1984 Tax Ct. Memo LEXIS 329 | Tax Ct. | 1984
MEMORANDUM FINDINGS OF FACT AND OPINION
TANNENWALD,
You are not operated exclusively for exempt purposes within the meaning of
Petitioner then timely filed its petition herein.
1984 Tax Ct. Memo LEXIS 329">*332 This case was submitted fully stipulated pursuant to Rule 122. The administrative record stipulated by the parties is incorporated herein by this reference. See Rule 217.
Petitioner was incorporated in Oklahoma on November 28, 1978. Its officers are Rev. James E. Ewing, president, Rev. M. R. McElrath, senior vice-president, Rev. D. R. Luce, vice-president, Doris Ratliff, secretary, and Rev. O. Duane Snyder, treasurer. 3 Rev. Ewing and Rev. McElrath run petitioner.
Petitioner's principal activity consists of mailing its literature, which focuses on the ministry of Rev. Ewing, to individuals throughout the United States. Since its incorporation, petitioner has sent its mailings to over 3,000,000 homes. Petitioner's "congregation" consists of approximately 160,000 households, who receive petitioner's mailings on a regular basis (approximately once per month). Petitioner1984 Tax Ct. Memo LEXIS 329">*333 has no house of worship. 4 Petitioner has also held, on a few occasions, revival meetings and crusades around the United States. 5
Petitioner maintains an office where its employees carry on petitioner's activities in Beverly Hills, Calif. The recipients of petitioner's mail correspond with it, however, through a post office box in Atlanta, Ga. Brinks, Inc., a courier service, picks up the mail from the Atlanta box and ships it to Tulsa, Okla. (via Delta Airlines), where the mail is delivered by Brinks to the Bank of Oklahoma in Tulsa. Bank personnel separate the donations from any prayer requests, deposit all donations in petitioner's account with the Bank of Oklahoma, and forward all prayer requests to petitioner's California office.
The literature petitioner mails is procured through Twentieth1984 Tax Ct. Memo LEXIS 329">*334 Century Advertising Agency, Inc. (Advertising). Rev. Ewing and Rev. McElrath are the sole shareholders of Advertising. 6 Advertising does not printing itself. Instead, it subcontracts the work out and bills petitioner the subcontractor's price plus a 15-percent commission. Any bill unpaid after 90 days incurs interest charges of 1-1/2 percent per month. Advertising also makes advances to petitioner for postage, etc.; interest thereon begins to accrue immediately at 1 percent per month. Although Advertising apparently has clients not related to Rev. Ewing and Rev. McElrath, 7 it does not advertise its services. Approximately two-thirds of the time of Advertising's employees is devoted to petitioner's needs. No legitimate
Twentieth Century Data Processing, Inc. (Data), all of whose stock is owned by Rev. Weing and Rev. McElrath, 8 provides petitioner, through Advertising, with computer services that petitioner needs to distribute its literature. 9 Data makes no profit on its dealings with Advertising; instead, Advertising adds 15 percent to Data'a cost and bills petitioner accordingly.
1984 Tax Ct. Memo LEXIS 329">*336 Rev. Ewing's Evangelistic Ministries, Inc. (Ministries) is an organization operated by Rev. Ewing and Rev. McElrath in much the same manner as petitioner; each organization focuses on Rev. Ewing and his teachings of donating money to receive "God's blessings." Although petitioner and Ministries apparently have separate mailing lists, the literature utilized by each organization is similar and they have co-sponsored certain revival meetings.
