You can fault Cousin Jedediah for many things—many things—but charisma is not amongst them. It turns out that Jed has developed something of a following. He assures you that it is not a cult, which you have to imagine are the first words out of every cult leader’s mouth when questioned about it. Having drank Jed’s Kool-Aid, the members of his new religious “order” follow him around like willing lambs, but they have made musings about more practical considerations like religious tax exemptions for the order, and that is why Jed came to you early one Thursday morning.

It turns out that whilst in prison, Jedediah was introduced to a higher power, whom he chose to call peyote.  Jed tells you one day that he understands why the Earth “is.”  Not why it is warming at alarming rates, or why it is going to hell in a handbasket, just why it “is.”  You nodded and thought for a second about having an epistemological conversation with Jed to see how far his knowledge reached, but you would have rather gone boar hunting with a pen knife than listen to his psilocybin-induced philosophy of why you “are.”

Nonetheless, in a moment of clarity—you suspect his shroom supply ran out—Jed comes to you with a question about a religious organization that he has founded.  You are naturally suspect, but you allow him to go on, if for no other reason than to make crushing his dreams that much sweeter.  Specifically, he wants to know about religious tax exemptions vis-à-vis his peyote-qua-sacrament order.

Jed befriended a self-proclaimed “shaman of the shroom,” who briefly bunked with Jedediah, and who taught a doctrine that, according to Jed, predated any major religion or doctrine currently practiced in today’s world.  Although the shaman’s doctrine practice traditional aspects of numerous religions and drew upon several religious texts, the main thrust of the doctrine was the use of “Sacraments,” which were not only a fundamental aspect of the shaman’s personal religion, but of “being human.”

The shaman indicated that every member of his order had the right to utilize Sacraments in any way, shape or form, so long as it is responsible and not done in such a way that results in undue harm to themselves or others. You ask Jed what, precisely, the “Sacraments” might be, and he tells you that the Shaman accepted numerous natural organic plants and fungi and their constituents as Sacraments, in particular the ones that made you trip so hard that your feelings had colors.

Jed further explains that the shaman had devoted members and allies in every state in America who depend on him to supply the Sacraments required to practice their religion, or to “exercise the unalienable right to Life, Liberty, and the pursuit of Happiness.”  With the shaman unjustifiably incarcerated, Jedediah had taken it upon himself to shepherd the shaman’s flock, whom he calls his “religious order.”

He asks you whether you think he will be able to obtain IRC § 501(c)(3) tax-exempt status for his order and whether you would be willing to file his Form 1023-EZ (Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) to entitle the flock to religious tax exemptions.  Time for the dream crushing, you gleefully think to yourself.

The Law of Religious Tax Exemptions

IRC § 501(c)(3) provides for the exemption from federal income tax of corporations organized and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the benefit of any private shareholder or individual. Treas. Reg. § 1.501(c)(3)-1(a)(1) provides that to be exempt as an organization described in IRC § 501(c)(3), an organization must be both organized and operated exclusively for one or more exempt purpose. If an organization fails to meet either the organizational test or the operational test, it may not receive a religious tax exemption.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in IRC § 501(c)(3). An organization will not be operated exclusively for exempt purpose if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

In turn, Treas. Reg. § 1.501(c)(3)-1(d)(2) defines charitable as it is used in its generally accepted legal sense, which includes the relief of the poor and distressed, advancement of religion, advancement of education or science, erection or maintenance of public buildings, lessening the burdens of government, or promoting social welfare if it is an organization designed to accomplish one of the above causes or to lessen neighborhood tensions, defend human and civil rights, or combat community deterioration and juvenile delinquency.

Illegal Purposes Not Charitable

As you explained to Uncle Bill when he wanted to create a charity to assist poor people with access to recreational marijuana in this article, even if certain states have decriminalized drugs such as marijuana, psilocybin, and peyote, they remain illegal under federal law; therefore tax exemptions – even religious tax exemptions – are not available.  Specifically, all such substances are “Schedule 1” controlled substances under 1 U.S.C. § 812(b)(1).  Religious tax exemptions, therefore, are not given for illegal purposes…not matter how righteous they might be.

Nonetheless, the “use, possession, or transportation of peyote by an Indian for bona fide traditional ceremonial purposes in connection with the practice of a traditional Indian religion” is lawful and may not be prohibited by the United States or any State.  You remind Jedediah that he is a lapsed Lutheran, and other than a dalliance by his great grandmother with one of the last of the Mohicans, which produced a rather tanned son named Bijou, who spawned an even more eclectic side of the family, with which you have historically limited contact, he has no Native American ties.

