## Facts

- Church by Mail, Inc. was an Oklahoma nonprofit corporation formed in 1978 and managed by Rev. James E. Ewing and Rev. M. R. McElrath.
- The organization conducted a “mail ministry” as its primary activity, sending religious materials nationwide, typically monthly, to a large mailing list; many mailings included requests for donations.
- For the year ending December 31, 1980, it received approximately $3,000,155 in contributions from recipients.
- A closely related for-profit entity, Twentieth Century Advertising Agency, provided most printing and mailing services for Church by Mail’s campaigns.
- Twentieth was owned and controlled by Ewing and McElrath; family members worked for Twentieth; Twentieth and Church by Mail shared office space.
- Service contracts between Church by Mail and Twentieth were executed by Ewing on behalf of both entities; Twentieth billed “cost plus” a 15% commission and charged 1.5% monthly interest on unpaid balances.
- The IRS denied recognition of exemption under I.R.C. § 501(c)(3), concluding the organization was not operated exclusively for exempt purposes and that net earnings inured to private individuals.
- The Tax Court, on a fully stipulated administrative record in a declaratory judgment action under I.R.C. § 7428, upheld the denial; Church by Mail appealed.

## Issues

1. Whether Church by Mail was operated “exclusively” for religious or charitable purposes under I.R.C. § 501(c)(3) when its operations substantially furthered a related for-profit business.
2. Whether a substantial part of Church by Mail’s net earnings inured to the benefit of private individuals, disqualifying it from § 501(c)(3) status.

## Decision

- The Ninth Circuit affirmed the Tax Court’s judgment sustaining the IRS’s denial of recognition of exemption.
- The court upheld findings that Church by Mail had a substantial non-exempt purpose: providing a market for Twentieth’s services.
- The court upheld findings that a substantial portion of net earnings inured to the private benefit of Ewing, McElrath, and their families through the related-party arrangements.
- The court treated the challenged determinations as factual and found no clear error on the stipulated record.

## Legal Principles

- An organization does not satisfy § 501(c)(3)’s “operated exclusively” requirement if it has a substantial non-exempt purpose, even if it also conducts religious activity.
- § 501(c)(3) exemption is unavailable if any part of an organization’s net earnings inures to the benefit of private shareholders or individuals.
- Related-party transactions and non-arm’s-length contractual terms may support findings of substantial non-exempt purpose and private inurement.
- Appellate review of the Tax Court’s factual findings in this context applies the clearly erroneous standard.

## Conclusion

The court denied § 501(c)(3) recognition because the organization’s structure and operations substantially served a related, insider-controlled for-profit enterprise and resulted in substantial private inurement, defeating the statutory requirements for exemption.


Church by Mail, Inc. v. Comm’r, 765 F.2d 1387 (9th Cir. 1985)