Petitioner, Ministries, and Advertising share office space at 450 Doheney Road, Beverly Hills, Calif. Other than Rev. Luce, Rev. Snyder, and Richard Sutherland of Data, the record does not reveal any employees of petitioner, Ministries, Advertising, or Data who are not related to Rev. Ewing or Rev. McElrath. 10 Rev. Ewing's workday 11 is devoted approximately 40 percent to petitioner, 40 percent to Ministries, and 20 percent to Advertising. Rev. McElrath's workday is devoted approximately 50 percent to petitioner, 40 percent to Ministries, and 10 percent to Advertising. Since 1977, Rev. Ewing and Rev. McElrath have received, as compensation for services, the following amounts from petitioner, Ministries, and Advertising: 12
| Rev. Ewing | ||||
| Year | Petitioner | Ministries | Advertising | Total |
| 1977 | $21,350.00 | $21,350.00 | ||
| 1978 | none | 70,700.00 | none | 70,700.00 |
| 1979 | none | 67,500.00 | $10,600 (from May) | 78,100.00 |
| 1980 | 13 $48,600 | 29,015.30 | 88,294.22 | 165,909.52 |
| 1981 | 48,600 | 8,100.00 | 111,600 (through | 168,300.00 |
| August) | ||||
| Rev. McElrath | ||||
| 1977 | $14,070.00 | $14,070.00 | ||
| 1978 | none | 59,060.00 | none | 59,060.00 |
| 1979 | none | 50,782.65 | $10,600 (from May) | 61,382.65 |
| 1980 | n13 $46,500 | 18,150.30 | 86,300 | 150,950.30 |
| 1981 | 46,500 | 6,889.54 | 111,600 (through | 164,989.54 |
| August) | ||||
1984 Tax Ct. Memo LEXIS 329">*338 In 1980, Brenda Ewing, Rev. Ewing's daughter, received $10,500 from Data, $8,550 from petitioner, and $5,519.29 from Ministries. Paul Ewing, Rev. Ewing's son, received $30,000 from Advertising. Ray McElrath, Jr., Rev. McElrath's son, received $30,000 from Advertising and $10,500 from Data.
In 1980, petitioner received $3,000,155 in "contributions" from its "members." During that same year, petitioner incurred "direct expenses" -- direct expenses of its mailings -- of $2,958,060 14 and "other expenses" of $680,867.15 Petitioner's net loss for 1980 was thus $638,772, which, when combined with petitioner's earlier losses of $169,613, totaled a net loss since incorporation of $808,385. Petitioner's unaudited balance sheet dated December 31, 1980, lists assets of $66,711 and current liabilities of $875,096, of which $848,219 represents accounts payable to Advertising.16
1984 Tax Ct. Memo LEXIS 329">*339 Advertising billed commission income during 1980 of $204,240.30 to petitioner and $51,175.56 to Ministries and apparently received $60,144.30 in commission income from organizations unrelated to Rev. Ewing and/or Rev. McElrath. Advertising also apparently received $1,444,000 from "unrelated" organizations for undisclosed services. Advertising's balance sheet dated March 31, 1981, lists retained earnings of $774,977. 17
Petitioner's "message" is based on the proposition that God is the source of all blessings and that, to receive God's blessings, "Christians should contribute of their means cheerfully, regularly, systematically, proportionately and liberally." Both petitioner and Ministries solicit donations, inter alia, through a monthly donation plan called "Your Gold Book Partnership with God." Petitioner's mailings are replete with exhortations to become a "Gold Book" member and with testimonials of the spiritual, physical, and financial blessings people have received after becoming1984 Tax Ct. Memo LEXIS 329">*340 members. One page of one mailing contains, inter alia, the following testimonials 18 under the heading, "Jesus says 'Give, and it shall be given unto you' (Luke 6:38)":
Dear Rev. Ewing, I have just got to let you all know what God has done for me since requesting prayer. * * * Yesterday I had only $1.00 to send for the help of God's work, but I put God first and sent that dollar. Today God blessed me with a check for $1,392.89. Oh, what a wonderful God we have. * * * I believe in God. * * * I am sending my Gold Book payment and $25.00 to help with God's work. * * *
Dear Rev. Ewing, God has been good to me * * *.I have been a Gold Book Member for over five years and God has been showering blessings upon me. About two months ago I sent in my prayer request that property I owned back east would be sold, that I would be rid of it, and hardly had I sent this request * * * to you all before God answered! I am sending these two checks as a love offering to help carry on God's work. I am thanking God * * *. Truly God's Word is true. I am a witness that He will supply all our needs. He does supply mine.
