Revoking A Church’s Tax-Exempt Status

 

I do not recall an audit of a church during my career.

I have however practiced at the other end: helping religious organizations obtain tax-exempt status.

Terms are important here. Let us look at two: churches and religious organizations.

A church is the immediate mental image: a congregation; an established place to meet; a code of doctrine; procedures for ordaining ministers, and so forth. A more intuitive term would be “a house of worship,” and worship would include Christianity and other religions.

A religious association is a religiously-oriented entity other than a church.

The terminology is important be cause churches do not need to apply for and obtain tax-exempt status. As long as they meet basic Section 501(c) requirements, they are deemed to be tax-exempt – the term is “per se” – just by being a church. That said, it is not unusual for a church to formally apply for tax-exempt status. Why? To tie to bow, so to speak. Chances are the church will regularly and routinely seek tax-deductible donations. It might be helpful to assure donors that the IRS recognizes the church as qualifying to receive such donations.

Since a church does not need to request and obtain 501(c) status, it is also not required to file annual Forms 990. It can, of course, the same as it can also formally apply for exempt status. The church can decide.

A religious organization – not being a church – must apply for exempt status, file annual Forms 990, and all the paperwork we routinely associate with being tax-exempt.

Let’s return to the requirements, and then we will discuss a church that crossed the line.

There are five basic requirements under Section 501(c):

·      The entity must be a corporation.

·      The entity must be organized and operated exclusively for religious, educational, scientific, and other charitable purposes.

·      Net earnings may not inure to the benefit of any private individual or shareholder.

·      No substantial part of the organization’s activity may be attempting to influence legislation.

·      The organization may not intervene in political campaigns.

These are the minimum hurdles. In practice there is some latitude (must be a corporation, for example, but the definition of corporation for this purpose is generous), but one must still keep the tires on the pavement.

The Community Worship Fellowship (CWF) was founded in 1998 by Lester Goddard and his family. The organizing documents with Oregon had all the magic words (“organized exclusively for …”), and it obtained tax-exempt status from the IRS. It was governed by an uncompensated council of elders.

There are two broad requirements in this area: what the paperwork says and what you actually do. So far, the paperwork seems normal.

However, it turned out that your name had to be “Goddard” (or related to) to be on the council of elders – the governing body of the church.

Bad start. They might want to address this as soon as possible.

After a decade the IRS began asking questions. There were reports that CWF assets were being used for personal benefit. The church blew off the initial inquiry. The IRS responded by auditing years 2013 through 2016.

COMMENT: Brilliant.

The IRS discovered the following:

·      Lester Goddard determined his own salary and bonus.

·      His salary and bonus were approved by the members, but most of the members were related to Lester.

·      CWF credit cards showed purchases of Prada handbags, jewelry, perfume, and furs.

·      CWF paid personal boat payments and private travel, including Disneyland and Hawaii.

·      CWF paid for improvements (think a pool) at Lester’s home.

·      CWF lent money to Lester and family. Let’s say CWF was … not rigorous … about the money being repaid.

In tax lingo, this money shuffle is called “private inurement.” In common conversation, we call it something else.

Meanwhile CWF moved its incorporation from Oregon to Hawaii. Why? I am not sure. The IRS – to the best of my knowledge – still reaches Hawaii.

In December 2018 the IRS revoked CWF’s exemption.

Problem: the IRS did not publicly disclose the revocation. How were donors to know?

In March 2019 CWF filed suit.

In October 2025 the Federal Court of Claims finally decided.

The reason for a six-year delay? There were 18 stays for additional discovery.

This is not a pretty story, and church exemptions is not an area the IRS likes to tread. Tax and constitutional law weave together closely, and even an IRS win might be construed as pyrrhic. There are more than 350,000 religious tax-exempt organizations, for example, but less than five lost their exemption in 2023. None of those five were churches.

Our case this time was Community Worship Fellowship v United States, No 19-352 (Fed Cl October 23, 2025).

Can Your Tax Preparer Expose You To Fraud?

We have talked about the statute of limitations many times.

In general, the IRS has three years to challenge your tax return and assess additional taxes. Reverse the direction and you likewise have three years to request refund of a tax overpayment.

The intent is clear: at some point the back and forth must stop.

Mind you, if the IRS assesses additional tax within that period, then the three-year statute for assessment transmutes to a ten-year statute for collection.

There are exceptions to the three years, of course. Here are some exceptions from Section 6501(c):

Let’s do a little tax practice today. Reread (c)(1) above. I have a question for you:

          Must the intent to evade tax be the taxpayer’s?

