TaxNewsFlash-Exempt Organizations

August 18, 2010
No. 2010-75

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Federal Circuit: Religious Organization Is Not a Church

The U.S. Court of Appeals for the Federal Circuit this week affirmed a decision of the Court of Federal Claims that a tax-exempt religious organization is not a church because it lacks the associational characteristics of a church, and bringing people together to worship is only incidental to its main function. Foundation of Human Understanding v. United States, 2009-5129 (Fed. Cir. August 16, 2010).

For an electronic version of the Federal Circuit’s decision: Foundation of Human Understanding

Background

The Foundation of Human Understanding (FHU) was formed in 1963. Its beliefs are based on Judeo-Christian beliefs and the doctrine and teachings of Roy Masters, who is FHU's founder, spiritual leader, board member, and president. FHU does not have members, per se, but does have ministers. FHU disseminates its messages primarily through broadcast and print media and the Internet.

In 1987, the Tax Court held that FHU qualified as a church for tax years before 1983, based on its activities at that time. Foundation of Human Understanding v. Commissioner, 88 T.C. 1341 (1987).

In 2001, the IRS commenced a church tax inquiry (i.e., an examination) for the years 1998, 1999, and 2000. In 2004, the IRS concluded that FHU's tax-exempt status under section 501(c)(3) would not be revoked, but that FHU no longer qualified as a church. FHU subsequently brought this suit for a declaratory judgment that it qualifies as a church as a matter of law. In 2009, the Court of Federal Claims held that, although FHU is a tax-exempt religious organization described in section 501(c)(3), it is not a church. See TaxNewsFlash-Exempt Organizations 2009-57.

Federal Circuit Court of Appeals

The Federal Circuit began its analysis by noting that neither Congress nor the IRS has provided much guidance as to the meaning of the term “church” in section 170, but it is generally agreed that not every religious organization is a church.

The circuit court noted that courts have generally declined to accept the 14 criteria developed by the IRS as a guide in evaluating whether an organization qualifies as a church, preferring instead the so-called "associational" test for church status—which was developed through several court opinions and requires that, in order to qualify as a church, an organization must serve an associational role in accomplishing its religious purposes. The Federal Circuit held that, whether applying the 14 criteria or the associational test, in order to be considered a church under section 170, a religious organization must create, as part of its religious activities, the opportunity for members to develop a fellowship by worshipping together.

During the years examined by the IRS, FHU did not hold regular services at any location and did not have a regular congregation, although it held 21 seminars at various locations throughout the United States. Although five of the seminars were held at FHU’s Tall Timber Ranch, the appeals court found that five meetings in a three-year period were not sufficient to establish a community of worship. The court found that FHU presented insufficient evidence to satisfy the associational test because it did not establish the frequency or nature of its meetings, the consistency of the congregation, or the extent to which the meetings enabled members to associate with each other in worship.

FHU asserted that its members regularly assembled to worship as a “virtual congregation” by listening to sermons broadcast over the radio and the Internet at set times. The court held that disseminating religious information, whether through print or broadcast media, does not fulfill the associational role required to qualify as a church under section 170. The court said that the fact that all of the listeners simultaneously received FHU’s message over the radio or the Internet does not mean that those members associated with each other and worshipped communally. FHU asserted that its “call-in” show enabled participants to call and interact with FHU’s clergy and were broadcast to listening congregants. However, the appeals court held that a call-in show does not provide individual congregants the opportunity to interact and associate with each other in worship and therefore does not satisfy the associational test.

For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or rspeizma@kpmg.com

 

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