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).

Creating A Tax Practice

 

It has been a couple of months on the blog.

I have been helping a friend and fellow CPA, at least as much as I could.

He is approaching retirement. He sold his practice to a larger firm. I remember talking with him about it:

Him:  What do you think?

CTG: I see the Federation and the Borg. What is your win condition here?

Him:  Yes, but ….

A rationalization that begins with “yes, but” should be a sign that you are about to buy real estate in the dark.

It has gone poorly. Zero surprise. The Borg are like that.

It was a clash of cultures: entrepreneurial versus bureaucratic, advisory versus compliance, real fees versus “valued added.”

He will survive. He may yet be able to retain several clients, reopen an office, and resume practice. He however will never be the same. 

His story has given me pause.

It also reminds me of someone who recently applied for tax-exempt status with the IRS.

More specifically, 501(c)(4) status.

As we have discussed before, Section 501 is the master key - so to speak – to tax-exempt status. The gold standard is 501(c)(3), which is both tax-exempt and contributions to which are tax deductible. That is about as good as it gets. The (c)(4) is a different beast: it is tax-exempt but contributions are not tax deductible. Why the difference? A (c)(4) frequently has an active advocacy role: think AARP, for example. That advocacy can rise to the level that it equals – or exceeds – the nonprofit motivation behind the organization.

Someone had the idea to form a tax practice as a nonprofit.

The nonprofit employs tax professionals licensed as attorneys, CPAs, enrolled agents and tax preparers with years of experience practicing worldwide taxation.”

How will it generate revenues?

The Corporation is a full-time tax service company supported by memberships and donations.”

How does this thing work?

There is a three-tier membership-based structure.

The first tier includes US taxpayers having hardship. The organization will charge per hour for complicated cases but not charge for simple cases.

The second tier is membership-based. One pays X dollars and receives comprehensive tax services.

The third tier is gauzy “feet on the ground” personnel including support volunteers.

I am not seeing it. Tier one is fee-based except for some pro bono work. Tier two is a flat-out copy of a boutique medical practice. I do not even know what tier three is, other than some filler when completing the tax-exempt application.

Why would someone go through this effort?

One of the main reasons for you to apply for the tax-exempt status is to meet the requirements established by TAS (Taxpayer Advocate Service) to be eligible for LITC (Low Income Tax Clinic) grants.”

Ahhh!

Along with one of your Board members personal investment and professional involvements, you have already generated the interest of several high-net-worth prospective donors.”

Methinks we found the motivation here.

The IRS saw it too:

The benefits provided by you are primarily for your paying members and you operate in a manner like organizations operated for profit. Thus, you are not operated exclusively for the promotion of social welfare within the meaning of Section 501(c)(4).”

BTW this is referred to as an “adverse determination” by the IRS. If a practitioner is aware that the IRS will come in adverse, it is not uncommon to withdraw the application. It allows the opportunity to fight another day.

The taxpayer did not withdraw in this case, and the adverse determination was issued as final.

Does this mean that the taxpayer cannot operate an organization with the pro bono and boutique fees and whatever feet-on-the-ground? Of course not. It just means that it will have to file and pay taxes – just like any other profit-seeking business.

What it cannot do is pretend to be tax-exempt.

This time we discussed IRS TEGE Release Number 202539014 dtd 9.26.25.

Seeking Tax Exempt Status By Lessening The Burden Of Government

Let’s introduce Captain Obvious: if you want charitable tax-exempt status from the IRS, you need to have a charitable purpose.

Let’s look at New World Infrastructure Organization’s application for tax-exempt status.

It starts with two individuals: Scott and Pam Johnston.

They owned a business called The Pipe Man Corp (TPMC). Scott was the president and Pam the vice-president

TPMC was organized to develop a portable pipe manufacturing system, working and shaping pipe in larger-than-usual sizes. Combine these pipes with road infrastructure and a business opportunity was created.

TPMC never got started. I guess it needed angel investors, and the investors never appeared.

The Johnstons then organized a nonprofit corporation called New World Infrastructure Organization (New World).  Scott and Pam were its only officers and directors. TPMC granted New World permission to use its copyrights and patents, whatever that meant, given that Scott and Pam were the only two officers and were on both sides of the equation.

New World submitted an application for tax-exempt status, stating that its …

… ultimate purpose and core focus will be charitable, with … [its] main beneficiary being Federal, State and Local Government Agencies.

OK, its purpose has something to do with government.

… our research will result in encouraging Economic Development throughout the United States. It will save time, money and lessen the burden of government. The prototype machinery, after testing, will be placed into service making very large corrugated metal pipe. The pipes need to make a Highway Overpass can be made and arched in less than a week. The cost of these pipes represent a fraction of the cost of traditional methods.”

Lessening the burden of government can be a charitable mission. For tax-exempts, this generally means that a governmental unit considers the organization to be acting on its behalf. The organization is freeing up resources – people, material, money – that the governmental unit would have to devote were it to conduct the activity itself.   

It would be helpful to present a prearranged understanding with one or more government units, especially since New World was hanging so much of its hopes on the lessening-the-burden-of-government hook.

Helpful but not happening.

I am not clear how New World was lessening anything.

According to the narrative description, … [New World] intends to fulfill its charitable purpose by working with governmental agencies, engineering firms, and businesses to reduce the cost of infrastructure projects to ‘as little as one fourth current costs.’”

Wait a second. Is New World saying that its exempt purpose was to reduce the cost of projects to the government? That is not really an exempt purpose, methinks. Let’s say that you start a business and guarantee the government that you will beat a competitor’s price by 10%. That may or may not be a good business model, but you are still in business and still for-profit. Maybe a little less profit, but still for-profit.

How about if New World provided its services at cost?

… while petitioner has suggested … that it would be willing to enter into an exclusivity agreement … to sell its product at cost, it has not established through its bylaws or otherwise that it would in fact do so.”

Seems that New World wanted a profit. It is not clear what it would do with a profit, although there is the old reliable saw of paying-out profits via salaries and bonuses to its two officers and directors.

The Court saw a failed business effort slapped into a tax-exempt application. The supposed charitable purpose was to offer a lower price on infrastructure projects, which was not quite as inspiring as clothing the poor or feeding the hungry. It appeared that no governmental unit had asked to have its burdens reduced. It further appeared that there was a more-than-zero possibility of personal benefit and private inurement to the Johnstons.

Why even go to all this effort?    

I suppose the (c)(3) status would have allowed New World to obtain the funding that its predecessor – TPMC – was unable to obtain. TPMC would have issued stock or borrowed money. New World would have raised capital via tax-deductible charitable contributions.   

The Tax Court said no dice.

Our case this time was New World Infrastructure Organization v Commissioner, T.C. Memo 2021-91.