IRS Denies Organization’s Application as a Church

The Internal Revenue Service has taken the unusual step of denying a group’s application for tax-exempt status as a church, in part because of concerns about the proposed organization’s lack of governance policies.

The IRS issued a letter ruling to the applicants in July, saying the group did not have “safeguards” to prevent the organization from benefiting the proposed board of directors, which was composed entirely of one person’s family. In addition, the applicants had not submitted bylaws or a conflict-of-interest policy.

Bert Harding, a tax-law specialist, said the IRS had several stronger reasons for rejecting the group’s application and wouldn’t have needed to include governance issues.

Citing a lack of bylaws or a conflict-of-interest policy to deny a church’s application represents a groundbreaking attempt by the agency to crack down on potential abuses, Mr. Harding said.

The IRS has taken a growing interest in how organizations are operating as an indicator of whether they are working in the public’s interest, including examining the structure of boards of directors.

Steven T. Miller, commissioner of the IRS’s tax-exempt division, has defended the move. “Despite the absence of explicit federal statutory provisions setting forth clear governance standards, we are not interlopers trying to regulate an area that is beyond our sphere,” he said in an April speech at Georgetown University.

But some nonprofit tax experts see the attempts as overreaching.

Marc Owens, a former director of the IRS’s division of exempt organizations, predicted that the tax agency may want the issue of whether it has authority to delve into this area resolved by the courts in a ruling that would define good governance as one of the standards for nonprofit organizations.

That would be a positive step, said Sally Blinken, a former New York State assistant attorney general, adding that evaluating an organization’s proposed board and governance policies is a good way to prevent future problems. “You see situations where the board is packed with friends and family and that’s a situation that’s ripe for abuse,” said Ms. Blinken, now a lawyer in New York.