As stated in Treas. Reg. § 1.501(c)(3)-1(a)(1), to qualify for exemption under IRC § 501(c)(3), an organization must be both organized and operated exclusively for purposes described in IRC § 501(c)(3). You explain to Jedediah that his “religious order” will not be found to be operated exclusively for exempt purposes as described in Treas. Reg. § 1.501(c)(3)-1(c)(1) because more than an insubstantial part of the order’s activities involves the provision of federally illegal substances to his order’s members, which does not further an exempt purpose for religious tax exemptions.

To be exempt under IRC § 501(c)(3), an organization must be operated tor a charitable or educational purpose as they are defined by statute and regulation and interpreted by the IRS and the courts. Treas. Reg. § 1.501(c)(3)-1(d)(2) requires that the purposes of all charitable trusts, including religious and educational trusts, may not be illegal or contrary to public policy.  The IRS has issued further guidance on this subject, too.

The order’s membership is available to anyone who can access its website and take its “courses” including how to make a peanut butter and mushroom sandwich, a trick Jed learned in prison to deal with the rather unpleasant taste of magic mushrooms. The order does not require that its members have any particular religious beliefs.

Its activities and membership are not limited to people defined in the Code as “Indian” (feather, not dot) and who use peyote for traditional ceremonial purposes in connection with their traditional “Indian Religion.” Therefore, the order’s use of peyote is illegal per 42 U.S.C. § 1996a(b)(1).

Federal law, under 21 U.S.C. § 841, prohibits the manufacture, distribution, possession, or dispensing of a controlled substance. Thus, Jedediah engages in illegal activities by distributing illegal substances across the country, which precludes exemption per 21 U.S.C. §§ 802(16), 812(b), and 841(a). Additionally, as detailed in U.S. v. Oakland Cannabis Buyers’ Cooperative,[1] Congress has determined that marijuana, as defined in 21 U.S.C. § 802(16), there is (currently) no exception to the general rule that the manufacture and distribution of cannabis is illegal.

Rev. Rul. 71-447 states that a trust formed for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid. This ruling is further clarified by Rev. Rul. 75-384, which provides that an organization that induces or encourages the commission of criminal acts cannot be exempt under IRC § 501(c)(3) since if violates the common understanding of a charitable trust.

These principles were later upheld in the Supreme Court case Bob Jones University v. U.S.,[2] where in reaching its decision, the Court indicated that entitlement to tax exemption depends on meeting certain common law standards of charity — namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy. Finally, the Supreme Court noted in Ould v Washington Hospital for Foundlings,[3] an IRC § 501(c)(3) organization cannot be formed for a purpose that is illegal. Providing the order’s members across the United States with “Sacraments,” including illegal ones such as cannabis, shrooms, and peyote, is one of the order’s primary purposes; therefore, religious tax exemptions are not in the order’s cards.

Because Jedediah’s newfound religious order advocates and engages in activities that contravene federal law, it serves a substantial nonexempt purpose. The presence of a single nonexempt purpose, if substantial, precludes religious tax exemptions (or any exemptions, for that matter) regardless of the number of important truly exempt purposes as the Supreme Court found in Better Business Bureau of Washington, D.C., Inc. v United States.[4]

Therefore, Jedediah’s order fails the operational test because its primary purpose furthers a substantial nonexempt purpose, as the possession, distribution, and use of controlled substances violates federal law and public policy. Therefore, the organization will not be recognized under IRC § 501(c)(3), and it will not be entitled to religious tax exemptions.

You break the news to Jed with the candor and sensitivity that you have come to admire in yourself.  If he were not high as a kite in a northeaster, he might have taken the lessons on religious tax exemptions a bit harder.  Nevertheless, he is playing a game of invisible chess with his (imaginary) best friend Sweet Willie, who apparently just made a rather aggressive move to put Jed in check.

As Jed muses, “Shit, I did not see that coming,” you bid yourself adieu, and wonder just how you were so lucky to be related to this bunch of ingrates by an accident of birth.

Source: PLR 202053019

Footnotes:

[1] 532 U.S. 483 (2001).

[2] 461 U.S 574 (1983).

[3] 95 U.S. 303 (1877).

[4] 326 U.S. 279 (1945).

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