Business-savvy church leaders sometimes use business jargon to describe their activities and efforts. A recent IRS denial of exemption for a nonprofit religious organization shows why doing so excessively can be problematic.
In a denial letter released March 8, 2013, the IRS addressed the application for 501(c)(3) exemption by a religious organization that described itself as having three divisions: a Ministry Division, a Consulting Division, and a Merchandising Division. While some aspects of the activities carried out by the organization's divisions as described in the ruling are common among religious nonprofits, the terminology used to describe them is not.
A variety of facts formed the overall basis for the IRS's denial, but we believe it can be reasonably inferred from the language in the denial that the IRS was particularly troubled by the organization's use of business jargon in describing its activities. For example, the IRS chose to put in quotation marks a number of the business jargon terms used by the organization, including the terms "divisions," "branches," "brands," and others. Following is an excerpt of the ruling:
In addition to your frequent references to Taxpayer, Church, and Website as "brands," you described the majority of your activities in the context of business models, supply chains, marketing strategies, and other, typically business-oriented approaches.
The IRS and courts have applied a "commerciality doctrine" in determining whether nonprofit organizations qualify for exempt status under Section 501(c)(3). The doctrine, which has been loosely defined by the IRS and the courts, is not found in the Code or Regulations. The core principle is the idea that operating revenue-generating activities in a highly commercial manner may indicate lack of an exempt purpose.