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B. The lower court erred in concluding that Three Angels
did not use its property primarily for religious purpose, as
revenues from its properties do not inure to any private person,
it supports a wide range of missionary activities, and it provides
its broadcast services at or below cost.
Three Angels used the properties at issue in this case, its
administrative and operational center, its carpenter shop, and
call center in a manner consistent with the religious purposes
discussed in the statement of the case and Section A above. Under
Illinois law, the requirement that property be used "exclusively"
for religious purposes means "the primary purpose for which the
property is used, not to any secondary or incidental purpose."32 Thus, an entity whose activities
on a property are primarily in furtherance of religious purposes
will not lose its tax-exempt status if there is some minor, incidental
or secondary use of the property for non-exempt purposes.33
32
Methodist Old Peoples Home v. Korzen, 39 Ill. 2d
149, 158, 233 N.E.2d 537, 542 (1968).
33
Evangelical Hospitals Corp. v. Dept. of Rev., 223
Ill. App.3d 225, 231, 584 N.E.2d 1004, 1008 (Ill. App. 2d 1991).
[page 37]
Further, space used for administrative, maintenance, or storage
purposes will be exempt if these uses are integral and necessary
to the exempt purpose.34
At the trial, the interveners attempted to dissect the administrative
facility into square-foot blocks broken down by specific purposes,
such as administrative use, production studios, advertising,
etc. TT 234. The hearing judge did a similar thing when she ruled
that the pastoral offices were exempt, but the rest of the facilities
were not. RD 3. But these distinctions are inappropriate, as
long as all the uses relate to and support the primary religious
purposes of Three Angels.
As one Illinois court put it, "Illinois courts have held that
property used as hospital administrative and support services,
property used as a hospital employee parking lot . . . and property
used as a child-care center serving employees of a tax-charitable
hospital all qualify for the property tax exemption."35 If the hearing judge below
was correct in her division of Three Angels property, then hospitals
would only have their emergency rooms, patient wards, and other
patient care areas exempt, and would pay taxes on parking lots,
maintenance rooms, and cafeterias. But this is not the approach
Illinois courts have taken, and this Court should not take that
approach with Three Angels' property.
In Illinois, one determines if a religious entity is operating
according to its religious purposes, both generally and in relation
to a particular property, by looking at two things:
34
Evangelical Hosp. Ass'n v. Novak 125 Ill. App. 3d
439, 465 N.E. 2d 986(Ill. App. 2d 1984) (administrative and storage
space that was supportive of religious purposes was tax exempt).
35
Mount Calvary Baptist Church v. Zehnder, 302 Ill.
App.3d 661, 672, 706 N.E.2d 1008, 1016 (Ill. App. 1d. 1998).
[page 38]
one, how the entity is organized, and two, "the actual facts
relating to its method of operation."36
In examining religious charities, the courts have found a
number of factors to be relevant to whether there is exclusive
operation for charitable purposes. These factors were helpfully
summarized for religious ministries in the case of Inter-Varsity
Christian Fellowship, where the court noted certain "specific
and vital" factors relevant to Inter-Varsity's exempt status.37 These included:
| |
1) |
It was organized as a not-for-profit corporation with a charter dedicated
exclusively to religious and charitable purposes; |
| |
2) |
None of its revenue inured to the benefit of any private
person and, upon dissolution, any capital surplus, if any, must
be distributed to another charitable organization; |
| |
3) |
It supported missionaries and served the needs of an evangelical movement; |
| |
4) |
It provided a substantial amount of materials free or below
cost to groups which were targeted for its message. |
A fifth factor that has emerged from the cases is that relating
to revenue of charitable organizations. As more fully discussed
below, this factor is basically whether:
| |
5) |
Any net revenue from sales by the organization are secondary
and incidental to the exempt purpose, the sales are of items
that further the organization's purpose, and the excess revenue
is used in the furtherance of the entity's charitable purposes. |
The evidence, even those facts considered undisputed, showed
that Three Angels meets these five factors.
