Imagine you are talking to a friend of a friend at a party, who says that you can avoid ever paying income taxes by taking six simple steps:
(1) form a corporation with the word “church” in the title;
(2) appoint yourself president/minister of the church;
(3) transfer your home, car, weekly income and other assets to the church;
(4) transfer your debt (mortage), car loans, etc. to the church;
(5) continue to spend your time and money as you did before;
(6) have the church pay you for your services as president/minister and pay your expenses (home, car, credit cards, kid’s tuition, etc.)
What would you do?
(a) ask this person for more details;
(b) talk to a law student about how to form a corporation;
(c) ask your minister if this is legitimate; or
(d) turn and run.
Correct answer: (d)
This scenario should set off the too-good-to-be-true alarm in most people’s heads. It hardly deserves a blog. But I am blogging about it anyway because it keeps coming up. These were the basic facts of one of the seminal cases on “church” status–American Guidance Foundation, Inc. v. U.S. (D.C. Dist. Ct. 1980). And there have been several cases with similar facts in the last 30 years. Most recently in Priv. Ltr. Rul. 201130011, the IRS revoked the exempt status of a similar organization. The technical legal grounds for revocation of the organization in this case, included (i) violating the private benefit doctrine, (ii) violating the private inurement doctrine and (iii) not being operated exclusively for exempt purposes. Any of these bases are sufficient to revoke exempt status.
My advice in addition to answer (d) above: don’t form a church unless you actually want to run a church. And turn and run from parties where people discuss taxes.