DIMARCO, ALLEN (1983)(O)(IND)

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ORDER

STATEMENT OF THE CASE

1.          The Department, in a notice dated May 27, 1982, assessed against the Protestor additional individual income tax alleged to be due and owing for the years 1979 and 1980.

2.          Pursuant to Iowa Code § 422.28 (1983), the Protestor filed a protest alleging assignment of error. The record does not indicate the Tax Review Committee's disposition, if any, of the matter. Subsequently, the Department filed its Answer to the protest, and the matter was set down for hearing.

3.          A Petition to Intervene in the matter was filed by the Intervenor on December 28, 1982. The Petition was granted by this Hearing Officer on April 8, 1983. On February 16, 1983, the Department served five interrogatories upon the Protestor. The interrogatories went unanswered, and on June 17, 1983, the Department filed a Motion to Compel Discovery. That motion was granted in an Order Compelling Discovery issued on July 5, 1983.

FINDINGS OF FACT

1.          On January 5, 1983, a Notice of Time, Place and Nature of Hearing was sent by certified mail to the parties by the Hearings Unit of the Department scheduling an evidentiary hearing for April 5, 1983, at 1:00 p.m. in Conference Room 2, Fourth Floor, Hoover State Office Building, East 13th and Walnut, Des Moines, Iowa. The notice was mailed to the parties at their last known addresses as indicated by the records of the Department and as required by Iowa Code § 17A.12 (1983) and Department rule 730-7.14 (17A) IAC. The matter was later continued to August 2, 1983, at 1:00 p.m.

2.          The Department's assessment of additional tax for the years 1979 and 1980 resulted from its disallowance of certain deductions from income taken by the Protestor during those years. The Protestor claimed the contested deductions during those years as a result of the following circumstances: on April 8, 1978, a "Charter" was granted to the Protestor and certain other individuals by the Universal Life Church, Inc., of 601 Third Street, Modesto, California. In the Charter, the following is stated: "This is to certify that a Congregation of the Universal Life Church, Inc. is started ... at RFD 4 ... MASON CITY ... IOWA." Subsequently, in this decision, the phrase "Universal Life Church" is abbreviated to "ULC." The signature of Kirby J. Hensley, President of the Universal Life Church (ULC) of Modesto, California appears on the document. The evidence does not indicate that the Universal Life Church (ULC) of Modesto, California ever exerted any direction, control or management over the congregation in Mason City. What little evidence there is in the record indicates a lack of such management, direction or control. Nor does the evidence indicate that the ULC in Modesto had any responsibility for the Mason City congregation's debts or that any property used by the Mason City congregation was owned or in any way controlled by the Universal Life Church (ULC) in Modesto. Neither the Protestor nor the Intervenor was certain of the amount of money which the Mason City congregation paid the Universal Life Church (ULC) of Modesto, California for the charter and various items of literature which the Modesto Church from time to time, subsequent to April 8, 1978, sent to the congregation.

3.          As of the date of the hearing, the congregation of the ULC of Mason City consisted of four members. These members were the four individuals previously mentioned as the congregation's ministers. In his testimony, the Protestor vaguely implied that during the years 1979 and 1980, the congregation had been larger. However, neither the Protestor nor the Intervenor presented testimony or other evidence to substantiate this, aside from the general statement that the congregation had been larger. The evidence does not indicate that any baptisms, marriages, funerals or other ordinary and usual religious functions, such as confirmations and retreats, were performed by any ministers of the ULC of Mason City during the years 1979 and 1980. Throughout that period, some services were conducted in the ministers' homes, but the number and frequency of those services does not appear in the record nor does the content of the services; it is not shown whether the services were more "social" than "religious" in nature or vice- versa. The Protestor testified that he did some "pastoral counseling;" however, he also testified that the pastoral counseling was partly "financial" and partly "moral" in nature. The Protestor did not state whether the "counseling" was more moral or more financial.

4.          The Protestor testified that in 1979 he contributed $5,427 to the ULC and in 1980, $4,357. The only support in the record for this contention is the Protestor's testimony. The Protestor submitted no cancelled checks or receipts of contributions as support for his testimony. Upon cross examination, the Protestor admitted that his gross income for the year 1979 was $10,859.67, and for the year 1980, $8,714.40. The Protestor further testified that he personally, during the period of the assessment, did not have a checking account and conducted all his transactions in cash. The Protestor declined to estimate his average monthly living expenses for 1979 and 1980, stating only that they were not large.