On first impression, the answer appears to be “yes.” Who - other than the taxpayer - stands to benefit from filing a false or fraudulent return?

Let’s talk about Stephanie Murrin.

For years 1993 to 1999 the Murrins used a tax preparer for their joint individual income tax return, as well as two partnerships in which Ms. Murrin was a general partner. Unbeknownst to the Murrins, the preparer placed false or fraudulent information on those returns with the intent to evade tax.

Why? We are not told.

The Murrins were not aware of the preparer’s actions, nor did they intend to evade tax.

The IRS (somehow) caught up to this and in 2019 (twenty years later) issued a statutory of deficiency for the years at issue. The IRS argued that the years were still open under the statute of limitations pursuant to Section 6501(c).

Mr. Murrin died before the case went to Tax Court.

Mrs. Murrin ran into a formidable obstacle: stare decisis.

The Tax Court had previously decided (in Allen) that Section 6501(c) did not look solely at the taxpayer to find intent.

Mrs. Murrin argued that Allen was wrongly decided. She based her argument on a Federal Circuit Court decision (BASR) disagreeing with the Tax Court decision in Allen.

She had an argument.

The Tax Court noted that each judge in BASR wrote separately, meaning that it was unclear which interpretation of Section 6501(c) prevailed. When everyone has an opinion, there is no standard for precedence.

With that backdrop, the Tax Court stated:

The Federal Circuit’s position on the precise point before us is not clear. We further note that ‘there is no jurisdiction for appeal of any decision of the Tax Court to the [Federal Circuit]’ in any event. Stare decisis principles thus would seem to weigh against our reconsideration of our precedent in light of BASR.”

The Tax Court had two arguments to support its position:

• By its own terms, this provision does not restrict its application to cases where taxpayers personally had intent to evade tax. Instead, Congress showed itself agnostic as to who had to have the intent to evade tax, choosing to ‘key [the extension of the limitation period] to the fraudulent nature of the return’ rather than tie it to taxpayer intent.”

• There are other Code sections (which we will skip for our discussion) where Congress explicitly limited required intent to the taxpayer. The fact that it did not do so here is a tell that Congress did not mean to limit the meaning of “intent” for purposes of this Section.

Mrs. Murrin lost before the Tax Court.

She appealed to the Third Circuit, and I read last week that she lost there also.

Is it fair? My first reaction is no, as taxpayer is the tax return and vice versa. Who else can have a closer connection to that return that the person filing it? It seems to me that the judicial wordsmithing here is drivel and prattle. Still, I acknowledge the necessity and persuasion of stare decisis, although poor drafting of tax law and stare decisis is a bad brew for common sense.

Our case this time was Murrin v Commissioner, No 23-1234 (3^rd Cir, August 18, 2025).

   

Use Of Wrong Form Costs A Tax Refund

Let’s talk about the following Regulation:

26 CFR § 301.6402-2

Claims for credit or refund

(b) Grounds set forth in claim.

(1) No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.

That last sentence is critical and – potentially – punishing.

I suspect the most common “claim for refund” is an amended return. There are other ways to claim, however, depending on the tax at issue. For example, businesses requested refunds of federal payroll taxes under the employee retention credit (“ERC”) program by filing Form 941-X. You or I would (more likely) file our claim for refund on Form 1040-X. 

File a 1040-X and the tax “variance doctrine” comes into play. This means that the filing must substantially inform the IRS of the grounds and reasons that one is requesting a refund. Both parties have responsibilities in tax administration. A taxpayer must adequately apprise so the IRS can consider the request without further investigation or the time and expense of litigation.

Here is a Court on this point in Charter Co v United States:

The law requires a taxpayer “to do more than give the government a good lead based on the government’s ability to infer interconnectedness.”

Another way to say this is that the IRS is not required to go all Sherlock Holmes to figure out what you are talking about. 

Let’s look at the Shleifer case.

Scott Shleifer was a partner in an investment firm. He travelled domestically and abroad to investigate new and existing investment opportunities. Scott was not a fan of commercial airfare, so he used his personal plane. He waived off reimbursement from the partnership for his air travel.

COMMENT: Scott is different from you or me.

The Shleifers filed their 2014 joint individual tax return. Whereas it is not stated in the case, we can assume that their 2014 return was extended to October 15, 2015.

In October 2018 they filed an amended return requesting a refund of almost $1.9 million.

