Private Letter Rulings - Org Denied Exemption for Promoting Bishop Campaign
GiftLaw Note:
Org was formed as a Sec. 501(c)(3) organization for exempt purposes. Org’s primary activities include preaching engagements, revivals, worship services and mission outreach. Org’s Director and Chairman is F, a pastor at a local church for whom Org receives and sends requests. F is seeking to be appointed as a bishop for E Church, a candidacy that Org supports. The office of bishop is the highest office in the E church and may entail a higher compensation level. Org arranges for F to travel to various E churches to preach and teach. After some of these events Org may promote F’s candidacy for bishop. Org’s website communicates support for F’s candidacy while also soliciting donations for F’s campaign. The Service reviewed Org’s application to determine if it qualified for exemption.
Sec. 501(c)(3) organizations must be organized and operated exclusively for one or more exempt purposes with no part of their net earnings inuring to the benefit of any private shareholder or individual. An organization is not operated exclusively for an exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Here, F, who is Org’s Director and Chairman, is a private individual. Org’s support of F’s candidacy inures to her benefit because it helps advance her career from pastor to bishop. The office of bishop may provide F with greater power and higher compensation. In addition, while F’s speaking engagements otherwise serve an exempt purpose, they also contain the secondary, nonexempt purpose of promoting F’s candidacy. Thus, Org does not operate exclusively for exempt purposes because some of its activities further the nonexempt purpose of promoting F’s candidacy for bishop. Therefore, Org’s application for exemption is denied.
Sec. 501(c)(3) organizations must be organized and operated exclusively for one or more exempt purposes with no part of their net earnings inuring to the benefit of any private shareholder or individual. An organization is not operated exclusively for an exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Here, F, who is Org’s Director and Chairman, is a private individual. Org’s support of F’s candidacy inures to her benefit because it helps advance her career from pastor to bishop. The office of bishop may provide F with greater power and higher compensation. In addition, while F’s speaking engagements otherwise serve an exempt purpose, they also contain the secondary, nonexempt purpose of promoting F’s candidacy. Thus, Org does not operate exclusively for exempt purposes because some of its activities further the nonexempt purpose of promoting F’s candidacy for bishop. Therefore, Org’s application for exemption is denied.
6/5/2015 (1/27/2015)
Dear * * *:
We considered your application for recognition of exemption from federal income tax under section 501(a) of the Internal Revenue Code ("Code"). Based on the information provided, we determined that you don't qualify for exemption under section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please keep it for your records.
ISSUES
Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons explained below.
FACTS
You are a corporation formed on D under the laws of the state of C. Your Articles of Incorporation indicates the purposes for which you were formed are charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Code.
Your past, current, and future activities include preaching engagements, revivals, Bible Studies, worship services, and mission outreach trips. The activities are primarily conducted at E denomination churches throughout the United States. You receive and send requests for F, who is your Director/Chairman and a pastor at a local E church, to preach, teach, or exhort the Word of God. F was instrumental in your formation. Your Committees, which consist of licensed preachers and members of the E Church, are responsible for coordinating, planning, and fundraising for your activities. The five committees are Public Relations, Communications, Social Media, Marketing and Strategy, and Fundraising.
You also support F's candidacy for the bishop of the E Church. The E Church does not appoint its bishops. Instead, delegates are elected to the church's quadrennial conference by its grassroots clergy and lay members, and the delegates in turn vote on candidates for the bishop. The office of bishop is the highest office within the E Church; the bishops together comprise the G, which is the governing body of the church. Candidates for the office of bishop are normally required to pay for their campaign expenses by seeking donations and organizing fundraisers while preaching, teaching, and exhorting the Word of God. The E Church does not assist candidates with such expenses.
The office may also entail a higher compensation than that which is typically earned by local pastors such as F. However, we are unclear on this matter since you did not respond to our question on this point.
You arrange for F to travel to various E churches to preach, teach, and exhort the word of God, where after the event you may conduct activities to make audience members aware of the fact that F is running for bishop. You have printed advertisements and distributed campaign materials (postcards, bookmarks, ink pens, and buttons) in support of F's candidacy. Your corporate name, H, and your website URL, J, each consists of a short phrase unambiguously communicating the candidacy of F and support for such candidacy. Your website solicits donations for the F's election campaign. You conduct an annual dinner dance fundraiser where attendees are advised that the proceeds benefit H.
Your revenues come from online donations, other contributions, and the annual fundraising gala. Funds are used to pay for administrative expenses, public relations, print/written communications, social media, marketing and strategy, fundraising, and travel.
