Constitutional Law > Bill of Rights >
Fundamental Freedoms > Freedom of Religion > Free Exercise of Religion
Tax Law > State & Local Taxes > Personal
Property Tax > Exempt Property > General Overview
[HN1] Taxation of religious organizations is
constitutionally permissible under the free exercise of religion clause of the
First Amendment to the Constitution. It follows that church property is taxable
except as it may be specifically exempted by statutory enactment.
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Charitable, Religious & Scientific Organizations
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Conditions & Restrictions (IRC secs. 501-505,
521, 526-530)
[HN2] For a church to receive the benefit of
tax exemption, it must satisfy the requirements of 26 U.S.C.S. § 501(c)(3).
This section requires that: (1) it is organized and operated exclusively for
charitable purposes; (2) no part of its earnings inure to the benefit of a
private individual or shareholder; and (3) the organization does not substantially
engage in attempts to influence legislation and does not intervene in political
campaigns. Failure to satisfy any one of the requirements set forth in §
501(c)(3) is fatal and will destroy tax exempt status. In addition, to receive
the benefit of tax exempt status two further requirements have been read into §
501(c)(3). The organization must be formed for a public as opposed to a private
purpose, and the activities of the organization must be in conformity with
well-defined public policy.
Antitrust & Trade Law > Exemptions
& Immunities > Parker State-Action Doctrine > Private Parties
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Conditions & Restrictions (IRC secs. 501-505,
521, 526-530)
[HN3] A single substantial nonreligious
purpose precludes exempt status.
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Conditions & Restrictions (IRC secs. 501-505,
521, 526-530)
[HN4] An organization is not operated
exclusively for one or more exempt purposes if its earnings inure in whole or
in part to the benefit of private shareholders or individuals. Treas. Reg. §
1.501(c)(3)-1(c)(2); 26 C.F.R. § 1.501(c)(3)-1(c)(2).
Estate, Gift & Trust Law > Personal
Gifts > General Overview
Tax Law > Federal Income Tax Computation
> Deductions for Nonbusiness Expenses > Charitable Contributions (IRC
sec. 170) > Religious Organizations
[HN5] Private inurement is proscribed by 26
U.S.C.S. § 170(c)(2)(C) and thereby disqualifies a minister's gift to his
church from being considered a charitable contribution.
Tax Law > Federal Estate & Gift Taxes
> Deductions > Charitable Deductions (IRC secs. 2055, 2522, 2524) >
Disallowance of Deductions
Tax Law > Federal Income Tax Computation
> Deductions for Nonbusiness Expenses > Charitable Contributions (IRC
sec. 170) > Disallowance of Deduction
Tax Law > Federal Income Tax Computation
> Deductions for Nonbusiness Expenses > Charitable Contributions (IRC
sec. 170) > Religious Organizations
[HN6] The United States Tax Court consistently
upholds the Internal Revenue Service's position of disallowing charitable
deductions for donations taxpayers make to churches they establish which
operate for the benefit of their founders.
Estate, Gift & Trust Law > Personal
Gifts > General Overview
Tax Law > Federal Income Tax Computation
> Deductions for Nonbusiness Expenses > Charitable Contributions (IRC
sec. 170) > Religious Organizations
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Conditions & Restrictions (IRC secs. 501-505,
521, 526-530)
[HN7] In addition to requiring that a church
meet the requirement of 26 U.S.C.S. § 501(c)(3), 26 U.S.C.S. § 170 requires
that a "donation" must qualify as a charitable contribution within
the meaning of the code. Consequently, where the donor expects to obtain a
commensurate benefit, deductions are disallowed. A charitable contribution is
synonymous with a gift. If the benefits that the transferor can reasonably
expect to obtain by making the transfer are sufficiently substantial to provide
a quid pro quo, no deduction under § 170 is allowed.
Tax Law > Federal Income Tax Computation
> Taxable Income (IRC sec. 63)
[HN8] Religious officials are required to pay
income tax on earnings. An individual is not relieved of federal income tax
liability on income earned by merely assigning his income to a church. Nor does
a vow of poverty grant automatic immunity from federal income tax. For a vow of
poverty to be effective, and an exemption to accrue, the member of the
religious order must receive the income as an agent of the order and remit the
income to the order where the funds will be treated as the income of the order and
not the member. Where there is a vow of poverty, an agency relationship must be
established in which the employer looks directly to the order, not the
individual member, for performance of services.
Business & Corporate Law > Agency Relationships
> General Overview
Tax Law > Federal Income Tax Computation
> Dependent & Personal Exemptions (IRC secs. 151-153)
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Charitable, Religious & Scientific Organizations
[HN9] For a vow of poverty to have exemptive
tax consequences, the church must be exempt under 26 U.S.C.S. § 501(c)(3), the
minister must be an agent, not a principal of the church, and the activities
performed by the minister agent must be in furtherance of the exempt purposes
of the church.
Tax Law > Federal Tax Administration &
Procedure > Audits & Investigations > Examinations (IRC secs.
7601-7606, 7608-7613) > Church Tax Examinations & Inquiries
Tax Law > Federal Tax Administration &
Procedure > Burdens of Proof > General Overview
Tax Law > Federal Taxpayer Groups >
Exempt Organizations > Conditions & Restrictions (IRC secs. 501-505,
521, 526-530)
[HN10] The Internal Revenue Service is
specifically authorized to audit churches in certain circumstances. 26 U.S.C.S.
§ 7605(c). In amplification, Treas. Reg. § 1.6033-2(a)(2) provides that every
organization exempt from tax shall submit such additional information as may be
required by the Internal Revenue Service to ascertain the basis of its exempt
status and to administer the provisions of 26 U.S.C.S. § 501 and the subsequent
code sections. The burden of proof is on the organization seeking to obtain tax
exempt status. An exemption is an exception to the norm of taxation. An
organization which seeks to obtain tax exempt status, therefore bears a heavy
burden to prove that it satisfies all the requirements of the exemption
statute. Exemptions from taxation are not granted by implication.