COMMENT: And there you have your claim. In addition, notice that the two Octobers were three years apart. Remember that the statute of limitations for amending a return is three years. Coincidence? No, no coincidence.

What drove the amended return was depreciation on the plane. The accountant put the depreciation on Schedule C. It was – in fact – the only number on the Schedule C.

In July 2020 the IRS selected the amended return for audit.

COMMENT: A refund of almost $1.9 million will do that.

The Shleifer’s accountant represented them throughout the audit.

In March 2022 the IRS denied the refund.

Why?

Look at the Schedule C header above. It refers to a profit or loss “from business.” Scott was not “in business” with his plane. It instead was his personal plane. He did not sell tickets for flights on his plane. He did not rent or lease the plane for other pilots to use. It was a personal asset, a toy if you will, and perhaps comparable to a very high-end car. Granted, he sometimes used the plane for business purposes, but it did not cease being his toy. What it wasn’t was a business.

The accountant put the depreciation on the wrong form.

As a partner, Scott would have received a Schedule K-1 from the investment partnership. The business income thereon would have been reported on his Schedule E. While the letters C and E are close together in the alphabet, these forms represent different things. For example:

·       There must be a trade or business to file a Schedule C. Lack of said trade or business is a common denominator in the “hobby loss” cases that populate tax literature.

·       A partnership must be in a trade or business to file Schedule E. A partner himself/herself does not need to be active or participating. The testing of trade or business is done at the partnership - not the partner - level.

·       A partner can and might incur expenses on behalf of a partnership. White there are requirements (it’s tax: there are always requirements), a partner might be able to show those expenses along with the Schedule K-1 numbers on his/her Schedule E. This does have the elegance of keeping the partnership numbers close together on the same form.   

After the audit went south, the accountant explained to the IRS examiner that he was now preparing, and Scott was now reporting the airplane expenses as unreimbursed partner expenses. He further commented that the arithmetic was the same whether the airplane expenses were reported on Schedule C or on Schedule E. The examiner seemed to agree, as he noted in his report that the depreciation might have been valid for 2014 if only the accountant had put the number on the correct form.

You know the matter went to litigation.

The Shleifers had several arguments, including the conversation the accountant had with the examiner (doesn’t that count for something?); that they met the substantive requirements for a depreciation deduction; and that the IRS was well aware that their claim for refund was due to depreciation on a plane.

The Court nonetheless decided in favor of the IRS.

Why?

Go back to the last sentence of Reg 301.6402-2(b)(1):

A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.

The Shleifers did not file a valid refund claim that the Court could review.

Here is the Court:

Although the mistake was costly and the result is harsh …”

Yes, it was.

What do I think?

You see here the ongoing tension between complying with the technical requirements of the Code and substantially complying with its spirit and intent.

I find it hard to believe that the IRS – at some point – did not realize that the depreciation deduction related to a business in which Scott was a partner. However, did the IRS have the authority to “move” the depreciation from one form to another? Then again, they did not have to. The accountant was right: the arithmetic worked out the same. All the IRS had to do was close the file and … move on.

But the IRS also had a point. The audit of Schedule C is different from that of Schedule E. For example, we mentioned earlier that there are requirements for claiming partnership expenses paid directly by a partner. Had the examiner known this, he likely would have wanted partnership documents, such as any reimbursement policy for these expenses. Granted, the examiner may have realized this as the audit went along, but the IRS did not know this when it selected the return for audit. I personally suspect the IRS would not have audited the return had the depreciation been reported correctly as a partner expense. 

And there you have the reason for the variance doctrine: the IRS has the right to rely on taxpayer representations in performing its tax administration. The IRS would have relied on these representations when it issued a $1.9 million refund – or selected the return for audit.

What a taxpayer cannot do is play bait and switch.

Our case this time was Shleifer v United States, U.S. District Court, So District Fla, Case #24-CV-80713-Rosenberg.

A Psychiatrist, Chauffer, Physician, Peace Officer, Pheasant Hunter

 

He said that his patients often called him a psychiatrist, chauffer, physician, peace officer, or even a pheasant hunter.”

He is David Laudon, a chiropractor in Minnesota and the subject of one of the more entertaining Tax Court opinions of the last decade. Laudon, however, reached too far for too long, and he was about to learn about snapback.

