one other than Slough
performed any activities in behalf of petitioner.

Illustrative of the fact that Slough’s activities were
more personal than church oriented is the manner in
which Slough selected the individuals who allegedly
received the money from the checks Slough wrote on
petitioner’s bank account to cash. Slough testified that
the individuals selected were people whom Slough per-
sonally knew to be in need of funds. These individuals
neither applied to Slough nor to petitioner. Rather,
Slough unilaterally selected them. The grants were not
made in an objective and nondiscriminatory manner
based on established criteria. It has been held that
grants made on a personal basis do not constitute ex-
empt activity. Church In Boston v. Commissioner, 71
T.C. 102 (1978). This type of — activity by Slough,
while commendable, cannot be said to be the activity of
petitioner.

Petitioner’s primary, if not sole, activity was the mak-
ing of passive irivestments. This included investments in
certificates of deposit, stocks, and real estate. It borrow-
ed considerable amounts of money in order to finance its
investment activities. During both 1973 and 1974 it
made a profit in excess of $25,000 from its buying and
selling of stocks.

—24a—

Petitioner’s involvement in a moneymaking activity is
not a per se bar to qualification as a tax-exempt
organization. Aid to Artisans, Inc. v. Commissioner, 71
T.C. 202, 211 (1978); Pulpit Resource v. Commissioner,
supra; Orton v. Commissioner, 56 T.C. 147 (1971). The
question is what purpose is accomplished by this activi-
ty. The avowed purpose was to make a profit in order to
accumulate money with which to build a church. Thus
the Court is not presented with a case where the
moneymaking activity, in ana of itself, accomplished an
exempt purpose. Compare Pulpit Resource v. Com-
missioner, supra; Orton v. Commissioner, supra; Saint
mo Foundation v. Commissioner, 26 T.C. 648
1956).

However, the prospects of accomplishing the avowed
purpose at any time in the foreseeable future appears
remote. While an architect friend of Slough’s had made
preliminary sketches of an elaborate church building
during his spare time, nothing had been done to follow
through on the design. Slough testified that it would
have cost $4-5 million to build such an edifice at the
time it was sketched and that due to inflation the cost
would be considerably more today. Slough testified that
petitioner had about $190,000 in assets at the time of
trial, 7 years after petitioner was formed. About $50,000
of this amount was produced bv petitioner’s investment
activities, and most of the balance came from con-
tributions by Slough who had contributed almost $100,-
000 to petitioner by the end of 1974. There is no
evidence that petitioner solicited either the public or its
members for contributions.*!

The facts present in the instant case are similar to
those in Randall Foundation v. Riddell, 244 F. 2d 803

(9th Cir. 1957). In Randall Foundation the principal ac-
7 of the organization was securities trading. Most of

81 Apparently the only other contributions received by
igen we Ae 5 were two contributions of $500 each, but we cannot

certain that these were not repayments of cash given the
contributors by Slough.

—25a—

the profit earned from such activity was accumulated,
although small charitable contributions were made.
Testimony was introduced in that case to the effect that
the accumulated funds were to be used for a boys’ home
but that more funds were needed before that objective
could be pursued. In holding that the organization’s
principal activity was the trading of stocks and that it
was not tax exempt, the Court stated:

It is not our intention to say that a case can never
be made out on the facts of a particular situation
for aggregation of funds by a corporation for ul-
timate disposition to a charitable purpose. But a
corporation which in its inception engages in trade,
business or speculation, and only has a vague
charitable design, does not in our opinion come
within the terms of the statute. * * * [Fn. omitted;
244 F. 2d at 804-805.]

As in Randall Foundation petitioner had no obligation
to use the accumulated funds for the avowed purpose.
The similarities between the two cases as to the nature
of the profit-making activities, the accumulation of those
profits, and the vague, ultimate, albeit potentially ex-
empt, disposition of those profits makes Randall Foun-
dation difficult to distinguish. We therefore find that
petitioner was not primarily engaged in activities which
accomplished a tax-exempt purpose.