Criminal Law & Procedure > Criminal
Offenses > Fraud > False Pretenses > General Overview
[HN11] See N.Y. Gen. Bus. Law § 356-fff.
Civil Procedure > Remedies > Injunctions
> Permanent Injunctions
Torts > Business Torts > Fraud & Misrepresentation
> General Overview
[HN12] Under N.Y. Exec. Law § 63(12), the
state attorney-general is authorized to seek and obtain restraining orders and
restitution against corporations and individuals who have engaged in repeated
or persistent fraudulent or illegal business practices. "Fraud" and
"fraudulent" are defined to include acts and practices having the
capacity or tendency to deceive the public even where there is no actual intent
to deceive.
Legal Ethics > Unauthorized Practice of
Law
[HN13] N.Y. Jud. Law § 478 prohibits the
unauthorized practice of law.
Legal Ethics > Unauthorized Practice of
Law
[HN14] See N.Y. Jud. Law § 478.
Business & Corporate Law > Unincorporated
Associations
Legal Ethics > Unauthorized Practice of
Law
[HN15] N.Y. Jud. Law § 495 prohibits
corporations or voluntary associations from practicing law.
Legal Ethics > Unauthorized Practice of Law
[HN16] The promise to provide legal advice in
the future is the unauthorized practice of law. Holding oneself out to the
public as being capable of giving legal advice is improper.
Education Law > Departments of Education
> State Departments of Education > Authority
[HN17] See N.Y. Educ. Law § 224(1).
Constitutional Law > Bill of Rights >
Fundamental Freedoms > Freedom of Religion > Free Exercise of Religion
[HN18] Not all burdens on religion are
unconstitutional and the state may justify a limitation on religious liberty by
showing that it is essential to accomplish an overriding governmental interest.
Constitutional Law > Bill of Rights >
Fundamental Freedoms > Freedom of Religion > Free Exercise of Religion
[HN19] The First Amendment free exercise of
religion clause of the Constitution is not a license for unrestricted conduct.
Freedom to believe is absolute but courts may restrict acts and conduct if the
intrusion is justified by a compelling state interest to protect society and
maintain peace, order and morality. The courts establish a balancing test between
the free exercise of religion and the state's interest in protecting the
public. The First Amendment embraces two concepts -- freedom to believe and
freedom to act. The first is absolute but, in the nature of things, the second
cannot be. Conduct remains subject to regulation for the protection of society.
The freedom to act must have appropriate definition to preserve the enforcement
of that protection. In every case the power to regulate must be exercised as
not, in attaining a permissible end, unduly to infringe the protected freedom.
Civil Procedure > Remedies > Injunctions
> Contempt
Civil Procedure > Sanctions > Contempt
> Civil Contempt
[HN20] N.Y. Jud. Law § 773 provides for a
fine for civil contempt. It states that if actual loss or injury has been
caused to a party by reason of the misconduct proved against the offender a
fine, sufficient to indemnify the aggrieved party, must be imposed and paid
over to the aggrieved party.
HEADNOTES
[***1] Religious
Corporations and Associations -- Unlawful Sale of Ministers' Credentials for
Tax Avoidance -- Unlawful Pyramid Scheme
Respondent
Life Science Church and certain named church officials, in addition to being
guilty of criminal contempt for willful disobedience of a prior court order,
are permanently enjoined (1) from engaging in fraudulent and deceptive
practices (Executive Law, § 63, subd 12) based upon representations to the
public claiming that a complete legal tax exemption could be obtained after
paying $ 3,500 for minister's credentials and attending three training sessions
at the church's "college" since neither the church nor any of its
ministers is entitled to a tax exemption in view of the fact that the church
operates in whole or in part for the private purposes of the respective
ministers and their families (US Code, tit 26, § 501, subd [c], par [3]; § 170,
subd [c], par [2], cl [C]; 26 CFR 1.501 [c] [3]-1 [c] [2]); (2) from engaging
in an unlawful pyramid scheme (General Business Law, § 359-fff) based upon the
payment of commissions to member ministers for the recruitment of new
ministers; (3) from engaging in the unauthorized practice [***2] of law (Judiciary Law, § 478) based upon representations
that the church would provide legal advice to its ministers on tax and other
matters; and (4) from continuing to use the name "college" without
proper authorization (Education Law, § 224); the constitutional protection of
the free exercise of religion is not a license for unrestricted conduct and
cannot be used as a shield to an unlawful claim of tax exemption, an illegal
pyramid scheme, the improper practice of law and misuse of the term
"college".
COUNSEL: Robert Abrams, Attorney-General (Carole L. Weidman, Judith E. Siegel-Baum
and Carol H. Arber of counsel), for petitioner.
Martin Garbus, Seth Siegel and Jay Dennis Cohen for Life Science
Church and others, respondents, George Delmarmo for Howard Tapen and
another, respondents.
JUDGES: Seymour Schwartz, J.
OPINION BY: SCHWARTZ
OPINION
[*952]
[**667] OPINION OF THE COURT
Petitioner,
the Attorney-General of the State of New York, seeks a permanent injunction
enjoining respondents from violating subdivision 12 of section 63 of the
Executive Law, claiming fraud in seeking church-related charitable exemptions,
article 23-A of the General Business Law,
[***3] claiming an unlawful
pyramid scheme and article 15 of the Judiciary Law, claiming the unlawful
practice of law. Petitioner also seeks
restitution of the sums paid to respondents.
