Church by Mail, Inc. v. C.I.R.
| Decision Date | 16 July 1985 |
| Docket Number | No. 84-7663,84-7663 |
| Citation | 765 F.2d 1387 |
| Parties | -5483, 85-2 USTC P 9549 CHURCH BY MAIL, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
J.C. Joyce, Blackstock, Joyce, Pollard, Blackstock & Montgomery, Tulsa, Okl., for petitioner-appellant.
Thomas Gick, Michael Paup, Washington, D.C., for respondent-appellee.
Appeal from the decision of the United States Tax Court.
Before ALARCON and POOLE, Circuit Judges, and REED, * District Judge.
Church By Mail, Inc. (hereinafter the Church) appeals from the tax court's judgment on a stipulated administrative record denying the Church tax-exempt status pursuant to Internal Revenue Code (I.R.C.) Secs. 501(a) and 501(c)(3). The Church contends that the tax court erred in finding that the Church is operated for the non-exempt purpose of providing a market for the services of Twentieth Century Advertising Agency (hereinafter Twentieth), a for-profit organization owned and controlled by Reverend James E. Ewing and Reverend M.R. McElrath, the same persons who serve and control the Church. The Church also argues that the tax court erred in finding that a substantial portion of the Church's net earnings inures to the private benefit of Reverend Ewing and Reverend McElrath and their respective families. Because the tax court's factual findings are supported by evidence in the record, we affirm.
Church By Mail, Inc. was incorporated under the laws of Oklahoma on November 28, 1978. The Church's primary activity has been the preparation, printing and mailing of various religious messages, most of which include a request for money. The Church is run by Reverend Ewing and Reverend McElrath. The Church also employs Reverend O.D. Snyder, Reverend D.R. Luce and Brenda Ewing.
The Church's mailing audience includes 3,393,055 homes, of which 167,698 are regular recipients. The Church mails at least one and sometimes as many as three sermons a month to its regular recipients. During the year ending December 31, 1980, the Church received $3,000,155 in donations from the recipients of its sermons.
Twentieth Century Advertising Agency provides the printing and mailing services for the Church's mass mailings. Twentieth is owned and controlled by Reverend Ewing and Reverend McElrath. Twentieth also employs Paul Ewing and Ray McElrath Twentieth's services are provided to the Church under two contracts signed by Reverend Ewing on behalf of both Twentieth and the Church. Pursuant to the contracts, Twentieth subcontracts out the printing and bills the Church at cost plus a 15% commission. Any bills unpaid after ninety days accrue interest charges at a rate of 1 1/2% per month. In accordance with the contracts, Twentieth advanced $2,867,180 to the Church between April 1980 and February 1981. During this same period, the Church repaid principal of $1,757,178, and paid Twentieth $180,515 in commissions and $26,549 in interest. Approximately two-thirds of the time of Twentieth's employees is devoted to work for the Church.
the ministers' sons. Twentieth and the Church share office space in Beverly Hills, California.
In 1980, Twentieth received additional income from unrelated organizations for undisclosed services of approximately $1,144,000. Although Twentieth apparently has clients unrelated to the Church, Twentieth refuses to identify them. Twentieth does not advertise the availability of its services.
Since 1977, Reverend Ewing and Reverend McElrath have received the following amounts as compensation for services from the Church and Twentieth:
Reverend Ewing1/5
--------------
Year Church By Mail Twentieth1/5
---- -------------- ---------
1977 --- ---1/5
1978 none none1/5
1979 none $ 10,600 (from May)1/5
(contracts signed in 1980)1/5
1980 $48,600 $ 88.294.221/5
1981 $48,600 $111,600 (through August)1/5
Reverend Ewing
--------------
Year Church By Mail Twentieth
---- -------------- ---------
1977 --- ---
1978 none none
1979 none $ 10,600 (from May)
(contracts signed in 1980)
1980 $48,600 $ 88.294.22
1981 $48,600 $111,600 (through August)
Both ministers also have the use of automobiles whose total value is $48,789. Since 1980, Brenda Ewing has received $8,550 per year from the Church, and Paul Ewing and Ray McElrath, Jr. have received $30,000 yearly from Twentieth.