In addition, petitioner has failed to convince us that
petitioner was no more than insubstantially operated for
the private benefit of Slough or that no net earnings in-
ured to the benefit of private individuals. The prohibi-
tion against operation of an organization for a private
benefit is but another way of requiring that an organiza-
tion be operated exclusively for tax-exempt purposes,
ie., for public benefit. Sec. 1.501(cX3)-1(dX1Xi) and (ii),
Income Tax Regs. Although the requirement that an
organization be operated exclusively for tax-exempt pur-
poses (and not for a private benefit) is statutorily dis-
tinct from the prohibition against the inurement of net
earnings to the benefit of private individuals, for con-
venience both requirements will be discussed together

—26a—

because much of the evidence is applicable to both.’? No
single factor or combination thereof controls our conclu-
sion. Rather, these factors, taken in the aggregate, re-
quire the conclusion we reach.

Slough testified that one of his reasons for organizing
petitioner was to have an organization in which he
would participate and dictate some of the policies. The
amount of control Slough exercised over petitioner’s
operations and the blurring of the lines of demarcation
between the activities and interests of petitioner, Slough,
and Slough’s wholly owned corporations makes it im-
possible to conclude that petitioner was operated for a
public benefit rather than a private interest.

Slough made large contributions to petitioner for
which he took charitable contribution deductions. This
money, however, never passed out of Slough’s control
since he dominated petitioner. Nor was any substantial
portion of this money ever expended other than for in-
vestment purposes. Thus, in effect, Slough was able to
reduce his current taxable income for donations which
never left his control. In addition, one of the reasons for
petitioner’s purchase of an office building, its only in-
vestment in real estate, was Credit Control Services’
need for more office space. Petitioner’s downpayment for
the building was provided by Credit Control Services as
advance rental and the building was leased under a net
lease. Thus, Credit Control Services was able to current-
ly deduct the “cost” of the building. It was also able to
use petitioner’s credit. It is recognized that the office
building may have been a good investment for petitioner
and that Credit Control Services paid a reasonable rent.
Nevertheless, when petitioner’s investments are dictated
in Lg by the n of private interests, it cannot be
said that petitioner was operated exclusively for the
public benefit.

Considerable evidence was introduced concerning
petitioner’s financial transactions. There is a dispute
between the parties about whether, as a result of several

& See fn. 27.

—27a—

transactions, Business Management owed petitioner $3,-
000 or petitioner owed Business Management $10,000.
Petitioner’s failure to keep adequate records and the
manner in which money was handled and loans were
paid makes it impossible to trace completely pctitioner’s
financial transactions. In any event, it is clear that
money passed back and forth between petitioner and
Slough and his businesses whenever one or the other
needed the cash. Petitioner was utilized by Slough as an
“incorporated pocketbook” into which he could transfer
excess personal funds, claiming tax deductions, while he
still retained complete control of the funds and used
them for purposes unrelated to religious activities. Mean-
while, the income and gain from petitioner’s invest-
ment activities was intended to be tax free. And based
on past history, this situation will continue to exist
for a long time. And even if petitioner should eventually
build a church and conduct public services, Slough
would, presumably, continue to control the use of its
funds. As he testified, one of the reasons Slough orga-
nized petitioner was to have an organization in which he
could participate and dictate policies.

In addition, petitioner failed to introduce adequate
evidence to prove that Slough’s writing of $5,200 in
checks to cash and the payment of $1,600 to Slough’s
daughter did not inure to the benefit of private in-
dividuals. Slough’s testimony alone is not sufficient. It
was not only uncorroborated by records or the testimony
of other witnesses but his explanation of why the $1,600
was given to his daughter was inconsistent with the ex-
planation he had given the revenue agent.

Based on the evidence produced, we cannot conclude
that as a result of its financial transactions, no part of
petitioner’s net earnings inured to the benefit of Slough
or members of his family or one of his wholly owned cor-
porations. In view of petitioner’s burden of proof, this
question must be resolved in favor of respondent.

In summary, we conclude that petitioner was not
operated exclusively for a pur exempt under section
501(cX(3), that petitioner has failed to establish that no

—28a—

part of its net earnings inured to the benefit of a private
individual, and that respondent properly revoked
petitioner’s previously granted exemption.*

An appropriate order will be entered.

88 Petitioner does not make the alternative argument that
regardless of whether it is entitled to tax-exempt status, the
respondent’s determination should not be _ retroactively
applied. In view of respondent’s authority ‘to retroactivel

revoke the steam status of an organization, sec. 7806(b),
sec, 1.501(a)-1(aX2), Income Tax Regs., this issue need not be

—29a—
INTERNAL REVENUE CODE OF 1954

§501. Exemption from tax on corporations,
certain trusts, etc.