Back to the Court:

But not a ghostbuster. The Commissioner rhetorically asserted that some of Laudon’s trips might have made more sense if he was claiming to be a ghostbuster. Laudon then disclaimed any employment as a ghostbuster. In his reply brief the Commissioner conceded that Laudon was not ‘employed or under contract to perform work as a ghostbuster during the tax years at issue in this case.’”

Methinks Laudon missed the joke.

How did Laudon get to court?

Easy: he was audited for years 2007 through 2009.

His records were … colorful, humorous, inadequate.

Laudon did not keep records of his income in any decipherable form.”

The IRS did a reconstruction of his business income by analyzing his bank accounts. The rule of thumb is straightforward: all deposits are income unless one can prove otherwise. A common otherwise is when a taxpayer transfers money between accounts.

Laudon contends that the Commissioner failed to classify certain deposits as nontaxable, including insurance payments for damage to several vehicles, one of which was involved in a ‘high speed police chase’ with a man ‘high on meth and cocaine.’”

There is something you do not see every day. The other thing the Court did not see was “any evidence” that the deposits were what and as Laudon described.

We therefore accept the Commissioner’s reconstruction of income.”

On to deductions.

He treats some of his patients in his home and claims to use roughly half of his house – the basement and half of the garage – for business.”

This could be a problem. Rember that an office in home deduction requires exclusive business use of the space. He claimed a lot of space, ratcheting the pressure on “exclusive.”

Like many chiropractic offices, Laudon’s has beds, tables, and a waiting area. But unlike most, his also comes equipped with a Wii, Xbox 360, big-screen TVs and, for a time, a working hair salon.”

Hair salon? What kind of chiropractic office is this?

I see that Laudon represented himself at Tax Court. I would also guess that he represented himself during the audit. Why do I say that?

We particularly disbelieve his claim that the Xbox, Wii, big-screen TVs and other electronics in his basement were used exclusively for chiropractic purposes since this claim conflicts with his much more plausible admission to the IRS examiner during audit that his daughter and his girlfriend’s son would play these video games while he was on the phone.”

There is an example of why I almost never have a client meet or speak directly with the IRS – I cannot control the exchange.

Laudon was deducting between 40,000 and 60,000 miles per year for business purposes.

.. for example, driving to a ‘schizophrenic’ patient who was – on more than one occasion – ‘running scared of demons’ down a rural Minnesota highway .…”

That last part should be incorporated into a folk or country song. I can almost hear the melody.

Laudon apparently had a penchant for adult beverages.

Laudon claimed to have driven hundreds of miles per day – sometimes without a valid license ….”

I’ll bite. What happened to his license?

Even his testimony about multiple entries in the logs where he wrote “DUI” was not credible: He claimed that these were not references to being stopped by the police while under the influence, or driving while his license was suspended .…”

Then what were they?

They “instead were his misspellings of a patient named: 'Dewey' - a supposed patient of his.'"

This is starting to read like a sit com script. I am waiting for the reference to tiger blood.

But he had a mileage log, right? Did that count for anything?

Laudon had a mileage log, but it fails to meet section 274(d)’s standards. The … entry, for example, describes his purpose as ‘travel to and from places.’”

Zen-like. Nice.

The Court also looked at other expenses, including “Other Expenses” for the three years under audit.

Most of this amount - $22,665 – was a deduction for the value of Laudon’s labor, supplies and stolen goods ….”

Wait on it.

… related to the renovation of a home that Laudon neither lived nor worked in, or even owned.”

It fits. Well done, sir.

Laudon was getting clipped on almost every deduction.

But wait.

You know the IRS wanted penalties.

Laudon asserts the defense that he reasonably relied on the advice of a tax professional.”

Yep, that is a defense, but you must use a tax professional, provide all information – good or bad – to the professional and actually rely on the professional.

Moreover, while he claimed to have brought all of his receipts to H&R Block along with his summaries, he later stated that his preparers didn’t want him to just walk in with his receipts and have them add it up ….”

Folks, accountants do not add up grocery bags of receipts. Considering that the profession usually bills based on work time, I doubt you want to pay someone for adding up your receipts.

The Court was direct:

We don’t need to address the …. because we don’t believe that Laudon provided ‘necessary and accurate information’ to his advisor.”

At this point, the Court did not believe anything Laudon was saying.

Having blinded H&R Block to the details and peculiarities of his chiropractic enterprise, Laudon cannot now claim that he relied on H&R Block’s advice. We sustain the penalty.”

Our case this time was David William Laudon v Commissioner. T.C. Summary Opinion 2015-54.

If you read only one, make it this one.