[*953]
A preliminary injunction was issued by the Honorable Herman Cahn on
August 6, 1980 and an order entered thereon on August 12, 1980. That order enjoined respondents from (1)
accepting payment as compensation for selling ministers' credentials; (2) compensating
affiliated or nonaffiliated institutions for the recruitment of ministers if
such compensation were based on the number of ministers ordained; and (3)
stating the tax consequences of becoming a minister or starting a church unless
such tax consequences were in the form of a written opinion furnished by an
attorney or certified public accountant.
On October
6, 1980, petitioner received a complaint that respondent Life Science Church
was continuing to sell ministers' credentials and was still disseminating tax
advice in violation of the August 12 injunction. Petitioner instituted an investigation and on
October 17, 1980 filed a motion to punish respondents for civil and criminal
contempt. The proceedings were referred to this court for [***4] trial.
Petitioner
does not seek to enjoin the right of the Life Science Church to practice its
religion. At trial petitioner conceded
the right of the Life Science Church to maintain its theology and
teachings. "The basic doctrines,
principles and beliefs held as 'TRUTH' of the Life Science Church are The Declaration
of Independence and The Constitution of the United States. (The 16th and 25th Amendments are not
included in the Doctrines of the Life Science Church.)" The Attorney-General
seeks to enjoin only those practices not protected by the Constitution and
statutes and which are violative of laws applicable to all individuals, groups,
organizations and institutions in our society.
At trial
the Attorney-General presented the testimony of its Investigator Edward
Martinez who attended a Freedom Foundation tax seminar on January 31, 1980 and
subsequently became an ordained minister in the Life Science Church. Mr.
Martinez testified that at the introductory seminar he was given instruction by
respondents Frank Petrozza, Rick Ross, and James Rotollo. He also viewed a film on tax strategies
featuring William Drexler, archbishop of the Life Science Church and a
disbarred attorney [***5] who was
recently convicted of tax violations in connection with misrepresentation of
the tax laws as a sales pitch in
[*954] the sale of ministries in
the Life Science Church. Martinez' instructors explained how by joining the
church he could become completely and legally tax free while at the same time
maintaining his secular employment. The
church guaranteed to back its members legally and financially if challenged by
any government authorities. Tax
exemption was to be obtained after paying $ 3,500 for minister's credentials
and [**668] attendance at three training sessions of the
Life Science College. Once full payment
was made the minister would name and establish his own church chartered by the
Life Science Church. He then could either make donations to his church or take
a vow of poverty placing all his property in the name of his particular church
and then pay for all personal and family expenses through the church account,
thereby avoiding all taxes. To encourage
prospects to join quickly they were informed that the $ 3,500 payment would
rise $ 100 in each succeeding month.
They were urged to be wise and affiliate immediately before having to
make higher payments.
[***6]
Respondents Petrozza and Rotollo informed Investigator Martinez that he
would receive a 10% commission on payments made by any new minister he
recruited into the church.
The first
session attended by Investigator Martinez was a class in preparing Federal and
State income tax returns taught by respondent Bernice Gross with the assistance
of respondents Howard Tapen, Frank Petrozza, and Larry Ranucci. At this session he learned that respondent
Howard Tapen was the New York area director of the Life Science Church and that
Tapen was to be contacted for legal advice and consultation but by appointment
only.
The second
training session attended by Investigator Martinez was devoted to drafting
church by-laws, a constitution, and trust agreements. Joseph Dalconzo taught the class aided by
Carmine D'Onofrio and respondent Annette Schack.
On
February 23, 1980, Investigator Martinez completed his payment to Howard Tapen
for his minister's credentials. Being paid up and now a minister, he was
instructed to attend a meeting of supervisors for his third college [*955]
training session. That meeting
was conducted by Messrs. Tapen, Dalconzo
and Ranucci. Mr. Dalconzo and Mr. Tapen
described [***7] the new chain of
command in the church and the necessity of using church terms, not business
terms. The ministers were informed that
Frank Ebner as legal counsel would deal with ministers' problems with banks and
real property tax. Mr. Ranucci then described
how a Life Science Church minister could become a millionaire in one year by
recruiting new ministers, who in turn would recruit new ministers thereby
receiving commissions on all recruitments at an ever increasing level which
would make him a millionaire.
On March
27, 1980 Investigator Martinez received his formal minister's credentials and
on March 31, 1980 a Doctor of Divinity degree from the Life Science Church.
Joseph
Dalconzo testified that he was introduced to the Life Science Church by Larry
Ranucci. It was agreed that Dalconzo
would become a director of the Life Science Church upon payment of $ 10,000 and
would have his own organization. An agreement
was drafted and executed by Dalconzo and Ranucci incorporating those
terms. Dalconzo then proceeded to attend
meetings and recruit ministers. During
his involvement with the church, Dalconzo was made aware that Ranucci was
bishop of the New York area, William Drexler,
[***8] archbishop, and Ebner and
Tapen, acting bishops. Petrozza and
Dalconzo were directors with each responsible for his own organization.
Through
Ranucci, Dalconzo learned the details of the church's marketing program. A minister who recruited another was a
"missionary representative" and received a 10% commission on each
recruit's payment. After recruiting two
ministers in one month he became a "missionary supervisor". After the first two recruits the commission
rose to $ 500 for each recruit. As a director, Dalconzo received 40% of the
money paid by those he recruited. Dalconzo testified that during his six months
in the Life Science Church he recruited 20 people and received approximately $
95,000. To avoid disputes a grievance
committee was set up to deal with problems concerning the division of
commissions.
[*956]
Other testimony and evidence confirmed the testimony of Investigator
Martinez and Joseph G. Dalconzo as to the operations of the Life Science
Church, the recruitment of ministers, the theme on how to become a millionaire,
promises of tax exemption and
[**669] the legal backing the
church would provide for its ministers.