5.          The testimony is extremely confusing concerning the entity to which the supposed contributions were made. At times, the Protestor testified that the supposed contributions were made to the ULC of Mason City; at other times, he testified that they were made to the ULC of Modesto, California. After some repeated study of the record, the Officer concludes that the substance of the Protestor's testimony is that the supposed contributions were placed in a checking account maintained, during 1979 and 1980, by the ULC of Mason City at the United Home Bank in Mason City. Once in that checking account, the alleged contributions were made to the ULC of Modesto by virtue of the fact that the ULC of Modesto and the ULC congregation of Mason City are "one church." There is no evidence, testimonial or documentary to indicate that any money, other than very small amounts for bookkeeping services, was actually, physically transferred from the ULC congregation in Mason City to the ULC of Modesto.

6.          During 1979 and 1980, in return for his services as a "minister" to the ULC congregation of Mason City, the Protestor received a housing allowance. He could not remember the amount of that housing allowance. He also testified that he possibly received a "utilities allowance" but could not state for certain whether he received such an allowance or how much it was. He also testified that the other "ministers" of the Mason City ULC congregation were also given a housing allowance. The record is devoid of any evidence that persons other than the four ministers made any contributions to the Mason City Universal Life Church (ULC) congregation in 1979 and 1980.

7.          As previously mentioned in the Statement of the Case, on February 16, 1983, the Department served interrogatories upon the Protestor. The exact wording of those interrogatories is not a part of the record. As of June 17, 1983, when the Department's Motion to Compel Discovery was filed, the interrogatories had not been answered. As of the date of the hearing, in spite of the existence of an Order Compelling Discovery issued on July 5, 1983, the Protestor still had not answered the interrogatories. The Protestor testified that he received a copy of that Order, in spite of the fact that the Order sent to the Protestor was returned as unclaimed. The Protestor's testimony is suitable to establish that the substance of one of the Department's five interrogatories was the question of what documentary evidence, if any, existed to prove the existence and amount of the Protestor's supposed contributions to the Universal Life Church (ULC) of Modesto. This is so because the Protestor testified that his reason for not answering the interrogatories was that he had written to the ULC of Modesto requesting documentation for his contributions but had received no reply from that organization. Because of this, he could not fully and completely answer the Department's interrogatories. As of the date of the hearing, the Protestor had received no receipts from the ULC of Modesto, this in spite of the fact that, in the Protestor's own words, the request for the receipts had been made "quite a few months ago."

8.          The ULC of Modesto propounds no religious doctrines other than beliefs in freedom of religion and "that which is right." The church believes that "right" must be decided "in the heart of each person." See Protestor's exhibit D.

9.          The Internal Revenue Service has conceded that the Universal Life Church, Inc. (ULC) of Modesto, California is a church and that contributions to that body are deductible for federal income tax purposes under I.R.C. § 170 (1954). The Internal Revenue Service has further conceded that, under I.R.C. § 501 (1954) the church's income is not subject to taxation. These findings of fact are derived from the Protestor's exhibits A and B and are made in accordance with Department rule 730-7.17(2)(c) (2) (17A) IAC.

CONCLUSIONS OF LAW

1.          The Department has jurisdiction of this matter pursuant to Iowa Code § 422.28 (1983).

2.          A threshold question concerns the issues which may or may not be discussed in this case. The Intervenor, Mr. Nasheim, objected to any issue being discussed other than the one set out in the Notice of Time, Place and Nature of Hearing. The relevant portion of that notice reads as follows:

A single issue is involved in this case. This concerns the question of whether or not payments made to an organization known as the Universal Life Church are tax deductible donations. The Protestor urges that these payments are tax deductible donations. The Department argues that they are not.