36
Evangelical Teacher, 118 Ill. App. at 25, 454 N.E.
2d at 838.
37
Inter-Varsity Christian Fellowship v. Hoffman, 62
Ill. App. 3d. 798, 802-03, 379 N.E.2d 813, 817 (Ill.
[page 39]
Factor One – Organized and dedicated to a charitable or religious purpose.
First, Three Angels' Articles of Incorporation state that
its purposes will be those of a purely religious or charitable
not-for-profit organization. RD 5; TT 53-55, Appl. Exh. 2. The
Articles then state that Three Angels will "develop, plan, promote,
produce and direct in cooperation with various religious organizations,
all types of religious programming for electronic transmission
for television and radio broadcasting throughout the world."
Id. at Sec. 1.2(a).
Factor 2 – No Personal Inurement and a Dissolution Clause
Second, Three Angels Articles state that none of its net
earnings shall "inure to the benefit of . . . its members, trustees,
directors, officers or other persons." Id. at 1.2(I)(I). Further,
the governing documents require that, upon dissolution of Three
Angels, all assets shall be distributed to organizations that
are "organized and operated exclusively for charitable, religious,
educational scientific purposes" and are not-for-profit organizations
under federal law. TT 60-61, Appl. Exh. 3. There was some confusion
on the existence of a dissolution clause in the hearing judge's
initial opinion, but in a later ruling, she recognized that one
existed. OPR 2.
The hearing judge's concerns with the topic of inurement is
twofold. First, she mistakenly held that Three Angels does not
have an independent board, and the organization is basically
a closely held business of the Sheltons. RD 7, 35. Pages 11 to
13 above detail the plain factual error of this conclusion, including
testimony by Dr. Walter Thompson, the board chairman, Elder Ken
Denslow, Adventist leader and board member, Larry Ewing, CPA
and Three Angels treasurer, and Alan Lovejoy, independent accountant
with Gray, Hunter and Stenn, LLP, Accountants.
App.2d 1978).
[page 40]
Second, she mistakenly concluded that Linda Shelton, Three
Angels vice president, received royalties from Three Angels for
music CDs. Once again, as described in pages 15 to 16 above,
there is no evidentiary basis for this application of law to
fact. Linda received no royalties from Three Angels, but received
de minimis royalties of $20 or so from a third party with no
connection with Three Angels from the licenses to her songs,
which were her personal property. Once again, the hearing judge's
application of fact to law on this point were in error.
Given these points, this Court should find that Three Angels
meets the no inurement standard. It should reverse the lower
court's legal conclusion on this point, and reject the hearing
judge's legal conclusion that Three Angels profits goes to the
personal inurement of private persons.
Factor 3 – Missionary Activity and Support of an Evangelical Movement
Three Angels broadcasting has a close association with the
Adventist Church. Adventist leaders and pastors are on its board,
including the current president of the Illinois Conference of
Seventh-day Adventists. TT 93-94. All the board members are active
members of the Adventist church. TT 92. Danny Shelton is an ordained
elder and serves as a lay minister of the Adventist church. TT 38.
Further, the evidence overwhelmingly shows that Three Angels
supports and directly carries out missionary activity. It purchased
property and buildings in Russia to serve as church building and
offices as well as a religious broadcast center. TT 133-134.
It pays the salaries of the 30 to 40 employees who operate the
religious broadcast ministry in Russia. T 134, 188. It also similarly
owns and operates a religious broadcast ministry in
[page 41]
the Philippines. The facility there employees about ten full-time
employees and broadcasts religious programs to a potential audience
of 20 million people. TT 135.
But not only does Three Angels support missionary activity,
it directly carries it out. As more fully described above in
pages 20 to 22, Three Angels leadership is actively involved
in preaching, praying, and praising in churches throughout America
and overseas. The Three Angels team has conducted a number of
direct evangelism preaching campaigns resulting in many baptisms,
including 15,000 in India and a similar number in Russia in 2000
and 2001. TT 136.
