Appeal from the United States Tax Court
Before BAUER, WOOD, and COFFEY, Circuit Judges.
BAUER, Circuit Judge. Bethel Conservative Mennonite Church (Bethel Mennonite) appeals the Tax Court's affirmance of the Commissioner's determination that Bethel Mennonite was not qualified for exemption from federal income tax under Section 501(a) of the Internal Revenue Code, as an organization described in Section 501(c)(3). I.R.C. §§ 501(a) & 501(c)(3) (1976). The issue before us is whether Bethel Mennonite was organized and operated exclusively for religious or other exempt purposes before January 20, 1981, within the meaning of Section 501(c)(3) and the regulations thereunder. Because the case was submitted to the Commissioner on a stipulated administrative record, that record is presumed true for purposes of tax court proceeding and for purposes of this appeal.
Bethel Mennonite is located in Nappanee, Indiana. From the time of its inception in 1955 to the present, Bethel Mennonite has had the same pastor, who receives no compensation for his pastoral duties. The church operates independently of other Mennonite congregations, and, prior to January 20, 1981, operated pursuant to its "Confession of Faith." This document sets forth the tenets of the congregation's beliefs, the "Standards and Guiding Principles," and the provisions for the church's administration. In 1976, Bethel Mennonite entered into the Midwest Mennonite Fellowship with fourteen other independent Mennonite churches. Although the Fellowship was formed to establish and support the Marantha Bible School in Lansing, Minnesota, each member church of the Fellowship must adopt "The Constitution of the Midwest Mennonite Fellowship." This Constitution provides, among other things, that each member-congregation must "appreciate our Christian heritage as brought to us through the Mennonite Church, and [is] by the Grace of God endeavoring to preserve the heritage." Fellowship Constitution, art. III, pt. A. Adm. R. ex.2(c).
To become a member of Bethel Mennonite, an individual is required to undergo a period of instruction on the tenets of its faith, conform to church discipline, and receive consent of the congregation. If the individual is accepted, he is required to be baptized. As of May 16, 1980, Bethel Mennonite had 115 members. Throughout its existence, Bethel Mennonite has held regular worship services twice a week and has engaged in numerous religious and charitable activities. In 1964, Bethel Mennonite established a medical aid plan for its members. The purpose of the plan was "to share and bear one another's burden (Gal. 6 verse 2 and Phil. 2:4), which may arise from Medical Needs, Hospitalization, Surgery, and death of our members." The Bethel Medical Aid Plan, Adm. R. ex. 2(o). The plan was available to all members of the congregation in good standing and their dependents.
On May 20, 1980, Bethel Mennonite filed an application for recognition of exemption under Section 501(c)(3) of the Tax Code. On October 23, 1980, the Commissioner sent notice to Bethel Mennonite that its application would not be approved. The Commissioner concluded that Bethel Mennonite was not organized exclusively for exempt purposes because its documents did not contain a statement of its purposes or provide for the disposition of its assets on dissolution. The Commissioner also concluded that Bethel Mennonite was not operated exclusively for exempt purposes because the Bethel Medical Aid Plan served the private interests of its members.
Bethel Mennonite timely protested this ruling and subsequently adopted a new constitution that stated that the church had been organized exclusively for religious, charitable, and educational purposes, and provided properly for the distribution of its assets on dissolution as suggested by the Commissioner. The new Bethel Mennonite Constitution made no provision for the Medical Aid Plan that was discontinued by January 20, 1981.
On March 27, 1981, Bethel Mennonite received a final adverse ruling as to its exempt status under Section 501(c)(3) for the taxable period preceding January 20, 1981. Bethel Mennonite was approved, however, for exempt status for the taxable period beginning January 20, 1981. Bethel Mennonite was approved, however, for exempt status for the taxable period beginning January 20, 1981. Bethel Mennonite exhausted its administrative remedies within the Internal Revenue Service and filed a petition for a declaratory judgment in the Tax Court, pursuant to I.R.C. § 7428(a), requesting the Tax Court to declare the Commissioner's final determination was not an organization described in section 501(c)(3) to be incorrect. The Tax Court upheld the Commissioner's determination, 80 T.C. 352 (1983), and held that because the plan was available to Bethel Mennonite congregation members and their dependents only, the Commissioner did not err in determining that the plan was in furtherance of the private interests of the members of Bethel Mennonite. Moreover, the Tax Court held, the amount of the church's funds going to the Medical Aid Plan was not insubstantial. Because the Tax Court found that the Commissioner was correct in determining that Bethel Mennonite was not operated for an exempt purpose prior to January 20, 1981, the Tax Court found it unnecessary to discuss or decide whether the Commissioner was correct in determining that Bethel Mennonite was not organized for an exempt purpose prior to that date. After a thorough review of the record, we find that the Commissioner was incorrect in both of his determinations.
Among the various requirements for an organization to receive tax exemption under Section 501(c)(3), it must be organized and operated exclusively for religious or other exempt purposes. This requirement is disjunctive; failure to meet either requirement will result in denial of the exemption. Treas. Reg. § 1.501(c)(3)-l(a)(1). The Commissioner denied Bethel Mennonite its exemption for failure to meet both requirements.
The Tax court held that Bethel Mennonite's Medical Aid Plan was a sufficient basis on which the Commissioner could deny the tax exemption. The Tax court stated that although it considered Bethel Mennonite "a bona fide church whose doctrines were based on fundamental Christian principles," 80 T.C. at 358, the administrative record supported the commissioner's conclusion that the Aid Plan constituted a substantial nonexempt activity. Id. at 359. Because the Tax Court determined that the plan involved twenty-two percent of the church's funds and was intended solely to serve the private interests of the church's members, tax exemption was denied.
Bethel Mennonite contends that regardless of the fact that the Plan is limited to giving aid to members of its congregation only, the plan was established and maintained in furtherance of one of the seven ordinances of the Mennonite faith to come to the assistance of its needy, and as such did serve a religious purpose. The Tax Court dismissed this rationale and stated that "certainly this is a worthy purpose and is undoubtedly practiced by the Mennonites in many ways. But the benefits of this plan are not limited to even the needy of its members, and we fail to see how taking care of its own furthers any religious or other exempt purpose of [Bethel Mennonite]." Id. at 361.
We think that the Tax Court erroneously held that there was "no link . . . between this plan and [Bethel Mennonite's] tenets of faith," id., and uses too narrow a definition of "needy" in this case in applying Bethel Mennonite's beliefs to its religious practices. The Medical Aid Plan states that its purpose is "to share and bear one another's burden (Gal. 6, verse 2 and Phil. 2:4), which may arise from Medical Needs, Hospitalization, surgery, and death of [its] members," Adm. R. ex. 2(o), and directly supports the congregations eighth Standard and ...