LAW
Section 501(c)(3) of the Code provides for exemption from federal income tax for organizations that are organized and operated exclusively for charitable, educational, religious, or scientific purposes, no part of the income of which inures to the benefit of private individuals.
Section 1.501(a)-1(c) of the Income Tax Regulations, hereafter "Regulations," defines "private shareholder or individual" to mean persons having a personal and private interest in the activities of the organization.
Section 1.501(c)(3)-1(a)(1) of the Regulations states that, in order to be exempt as an organization described in section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.
Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Section 1.501(c)(3)-1(c)(2) of the Regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.
Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.
In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, (1945), the Supreme Court held that the presence of a single nonexempt purpose, if substantial in nature, will destroy a claim for exemption regardless of the number or importance of truly exempt purposes. The court found that a trade association had an "underlying commercial motive" that distinguished its educational program from those carried out by entities such as universities, and therefore the association did not qualify for exemption.
In Old Dominion Box Co. v. United States, 477 F.2d 340 (4th Cir. 1973), cert. denied 413 U.S. 910 (1973), the Fourth Circuit held that operating for the benefit of private parties constitutes a substantial nonexempt purpose.
In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court held that an organization that operated a school to train individuals for careers as political campaign professionals, but that could not establish that it operated on a nonpartisan basis, did not exclusively serve purposes described in section 501(c)(3) of the Code because it also served private interests more than incidentally. The court found that the organization was created and funded by persons affiliated with Republican Party entities and that most of the organization's graduates worked in campaigns for Republican candidates. Consequently, the court concluded that the organization conducted its educational activities with the objective of benefiting Republic candidates and entities and was therefore operated for the substantial nonexempt purpose of benefiting private interests.
In Westward Ho v. Commissioner, T.C.M. 1992-192, an organization was created by three individuals to provide funds to indigent and antisocial persons. The court concluded that the organization's true purpose was to provide the three founders, who owned businesses in the local area, with a more desirable business environment by removing disruptive homeless persons from the locality.
APPLICATION OF LAW
To be exempt under Section 501(c)(3) of the Code, you must be organized and operated exclusively for exempt purposes within the meaning of that section. An organization is "operated exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in Section 501(c)(3). See Section 1.501(c)(3)-1(c)(1) of the Regulations. In addition, your activities must serve the public interest and may not benefit private interests more than incidentally, as described in Section 501(c)(3)-1(c)(2) of the Regulations. Your Director/Chairman, F, is a private individual, as defined in Section 501(a)-1(c) of the Regulations, as she has a personal and private interest in your activities. Your support of F's candidacy inures to her benefit by being designed to help advance her career from pastor to bishop, with all the additional power and presumably higher compensation that the higher office entails. You have failed the operational test, as described in Section 1.501(c)(3)-1(a)(1) of the Regulations, causing you to fail to qualify for exemption.
Additionally, while F's speaking engagements may otherwise serve exempt religious purposes, they would appear to also serve a secondary, nonexempt purpose of promoting F's candidacy when viewed in combination with your other campaign activities. See American Campaign Academy, supra, and Westward Ho, supra.
Operating for the benefit of private parties such as F constitutes a substantial nonexempt purpose. Old Dominion Box Co., supra. The presence of a single nonexempt purpose, if substantial in nature, will destroy a claim for exemption regardless of the number or importance of truly exempt purposes. Better Business Bureau of Washington, D.C., Inc. v. United States, supra. See also Regs. Section 1.501(c)(3)-1(d)(1)(ii), supra. Therefore, because your activities inure to the benefit of F and do not serve exclusively exempt purposes, you do not meet the requirements for exemption under section 501(c)(3) of the Code.
YOUR POSITION
You contend that support of F's candidacy for the office of bishop furthers exclusively charitable or religious purposes by providing opportunities for preaching, teaching, and exhorting the word of God. F is the vehicle by which your vision and mission of transforming lives through relevant preaching and teaching of God's Word are accomplished. You state that, "Upon the prayerful election of F as a bishop of the E Church, the members of H would be able to continue the vision and mission as set forth and adopted by the organization."
OUR RESPONSE TO YOUR POSITION
As explained above, your support of F's candidacy confers a substantial, direct material benefit on F by helping to advance F's career and thus serves a substantial nonexempt purpose. Your activities inure to the benefit of F, disqualifying you from exemption under section 501(c)(3) of the Code.
CONCLUSION
Because your earnings inure to F's benefit and do not serve exclusively exempt purposes, you do not qualify for exemption under section 501(c)(3) of the Code.
* * *
Sincerely,
Director, Exempt Organizations
Enclosure:
Publication 892