ULC Court Cases: Universal Life Church v. USA (1997)

Case Background

This court case encompasses the original Universal Life Church's attempts to regain their tax-exempt status after the IRS revoked it.

On August 14, 1997 the Universal Life Church took the United States of America to the 9th Circuit Court of Appeals arguing that the automatic stay provision of bankruptcy law had been violated in the case of the Universal Life Church vs. the United States of America. The automatic stay provision provides that anyone who files for Chapter 11 bankruptcy is protected from debt collectors.

In 1969 as well as in 1970, the IRS denied the application for tax-exempt status by the Universal Life Church, a nonprofit organization that at the time was based solely out of California, which provides ordinations for anyone that wishes to become a legally-recognized ordained minister. The IRS believed that the ULC had participated in other activities not relating to the religious nature of their organization. The Church paid the taxes as well as the interest that was due for the year of 1969 and then sued in court in order to obtain a refund. The court ruled in the favor of the ULC, finding that the activities the IRS contested, which included the ordination of ministers and granting church charters were not significant enough to deny tax exemption status.

The IRS then revoked the tax-exempt status of the ULC once more in 1984 for the years 1978 to 1981, in response to which the Universal Life Church legal team disputed the decision at the Court of Federal Claims. This time the court did not rule in the favor of the ULC. They upheld the revocation stating that the Universal Life Church did not fall under tax exemption laws due to the fact that they gave their ordained ministers tax advice and had also failed to control its congregations’ non-tax exempt activities.

On November 30, 1989, the ULC filed for Chapter 11 bankruptcy. At the same time, the IRS was investigating their tax-exempt status from 1982 to 1985. They declared the Church to have not fallen under tax-exempt rules and therefore revoked their status from that period, ordering the Church to pay back taxes estimated to be around $6 million. The Universal Life Church legal team filed a motion in Bankruptcy Court against the IRS on July 20, 1993, stating that the IRS had violated the automatic stay provision of the bankruptcy law. The Bankruptcy Court denied the motion, ordering the Church to pay back taxes for the period stated. The District Court agreed with the previous court cases, stating that the revoking of tax-exempt status fell under the exemptions of the automatic stay provision.

The exemption states that any governmental institutions that violate the automatic stay provision may do so only if their action is to protect the financial interest of the government, or if is in relation to the safety and welfare of the public.

Rulings And Outcomes

The 9th Circuit Court ruled in agreement with the previous court cases, and found the IRS to be operating under this exemption because the act of revoking the ULC’s tax-exempt status was deemed as a benefit to the public. They declared that anyone who was willing to donate to the Universal Life Church must be assured that their contributions were used legitimately, which the IRS believed was not the case; this was the reason why the Universal Life Church has its tax-exempt status revoked. The IRS’s argument was that taxpayers are paying for the ULC to run as a tax-exempt organization due to its non-profit nature so, if the ULC is not running under the rules governing how non-profit organizations can spend their money, then the taxpayers are being taken advantage of. The 9th Circuit Court ruled that the IRS was operating under fraud detection, and therefore were exempt from the automatic stay provision that would have otherwise protected the ULC.

Outcome: the ULC of Modesto, CA was no longer able to file as a tax-exempt organization

Read the court’s summary of the case here.