Respondents
rested without producing [***9] any
witnesses. They also failed to produce
certain subpoenaed documents and from this failure the court has drawn
inferences further supporting petitioner's version of the operations of the
church.
The
Attorney-General challenges the Life Science Church's claim of complete legal
tax exemption through the purchase of minister's credentials, that churches
cannot be audited or questioned by the Internal Revenue Service, that churches
are automatically exempt from taxation, that the burden is on the Internal
Revenue Service to establish that a church is not entitled to exempt status,
that ministers under a vow of poverty pay no taxes and that money given to any
church is tax deductible. It denies that
a minister may keep his job and donate up to 50% of his income to his own named
church made up of himself, his spouse and children and be entitled to a
charitable contribution deduction and thereby substantially reduce his tax
obligations. It challenges the alternative
procedure offered that a minister taking a vow of poverty to his church will
eliminate his tax liability entirely.
Under the vow of poverty procedure a minister would claim authority to
expend church funds for his family's [***10]
food, clothing, shelter, personal expenses and even for spiritual
retreats to Las Vegas. The record is
abundantly clear that all of these assertions were made by responsible
representatives of the Life Science Church in their efforts to recruit new
ministers.
The
Attorney-General contends that the tax benefits claimed by the Life Science
Church in setting up separate subsidiary churches are fraudulent and misleading
and are in violation of subdivision 12 of section 63 of the Executive Law.
The income
tax system of the United States -- the envy of almost every government in the
world -- depends on [*957] voluntary compliance by taxpayers who are
called upon to compute and fix their own tax.
Fewer than 2% of Federal income tax returns are audited. For such a voluntary system to be successful,
taxpayers must believe that it is essentially fair in operation and that the
burden of taxation is equitably spread.
If this self-discipline is to be maintained improper exemptions must be
ferreted out and denied because it is impossible for the government to collect
income taxes through audit alone and the very structure of organized government
may be undermined.
Witnesses
presented [***11] by the
Attorney-General included some of the Nation's leading tax experts: Jerome
Kurtz, former Commissioner of the Internal Revenue Service; Father Charles
Whelan, professor of law, Fordham University Law School, an expert on church
tax exemptions; Stanley Weithorn, author of a definitive treatise on tax exempt
organizations and Howard Schoenfeld, special assistant to the assistant
commissioner for exempt organizations of the Internal Revenue Service. Their testimony aided the court in focusing
on the tax exemption issues presented.
[HN1]
Taxation of religious organizations is constitutionally permissible under the
free exercise of religion clause of the First Amendment to the
Constitution. ( Watchtower Bible
& Tract Soc. v County of Los Angeles, 30 Cal 2d 426, cert den 332 U.S.
811; Ham Evangelistic Assn. v Matthews, 300 Ky 402.) It follows that
church property is taxable except as it may be specifically exempted by
statutory enactment. The issue then is
not one of constitutional dimension but whether an individual or organization
claiming religious exemption qualifies under applicable statutes.
[HN2] For
a church to receive the benefit of tax exemption, it must satisfy the
requirements [***12] of section 501
(subd [c], par [3]) of the Internal Revenue Code. This section requires that:
(1) It is
organized and operated exclusively for charitable purposes;
(2) No
part of its earnings inure to the benefit of a private individual or
shareholder;
[*958]
[**670] (3) The organization does
not substantially engage in attempts to influence legislation and does not
intervene in political campaigns.
Failure to
satisfy any one of the requirements set forth in section 501 (subd [c], par
[3]) is fatal and will destroy tax exempt status. ( Stevens Bros. Foundation
v Commissioner of Internal Revenue, 324 F2d 633, cert den 376 U.S. 969.)
In
addition, to receive the benefit of tax exempt status two further requirements
have been read into section 501 (subd [c], par [3]). The organization must be formed for a public
as opposed to a private purpose, and the activities of the organization must be
in conformity with well-defined public policy.
The
subsidiary churches sanctioned by Life Science Church operate in whole or in
part for the private purposes of the respective ministers and their families
and thereby violate both the inurement and operational requirements
[***13] of section 501 (subd [c], par
[3]). The courts have held that [HN3] a
single substantial nonreligious purpose precludes exempt status. ( Parker v Commissioner of Internal
Revenue, 365 F2d 792; American Inst. for Economic Research v United
States, 302 F2d 934.)
[HN4] An
organization is not operated exclusively for one or more exempt purposes if its
earnings inure in whole or in part to the benefit of private shareholders or
individuals. (Treasury Reg, § 1.501 [c]
[3]-1 [c] [2]; 26 CFR 1.501 [c] [3]-1 [c] [2].)
In Calvin
K. of Oakknoll v Commissioner (69 TC 770, 37 TCM 1380, affd 79-1 USTC, par
9328), the United States Court of Appeals for the Second Circuit, affirmed on
the opinion below of the Tax Court which held that the "Religious Society
of Families" was not operated exclusively for religious purposes and
consequently contributions to the organization were not deductible for tax
purposes. The Tax Court stated (37 TCM,
at pp 1381-1382): "[No] one besides petitioners benefited from the use of
Society property. Petitioners alone had
signature authority over the Society's checking account * * * By providing for
petitioner's personal needs, the Society had [***14] a 'non-charitable purpose substantial in
nature.' * * * We conclude, therefore, that
[*959] the Society was not operated
exclusively for the specified purposes."
[HN5]
Private inurement is also proscribed by section 170 (subd [c], par [2], cl [C])
of the Internal Revenue Code and thereby disqualifies a minister's gift to his
church from being considered a charitable contribution. While the evidence is sparse, the best that
can be said is that less than 5% of Life Science Church funds go to charity and
unless a minister can establish that there has been no private benefit or
inurement to him, the church does not qualify as tax exempt and contributions
are not deductible.