(a) Exemption from taxation—An organization de-
scribed in subsection (c) or (d) or section 401(a) shall be
exempt from taxation under this subtitle unless such ex-
emption is denied under section 502 or 503.

(b) Taz on unrelated business income and certain other
activities—An organization exempt from taxation under
subsection (a) shall be subject to tax to the extent pro-
vided in parts II, III, and VI of this subchapter, but (not-
withstanding parts IT, ITI, and VI of this subchapter) shall
be considered an organization exempt from income taxes
for the purpose of any law which refers to organizations
exempt from income taxes.

(c) List of exempt organizations.—The following or-
ganizations are referred to in subsection (a):

(1) Corporations organized under Act of Congress,
if such corporations are instrumentalities of the Unit-
ed States and if, under such Act, as amended and sup-
plemented, such corporations are exempt from Federal
income taxes.

(2) Corporations organized for the exclusive pur-
pose of holding title to property, collecting income
therefrom, and turning over the entire amount thereof,
less expenses, to an organization which itself is ex-
empt under this section.

(3) Corporations, and any community chest, fund,
or foundation, organized and operated exclusively for
religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or to foster national
or international amateur sports competition (but only
if no part of its activities involve the provision of
athletic facilities or equipment), or for the prevention
of cruelty to children or animals, no part of the net
earnings of which inures to the benefit of any private

—30a—

shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or oth-
erwise attempting, to influence legislation (except as
otherwise provided in subsection (h)), and which does
not participate in, or intervene in (including the pub-
lishing or distributing of statements), any political
campaign on behalf of any candidate for public office.

(4) Civie leagues or organizations not organized
for profit but operated exclusively for the promotion
of social welfare, or local associations of employees,
the membership of which is limited to the employees
of a designated person or persons in a particular mu-
nicipality, and the net earnings of which are devoted
exclusively to charitable, educational, or recreational
purposes.

(5) Labor, agricultural, or horticultural organiza-
tions.

(6) Business leagues, chambers of commerce, real-
estate boards, boards of trade, or professional football
leagues (whether or not administering a pension fund
for football players), not organized for profit and no
part of the net earnings of which inures to the bene-
fit of any private shareholder or individual.

(7) Clubs organized for pleasure, recreation, and
other nonprofitable purposes, substantially all of the
activities of which are for such purposes and no part
of the net earnings of which inures to the benefit of
any private shareholder.

(8) Fraternal beneficiary societies, orders, or as-
sociations—

(A) operating under the lodge system or for
the exclusive benefit of the members of a fraternity
itself operating under the lodge system, and

(B) providing for the payment of life, sick, ac-
cident, or other benefits to the members of such
society, order, or association or their dependents.

(9) Voluntary employees’ beneficiary associations
providing for the payment of life, sick, accident, or

—3la—

other benefits to the members of such association or
their dependents or designated beneficiaries, if no part
of the net earnings of such association inures (other
than through such payments) to the benefit of any
private shareholder or individual.

(10) Domestic fraternal societies, orders, or asso-
ciations, operating under the lodge system—

(A) the net earnings of which are devoted ex-
clusively to religious, charitable, scientific, literary,
educational, and fraternal purposes, and

(B) which do not provide for the payment
of life, sick, accident, or other benefits.

(11) Teachers’ retirement fund associations of a
purely local character, if—

(A) no part of their net earnings inures (other
than through payment of retirement benefits) to
the benefit of any private shareholder or indi-
vidual, and

(B) the income consists solely of amounts re-
ceived from public taxation, amounts received
from assessments on the teaching salaries of mem-
bers, and income in respect of investments.

(12) Benevolent life insurance associations of a
purely local character, mutual ditch or irrigation com-
panies, mutual or cooperative telephone companies,
or like organizations; but only if 85 percent or more
of the income consists of amounts collected from
members for the sole purpose of meeting losses and
expenses. In the case of any mutual or cooperative
telephone company, the preceding sentence shall be
applied without taking into account any income re-
ceived or accrued from a nonmember telephone com-
pany for the performance of communication services
which involve members of such mutual or cooperative
telephone company.