Dear Rev. Ewing, The Lord has blessed me since I became a Gold Book Member. 1984 Tax Ct. Memo LEXIS 329">*341 He has blessed me with a new car. I will always be a Gold Book Member. Continue to pray for me * * *. I am sending my Gold Book payment. May God bless you.
Interspersed with these testimonials are pictures of a check, a house, a new car, and a Gold Book.Below these testimonials is the statement, "Your GOLD BOOK has been prayed over and it is charged with GOD'S POWER and PROMISES * * *. The next step is up to you * * * our address is on the Front Cover. * * * Write us now!!!"
Petitioner's mailing for persons to request a "sealed word from the Lord" states:
Yes Rev. Ewing,
1984 Tax Ct. Memo LEXIS 329">*342 I have a worry and I want God's success and prosperity blessings on my life. Psalms 37:4
Please check:
[] I want "soul power".
[] I want a new home.
[] I want a new car.
[] I want a lump sum of money. How much? $ .
[] I want healing for myself and someone else.
* * *
Rev. Ewing, I want to help you in all the things that God has called you to do.
Here is my offering of [] $20.00 [] $10.00 [] $5.00 [] $ .
Another mailing from petitioner states in part:
Will you * * * sacrifice $5 to $10? Wait a minute, I know this is a sacrifice for you. The Holy Spirit said to ask you to give God something you planned for something else. Sacrifice it to God for those lost souls. Prove God (Mal. 3:10)
Petitioner's monthly "worship service" is merely another mailing preaching the blessings one will receive if one follows Rev. Ewing (and makes the requested donations). Several mailings contain items, such as a "prayer rug," a "page from my [Rev. Ewing's] Bible," a "faith handkerchief," a "crimson red virtue cross," etc., to be kept overnight (or for a few days) and then returned to petitioner with a (usually the amount requested) donation. A thank-you letter mailed to people who return the prayer rug includes "anointing oil" and, inter alia, with emphasis as indicated, the following directions:
The Bible says to annoint the sick with oil. A lot of people are sick financially. They need to be healed financially * * *. It seems like the devil's bunch has all the money, but I believe God can bless
A letter, with emphasis as indicated, accompanying a "mantle" to be prayed on and then returned, with an offering, to petitioner contains the following statement about Rev. Ewing's own experience:
Rev. Duane Snyder and I were sitting in Denny's Restaurant in Santa Monica, California and I noticed this man sitting at a table across from ours, crying. I went over and sat down with him and told him, "
1984 Tax Ct. Memo LEXIS 329">*346 To qualify for exemption under
1984 Tax Ct. Memo LEXIS 329">*347 The governing principles in applying the operational and private inurement tests of
An organization is operated "exclusively" for exempt purposes if its activities primarily serve one or more exempt purposes and not, except to an insubstantial degree, a non-exempt purpose.
In determining whether these conditions are satisfied, the "operated exclusively for exempt purposes" and the "private inurement" tests often substantially overlap. See
One final preliminary observation. Whether the operational requirement of
Respondent contends that petitioner was operated to a substantial degree for nonexempt purposes in that it benefited Rev. Ewing and Rev. McElrath through its "business arrangements" with Advertising. Petitioner contends that it was operated exclusively for religious purposes and that the reasonableness of petitioner's payments to Advertising rather than the financial rewards to Rev. Ewing and Rev. McElrath and their families is the critical element.
