Opinion ID: 491560
Heading Depth: 2
Heading Rank: 1

Heading: Tax Exemption

Text: 21 Internal Revenue Code Sec. 501 exempts certain organizations from taxation. Section 501(c)(3) exempts: 22 corporations and any community chest, fund, or foundation, organized and operated exclusively for religious ... purposes, ... no part of the net earnings of which inures to the benefit of any private shareholder or individual.... 23 To qualify for exemption, a church must show that it is (1) organized, and (2) operated, exclusively for religious or charitable purposes. Hall v. Commissioner, 729 F.2d 632, 634 (9th Cir.1984). 24 The Church strenuously argues that the trial court failed to recognize it as a bona fide religion. This argument goes to whether the Church meets the organizational test. Neither the Commissioner, nor the Tax Court, nor this court questions that the Church of Scientology of California was organized for a bona fide religious purpose. The only question before the court, is whether the Church met the second requirement for tax exempt status, the operational test. 25 Four elements compose the operational test. First, the organization must engage primarily in activities which accomplish one or more of the exempt purposes specified in Sec. 501(c)(3). Treas.Reg. Sec. 1.501(c)(3)-1(c)(1); Church by Mail, Inc. v. Commissioner, 765 F.2d 1387, 1391 (9th Cir.1985). Second, the organization's net earnings may not inure to the benefit of private shareholders or individuals. Treas.Reg. Sec. 1.501(c)(3)-1(c)(2); Church by Mail, 765 F.2d at 1391. Third, the organization must not expend a substantial part of its resources attempting to influence legislation or political campaigns. Treas.Reg. Sec. 1.501(c)(3)-1(c)(3); Church by Mail, 765 F.2d at 1391. Courts have imposed a fourth element. Organizations seeking exemption from taxes must serve a valid public purpose and confer a public benefit. Bob Jones University v. United States, 461 U.S. 574, 585-92, 103 S.Ct. 2017, 2025-29, 76 L.Ed.2d 157 (1983). If an organization fails to comply with any one of these four elements, it will fail the operational test and lose its eligibility for tax exempt status. Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir.1974). 26 We conclude that the Church failed to establish that no part of the net earnings ... inures to the benefit of any private shareholder or individual.... 26 U.S.C. Sec. 501(c)(3). Because we may affirm the Tax Court on this ground, we do not reach the questions of whether the Church operated for a substantial commercial purpose or whether it violated public policy.