[HN6] The
United States Tax Court has consistently upheld the Internal Revenue Service's
position of disallowing charitable deductions for donations taxpayers make to
churches they establish which operate for the benefit of their founders. ( Basic Bible Church v Commissioner,
74 TC 846 [1980]; Lynch v Commissioner, 41 TCM 204; Abney v
Commissioner, 39 TCM 965; Pusch v Commissioner, 39 TCM 838, affd 628
F2d 1353; Walker v Commissioner, 37 TCM 1851-15; Calvin K. of
Oakknoll v Commissioner, [***15] 37
TCM 1380, supra; Heller v Commissioner, 37 TCM 643; Clippinger v
Commissioner, 37 TCM 484; Revenue Rule 78-232, 1978-1 CB 69.)
[HN7] In
addition to requiring that a church meet the requirement of section 501 (subd
[c], par [3]), section 170 requires that a "donation" must qualify as
a charitable contribution within the meaning of the code. Consequently, where the donor expects to
obtain a commensurate benefit, deductions are disallowed. A charitable contribution is synonymous with
a gift. ( DeJong v Commissioner of Internal
Revenue, 36 TC 896, 899, affd 309 F2d 373; Channing v United States,
4 F Supp 33, affd [**671] 67 F2d 986, cert den 291 U.S. 686.) If the
benefits that the transferor can reasonably expect to obtain by making the
transfer are sufficiently substantial to provide a quid pro quo, no deduction
under section 170 is allowed. (Revenue
Rule 78-232, 72-506.) Here, Life Science ministers anticipated and received
direct economic benefits from their payments to their church. Accordingly,
their payments were not "gifts" within the meaning of section 170 and
were not deductible contributions.
[*960]
[HN8] Religious officials are required to pay income [***16] tax on earnings. An individual is not relieved of Federal
income tax liability on income earned by merely assigning his income to a
church. Nor does a vow of proverty grant automatic immunity from Federal income
tax. For a vow of poverty to be effective, and an exemption to accrue, the
member of the religious order must receive the income as an agent of the order
and remit the income to the order where the funds will be treated as the income
of the order and not the member. (Revenue
Rule 77-290, 76-323; Francis E. Kelly, 62 TC 131.)
Where
there is a vow of poverty, an agency relationship must be established in which
the employer looks directly to the order, not the individual member, for
performance of services. Therefore,
[HN9] for a vow of poverty to have exemptive tax consequences, the church must
be exempt under section 501 (subd [c], par [3]), the minister must be an agent,
not a principal of the church, and the activities performed by the minister
agent must be in furtherance of the exempt purposes of the church. Judged by
this standard, a minister of the Life Science Church who maintains his regular
secular employment and takes a vow of poverty does not secure an income
[***17] tax exemption.
Life
Science Church's contention that it cannot be audited by the Internal Revenue
Service is wrong. [HN10] The Internal
Revenue Service is specifically authorized to audit churches in certain circumstances. (Internal Revenue Code [US Code, tit 26, §
7605, subd (c)].) In amplification, Treasury Regulation 1.6033-2 (a) (2)
provides that every organization exempt from tax shall submit such additional
information as may be required by the Internal Revenue Service to ascertain the
basis of its exempt status and to administer the provisions of section 501 and
the subsequent code sections.
The burden
of proof is on the organization seeking to obtain tax exempt status. An
exemption is an exception to the norm of taxation. An organization which seeks to obtain tax
exempt status, therefore bears a heavy burden to prove that it satisfies all
the requirements of the exemption statute.
The Supreme Court repeatedly has said that exemptions from taxation are
not granted by implication. [*961] (See, e.g., Mescalero Apache Tribe v Jones,
411 U.S. 145, 156, and authorities therein cited; Harding Hosp. v United
States, 505 F2d 1068.)
In
addition, respondents introduced [***18]
into evidence a purported exemption letter from the Internal Revenue
Service (respondents' "T" in evidence) which had the earmarks of forgery. It was disavowed by Commissioner Kurtz,
Mr. Schoenfeld and Father Whelan and
respondents were unable to offer any proof of its authenticity. The parties then stipulated that the Life
Science Church never received an exemption from the Internal Revenue
Service. There was also compelling
testimony that the Internal Revenue Service would not grant an exemption to the
Life Science Church.
The
representations made by Life Science Church through its responsible agents and
its publications claiming charitable exemptions were repeatedly stated and
emphasized at meetings. They were in
error and are fraudulent and deceptive practices in violation of subdivision 12
of section 63 of the Executive Law.
Section 359-fff of the General Business Law of
the State of New York provides:
[**672]
"[HN11] Chain distributor schemes prohibited
"1.
It shall be illegal and prohibited for any person, partnership, corporation,
trust or association, or any agent of employee thereof, to promote, offer or
grant participation in a chain distributor scheme.
"2.
As used [***19] herein, a 'chain
distributor scheme' is a sales device whereby a person, upon condition that he
make an investment, is granted a license or right to solicit or recruit for
profit or economic gain one or more additional persons who are also granted
such license or right upon condition of making an investment and may further
perpetuate the chain of persons who are granted such license or right upon such
condition. A limitation as to the number
of persons who may participate, or the presence of additional conditions
affecting eligibility for such license or right to recruit or solicit or the
receipt of profits therefrom, does not change the identity of the scheme as a
chain distributor scheme. As used
herein, 'investment' means any acquisition,
[*962] for a consideration other
than personal services, of property, tangible or intangible, and includes without
limitation, franchises, business opportunities and services. It does not include sales demonstration equipment
and materials furnished at cost for use in making sales and not for resale.
"3. A
chain distributor scheme shall constitute a security within the meaning of this
article and shall be subject to all of the provisions [***20] of this article."