(13) Cemetery companies owned and operated ex-
clusively for the benefit of their members or which are
not operated for profit; and any corporation chartered
solely for the purpose of the disposal of bodies by

—32a—

burial or cremation which is not permitted by its
charter to engage in any business not necessarily in-
cident to that purpose and no part of the net earn-
ings of which inures to the benefit of any private
shareholder or individual.

(14)(A) Credit unions without capital stock or-
ganized and operated for mutual purposes and with-
out profit.

(B) Corporations or associations without capital
stock organized before September 1, 1957, and op-
erated for mutual purposes and without profit for the
purpose of providing reserve funds for, and insurance
of shares or deposits in—

_(i) domestic building and loan associations,
(ii) cooperative banks without capital stock or-
ganized and operated for mutual purposes and
without profit, or
(iii) mutual savings banks not having capital
stock represented by shares.

(C) Corporations or associations organized before
September 1, 1957, and operated for mutual purposes
and without profit for the purpose of providing re-
serve funds for associations or banks described in
clause (i), (ii), or (iii) of subparagraph (B); but only
if 85 percent or more of the income is attributable
to providing such reserve funds and to investments.
This subparagraph shall not apply to any corporation
or association entitled to exemption under subpara-
graph (B).

(15) Mutual insurance companies or associations
other than life or marine (including inter-insurers and
reciprocal underwriters) if the gross amount received
during the taxable year from the items described in
section 822(b) (other than paragraph (1)(D) there-
of) and premiums (including deposits and assess-
ments) does not exceed $150,000.

(16) Corporations organized by an association sub-
ject to part IV of this subchapter or members there-

—33a—

of, for the purpose of financing the ordinary crop
operations of such members or other producers, and
operated in conjunction with such association. Exemp-
tion shall not be denied any such corporation because
it has capital stock, if the dividend rate of such stock
is fixed at not to exceed the legal rate of interest in
the State of incorporation or 8 percent per annum,
whichever is greater, on the value of the considera-
tion for which the stock was issued, and if substan-
tially all such stock (other than nonvoting preferred
stock, the owners of which are not entitled or per-
mitted to participate, directly or indirectly, in the
profits of the corporation, on dissolution or otherwise,
beyond the fixed dividends) is owned by such associa-
tin, or members thereof; nor shall exemption be de-
nied any such corporation because there is accumu-
lated and maintained by it a reserve required by State
law or a reasonable reserve for any necessary purpose.

(17)(A) A trust or trusts forming part of a plan
providing for the payment of supplemental unemploy-
ment compensation benefits, if—

(i) under the plan, it is impossible, at any time
prior to the satisfaction of all liabilities with re-
spect to employees under the plan, for any part
of the corpus or income to be (within the taxable
year or thereafter) used for, or diverted to, any
purpose other than the providing of supplemental
unemployment compensation benefits,

(ii) such benefits are payable to employees un-
der a classification which is set forth in the plan
and which is found by the Secretary not to be
discriminatory in favor of employees who are of-
ficers, shareholders, persons whose principal duties
consist of supervising the work of other employ-
ees, or highly compensated employees, and

(iii) such benefits do not discriminate in favor
of employees who are officers, shareholders, per-
sons whose principal duties consist of supervising
the work of other employees, or highly compen-

—34a—

sated employees. A plan shall not be considered
discriminatory within the meaning of this clause
merely because the benefits received under the
plan bear a uniform relationship to the total com-
pensation, or the basic or regular rate of com-
pensation, of the employees covered by the plan.

(B) In determining whether a plan meets the re-
quirements of subparagraph (A), any benefits pro-
vided under any other plan shall not be taken into
consideration, except that a plan shall not be con-
sidered discriminatory—

(i) merely because the benefits under the plan
which are first determined in a nondiscriminatory
manner within the meaning of subparagraph (A)
are then reduced by any sick, accident, or unem-
ployment compensation benefits received under
State or Federal law (or reduced by a portion of
such benefits if determined in a nondiscriminatory
manner), or

(ii) merely because the plan provides only for
employees who are not eligible to receive sick,
accident, or unemployment compensation benefits
under State or Federal law the same benefits (or
a portion of such benefits if determined in a nondis-
criminatory manner) which such employees would
receive under such laws if such employees were
eligible for such benefits, or

(iii) merely because the plan provides only
for employees who are not eligible under another
plan (which meets the requirements of subpara-
graph (A)) of supplemental unemployment com-
pensation benefits provided wholly by the employer
the same benefits (or a portion of such benefits if
determined in a nondiscriminatory manner) which
such employees would receive under such other
plan, but only if the employees eligible under
both plans would make a classification which would
be nondiscriminatory within the meaning of sab-

paragraph (A).