On January 10, 1980, the Church filed an application with the Commissioner of the Internal Revenue Service (hereinafter the Commissioner) seeking recognition of exemption from federal income tax pursuant to section 501(c)(3) of the Internal Revenue Code of 1954. The Commissioner denied the Church's application, finding that the Church was not operated for exempt purposes within the meaning of section 501(c)(3) because it served private rather than public interests and because part of its earnings inures to the benefit of private individuals. The Commissioner also concluded that even if the Church did qualify as an exempt organization pursuant to section 501(c)(3), contributions to the Church were not deductible because it was not a church within the meaning of I.R.C. Sec. 170(b)(1)(A)(i).
The Church filed a petition for declaratory judgment with the tax court on December 1, 1982, requesting that the court determine that the Church is exempt from taxation pursuant to I.R.C. Sec. 501(a) as an organization described in I.R.C. Sec. 501(c)(3), and that contributions to the Church are deductible under I.R.C. Sec. 170(b)(1)(A)(i). 1 By The tax court upheld the Commissioner's determination, holding that (1) the Church was operated for the non-exempt purpose of providing a market for Twentieth's services, and (2) a substantial, if not principal, purpose of the Church's operations was to generate income for the private benefit of Reverend Ewing and Reverend McElrath and their respective families.
stipulation, the facts were submitted to the tax court on the complete administrative record.
Although the ultimate determination that the Church does not qualify for tax-exempt status pursuant to I.R.C. Sec. 501(c)(3) is a legal conclusion, it is based solely upon a finding that the Church is operated for a substantial non-exempt purpose. See Treas.Reg. Sec. 1.501(c)(3)-1(a)(1). This is a factual finding reviewable under the clearly erroneous standard. est of Hawaii v. Commissioner, 71 T.C. 1067, 1079 (1979), aff'd without opinion, 647 F.2d 170 (9th Cir.1981); Commissioner v. John Danz Charitable Trust, 284 F.2d 726, 735 (9th Cir.1960); accord, Ohio Teamsters Educ. & Safety Training Trust Fund v. Commissioner, 692 F.2d 432, 435 (6th Cir.1982). We defer to the expertise which the tax court brings to bear on its consideration of complex factual situations. Thompson v. Commissioner, 631 F.2d 642, 646 (9th Cir.1980), cert. denied, 452 U.S. 961, 101 S.Ct. 3110, 69 L.Ed.2d 972 (1981).
The Church contends that we should undertake a de novo review of a tax court's decision on a stipulated record. The Church argues that because no evidence was presented to the tax court (other than the stipulated administrative record) and no witnesses appeared, this court is in as good a position to assess the evidence as was the tax court.
We disagree. We have consistently held that the existence of stipulated facts does not alter our role in reviewing the evidence. See, e.g., Azevedo v. Commissioner, 246 F.2d 196, 197 (9th Cir.1957); accord, Thompson v. Commissioner, 631 F.2d at 646; Commissioner v. John Danz Charitable Trust, 284 F.2d at 735. But cf. Demirjian v. Commissioner, 457 F.2d 1, 4 (3d Cir.1972) (). The Supreme Court recently approved our strict construction of Fed.R.Civ.P. 52(a) in Anderson v. City of Bessemer, --- U.S. ----, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). The Court held that deference was to be accorded to the original fact finder's findings even when they are based solely upon physical or documentary evidence or inferences from other facts. Id. at 1512. The Court observed that the fact that Rule 52(a) emphasizes the special deference which must be paid to credibility determinations does not exclude other categories of factual findings from its scope, noting that the rationale for deference to the fact finder also rests upon the fact finder's special expertise and the parties' focus on proving the facts below. Id.
The Church argues that we have approved application of a de novo standard of review to a tax court's decision on a stipulated record, citing Stern v. Commissioner, 747 F.2d 555 (9th Cir.1984). The Church's reliance upon Stern is misplaced. In Stern, we observed that a tax court's application of law to undisputed facts is reviewable de novo. Id. at 557; accord, Sennett v. Commissioner, 752 F.2d 428, 430 (9th Cir.1985). In the instant case, the Church disputes the tax court's factual finding that the Church is operated for a substantial non-exempt purpose; the only stipulation was to the submission of the case on the agency record. Therefore, Stern is not applicable to the instant case, and the tax court's factual finding is binding on us unless clearly erroneous. Peck v. Commissioner, 752 F.2d 469, 472 (9th Cir.1985).
I.R.C. Sec. 501(a) confers tax-exempt status on those organizations which are The dispositive issue in this case is whether the Church meets the "operati...
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