The
legislative history of section 359-fff states its goals (Memorandum of
Attorney-General, NY Legis Ann, 1974, pp 78-79): "[The] chain distributor
scheme is an improvident promotion designed to lure persons in the lower income
brackets, the young, the gullible, the unemployed or other persons in desperate
need of a source of income into believing that through the magic of the chain
distributor scheme, they can become one of the top two or three percent of the
money earners in this country. Such
representations usually result in a total financial loss to a person joining
the chain distributor scheme. However,
because the people to whom this approach is made often are easily led to
believe that by such fanciful ventures they can escape from their current
predicaments, it is imperative that legislation prohibiting such schemes be enacted
as soon as possible to remove such schemes that prey on the unwary."
The Life
Science Church promised return of the $ 3,500 or $ 3,600 payment to a
prospective minister, and an even larger cash return if sufficient new
ministers were received through him. A
new member of the Life Science Church was given the right to act as [***21] "missionary representative" and was
entitled to a 10% commission for each new member he recruited into the church.
After recruiting two fully paid members in one month, the "missionary representative"
was granted advancement to the "missionary supervision" level and
thereby became eligible to receive a special bonus of $ 500 for each new fully
paid minister recruited. After the "missionary supervision" level,
one could become a director, and, like Director Dalconzo, receive 40% of all
fees from the ministers brought in.
[*963]
Ministers were enticed through a demonstration of number doubling. Two became 4, 8 became 16, 32 became 64,
etc., and commissions mounted from $ 360 to a total of $ 1,023,500 when 2,047
new recruits were added. A chart was
prepared to give dramatic visual impact on how to become a millionaire and
member ministers were encouraged to join in a vocal "money humm" at
meetings to raise morale and encourage a financial spirit. Computerized "family trees" were
prepared to determine who was entitled to what proportion of a new minister's
payment. A grievance committee was set
up to resolve disputes.
Variations
on the theme were possible. The contract
executed [***22] by Dalconzo and Ranucci
provided for a 40% commission to Dalconzo for bringing in new ministers. Under the contract, Dalconzo received $
95,000 by bringing in 20 ministers.
[**673]
[HN12] Under subdivision 12 of section 63 of the Executive Law of the
State of New York, the Attorney-General is authorized to seek and obtain
restraining orders and restitution against corporations and individuals who
have engaged in repeated or persistent fraudulent or illegal business
practices. "Fraud" and
"fraudulent" have been defined to include acts and practices having
the capacity or tendency to deceive the public even where there is no actual
intent to deceive. ( Matter of
Lefkowitz v Bull Inv. Group, 46 AD2d 25.)
The
evidence conclusively demonstrates a pyramid scheme in violation of section
359-fff of the General Business Law for which the Attorney-General is entitled
to a restraining order and restitution to those affected.
[HN13] Section 478 of the Judiciary Law
prohibits the unauthorized practice of law. The section provides: "[HN14]
It shall be unlawful for any natural person to practice or appear as an attorney-at-law
or as an attorney and counselor-at-law for a person other than himself in a
court [***23] of record in this state or
in any court in the city of New York, or to furnish attorneys or counsel or an
attorney and counsel to render legal services, or to hold himself out to the
public as being entitled to practice law as aforesaid, or in any other manner,
or to assume to be an attorney or counselor-at-law, or [*964]
to assume, use, or advertise the title of lawyer, or attorney and
counselor-at-law, or attorney-at-law or counselor-at-law, or attorney, or
counselor, or attorney and counselor, or equivalent terms in any language, in
such manner as to convey the impression that he is a legal practitioner of law
or in any manner to advertise that he either alone or together with any other
persons or person has, owns, conducts or maintains a law office or law and collection
office, or office of any kind for the practice of law, without having first
been duly and regularly licensed and admitted to practice law in the courts of
record of this state, and without having taken the constitutional oath and
without having subscribed and taken the oath or affirmation required by section
four hundred sixty-eight of the judiciary law and filed the same in the office
of the clerk of the court [***24] of
appeals as required by said section."
[HN15] Section 495 of the Judiciary Law
prohibits corporations or voluntary associations from practicing law.
Ministers
were informed at meetings that Dr. Howard Tapen would provide legal advice. Dr.
Tapen was not a lawyer. Ministers were
discouraged from going to an outside attorney for advice on church
business. Jack Tizzio was informed that
the payment he made to become a minister was in part to cover the costs of the
legal and financial backing that the church offered.
A film
shown to prospective ministers introduced William E. Drexler, "the
greatest tax attorney in this country", who spoke on the Life Science
Church and encouraged membership. Mr.
Drexler was disbarred by the State of Minnesota from practicing law and was
recently convicted in California for misrepresenting the tax laws in order to
sell ministries in the Life Science Church.
[HN16] The
promise to provide legal advice in the future is the unauthorized practice of
law. ( People v Alfani, 227 NY 334.) Holding oneself out to the public
as being capable of giving legal advice is improper. ( People v People's Trust Co., 180 App
Div 494.) Mr. Ebner and Mr. Tapen were not attorneys, [***25]
yet they were referred to as "legal advisors" of the Life
Science Church to whom ministers were to go for advice.
[*965] Matter
of New York County Lawyers' Assn. v Dacey (28 AD2d 161, revd 21 NY2d 694)
which held that defendant's book, which included forms of wills, inter vivos
trusts and other related documents, was not the practice of law, is
distinguishable. There it was held (28
AD2d, at p 174 [dissenting opn]) that the book did not involve "the representation
and the advising of a particular person in a particular situation". Here, however, personalized and particular
tax and organization advice to
[**674] individuals and groups
and the offer of future legal advice bring church conduct out of the Dacey
holding. Prospective ministers were assured
that they would be backed legally and financially by the Life Science Church.
