A coffee shop with some light fare, free wifi and plentiful outlets in a downtown area sounds like a great idea. The question the IRS had to answer was whether such an enterprise, with a charitable religious twist can qualify as a 501(c)(3) organization. To the organization featured in Private Letter Ruling 201645017, the answer was no. Private letter rulings are redacted and I had no luck penetrating the redaction on this one, so I am going to dub the organization His Place for purposes of discussion.
“His Place” was formed with the following purposes:
(i) Proclaiming earnestly the gospel message and to urge its personal acceptance.
(ii) Promoting prayer, Bible study, missions, Christian fellowship, evangelism, Christian service and encouraging, in every possible way, a lifetime commitment to Christ.
(iii) Providing a forum in which the Gospel of Jesus Christ can be discussed with non-believers outside of a formal church setting.
(iv) Generously extending the grace of God by giving away 100% of all profits (except those retained for capital expenditures) to community ministries, other local, national or international non-profits or organizations, or those in financial need.
The minister of a local church was one of the founders and he came up with the vision of a coffee shop “where believers could interact with non-believers in a safe and friendly environment to convey the Gospel in a non-confrontational manner in word and deed”. It was formed as a separate entity from the church with the hope that other churches and organizations would participate.
The executive summary of the business plan for the coffee house stated four purposes:
The promotion of the Gospel was subtle and indirect.
Several times a year the Gospel has been promoted through a program referred to as “L”. This program consists of a donor paying for a certain amount of coffee in advance. Then, when a customer comes in they are told by the staff that the coffee has already been paid for and, “that the coffee is not “free” but that the price has already been paid for it – just like Jesus already paid the price for all of our sins by dying on the cross for us.
That struck me as just a little tacky – Christianity as an elaborate game of Pay It Forward
So I consulted with my blogging buddy Rev. William Thornton, who is my go-to guy on all matters evangelical. He wrote me that the program is:
…a common, low key evangelistic technique used by church planters and established churches. My church has a similar program. You pay for the car behind you at the fast food window and get the attendant to hand them a card that mentions the name of the church. It’s non-confrontational, non-direct even, and may be effective in branding the church leading to visits to worship and further inquiries. We are evangelicals, you know, and a subtle way to offer good news is OK with me.
It’s all the “Jesus junk” sold at bookstores that trivializes the Gospel.
Too Much Business For An Exemption
The IRS took note of His Place’s commitment to donate all its profits (when it has some) to charity, but that was not enough to qualify for exemption.
Your primary activity is the operation of a coffee shop in a commercial manner. You are open to the public Monday through Friday from 6 a.m. to 8 p.m. and Saturday from 7 a.m. to 8 p.m. You have free WiFi and power outlets throughout for customer use. You have space that can be used for gatherings such as meetings and parties. You have a selection of food and beverage items that can be purchased at the coffee shop. Your hours and menu can be found on your website and your Executive Summary indicates that you believe the location of the coffee house is ideal because there are no other similar businesses downtown. Therefore, the operation of your coffee shop to raise funds is a commercial activity, not a charitable activity.
Additionally, you do not meet the requirements of Reg. 1.501(c)(3)-1(c)(1) because more than an insubstantial amount of your activities are furthering non-exempt purposes. Your operation of a coffee shop consists of providing food and beverage to the public for a fee.
I asked Paul Streckfus of EO Tax Journal for his thoughts. Paul had run the ruling without comment. He wrote me.
The coffee shop ruling is a common problem in the EO world . Can you take a business activity and give it enough of an overlay of religious, educational, or charitable activity to then conclude that is is operated primarily for exempt purposes? It usually comes down to facts and circumstances so you can argue either it’s primarily a business activity or not. It’s why everybody can be an EO expert!
Is The Game Worth The Candle?
When I think about an entity like His Place, I wonder why they really need to bother with the aggravation of exempt status. They aren’t making any profits yet and if they did would it really kill them to render a little unto Caesar? Perhaps this is another instance of Reilly’s Second Law of Tax Planning – Sometimes it is better to just pay the taxes.
Ed Zollars covered the ruling on Current Federal Tax Developments. There was also a summary on a Salvation Army website.