We find it unnecessary to delve into the question of the reasonableness of the arrangements between the entities involved herein, particularly the arrangements between1984 Tax Ct. Memo LEXIS 329">*351 petitioner and Advertising. We reject petitioner's invitation to compartmentalize our analysis. We believe that the
Petitioner argues at great length that the arrangement with Advertising promoted petitioner's religious interests rather than the private interests of Rev. Ewing and Rev. McElrath. First, petitioner contends that Advertising was able to obtain lower printing prices for petitioner (even including the 15-percent commission) than petitioner would have been able to obtain on its own. We recognize that the general conclusion as to more favorable treatment1984 Tax Ct. Memo LEXIS 329">*352 of Advertising is set forth in the administrative record and that facts as represented in the administrative record must usually be assumed to be true. Rule 217(b)(1);
Second, petitioner points to the substantial advances made by Advertising to petitioner for printing expenses and postage when, petitioner contends, the money could have been invested more safely elsewhere at a higher after-tax rate of return. Rev. Ewing's and Rev. McElrath's "altruism" in causing Advertising to make these1984 Tax Ct. Memo LEXIS 329">*354 advances (at 18 percent annual interest on advances unpaid after 90 days for printing expenses and 12 percent annual interest on advances for postage) when most banks apparently would not extend petitioner credit 23 is belied by their control of both sides of the transaction. If Rev. Ewing and Rev. McElrath wished to have Advertising earn more or less interest (and thereby divert more or less of petitioner's receipts (donations) into their own pockets), they could merely cause petitioner to borrow more or less money or pay it back faster or slower. The record before us simply does not convincingly establish, as petitioner contends, that petitioner borrowed as little as possible from Advertising and paid it back as quickly as possible. 24
1984 Tax Ct. Memo LEXIS 329">*355 Third, petitioner contends that the 15-percent printing commission that Advertising charged was reasonable, since Advertising took care of all the non-artistic, non-religious aspects of the printing and mailing. Regardless of whether the 15-percent rate was reasonable or excessive, Rev. Ewing and Rev. McElrath (through Advertising) benefited substantially from the operation of petitioner. See
1984 Tax Ct. Memo LEXIS 329">*357 In pointing to the element of dual control by Rev. Ewing and Rev. McElrath, we recognize that it may be argued that this element should only be taken into account in determining petitioner's right to exempt status at a future date. See
Petitioner makes much of the fact that the cash flow from petitioner to Advertising was never sufficient to eliminate indebtedness of the former to the latter and that this situation was expected to continue -- indeed, with an ever-increasing gap. from this, petitioner reasons that, in actuality, Advertising could never expect to benefit beyond the payments it received for services rendered, which petitioner contends, and we have assumed, were reasonable. This is a curious argument, because it proceeds on the assumption that petitioner will ultimately fail financially -- an assumption which we are not convinced that the record herein requires us to make. Moreover, such argument ignores the fact that, in the event of petitioner's financial failure, Advertising would acquire the presumably unrestricted benefit of petitioner's mailing lists -- property which we cannot say, on the basis of the record herein, would be without value. See n. 25, 1984 Tax Ct. Memo LEXIS 329">*359
The case most analogous to the situation herein in
Petitioner herein contends that
1984 Tax Ct. Memo LEXIS 329">*362 The long and the short of the matter is that, taking facts revealed by the record herein in their
1984 Tax Ct. Memo LEXIS 329">*363
Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect and all references to Rules are to the Tax Court Rules of Practice and Procedure. ↩
2. A November 12, 1980, letter to respondent from petitioner's counsel asserts that petitioner is also seeking exemption as a
section 170(b)(1)(A)(vi) organization. In light of our conclusion on thesection 501(c)(3)↩ issue, we need not reach this question.3. Neither Rev. Ewing nor Rev. McElrath ever attended divinity school. Both were ordained by the Independent Assemblies of God, San Diego, Calif, Rev. Luce attended Southwest Bible College, Waxahatchie, Tex., for two years. Rev. Snyder graduated from Southwestern Bible College, Oklahoma City, Okla.↩