3.          The Officer believes that it is proper to consider the issue of the contributions' existence. In its interrogatories, the Department requested of the Protestor documentation to prove that the contributions had in fact been made. Such a request was notice to the Protestor that the Department considered the contributions' existence to be in issue in the case. The Protestor received this notice long before the hearing occurred. If one party to an administrative hearing has been informed that the opposing party considers a matter to be at issue and has been given opportunity to gather and present evidence on that issue, the issue may be considered by the person hearing the case even if it is not contained in the notice of hearing because no "unfair surprise" is involved for either party, see B. Schwartz, Administrative Law, § 97 (1976) and this Hearing Officer's decision in the matter of North American Car Corp. (docket number 79-158-5A-A, August 27, 1980). Also, in a case the facts of which are very similar to this one, the U.S. Tax Court decided that "Cancelled checks substantiating the contribution were the subject of pre- trial discovery efforts by respondent (the Internal Revenue Service), and petitioner (taxpayer) was thus fully informed of respondent's position that the alleged contributions had not been substantiated." Barry R. Schilberg, 82,336 P-H Memo TC, at 1430. The party in that case appeared pro se, Schilberg at p. 1429.

4.          The question of whether the Protestor made any contributions during the years 1979 and 1980 may thus be considered. Under federal law, the person claiming the benefit of a deduction has the burden of proving that the deductible expense was incurred, Welch v. Helvering, 54 Sup. Ct. 8, 9 (1933). A similar evidentiary burden exists under Iowa law, In Re Estate of Waddington, 201 N.W.2d 77, 79 (Iowa 1972). That burden is not carried if the only evidence for the existence of the deductible expense is the taxpayer's testimony. In the Schilberg case, the taxpayer testified that he had made certain contributions to a "Church of United Brotherhood" (CUB) and presented as additional evidence receipts for those contributions signed by himself. The court observed:

First, Petitioner has not convinced us that he actually made any contributions to CUB in 1976. His testimony on this point was cast in the most general terms. The only evidence offered to show the alleged contribution was two receipt forms ... Petitioner admitted, however, that he personally wrote the receipts and placed a stamp on them indicating that CUB had received the stated amounts. Those receipt forms without corroboration do not establish that he made any contributions to CUB in 1976.

Petitioner did not offer in evidence any cancelled checks, bank statements, or any other documentation to corroborate the receipt forms that he signed ... The receipt forms carry no more evidentiary weight than Petitioner's own testimony, and we do not find either convincing.

5.          However, assuming hypothetically that in fact the Protestor did transfer funds into the bank account of the ULC of Mason City, on this record those transfers of funds cannot be considered deductible contributions. Under Iowa Code § 422.9(2), contributions, deductible under the Internal Revenue Code, are deductible for the purposes of computing Iowa taxable income I.R.C. § 170 (1954) reads in relevant part:

§ 170. Charitable, etc., contributions and gifts.

(a) Allowance of deductions.

(1) General rule. There shall be allowed as a deduction any charitable contribution (as defined in (c)) payment of which is made within the taxable year.

....

(c) Charitable contributions defined. For purposes of this section, the term " charitable contribution" means a contribution or gift to or for the use of -

....

(2) A corporation, trust, or community chest, fund, or foundation -

....

(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes ... or for the prevention of cruelty to children or animals;

(C) no part of the net earnings of which inures to the benefit of any private shareholder or individual ....

6.          Assuming the transfers were made, why can they not be considered " charitable contributions"? First, the record clearly demonstrates that the supposed transfers were made only to the account of the ULC in Mason City. There is no evidence that the supposed donations were ever transferred from the ULC of Mason City to the ULC of Modesto, California. Under these circumstances, if the Protestor is to take advantage of the ULC of Modesto, California's tax deductible status, a contribution to the ULC of Mason City must be synonymous with a contribution to the ULC of Modesto. Under facts similar to those in this case, the tax court has stated that such a contribution is not synonymous. In other words, the tax court has held that the parent church of Modesto and local congregations of the ULC are not "one church." The tax court has held instead that the mere securing of a charter from the ULC of Modesto by a local congregation does not allow the local church to participate in ULC of Modesto's tax exempt status. That tax exemption is an "individual" and not a "blanket" exemption, applicable only to the ULC of Modesto and not to other congregations, Luise K. Woods, 82653 P.H. Memo TC, p. 2892 and cases cited at fn. 4, and William R. Hall, 82337 P.H. Memo TC at p. 1435. If a parent church exercises a suitable amount of management, direction and control over a local church and performs other acts such as assuming responsibility for the debts of the local church or owns or controls the property on which the local church stands, it can in fact be said that the parent and local church are one organization and the tax exempt status of the parent church can devolve upon the local church, McGahen v. Commissioner, 76 T.C. 468, 481 (1981). However, absent a showing of such management, direction, control, responsibility or ownership, as is the case here, parent and local churches must be considered separate entities and a contribution to one is not, ipso facto, a contribution to the other. In summary, the contributions, if they ever existed, went only to the Mason City church and not to the tax exempt ULC of Modesto.