These facts, along with the close relationship between Three
Angels and the Seventh-day Adventist Church, a growing worldwide
evangelical movement, as described above at pages 4 to 7, support
the finding that Three Angels meets the criteria of factor three.
This Court should reject any legal conclusions made by the hearing
judge to the contrary.
Factor 4 – Reduced or No-Cost Benefits to the Public
The evidence at trial demonstrated that Three Angels gives
away, at no charge, a significant amount of religious literature,
videos, audio tapes and other materials. TT 171, 172, 182, 186;
Appl. Exh. 18-21. Everyday, free material is promoted and made
available to the public on a variety of spiritual and religious
topics, including healthful living and finding spiritual peace.
TT 171. Every Thursday, there is a special, two-hour program
called 3-ABN Presents, where there is always a free give-away.
TT 172. During 2000, Three Angels sold its satellite dishes at
their materials cost, which represented a loss to Three Angels
because of the overhead and administrative expense associated
with the sales. TT 325. During 2001, the dishes were actually
sold at $50 less than their materials cost to Three Angels. TT
325-326. Indeed, a number of satellite
[page 42]
dishes were given away in both 2000 and 2001 to callers who
showed significant financial hardship. TT 300.
Even for books and materials that are listed for a modest
sale price, Three Angels will further discount the price or give
the items away if callers are unable to afford them. TT 169-170.
Further, its charges for air-time programming are set to cover
costs, not to make a profit, and even these prices are frequently
adjusted downward based on a participating ministry's ability
to pay. TT 160-162. Indeed, some participating groups or ministries
are given airtime at no charge. TT 106-108.
The items that Three Angels gives away and/or sells at or
below cost are further detailed above at pages 6-7, 9, 17-19.
The clear factual record, further set out at pages 8 to 10 above,
is that Three Angels gives away a significant amount of material
and airtime. Those items and airtime that Three Angels sells,
it does so at or below cost. There is no evidence in the record
to the contrary on either of these points. Thus, this Court should
conclude that Three Angels provides at-or-below-cost materials
and benefits to the public.
Factor 5 – Any net revenue is incidental to, and used
to further, Three Angels religious purposes and mission.
Fifth, the evidence will show that net revenue, if any, from
sales is an incidental and secondary form of revenue that accounts
for only a few percent of Three Angel's total revenue. TT 139;
Appl. Exh. 14 & 15. The Illinois Supreme Court has rejected the
notion that a revenue stream from sales that is greater than
the associated expenses, a net profit, will disqualify an organization
from being a tax exempt, "not-for-profit" entity.
[page 43]
Rather, the Court has noted that the "determining feature
of a 'profit with respect to a charitable institution is whether
there is inurement of benefit to a private individual."38
In Du Page County, the Court noted that the state erroneously
believed that if a not-for-profit organization accumulates funds
beyond their obligations, that a "fund balance ceases to be a
fund balance and becomes a 'profit.'"39 The Court rejected this
notion. It pointed out the foolishness of insisting that "not-for-profit"
organizations must literally have "no profit" on their sale of
items, thus maintaining minimal or non-existent fund balances.
"Conditioning tax exemption on high-risk money management," the
court asserted, fails to serve the interests of charitable organizations
and their beneficiaries."40
But this is precisely what the hearing judge requires of Three
Angels in the present case. She claims that "financials statements
prove that applicant netted a profit during the years at issue."
RD 38. She states that the size of the surplus, about 1.2 million
in 2000, and 1.9 million in 2001, disqualifies Three Angels as
being a "not-for-profit" entity. RD 38. What the hearing judge
overlooked was that compared to Three Angels operating expenses,
this revenue margin was actually quite slim. With operating costs
at about 1.2 million per month, these yearly surpluses represent
merely one to two months in operating costs.
The hearing judge included in the revenue totals a combination
of sales revenue and charitable donations. When the sales revenue
is looked at separately, it becomes clear, as testified to by
both Three Angels treasurer Larry Ewing, as well as independent
auditor
38
Du Page County Board of Review v. Joint Comm'n on Accreditation
of Healthcare Organizations, 274 Ill. App.3d 461, 470, 654 N.E.2d
240, 246 (Ill. App.2d. 1995).