Instructions were tailored to suit the needs of each minister to obtain income
tax exemption.
In its
totality, the conduct constitutes the unauthorized practice of law in violation
of section 478 of the Judiciary Law and subdivision 12 of section 63 of the
Executive Law. These representations not
only had the capacity to deceive,
[***26] but in fact did
deceive. ( People v Federated Radio
Corp., 244 NY 33; Matter of State of New York v Colorado State Christian
Coll. of Church of Inner Power, 76 Misc 2d 50.)
Section 224 of the Education Law provides:
"[HN17] 1. No individual, association, copartnership or corporation not
holding university, college or other degree conferring powers by special
charter from the legislature of this state or from the regents, shall confer
any degree or use, advertise or transact business under the name university or
college, or any name, title or descriptive material indicating or tending to imply
that said individual, association, copartnership or corporation conducts, carries
on, or is a school of law, medicine, dentistry, pharmacy, veterinary medicine,
nursing, optometry, podiatry, architecture or engineering, unless the right to
do so shall have been granted by the regents in writing under their seal."
The
parties stipulated at trial that the Life Science Church never filed an
application with the Department of Education.
The Life Science Church, nevertheless, held itself out as the Life Science
College. Prospective ministers were told
to attend "college classes" of the church. [***27]
Even if the Life Science College were authorized to exist in [*966]
another State, the Director of Program Review of the New York State
Department of Education testified, it would be necessary to file with the State
of New York to obtain authority. This
was never done. By using the word
"college" respondents violated section 224 of the Education Law.
Respondents
raise the defense of First Amendment free exercise of religion to the charges
brought against them. It bears
repetition that petitioner does not seek to enjoin the religious beliefs of the
church. Regardless of this litigation, it may continue to follow those
religious beliefs and adhere to its theology.
In United
States v Lee ( U.S. , 50 USLW 4201) the Supreme Court of the
United States reiterated that [HN18] not all burdens on religion are unconstitutional
and that the State may justify a limitation on religious liberty by showing
that it is essential to accomplish an overriding governmental interest.
Tension
between these two great principles does not automatically mean violation of the
free exercise of religion clause of the First Amendment to the Constitution of
the United States. The problem is [***28] an ancient
one and with near unanimity our civilization has sought its solution in
"Render therefore unto Caesar the things that are Caesar's; and unto God
the things that are God's." (St. Matthew, ch 22, verse 21.)
Respondent
Petrozza informed prospective ministers that he would show them how to become
tax exempt and that he was talking of a legal fiction as opposed to a religious
church. He warned prospective ministers not to admit to anyone that they became
ministers to achieve tax exemption. Mr. Dalconzo testified that members need
not separate themselves from their original church to become members of the
Life Science Church. From Life Science's perspective they could conscientiously
belong to the two churches. Prospects were told that they would be taught how
to become millionaires, that the word "selling" was simply another
word for "fund raising" and that "missionary program" was a
synonym for "marketing".
Members were warned that the purpose of making money through [*967]
the church should be expressed within the confines of the church but not
"out there". The produce was
described as "money".
[**675]
[HN19] The First Amendment free exercise of religion clause of
[***29] the Constitution is not a
license for unrestricted conduct.
Freedom to believe is absolute but courts may restrict acts and conduct
if the intrusion is justified by a compelling State interest to protect society
and maintain peace, order and morality.
( Reynolds v United States, 98 U.S. 145; Davis v Beason, 133
U.S. 333; Jacobson v Massachusetts, 197 U.S. 11.) The courts have
established a balancing test between the free exercise of religion and the
State's interest in protecting the public.
In Cantwell v Connecticut (310 U.S. 296, 303-304) the Supreme
Court of the United States stated: "[The] Amendment embraces two concepts
-- freedom to believe and freedom to act.
The first is absolute but, in the nature of things, the second cannot
be. Conduct remains subject to
regulation for the protection of society.
The freedom to act must have appropriate definition to preserve the
enforcement of that protection. In every
case the power to regulate must be exercised as not, in attaining a permissible
end, unduly to infringe the protected freedom".
In United
States v Lee ( U.S. ,
, 50 USLW 4201, 4202, supra), the Supreme Court reviewed the long
[***30] established analysis:
"[Not] all burdens on religion are unconstitutional." (See, e.g., Prince
v Massachusetts, 321 U.S. 158; Reynolds v United States, 98 U.S.
145.) "The state may justify a limitation on religious liberty by showing
that it is essential to accomplish an overriding governmental interest." (
Thomas v Collins, 323 U.S. 516; Wisconsin v Yoder, 406 U.S. 205; Gillette
v United States, 401 U.S. 437; Sherbert v Verner, 374 U.S. 398.)
In Matter
of Holy Spirit Assn. for Unification of World Christianity v Tax Comm. of City
of N. Y. (81 AD2d 64, 75, 79) the Appellate Division, First Department,
demonstrated the detailed analysis that may be made into the conduct of a
religious organization by the State as the protector of society and denied the
Unification Church an exemption from the real property tax stating:
[*968]
"Therefore, despite the religious content of the doctrine, and the
leitmotif of religion with which the eclectic teachings are tinged, the
doctrine, to the extent that it analyzes and instructs on politics and
economics has substantial secular elements.
The mere use of religious terminology in connection with politics and
economics [***31] will not obscure the
traditionally non-religious nature of these fields. Petitioner, by undertaking an adventure in
semantics, is attempting to cloak politics and economics with the blanket of religious
dogma * * *
"By
denying petitioner tax exemption, this court is not limiting petitioner's
freedom to practice its beliefs and disseminate its doctrines; rather, it is
merely declaring that petitioner is not organized and conducted in the manner
required by law to entitle it to a tax exemption."
