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BRIAN RUUD INTL. v. UNITED STATES

April 21, 1989

BRIAN RUUD INTERNATIONAL, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant


Harold H. Greene, United States District Judge.


The opinion of the court was delivered by: GREENE

HAROLD H. GREENE, UNITED STATES DISTRICT JUDGE

 Brian Ruud International (BRI), a religious organization devoted to the ministry of Brian Ruud, seeks a declaratory ruling that it is a tax-exempt religious organization under 26 U.S.C. § 501(c)(3). Presently before the Court is plaintiff's motion for summary judgment. At a hearing on that motion, the parties agreed to treat defendant's opposition to that motion as a motion for summary judgment on its own behalf. Therefore, this controversy can be determined on the basis of these cross-motions.

 I

 Background

 Sections 501(a) and (c) of the Internal Revenue Code allow tax exemptions for organizations that are organized and operated exclusively for religious, charitable, and other specified exempt purposes, provided that no part of the net earnings of the organization inures to the benefit of any private shareholder or individual. Treasury Regulation § 1.501(c)(3)-1(a)(1) requires that, in order to be exempt pursuant to section 501(c)(3), an organization must be both organized and operated exclusively for any one or more of the purposes enumerated in that Code section. An organization is not operated exclusively for such exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals, Treasury Regulation § 1.503(c)(3)-1(c)(2), or if it serves a private rather than a public interest. Treasury Regulation § 1.503(c)(3)-1(d)(1)(ii).

 Applying these principles to the facts offered by plaintiff, defendant revoked plaintiff's exemption. In its final action of June 19, 1985, defendant stated:

 
You are not operated exclusively for charitable, religious or any other exempt purpose as described in section 501(c)(3) of the Internal Revenue Code. You have been operating in such a manner that a portion of your net earnings has inured to the benefit of private individuals. Moreover, you have been operated to confer a private rather than a public benefit.

 In actions for declaratory judgments such as this, the scope of review is confined to the administrative record unless good cause is shown. Big Mama Rag, Inc. v. United States, 494 F. Supp. 473, 474 n. 1 (D.D.C. 1979). The standard of review is de novo. Id. Since defendant relies in its motion here on the same reasons given plaintiff in the final administrative action, the burden is upon plaintiff to show that defendant's determination is wrong. Basic Bible Church v. United States, 74 T.C. 846, 855 & n. 7 (1980). Thus, in order to succeed plaintiff must show (1) that it is operated for public, rather than private, benefit and (2) that no portion of the organization's net income inures to the benefit of a private individual.

 One of the most serious problems cited by defendant is plaintiff's failure to maintain satisfactory internal financial controls. Plaintiff concedes that this is the case. This alone is not sufficient to justify the denial of tax exempt status, but it has frustrated the efforts of both parties to determine the extent to which BRI paid for personal expenses of the Ruuds. Nevertheless, the parties have submitted a lengthy administrative record detailing the various accounts and expenses at issue. The Court has reviewed the record in detail, and it concludes that plaintiff has met its burden of showing that defendant's determination was incorrect. Accordingly, plaintiff's motion for summary judgment will be granted.

 II

 Public versus Private Benefit

 Section 501(c)(3) sets out the specific standards that govern the determination as to whether an organization should be exempt from taxation. The corporation must be "organized and operated exclusively for religious, charitable . . . or educational purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual. . . ." Courts have long recognized that the two parts of the test are closely interrelated, but plaintiff must satisfy both parts in order to prevail.

 It cannot seriously be disputed that plaintiff is a religious organization whose primary purpose is to convey Brian Ruud's teachings to others. The administrative record contains Brian Ruud's speaking schedule and copies of newspaper articles and promotional material regarding his appearances, all of which indicate that preaching his religion occupied a vast amount of Ruud's time. Further, the record contains the calendar for a retreat ...


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