39
Id. at 470, 948.
40
Id. at 470-71, 948.
[page 44]
Alan Lovejoy, that Three Angels did not make a "profit" from
the sale of airtime or other materials. TT 444, 476-477.
Three Angels fits well within existing Illinois caselaw on
the issue of revenue production. Inter-Varsity, the court rejected
the state's contention that "inasmuch as profits are made from
the sale of the literature, this is a non-exempt operation of
a charitable or religious organization."41 The court ruled that
"it was not the use to be made of the profits, but the nature
of the business done that should be considered in deciding questions
of liability of a charitable institution's property to taxation."42
In Evangelical Teacher, the court noted that the applicant
did not produce materials "to be distributed free of charge."
Rather, it at times would donate course and text materials to
mission schools and then offset these losses by "income from
'high volume textbook' sales."43 Clearly, these "high volume
textbook sales" were made at more than cost and generated a positive
income stream, yet this was not a disqualifying "profit."
A similar case to the instant one is Congregational Sunday
School, where applicant sold books at a "sufficient charge to
cover the expenses of this work."44 The court noted that it was
difficult to determine if a profit was made in any given year.
"Some years the business is operated at a profit and some years
it is operated at a loss," although it is impossible to tell
"what the expenses will be each year."45 But the important point
was that "such profits as do come from the business of selling
books and periodicals are devoted to the maintenance of the missionary
department. . . . The purposes of the
41
Inter-Varsity, 379 NE.2d at 816.
42
Id.
43
Evangelical Teacher, 118 Ill. App.3d at 23, 454 N.E.2d at 838.
44
Congregational Sunday School, 290 Ill. at 110-111, 125 NE. at 9.
45
Id.
[page 45]
[applicant] are directly carried out by the distribution of
its books and supplies, and the receipt of the money from the
sales is incidental and secondary."46
Very similarly, it may be difficult to pinpoint precisely
what "profit" or "loss" Three Angels takes on sale of airtime,
satellites, books, or materials. The testimony was that these
items were sold either at cost, or at a loss. TT 161, 166-167,
169-170. But even if some small "profit" was realized on these
items at times, that revenue was "incidental and secondary" to
the intent of the sales, which was to spread the religious message
of Three Angels through printed materials, audio and video broadcasts,
and videos and CDs.
The evidence at trial showed clearly that profit, when it
existed at all, was very incidental. Gross revenue from satellite
dish sales was $2.6 million in 2000, but the costs of satellite
dishes to Three Angels that year was nearly $3 million. Appl.
Exh. 14, p. 200019 and 200026. Thus, Three Angels took a $400,000
loss that year on satellite sales. In 2001, as sales caught up
with inventory, there were $600,000 in sales, and about $400,000
in dish costs, representing a net "profit" of $200,000. Appl.
Exh. 14, p. 4 and 12. But that still did not make up for the
$400,000 in losses from the previous year. Indeed, other costs
associated with satellite sales in 2001, including salaries and
shipping meant that even for that year there was no net revenue. TT 446-450.
The situation in regards to sales of tapes, videos, CDs and
books was very similar. Gross revenue from these items was about
$150,000 in 2000 and about $250,000 in 2001. Appl. Exh. 14 p.4
and Exh. 15 p. 4. Evidence at trial showed that the cost of goods
sold were likely at least as much, factoring in overhead and
administrative expenses associated with making, selling, and
distributing goods. TT 453. It is quite unlikely that
46
Id.
[page 46]
any net revenue, or actual profit, was received from any goods
sold. Certainly this is true in the aggregate. Appl. Exh. 14-15.
But even if one assumes there was no overhead or costs of
goods sold, which was obviously not the case, the revenue generated
from these sales was only one to two percent of total revenue
for both years, which was $14.5 million for 2000 and $14.5 million
for 2001. TT 139. This revenue from sales is patently "secondary
and incidental" to that associated with direct charitable contributions
to Three Angels, which makes up about 80% of total revenue. TT 140.
