a refuge for people who have become disgruntled with their own church or who just experience a desire at some stage of their life to become a minister. He was formerly in the mail order business and relies on his knowledge of mail order techniques to promote CGM.
CGM is run from offices in California by its president and secretary and their wives with the assistance of about half a dozen employees. CGM's officers testified that their primary activity is distributing the various mailings described above and answering the responses. Donations are used, as stated in the mailings, to pay advertising, mailing and operational expenses and salaries. Some of the remaining funds are to assist an orphanage in Mexico by sending cash, food, and other aid. Approximately 10-15% of CGM's gross income of $200,000 to $250,000 has been sent to charity in recent years and it has been the primary supporter of the Mexican orphanage. The only services conducted by CGM are brief weekday morning services attended by some of its employees at one of its corporate offices.
In order to establish that it is qualified for tax-exempt status, CGM has the burden of proving three elements contested by the IRS: (1) that CGM is a corporation operated primarily for religious and/or charitable purposes, 26 U.S.C. §§ 170(c)(2)(B), 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(c)(1); (2) that no part of CGM's net earnings inure to the benefit of any private shareholder or individual, 26 U.S.C. §§ 170(c)(2)(C), 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(c)(2), and (3) that CGM maintains records sufficient to demonstrate that it is entitled to tax-exempt status, 26 U.S.C. § 6001; 26 C.F.R. §§ 1.6000-1(c), 31.6001-1.
The testimony and exhibits are sufficient to establish that CGM was organized and has been operated for religious and charitable purposes. Its primary activity appears to be to solicit donations by licensing ministers who indicate they have some kind of general religious belief. Ministers are then sent periodic mailings soliciting contributions and encouraging them to pursue the will of God as they understand it. Such activity, when carried out to promote such religious beliefs, is religious activity. Cf. Universal Life Church, Inc. v. United States, 372 F. Supp. 770 (E.D. Ca. 1974). The donations are used to cover church salaries and organizational expenses or to provide financial support for an orphanage that the IRS acknowledges is a charity.
However, CGM has failed to keep records adequate to determine the full nature of its operations and failed to show that its operations do not inure in part to the private benefit of its officers. In order to claim tax-exempt status a corporation must keep records sufficient to show specifically its items of gross income, receipts and disbursements and show that it is entitled to the exemption. 26 U.S.C. § 6001; 26 C.F.R. §§ 1.6000-1(c), 31.6001-1.
There is no accurate record of CGM's expenses. CGM's records show numerous checks issued to cash without receipts. There is no record showing whether these funds were expended for operating costs, given to the orphanage or used for other purposes. For example, a sum of $9,400 in cash listed on CGM's books as expended for charity was kept in a safe by CGM's officers without any record of who received these funds or any indication in the records or corporate minutes that these funds were authorized. In addition, checks are frequently given to church employees or officers to allow them to convert them to cash, without any record or receipt indicating the purpose of the expenditure.
CGM also pays certain personal expenses of its officers to compensate them for the use of their homes and cars for CGM business without maintaining any adequate record of these arrangements or the payments.
The failure to present adequate records also prevented CGM from meeting its burden of showing that its operations were primarily for religious or charitable purposes and did not inure to the private benefit of its officers. Indeed, the proof showed that four cash contributions of $1,500, $5,000, $5,000 and $5,000 from one individual were personally received by the president of CGM between August, 1978 and November, 1979.
None of these contributions were ever recorded in CGM's books or entered in its bank account. These donations would have been the largest single donations ever received by CGM. They represent about 8% of CGM's gross income in 1979 and are almost equal to its total contributions to charity that year. These missing funds and the lack of adequate records or receipts for other payments to officers and employees makes it impossible for CGM to establish that it is not being operated for the private benefit of its members and provides independent grounds for rejecting its claim to tax-exempt status. Moreover, the inadequate accounting and evidence of private inurement makes it impossible to determine whether CGM's religious and charitable activities are really its primary activities.
CGM argues that these unaccounted for funds that apparently went to benefit at least one of its officers are not "net" earnings and therefore do not disqualify it for tax-exempt status. However, taking donations before they ever appear on the corporation's books deprives the organization of both its net and gross earnings. Moreover, it is precisely because there is no accurate record of expenses that it is impossible to determine where CGM's payments to its members end and its net earnings begin.
CGM also urges the Court to determine that it is a bona fide church under 26 U.S.C. § 170(b)(1)(A)(i), which would allow CGM contributors to deduct charitable contributions up to 50% of their contributions base in any taxable year. However, the issue of whether CGM is a "church" is irrelevant unless it first qualifies as a tax-exempt religious organization under § 170(c)(2) and § 501(c)(3). Contributions to CGM do not qualify as "charitable contributions" to a tax-exempt corporation under § 170(c)(2) because its activities inure to the private benefit of individual officers and none of its contributors can claim any deduction. Similarly, CGM's claim that it is not required to file tax returns because it is a tax-exempt church under 26 U.S.C. § 6033(b)(1) is beside the point because it cannot qualify as a § 501(c)(3) tax-exempt organization, which is a prerequisite to the § 6033 filing exemption.
CGM's complaint raises some other issues regarding the IRS's issuance of its revocation letter and the statute of limitations applicable under 26 U.S.C. § 7611. However, no relief based on these allegations was requested in the complaint, the pretrial papers or by CGM at trial and the factual allegations were never addressed at trial. In addition, even if the allegations were true they would not provide any basis for relief for CGM. The amendments to § 7611 CGM relies upon to challenge the IRS's actions, including the statute of limitations provisions, are only applicable to inquiries begun after December 31, 1984 and this inquiry began well before that date. P.L. 98-369, § 1033(d), 98 Stat. 494, 1039 (1984). Moreover, the amendments clearly provide that improper IRS procedures cannot be advanced as grounds for relief in a declaratory judgment proceeding. 26 U.S.C. § 7611(e) (setting forth exclusive remedy for violation of procedural requirements); H. Conf. Rep. No. 98-861, 98th Cong., 2d Sess. 1114 (1984), reprinted in 1984 U.S. Code Cong. & Ad. News 1445, 1802.
CGM failed to meet is burden to establish its entitlement to tax-exempt status under § 501(c)(3) and to deductible contributions under § 170(c)(2). Declaratory relief is denied and the complaint is dismissed with prejudice in an Order accompanying this Memorandum.
For reasons stated in a Memorandum accompanying this Order, it is hereby
ORDERED that plaintiff's petition for declaratory relief under 26 U.S.C. § 7428 is denied on the merits for lack of proof and the complaint is dismissed with prejudice; and it is further
ORDERED that defendant United States is awarded its costs from plaintiff Church of Gospel Ministry, Inc., as set by the Clerk.