7.          Could then, the Protestor's supposed gifts to the ULC of Mason City be considered " charitable contributions" for the purposes of I.R.C. § 170? The Officer reasons that under applicable law they could not be so considered. Initially, there was a complete failure to show that the ULC of Mason City is a "corporation, trust, or community chest, fund, or foundation," and such a showing is necessary to prove deductibility under § 170, Schilberg at p. 1430 and Woods at p. 2891. Also, there was a failure to show that the ULC of Mason City was organized and operated exclusively for religious purposes. It conducted none of the usual religious rites such as marriages, baptisms or funerals. The record does not disclose the church membership, other than those who were "ministers" of the church for which religious functions were performed. The Protestor did some counseling, but the evidence is fairly clear that this counseling was as much financial as religious. Under circumstances similar to those in this case, the federal tax court has held that a body was organized and operated only minimally and not exclusively for religious purposes, thus contributions to it were not deductible, see Jon M. Solander, 82,161 P-H Memo TC, at p. 683. The Officer reaches the same conclusion on this evidence. The ULC church in Mason City was pretty clearly organized and operated not only for religious purposes but for other purposes as well. Because of this, the supposed contributions to it are not deductible.

8.          The Protestor's contention failed additionally in that he has failed to prove that "no part of the net earnings" of the ULC of Mason City "inures to the benefit of any private ... individual." Under applicable law, if one individual or a small group of individuals controls an organization, and that same individual or group of individuals provides all or nearly all of the funds to the organization they control and, in turn, all or nearly all of the withdrawals from the organization's accounts are for the purpose of paying the salaries or living expenses of the controlling individual or group, the prohibition against inurement to the benefit of private individuals is violated, McGahen, 76 T.C. at pp. 482-83 and Church of the Transfiguring Spirit v. Comm'r, 76 T.C. 1, 6 (1981). The Protestor has completely failed to prove that donations to the ULC of Mason City do not inure to his benefit and the benefit of the three other ministers. His testimony on the whole matter of how much he or anyone else received from the church in the way of living expenses is so vague and general that it does not refute the Department's contention that his supposed contributions did inure to his benefit. The tax court's comments in Schilberg are germane at this point:

We add that, because this case involves an organization controlled by a limited number of individuals, Petitioner had a special duty of openness and candor as to all the facts; otherwise, the Court cannot be assured that upholding the claimed deductions would not sanction an abuse of the revenue laws. (citation omitted). Petitioner did not fulfill that duty. He failed to respond to Respondent's discovery efforts ... and his testimony was cast only in vague generalities. We are left with the firm conviction that CUB was formed and operated for predominantly personal purposes and that any religious activities connected with it were of minimal significance. (citations omitted.)

9.          In conclusion, the Officer has several remarks. He points to the court's refusal to sanction the taxpayer's failure to respond to discovery in Schilberg, supra, as justification for his own refusal to sanction the Protestor for failure to respond to discovery in this case. Additionally, the Protestor had placed heavy reliance upon the court's decision in Universal Life Church, Inc. v. United States, 372 F. Supp. 770 (U.S.D.C.E.D. Cal. 1974) while arguing that it was unconstitutional to examine various aspects of the operation of the ULC of Mason City. The Officer reasons that a close study of that case and other applicable cases in this area indicates that Universal Life Church, Inc. stands only for the proposition that exemption from taxation may not be denied upon the grounds that the doctrines which a church preaches are minimal, ridiculous or false, and by logical extension exemption may not be denied upon the grounds that the members of a purported church do not believe its doctrines, see Universal Life Church, Inc. at p. 776. The decision in that case does not prohibit the examination of a church's structure, public practices and finances to determine if the structure, practices and finances are those of a body "organized and operated exclusively for religious ... purposes."

Darwin D. Clupper Hearing Officer