Likewise, revenue associated with fees from airtime and production
fees, about $600,000 in 2000 and $850,000 in 2001, represent
about 4% and 6% respectively of total revenue. Appl. Exh. 14 p.
4 and Exh. 15 p. 4. Once again, this is dwarfed by the income
generated from directly charitable donations and gifts, which
was between $11 million and $13 million during those years. Id.
All the items sold by Three Angels, including religious books,
CDs, videos and tapes relate directly to Three Angel's religious
mission and purposes, as they all have a religious content and
message. TT 517, 597-599. Even the satellite receivers that Three
Angels sells have a direct religious connection, as the dishes
only receive religious broadcasting. TT 164. Three Angels sells
two types of receivers, one that only receives Three Angels'
broadcasts, and a second that receives Three Angels' programming
along with that of a few other religious, family oriented stations. TT 164-165.
The facts show that Three Angels receives no net revenue or
profits from its sales. But even if it were to receive some small
profit, and even if this Court were to decide that satellite
sales did not further Three Angels' religious purpose, the satellite
sales should be
[page 47]
viewed as secondary and incidental to Three Angels' total
activities and revenue that do not detract from the exempt status
of the property. "When the property as a whole, or in unidentifiable
portions, is used both for an exempt purpose and a nonexempt
purpose, the property will be wholly exempt only if the exempt
use is primary and the nonexempt use is incidental.'47
Three Angels' use of revenue from sales, insofar as they exceed
the costs of sales, goes only to further the ministry and religious
message of Three Angels.
Conclusion
The evidence is overwhelming and, as importantly, uncontradicted,
in support of the not-for-profit, religious nature of Three Angels
and its use of the subject properties for religious purposes.
Three Angels was organized and is operated for religious, charitable
exempt purposes. Its formational documents allow for no personal
inurement, and there was no evidence of any such inurement. Rather,
there was direct testimony on this point both by Three Angels
internal treasurer, and independent, external auditor, who both
agreed that no such inurement took place. The governing documents
also require that upon dissolution, Three Angels' remaining assets
will be distributed to a similar, not-for-profit organization.
Three Angels is a missionary organization that runs and supports
direct missionary efforts, as well as supporting the message
and mission of the Seventh-day Adventist church, a world-wide,
evangelical movement. Three Angels gives away significant amounts
of free material, including books, CDs, and tapes, as well as
more substantive items, such as satellite dishes and even broadcast
airtime. Net revenue, if
47
Evangelical Hospitals Corp. v. The Department of Revenue,
223 Ill. App. 3d 225, 231, 584 N.E.2d 1004, 1008.
[page 48]
any, received by Three Angels is entirely secondary and incidental
to the mission of Three Angels in getting its religious message out.
Requested Relief
For these reasons, the decision of the hearing judge should
be reversed, and this Court should grant Three Angels a tax exemption
for the properties at issue in this case for the years 2000 and 2001.
Alternatively, this Court should correct the lower court's
legal rulings regarding the legal standard of religious purposes,
and should remand the case for the hearing judge to consider
the testimony of Dr. Denis Fortin and Elder Ted Wilson in arriving
at a conclusion regarding the religious nature and activities
of Three Angels. If this approach is taken, this Court should
also correct the factual mistakes made by the hearing judge concerning
the make-up of the Three Angels board and the issue of personal
inurement to Danny and Linda Shelton, which is supported by no
evidence. Further, Three Angels should be given the opportunity
to take the discovery it was seeking on the constitutional issues,
including subpoenas and depositions of WTCT-TV, and to present
that evidence before the hearing officer.
THREE ANGELS BROADCASTING NETWORK, INC.
BY: [signed] D. Michael Riva
DATE: 3-8-05
D. Michael Riva, Ltd.
Attorney at Law
226 E. Main Street
West Frankfort IL 62896
And
Nichols P. Miller
Attorney at Law
2352 Bond Street
Niles MI 49120
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