Held to
these standards the claim of free exercise of religion is not a shield to an
unlawful claim of tax exemption, an illegal pyramid scheme, improper holding
out as an attorney and misuse of the term "college".
Respondents
contend that certain collaboration between petitioner's office and the District
Attorney of Nassau County taint a portion of the evidence and for that reason
the proceeding should be dismissed.
The record
reveals that Investigator Martinez held three meetings with the Nassau County
District Attorney's office and that Assistant Attorneys-General Siegel-Baum and
Weidman were deputized by the District Attorney of Nassau County but did not
actually act in that capacity.
[***32] There was no evidence of
a parallel or joint plan by the Attorney-General and District Attorney [**676]
to investigate the Life Science Church and respondents. In any event joint investigations are not
unknown. It is only when such an
investigation is carried on by one arm of government entitled to do so on
behalf of another arm of government not entitled to do so that such
investigation is improper. The only
claim of impropriety by respondents is to be found in petitioner's Exhibit No.
50, the contract entered into between Ranucci and Dalconzo. Respondents contend that this contract was
illegally given to the Attorney-General's office by Dalconzo's attorney who had
lawfully secured it from the District Attorney.
[*969]
The testimony established that because of the inconvenience to many of
the respondents in having their documents tied up by the District Attorney,
some were returned to them, including the Ranucci-Dalconzo contract. Dalconzo's attorney was one of many attorneys
given access to the documents subpoenaed by the District Attorney. Dalconzo was entitled to his contract. It had been executed by him and having
properly obtained it through his attorney, as [***33] other respondents had obtained their documents,
he was free to make it available to the Attorney-General. Further, the claim of taint, even if successful,
would only eliminate petitioner's "50" in evidence, the written contract. The contents of the contract were testified
to orally by Dalconzo at trial and this, together with the other evidence, was
sufficient to demonstrate the pyramid scheme.
As previously
stated Judge Cahn enjoined respondents from (1) accepting payment as
compensation for selling ministers' credentials; (2) compensating affiliated or
nonaffiliated institutions for the recruitment of ministers ordained; and (3)
stating the tax consequences of becoming a minister or starting a church unless
such tax consequences were in the form of a written opinion furnished by an
attorney or certified public accountant.
Respondent flagrantly disregarded this order.
On October
7, 1980 Investigator Michael A. Segarra attended a Freedom Foundation seminar
at the Taft Hotel. The meeting was
conducted by Anthony Rousseau, who discussed the tax consequences of becoming a
minister and solicited sales of ministers' credentials. He made it clear that
no credentials would be issued [***34] until
the entire donation had been paid. He
falsely advised the audience that the court's injunction had been lifted
against the church and its leaders. The
May edition of Good News, a church newspaper, was given to Investigator
Segarra together with another document which furnished written advice on the
tax consequences of becoming a minister.
These acts
constituted criminal contempt pursuant to section 750 of the Judiciary Law in
that they were in willful disobedience of the court's lawful mandate. While at least 24 seminars were conducted
since Judge Cahn's order, evidence is only available for that single
seminar. [*970] The Life Science Church is fined the sum of $
10,000 for criminal contempt for violating the restraining order.
[HN20] Section 773 of the Judiciary Law
provides for a fine for civil contempt.
It states that if "actual loss or injury has been caused to a party
* * * by reason of the misconduct proved against the offender * * * a fine,
sufficient to indemnify the aggrieved party, must be imposed * * * and paid
over to the aggrieved party". The
aggrieved parties are those individuals who were purchasers of ministers'
credentials whom Justice Cahn sought [***35]
to protect in his order and the actual loss to each party is the payment
made in exchange for those credentials. The payments made after August 12, 1980
should be returned to the purchasers as fines because they are defrauded consumers. ( State of New York v Unique Ideas, 44
NY2d 345.)
The petition
is dismissed against respondents Donna Petrozza, and Lorraine Jania for
petitioner's failure to make out a prima facie case against them. Lee Hirsch and Joseph G. Dalconzo are removed
as respondents upon consent of petitioner.
The
remaining respondents are permanently enjoined from directly, or
indirectly [**677] engaging in the following illegal, fraudulent
and deceptive acts:
(1)
Soliciting funds from the public for ministers' credentials.
(2)
Selling or offering to sell ministers' credentials.
(3)
Engaging or attempting to engage in a chain distribution scheme as defined in
section 359-fff of the General Business Law.
(4)
Engaging or aiding anyone in engaging in the unauthorized practice of law.
(5)
Continuing to use the name "college" unless and until proper authorization
is obtained from the appropriate State agency.
A
permanent receiver shall be appointed pursuant [***36] to section 353-a of the General Business Law,
who shall have all the authority provided by statute, including but not limited
to:
[*971]
(1) Establishment of a fund for restitution to be maintained for a
period of no less than two years from the time established and which time may
be extended if circumstances warrant.
(2) The
receiver shall account to the court with notice to the Attorney-General every
six months during the existence of the fund.
(3) Notice
shall be given to victimized consumers in the following manner:
(a)
Publication for no less than three consecutive weeks in a paper of general
circulation in each county in New York and in Nassau and Suffolk counties;
(b)
Individual notice shall be sent to each consumer who purchased credentials from
Life Science Church. Respondents' attorney shall provide the petitioner with an
affidavit stating the names of purchasers, contents of the notice and date of
the mailing;
(c) The
contents of said notices (newspaper and by letter) shall be submitted to the
Attorney-General for approval as to form and substance prior to mailing.
Pursuant
to CPLR 8303 (subd [a], par 6), subdivision 12 of section 63 of the Executive
Law, [***37] and subdivision 1 of section 353 of the
General Business Law, petitioner is awarded a sum for costs directly attributable
to the prosecution of this action, which it may establish by affidavit upon the
settlement of order.
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