4. Petitioner has stated that it intends to construct (as funds allow) a church building and conduct services therein, but there is no indication in the administrative record that this has taken place. ↩
5. Petitioner also intends to sermonize on radio and TV programs. Here again there is no indication in the administrative record that any such activity has yet taken place.↩
6. Advertising was incorporated on February 23, 1978. Rev. Ewing and Rev. McElrath each invested $250 in the corporation. ↩
7. The administrative record simply contains general allegations as to the existence of other clients. Petitioner refused to supply respondent with any written specifics in this regard. See also p. 24,
infra.↩ 8. Data was incorporated on May 7, 1979. Rev. Ewing and Rev. McElrath each invested $250 in this corporation. ↩
9. Data maintains an office at space occupied by Signal Data Services, Inc. (Singnal Data).The business relationship (if any) between Signal Data and Data is not clear from the record. Data pays a Richard Sutherland, an employee of Data, $54,996 to prepare necessary computer programs and be "responsible for all computer functions required by [petitioner]."↩
10. Rev. Luce receives a $36,000 salary from petitioner; Rev. Snyder receives a $45,000 salary from petitioner, even though he suffered a severe heart attack in 1979 and has had to curtail his activities substantially since that time. ↩
11. Petitioner alleges that Rev. Ewing and Rev. McElrath each works an average of 18 hours per day for petitioner, Ministries, and Advertising. ↩
12. Rev. Ewing also receives a parsonage allowance of $3,320; Rev. McElrath's parsonage allowance is $1,365. Rev. Ewing and Rev. McElrath also receive certain health benefits provided by petitioner to its employees. Advertising provides automobiles for Rev. Ewing and Rev. McElrath; Advertising's balance sheet dated March 31, 1981, lists the cost of these two vehicles as $48,789. ↩
13. Petitioner contends on brief that neither Rev. Ewing nor Rev. McElrath received a salary from it in 1980. However, since petitioner's own financial statement lists "salaries" expense of $193,817 for 1980 and since the record does not indicate who, other than Rev. Ewing, Rev. McElrath, Rev. Luce, Rev. Snyder, and Brenda Ewing, received salaries from it, we conclude that the salaries paid to those five persons in 1981 ($184,650) were also paid to them in 1980.↩
14. Petitioner's unaudited financial statements list the following "direct expenses" for 1980:
↩ Printing/mailing - letter answering $14,835 Printing/mailing 1,577,242 Printing 37,494 Postage - magazines 47,903 Postage - mail 427,346 Postage - answer mail 90,974 Computer processing 487,108 Computer - 20th Century Data 13,000 Freight expenses 60,197 Art work & Design 17,605 Photography work 1,633 Cost of mail inset materials 16,278 Envelope costs 45,411 Security 5,259 Insurance 751 Orphanage costs 400 Miscellaneous crusade costs 92,124 Specialty items - Christmas expense 22,500 15. Petitioner's unaudited financial statements list the following "other expenses" for 1980:
↩ Accounting $14,760 Advertising 960 Automobile lease 80 Automobile expense 10,683 Bank service charges 2,534 Donations 18,676 Dues and publications 195 Employee benefits 3,328 Employee rentals 3,742 Group insurance 783 Interest 167,658 Legal 41,854 Maintenance and repairs 21,783 Medical expenses 2,575 Office expense 17,114 Parsonage 6,930 Promotion 1,903 Rent 53,375 Salaries 193,817 Outside labor 10,846 Taxes - payroll 13,052 Taxes - property 2,391 Telephone 18,227 Uniform rental 2,580 Utilities 8,822 Insurance 4,600 Travel 53,543 Kitchen supplies 3,261 Relocation expense 795 16. Petitioner's other liabilities were:
↩ Notes payable - Manufacturer's bank $16,370 Accounts payable - Data 390 Payroll taxes payable 3,082 Loan payable - Ministries 7,035 17. Advertising's current assets, as of March 31, 1981, were:
↩ Cash $29,500 Accounts receivable - Ministries 352,540 Accounts receivable - Petitioner 1,257,186 18. A disclaimer in small print in the corner of this mailing states--
All printed testimonies have been reproduced as reported with editing being limited to construction and grammar. Church By Mail, Inc., assumes no legal responsibility for the veracity or permanency of reported healing, miracles, or other happenings. All supernatural events and blessings are contingent upon natural events and blessings are contingent upon spiritual condition, relative to the individual, and any other deviation from the intended Divine plan could result in mental, physical and or spiritual setback -- John 5:14.↩