Valuing a Questionable Business

 

Starting with a 46-page case soon after finishing tax season may not have been my best idea.

Still, the case is a hoot.

Here is the Court:

Backstabbing, infidelity, and blackmail – not the first words that come to mind in relation to a baby products company.”

We are talking about Kaleb Pierce and his (ex) wife Ms. Bosco.

Early on Pierce sought to make money any way he could. At age 16 he purchased an ice cream truck, for example. He met Bosco and they married in 2000. Several children soon followed.

That ice cream truck was not going to suffice. He switched to selling timeshares. He then switched to painting houses.

In 2005 they had another child. Bosco had an idea relating to nursing newborns, and Pierce had his next business idea. He reached out to Chinese manufacturers to make wristbands for nursing mothers. He set up a website, attended tradeshows and whatnot.

His idea was not an initial success.

But there was someone at the tradeshow who was successful. Pierce wanted to partner with them, but they were not interested, Pierce then decided to duplicate their company and run them out of business.

The model was easy enough: he would manufacture the product in China, undercut the existing retail price and then reduce that already-undercut price to zero by use of promotional codes. Where is the money, you ask? He would charge a shipping fee. Considering that the price was already reduced to zero, he figured he could press his thumb on the shipping fee as his profit point.

He was right, but not fully. In the early days, the products were sometimes shipped to customers showing the actual shipping cost. Those customers were not amused.

But Pierce could make money.

And the model was simple: appropriate someone’s product, create a website to pitch it, have the product manufactured cheaply, make money hand over fist. Mind you, the products were all directed at nursing mothers, so the window to market and sell was limited. He had to strike hard and fast. He also had to keep introducing new products, as he continually needed something on which to hang a shipping charge.

The company was called Mothers Lounge (ML). ML sold each product through a different subsidiary. This separation of business was vital to give the appearance that the companies were unrelated. Even so, many customers found that the same company was selling the products. They requested that different orders be shipped together, which ML could not do, of course. ML had reached a point where 97% of its revenues came from that free- just-pay-shipping model.

How did it turn out?

In his own words:

He “never imagined that he was going to be this successful.”

But then ….

Pierce had an extramarital affair.

Someone added a tracker to Pierce’s software that tracked his keystrokes and found out about the affair.

Someone sent a box with a letter demanding $100,000 by the following week or said someone would tell Bosco about the affair.

Pierce told Bosco about the affair first. The news shattered her. She no longer trusted him. She forbade him from attending tradeshows. He responded by sending employees in his place, but it was not the same. His employees were not as … creative … at recognizing … opportunities as Pierce. Eventually he stepped down as CEO to deal with his family.

The business was not the same.

But Pierce and Bosco were still printing money. He did what a nouveau-riche entrepreneur would do: he started estate planning.

It is here that we get back to tax.

They created a trust. The trust in turn created an operating company. Pierce and Bosco each gifted 29.4% ownership to the trust. They also sold a 20.6% interest to the operating company owned by the trust.

The tax lawyers were busy.

There was a gift tax return, which meant that ML needed a valuation.

The IRS selected the gift tax returns (one by each spouse) for audit.

Pierce and Bosco fired their valuation expert and hired another.

That is different, methinks.

The new expert came in with a lower number. Pierce and Bosco told the IRS that – if anything – they had overreported the gift. What was the point of the audit?

The IRS was not buying this. The IRS argued that the two had underreported the gift by almost $5 million. Remember that the gift tax rate is 40%, so this disagreement translated into real money. The IRS also wanted penalties of almost $2 million.

Off to Tax Court they went.

The Court discussed valuation procedures for over twenty pages, the detail of which I will spare us. The Court liked some things about Pierce and Bosco’s valuations (remember they had two) and also liked some things about the IRS valuation. Then you had the unique facts of Mothers Lounge itself, a business which was not really a business but was nonetheless quite profitable. How do you value a business like that, and how do you adjust for the business decline since the blackmail attempt? The IRS argued that ML could return to a more traditional business model. The Court noted that ML could not; it was a different animal altogether.

The decision is a feast for those interested in valuation work. The Court was meticulous in going through the steps, but it was not going to decide a number. Truthfully, it could not: there was too much there.

The Court instead made an interim decision under Rule 155, a Tax Court arcana requiring the two parties to perform – and agree to – calculations consistent with the Court’s reasoning.

And the Court will review those results in a future hearing.

Our case this time was Pierce v Commissioner, T.C. Memo 2025-29.