Religious Organization Loses
Claim for “Church” Status
Federal Claims Court upholds IRS’s revocation
of status for failure to fulfill “associational role”
A nonprofit religious organization that had to go to Tax Court to win recognition as a “church” in 1987 has had its church status retroactively revoked by the Internal Revenue Service, and the federal Claims Court has upheld the decision. The Court has ruled that the organization fails to meet several of the 14 points used by the IRS to gauge church status and has failed to fulfill the “associational role” necessary to qualify. (Foundation of Human Understanding v. U.S., No. 04-1141T, 7/21/09.)
The Foundation for Human Understanding was formed in 1963 to promulgate the religious, charitable, scientific, literary and educational aspects of mind over matter and spiritual health known as psychocatalysis and the particular form of meditation developed by Roy Masters and used by his followers.
The IRS originally granted 501(c)(3) exempt status as a religious organization and ruled that it was a public charity under Sections 509(a)(1) and 170(b)(1)(A)(vi). The IRS denied “church” status under Section 170(b)(1)(A)(i). The Foundation sought, and eventually won, standing as a “church” in a decision by the Tax Court. Church status is preferable for many reasons, in particular to avoid having to file Form 990 tax information returns and to make it harder for the IRS to begin an investigation.
In 2001, the IRS began a church investigation of the Foundation and ultimately revoked its church status retroactively to January 1, 1998. The IRS did not revoke its exempt status under 501(c)(3) or its public charity status under 170(b)(1)(A)(vi), but merely its church status. The Foundation filed for a declaratory judgment in the Court of Claims.
In a 109-page opinion, the Court reviewed the development of court decisions on church status. Neither the Tax Code nor the Regulations define a “church” and the legal issue has been murky for many years. (See Ready Reference Page: “What Constitutes 'Church' Eligible for Exemption?”) The Court said
“there is very little guidance” for courts having to decide whether an organization qualifies as a church.
The Court said other courts had developed at least three different approaches to the question. In one approach, a court said the basis is “the common meaning and usage of the word.” Although the Claims Court did not so characterize it, this is a kind of “you know it when you see it” approach that has not been generally followed by other courts.
A second line of cases has applied, without explicitly adopting, the IRS’s 14-point standard introduced by the IRS Commissioner in 1977. An organization is not required to meet all 14 tests, and no particular point is controlling. Some courts have found several of the 14 points to be of “central importance.”
Other courts have used the 14 points as indicia but also added the requirement for an “associational role.” One court described the associational role as follows: “The means by which an avowedly religious purpose is accomplished separates a ‘church’ from other forms of religious enterprise. At a minimum, a church includes a body of believers or communicants that assembles regularly in order to worship. Unless the organization is reasonably available to the public in its conduct of worship, its educational instruction, and its promulgation of doctrine, it cannot fulfill this associational role.”
The Court of Claims adopted the 14-point plus associational role approach.
The Foundation met the first two points of the 14 points without much discussion. It is a California nonprofit corporation and has a separate legal existence (1). The IRS did not contest that it has a “recognized creed and form of worship.” (2)
The Foundation conceded that it failed point 3 because it did not have a membership unassociated with other churches or denominations. (3) It does not require its followers to reject membership in other churches.
The Court found that it had developed a “distinct religious history” since its founding (4) and had a “literature of its own.” (5) The Court also found that the organization’s headquarters in Oregon qualified under the criterion of an “established place of worship” (6), despite the government’s argument that it had given up its Los Angeles property that was used several times a week for worship services at the time of the earlier litigation. The Court also found that it had a “definite and distinct ecclesiastical government” (7) with a board of directors. Its “founder and spiritual leader” was a member of the board and president of the corporation.
The Foundation also met the criteria of a formal code of doctrine and discipline (8) and ordained ministers (9), the Court said, but failed the point of schools for the preparation of ministers (10).
The Foundation adequately showed that its ministers are selected after completing prescribed courses of study (11) by showing that ministers are ordained once the founder is “personally satisfied” that the individual understands and can explain the doctrine, which usually requires personal tutelage ranging from a few months to several years of study. It did not meet the criterion of religious instruction for children (12) because a school jointly founded by Roy Masters and the Foundation in 1994 had become a separate entity, and although Masters remained on its board, there was no showing that the school taught the beliefs of the Foundation.
The Court discussed at length the requirement to have a “regular congregation.” (13) Although the Foundation had held several worship sessions for between 50 and 300 people each week in Los Angeles at the time of the earlier court decision, it had sold that property and not replaced it. Between 1998 and 2000, the Foundation had offered only 21 seminars at a variety of locations and only 5 were in Oregon. The Court said the Foundation’s other evidence was “too vague” to prove that it had a regular congregation and a letter-writing campaign it had generated among its followers did not supply sufficient information to prove a congregation.
Finally, the Court said its Sunday meetings were “not frequent enough to be called ‘regular’” (14) and that Masters’ radio and internet broadcasts “lack critical associational aspects characteristic of religious services and are therefore instead properly regarded simply as broadcasting and publishing services insufficient to qualify a religious organization as a church.”
“There is no evidence, for example,” the Court said, “that [the Foundation’s] adherents regard their experience while listening to [the Foundation’s] broadcasts as a shared experience with other of [the Foundation’s] followers, or as a communal experience in any way.”
In adding the “associational test” to the 14 points, the Court said that it was a “threshold standard which religious organizations must satisfy in order to obtain church status.” The Foundation no longer provided the associational role that it had maintained when it was originally classified as a church by the Tax Court.
It no longer had multiple services each week for 50 to 300 persons. Its primary current activities are internet and radio broadcasting, unsupplemented by the associational activities of the earlier days. Its religious purposes were accomplished through the writing, publishing and distribution of religious literature rather than through regular assembly of a group of believers in worship together.
Citing other cases that had reached a similar result, the Court held that the Foundation did not qualify as a church. “The extent to which Foundation brings people together for worship is incidental to its main function” as a religious broadcaster, the Court said. “When bringing people together for worship is only an incidental part of the activities of a religious organization, those limited activities are insufficient to label the entire organization a church.”
YOU NEED TO KNOW
Church status is obviously a thorny issue and there need to be criteria to separate legitimate religious activity from charlatans. If the associational test is now truly the “threshold standard,” it will be interesting to see how, or if, it changes in the era of social media, where so many communities are on line and virtual, rather than face to face in a room on a regular basis.
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