19. Respondent does not contend that petitioner attempted to influence legislation or participate in, or intervene in, any political campaign.↩
20. Petitioner and Ministries together accounted for over four-fifths of Advertising's printing work. ↩
21. Moreover, we note that, assuming Advertising did business with other clients, see p. 24,
infra, and p. 4,supra,↩ it is more than likely that the large volume of business carried out by Advertising in respect of petitioner's activities would have enabled Advertising to obtain more favorable terms than otherwise would have been available for those clients.22. Moreover, the absence of any subsidy for petitioner's printing expense is indicated in an affidavit by Rev. Ewing, which states, "[Advertising] does not provide lower printing costs to one client at the expense, cost, or other detriment to any other client of [Advertising]."↩
23. Petitioner apparently had trouble securing bank loans because of the bankruptcy of another organization that was previously operated by Rev. Ewing and Rev. McElrath. ↩
24. Petitioner stresses that, even though Advertising advanced it $2,867,180 between April 1980 and February 1981, petitioner was able to repay $1,757,178 of it during that period and
paid only $26,549 in interest. However, petitioner's financial statement for 1980 lists accrued interest of $167,658. Since approximately 97 percent of petitioner's debts on December 31, 1980, were owed to Advertising, see p. 9,supra,↩ it seems likely that most of the interest accrued during thay year was owed to Advertising.25. Petitioner alleges that it is caught in a "Catch-22" situation, because only through the operation of Advertising on a for-profit basis with clients in addition to those connected with Rev. Ewing and/or Rev. McElrath was Advertising able to accumulate sufficient sums of money to keep petitioner in operation and, yet, if petitioner had had Advertising's clients (and therefore Advertising's money), respondent would have argued that petitioner was operated for a commercial purpose. Petitioner's contention misses the point. Cf.
Ecclesiastical Order of Ism of Am, Inc. v. I.R.S., 725 F.2d 398">725 F.2d 398infra.↩ 26. We note that we made such an evaluation in
Pulpit Resource v. Commissioner, 70 T.C. 594">70 T.C. 59427. There is an indication that petitioner may have orally supplied respondent with some information in this regard, but obviously any such information is not contained in the record herein.↩
28. Ministries received a letter from respondent, dated July 31, 1979, granting it exempt status under
section 501(c)(3)↩ . As far as the record herein shows, Ministries' exempt status has not been revoked. Since that letter antedated petitioner's application for exemption and Ministries is not a party to this proceeding, we express no opinion as to the continued validity of Ministries' exempt status.29. The interrelationship between these organizations and their use to enrich Rev. Ewing and Rev. McElrath is illustrated by the manner in which Rev. Ewing's and Rev. McElrath's ever-increasing compensation was paid. In 1979, Rev. Ewing received $67,500 in compensation from Ministries and $10,600 from Advertising. In 1981, as Advertising's "business" grew, Rev. Ewing received only $8,100 from Ministries (to whom he devoted 40 percent of his time, apparently doing exactly the same work as in 1979) and $111,600 (for the first eight months of 1981) from Advertising (even though he devoted only 20 percent of his time to that organization). Rev. McElrath's compensation figures relfect a similar trend. See p. 7,
supra.↩ 30. We disagree with petitioner that we must, in light of the interlocking relationships of the various entities involved in activities of Rev. Ewing and Rev. McElrath, only take into account the payments to them by petitioner. However, even if we were to accept petitioner's position, we have already pointed out that, even if it were reasonable, inurement would still exist in the system of commissions and interest payments set up between petitioner and Advertising. ↩
31. In addition, no breakdown was given for certain of petitioner's 1980 expenses -- crusade costs, $92,124; travel, $53,543 -- which might well have constituted, at least to some extent, inurement to Rev. Ewing and Rev. McElrath.↩
32. In this connection, we note that only "members," which consisted of the original trustees and those elected by them, controlled petitioner. The consequence is that Rev. Ewing and Rev. McElrath had, through self-perpetuation, the continuing capacity to retain control of petitioner.↩
