The U.S. Court of Appeals for the Federal Circuit has rejected a taxpayer’s argument that the regular assembly of a “virtual congregation” was enough to meet the IRS definition of a church. The ruling could have implications for virtual churches that conduct worship through streaming of worship services and online discussions.
The case involved the Foundation for Human Understanding (Foundation), a religious organization whose teachings are “based upon Judeo-Christian beliefs and the doctrine and teachings of its founder, Roy Masters.” The Foundation has been operating since 1963 and was first recognized as tax-exempt in 1965.
The IRS denied the Foundation’s church status in 1983, but later lost in Tax Court. The Tax Court’s decision emphasized the Foundation’s traditional church activities, which included regular services in Los Angeles and Oregon, a school to indoctrinate children in its beliefs, seminars and meetings on an off-site ranch, and regular religious services for established congregations. The Foundation has always devoted substantial resources to its radio broadcasts and print materials. But the Tax Court felt that these activities did not override other indications that the Foundation operated as a church.
In the 1990s, the Foundation changed its operational model. The Foundation moved the school into a separate nonprofit organization, sold the buildings that it used for worship, and began holding off-site seminars less frequently. The Foundation’s primary activities consisted of spreading its message through print materials and radio broadcasts.
In 2001, the IRS took another look at the Foundation’s activities and decided that, although the Foundation did qualify as a religious organization under section 501(c)(3), it was not a church. The Foundation challenged the IRS’s determination and lost at trial. On appeal, the Court of Appeals for the Federal Circuit had to determine whether the Foundation was a “church” within the meaning of the tax laws.
The distinction between religious organizations and churches isn’t always easy to draw, especially since the Internal Revenue Code does not define “religion” or “church.” It is clear that not all religious organizations are churches, although all churches are religious organizations. Because churches are generally subject to less stringent reporting requirements and are presumptively exempt from taxation, many religious organizations would prefer to be classified as churches.
Applying the associational test for church status, the Court of Appeals looked for evidence that the Foundation conducted regular services with regular congregations. Although the Foundation continued to conduct seminars at the ranch, the seminars were infrequent and attended by different groups. The Court did not believe that these sporadic gatherings were enough to allow a defined group of congregants to establish a “community of worship.”
The Foundation argued that its “electronic ministry” was enough to qualify it as a church. This ministry involved worshipping as a “virtual congregation” by listening to regularly-scheduled sermons over the Internet and radio. The Court characterized these activities as dissemination of information, an activity that falls short of the association necessary to qualify an organization as a “church.” Because it believed that these activities did not allow a true communal experience (regular worship by a regular congregation), the Court upheld the IRS’s determination that the Foundation did not qualify as a church
This decision should be taken as a warning to virtual churches (also called simchurches) that intend for virtual services to qualify it as a church under the Internal Revenue Code. Traditional churches that operate an “internet campus” may not have much to worry about. The Court of Appeals seemed to think that traditional worship coupled with internet activities would be enough. As long as churches maintain traditional activities that involve regular meetings of an established group of worshippers, the existence of an online campus to supplement the traditional activities should be allowed.
But an increasing number of churches are operating exclusively over the Internet. These churches have sparked theological discussion about whether an online church is really a church. And it appears that the IRS and courts are asking the same questions.
Foundation of Human Understanding v. United States, No. 2009-5129 (Ct. App. Fed. Cir. 2010). Get the full text of the opinion here.