IRS Applies Kurtz Factors to Revoke Church Tax Exemption

From Got Questions

In PLR 202442006, released last week, the Service applied the familiar but questionable 14-factor test to revoke a worship corporation’s “church” tax exemption. This case is an easy call, but the discussion of what constitutes a church is mildly provocative, if only because the Service indulges the discussion at all. The government can’t ask questions like the one in the picture.  But it has no choice once we decide to exempt worship corporations from tax.  And of course, the Kurtz factors are necessarily biased towards Christian or western conceptions. That probably can’t be helped either.

The case involves a “home church.” Home churches are always easy marks for taxation, I think.  But they are hardly the problem when we think about religious tax exemption. The big issues are better resolved, if at all, in the context of megachurches, whose coffers are overflowing, whose leaders are very well paid, and whose politics, left or right, are obvious even from the pulpit.  The poor hapless “church” that is the subject of this PLR is comparable instead to the two-bit drug dealer selling dime bags on the corner.  Busting this “church” hardly makes a dent in the effort to understand and articulate church tax exemption. The big dogs aren’t slinging from corners. I’m not saying megachurches are selling dope, by the way.  But maybe I am.  

Long story short, a church tax audit discovered that the organization’s worship operations were so inextricably intertwined with the leader’s personal life that one could not be distinguished from the other.  The same checking account paid worship and personal expenses – rent, light bill, groceries, nail salon, and restaurant bills, to name a few.  It’s too easy.  But the Service’s application of the Kurtz factors is so infrequent that it’s worth taking note when it happens. I added the link and clarified some of the redacted language.  Here is some of what the letter said: 

For an entity to qualify as a church under IRC section 501(c)(3), the IRS applies the minimum operational requirements described in American Guidance Foundation, Inc. v. U.S., 490 F. Supp. 304 (D.D.C. 1980). The IRS uses a combination of these characteristics, together with facts and circumstances, to determine whether an organization is considered a church for federal tax purposes. These characteristics include:

• • Distinct legal existence
  • Recognized creed and form of worship
  • Definite and distinct ecclesiastical government
  • Formal code of doctrine and discipline
  • Distinct religious history
  • Membership not associated with any other church or denomination
  • Organization of ordained ministers
  • Ordained ministers selected after completing prescribed courses of study
  • Literature of its own
  • Established places of worship
  • Regular congregations
  • Regular religious services
  • Sunday schools for the religious instruction of the young
  • Schools for the preparation of its members

In cases where a church demonstrates that the organization is not organized and operated exclusively for religious purposes because of private benefit or inurement of net earnings, courts have held that the organization was not organized and operated exclusively for religious purposes, regardless of whether or not it is engaged in any significant religious activities. See Unitary Mission Church of Long Island v. Commissioner, 84 T.C. 36 (6.30.80), The Southern church of Universal Brotherhood Assembled, Inc. v. Commissioner, 74 T.C. 89 (9.10.80), Basic Bible Church v. Commissioner, 74 T.C. 72 (7-28-80), People of God Community v. Commissioner, 75 T.C. * (10.14.80). Additionally, there are numerous court memorandum decisions where IRC section 170 deductions were disallowed on same basis — that the church was not organized and operated exclusively” for religious purposes because of inurement or private benefit. See Manson v. Commissioner, T.C.M. 1980-315, Abney v. Commissioner, T.C.M. 1980-27, Pusch v. Commissioner, T.C.M. 1980-4.

. . .

You do not meet the criteria to be considered a church for federal tax purposes based on your characteristics and the relevant facts and circumstances. You have a separate legal existence and a recognized creed and form of worship. However, there is no evidence of an active governing board nor has the church provided evidence of rules governing their leaders and clergy nor how they are communicated. There is no evidence there is any other clergy associated with the organization other than Person 1, and no evidence of a seminary or school specific to developing the organization’s religious leaders. There is insufficient evidence to determine whether you have a distinct religious history. There has been no evidence provided that you have an exclusive membership base. No literature has been provided to evidence you have your own distinct body of literature such as books, manuals, speeches, and/or procedures for religious rites and services. You provided an address of your physical location as a church but there is no corresponding evidence that you held religious services in that location or any other location during the examination years. You also stated that services have also been held in the home of Person 1.  You did not provide any evidence that regular religious services were held nor did you provide any evidence that you have a regular congregation.

darryll k. jones