## Facts

- Living Faith, Inc., an Illinois not-for-profit corporation, was formed to operate in accordance with Seventh-day Adventist doctrine and received no direct church funding.
- It operated two “Country Life” vegetarian restaurants and health-food stores in Illinois, open to the general public, located in commercial shopping centers, and using a licensed brand name subject to Adventist-management guidelines.
- The organization asserted that its activities furthered Adventist religious teachings linking health, vegetarianism, and abstention from tobacco, alcohol, and caffeine to religious and moral conduct.
- It set prices at ordinary commercial levels and derived most revenue from customer sales rather than donations; it claimed substantial donations but lacked detailed records supporting that claim.
- Advertising materials combined religious themes with conventional commercial promotion, including claims about product quality and reputation.
- Living Faith offered ancillary exempt-type activities, including weekly Bible study classes and a monthly free vegetarian meal, but these were small in scale compared to the restaurant and retail operations.
- The IRS denied recognition of exemption under I.R.C. § 501(c)(3); the Tax Court sustained the denial; Living Faith appealed on a stipulated administrative record.

## Issues

1. Whether Living Faith was “operated exclusively for religious, charitable, or educational purposes” under I.R.C. § 501(c)(3) when its primary activities consisted of operating restaurants and health-food stores.
2. Whether the organization’s restaurant and retail operations reflected a substantial non-exempt commercial purpose under the § 501(c)(3) operational test.
3. Whether the Tax Court clearly erred in finding that Living Faith’s commercial characteristics disqualified it from exemption despite religious motivation and limited religious/charitable programming.

## Decision

- The Seventh Circuit affirmed the Tax Court’s decision upholding the IRS denial of § 501(c)(3) recognition.
- The court held that Living Faith’s manner of operation exhibited a substantial non-exempt commercial purpose.
- The court treated the Tax Court’s “operated exclusively” determination as a factual finding and concluded it was not clearly erroneous on the stipulated record.

## Legal Principles

- Under the § 501(c)(3) operational test, an organization fails exemption if it has a substantial non-exempt purpose, even if it also pursues genuine exempt purposes.
- Commercial indicia relevant to the operational test include market-rate pricing, competition with for-profit businesses, public-facing retail operations, and marketing resembling ordinary commercial advertising.
- Religious motivation or religiously consistent products do not convert an otherwise commercial enterprise into an organization operated exclusively for exempt purposes.
- Minor religious, educational, or charitable activities do not offset substantial commercial operations when the commercial purpose is more than incidental.
- Revenue patterns matter: predominant reliance on sales income, coupled with inadequate substantiation of claimed donations, supports a finding of substantial commercial purpose.

## Conclusion

The court denied § 501(c)(3) status because Living Faith’s restaurants and health-food stores were conducted in a commercially typical manner—market pricing, competitive locations, and commercial promotion—showing a substantial non-exempt purpose that outweighed its limited religious and charitable activities.


Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991)