—35a—

(C) A plan shall be considered to meet the re-
quirements of subparagraph (A) during the whole
of any year of the plan if on one day in each quar-
ter it satisfies such requirements.

(D) The term ‘‘supplemental unemployment com-
pensation benefits’? means only—

(i) benefits which are paid to an employee be-
cause of his involuntary separation from the em-
ployment of the employer (whether or not such
separation is temporary) resulting directly from
a reduction in force, the discontinuance of a plant
or operation, or other similar conditions, and

(ii) sick and accident benefits subordinate to
the benefits described in clause (i).

(E) Exemption shall not be denied under subsec-
tion (a) to any organization entitled to such exemption
as an association described in paragraph (9) of this
subsection merely because such organization provides
for the payment of supplemental unemployment bene-
fits (as defined in subparagraph (D)(i)).

(18) A trust or trusts created before June 25, 1959,
forming a part of a plan providing for the payment
of benefits under a pension plan funded only by con-
tributions of employees, if—

(A) under the plan, it is impossible, at any
time prior to the satisfaction of all liabilities with
respect to employees under the plan, for any part
of the corpus or income to be (within the taxable
year or thereafter) used for, or diverted to, any
purpose other than the providing of benefits under
the plan,

(B) such benefits are payable to employees un-
der a classification which is set forth in the plan
and which is found by the Secretary not to be dis-
criminatory in favor of employees who are officers,
shareholders, persons whose principal duties con-
sist of supervising the work of other employees, or
highly compensated employees, and

—36a—

(C) such benefits do not discriminate in favor
of employees who are officers, shareholders, per-
sons whose principal duties consist of supervising
the work of other employees, or highly compen-
sated employees. A plan shall not be considered
discriminatory within the meaning of this subpara-
graph merely because the benefits received under
the plan bear a uniform relationship to the total
compensation, or the basic or regular rate of com-
pensation, of the employees covered by the plan.

(19) A post or organization of war veterans, or
an auxiliary unit or society of, or a trust or founda-
tion for, any such post or organization—

(A) organized in the United States or any of
its possessions,

(B) atleast 75 percent of the members of which
are war veterans and substantially all of the other
members of which are individuals who are vet-
erans (but not war veterans), or are cadets, or are
spouses, widows, or widowers of war veterans or
such individuals, and

(C) no part of the net earnings of which inures
to the benefit of any private shareholder or indi-
vidual.

(20) an organization or trust created or organized
in the United States, the exclusive function of which
is to form a part of a qualified group legal services
plan or plans, within the meaning of section 120. An
organization or trust which receives contributions be-
cause of section 120(c) (5) (C) shall not be prevented
from qualifying as an organization described in this
paragraph merely because it provides legal services or
indemnification against the cost of legal services un-
associated with a qualified group legal services plan.

(21) a trust or trusts established in writing, cre-
ated or organized in the United States, and contributed
to by any person (except an insurance company) if—

(A) the purpose of such trust or trusts is ex-
clusively—

—37a—

(i) to satisfy, in whole or in part, the lia-
bility of such person for, or with respect to,
claims for compensation for disability or death
due to pneumoconiosis under Black Lung Acts;

(ii) to pay premiums for insurance exclu-
sively covering such liability; and

(iii) to pay administrative and other inci-
dental expenses of such trust (including legal,
accounting, actuarial, and trustee expenses)
in connection with the operation of the trust
and the processing of claims against such per-
son under Black Lung Acts, and

(B) no part of the assets of the trust may be
used for, or diverted to, any purpose other than—

(i) the purposes described in subpara-
graph (A), or

(ii) investment (but only to the extent that
the trustee determines that a portion of the
assets is not currently needed for the pur-
poses described in subparagraph (A)) in—

(I) public debt securities of the United
States,

(II) obligations of a State or local
government which are not in default as
to principal or interest, or

(IIT) time or demand deposits in a
bank (as defined in section 581) or an in-
sured credit union (within the meaning
of section 101(6) of the Federal Credit
Union Act, 12 U.S.C. 1752(6)) located
in the United States, or

(iii) payment into the Black Lung Dis-
ability Trust Fund established under section
3 of the Black Lung Benefits Revenue Act
of 1977, or into the general fund of the Unit-
ed States Treasury (other than in satisfaction
of any tax or other civil or criminal liability
of the person who established or contributed
to the trust).

