Church by Mail, Inc. v. Commissioner

In 1978, Church by Mail, Inc. (the church) (plaintiff) was organized by Reverends James Ewing and M.R. McElrath (the ministers). The church’s main focus was sending printed materials, including sermons, to its mailing list of over 3 million recipients. The church regularly requested money in its mailings and received over $3 million in donations in 1980. Twentieth Century Advertising Agency (Twentieth), a for-profit company also owned and controlled by the ministers, provided printing and mailing services for the church. Pursuant to two contracts between the church and Twentieth, signed by Reverend Ewing on behalf of both entities, Twentieth charged the church at cost plus 15 percent commission. Between April 1980 and February 1981, the church paid Twentieth over $180,000 under this arrangement and received significant advances that it partially repaid with minimal interest. Twentieth spent approximately two-thirds of its time on work for the church and refused to disclose its other clients. Twentieth did not advertise its services. From 1979 through 1981, Reverend Ewing received over $97,000 in compensation from the church and over $210,000 from Twentieth, and Reverend McElrath received $93,000 from the church and over $208,000 from Twentieth. In 1980, the church filed an application with the commissioner of internal revenue (defendant) to obtain tax-exempt status under Internal Revenue Code § 501(c)(3). The commissioner denied the application, and the tax court agreed, finding that the church functioned for the nonexempt purpose of providing a market for Twentieth’s business and that its earnings went principally to the private benefit of the ministers. The church appealed.