—38a—

For purposes of this paragraph the term ‘‘Black Lung
Acts’’ means part C of title IV of the Federal Coal
Mine Health and Safety Act of 1969, and any State
law providing compensation for disability or death
due to pneumoconiosis.

(d) Religious and apostolic organizations.—The follow-
ing organizations are referred to in subsection (a): Reli-
gious or apostolic associations or corporations, if such as-
sociations or corporations have a common treasury or com-
munity treasury, even if such associations or corporations
engage in business for the common benefit of the mem-
bers, but only if the members thereof include (at the time
of filing their returns) in their gross income their entire
pro rata shares, whether distributed or not, of the taxable
income of the association or corporation for such year. Any
amount so included in the gross income of a member shall
be treated as a dividend received.

(e) Cooperative hospital service organizations.—F or
purposes of this title, an organization shall be treated as
an organization organized and operated exclusively for
charitable purposes, if—

(1) such organization is organized and operated
solely—

(A) to perform, on a centralized basis, one or
more of the following services which, if performed
on its own behalf by a hospital which is an or-
ganization described in subsection (c)(3) and ex-
empt from taxation under subsection (a), would
constitute activities in exercising or performing
the purpose or function constituting the basis for
its exemption: data processing, purchasing, ware-
housing, billing and collection, food, clinical, in-
dustrial engineering, laboratory, printing, com-
munications, record center, and personnel (includ-
ing selection, testing, training, and education of
personnel) services; and

(B) to perform such services solely for two or
more hospitals each of which is—

—39a—

(i) an organization described in subsection

(c) (3) which is exempt from taxation under
subsection (a).
(ii) a constituent part of an organization de-
scribed in subsection (¢) (3) which is exempt
from taxation under subsection (a) and which,
if organized and operated as a: separate en-
tity, would constitute an organization de-
scribed in subsection (c) (3), or

(iii) owned and operated by the United
States, a State, the District of Columbia, or
a possession of the United States, or a politi-
cal subdivision or an agency or instrumental-
ity of any of the foregoing;

(2) such organization is organized and operated
on a cooperative basis and allocates or pays, within
814 months after the close of its taxable year, all net
earnings to patrons on the basis of services performed
for them; and

(3) if such organization has capital stock, all of
such stock outstanding is owned by its patrons.

For purposes of this title, any organization which, by rea-
son of the preceding sentence, is an organization described
in subsection (c) (3) and exempt from taxation under sub-
section (a), shall be treated as a hospital and as an or-
ganization referred to in section 170(b) (1 )(A) (iii).

(f) Cooperative service organizations of operating edu-
cational organizations.—For purposes of this title, if an
organization is—

(1) organized and operated solely to hold, com-
mingle, and collectively invest and reinvest (includ-
ing arranging for and supervising the performance by
independent contractors of investment services related
thereto) in stocks and securities, the moneys con-
tributed thereto by each of the members of such or-
ganization, and to collect income therefrom and turn
over the entire amount thereof, less expenses, to such
members,

—40a—

(2) org nized and controlled by one or more such
members, and

(3) comprised solely of members that are organiza-
tions described in clause (ii) or (iv) of section 170(b)
(1) (A)—

(A) which are exempt from taxation under sub-
section (a), or
(B) the income of which is excluded from taxa-
tion under section 115(a),

then such organization shall be treated as an organization
organized and operated exclusively for charitable purposes.

(zg) Definition of agricultural—For purposes of sub-
section (c) (5), the term ‘‘agricultural’’ includes the art
or science of cultivating land, harvesting crops or aquatic
resources, or raising livestock.

(h) Expenditures by public charities to influence legis-
lation.—

(1) General rule.—In the case of an organization to
which this subsection applies, exemption from taxa-
tion under subsection (a) shall be denied because a
substantial part of the activities of such organization

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1029%3A1. Public record. Not legal advice.