                        T.C. Memo. 1996-291



                      UNITED STATES TAX COURT



          THE CHURCH OF THE LIVING TREE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4608-95X.                       Filed June 24, 1996.



     John Stahl (an officer), for petitioner.

     Charles B. Burnett, for respondent.



                        MEMORANDUM OPINION

     KÖRNER, Judge:   By petition filed March 24, 1995, The Church

of the Living Tree (petitioner) through John Stahl, trustee,

filed a petition for a declaratory judgment under section 7428

that petitioner was entitled to exemption from income tax under

section 501(c)(3) as a church.

     All statutory references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure, except as otherwise

noted.

       At the time of filing the petition herein, petitioner was

located in Leggett, California.

       Respondent having filed with her answer herein the index of

the administrative record, under Rule 213(a)(3), and the parties

having stipulated the full administrative record, the case is to

be decided on the basis of such administrative record, Rule 217.

By stipulation of the parties, the case was submitted under Rule

122.    As specified in Rule 210(c), the Court has jurisdiction of

this action for declaratory judgment in that respondent has

issued an adverse determination as to petitioner's qualification

for exemption under section 501(c)(3); petitioner organization

was in existence at the time this action was brought; this

petition was brought within the time limits of section

7428(b)(3); and respondent has conceded that petitioner has

exhausted available administrative remedies.    The facts found

herein are those in the administrative record as stipulated by

the parties.    Rule 217(b)(1).

       Petitioner is an unincorporated association organized on

July 8, 1992.    Its articles of organization were submitted and

signed by John Stahl as founder, and he, together with two other

individuals, became the initial trustees and the governing body

of petitioner.    The organizational documents provide for "project

communities" at various places, each of which will elect a
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"steward" to serve on the board of directors of petitioner at

such time as these are formed.   Likewise, the authority of the

trustees will eventually be held by the "Advocate of the Tree"

who will be the church's chief executive and spiritual leader.

The Advocate of the Tree will be selected by a seminary of The

Church of the Living Tree.   To date, there has apparently been no

establishment of any project community other than petitioner's

home address, nor has there been any election of a board of

directors, nor has there been any establishment of a seminary and

the election of an Advocate of the Tree.   Thus, as far as this

record shows, the initial named trustees, of which John Stahl is

one, appear to be in charge of petitioner.

     John Stahl has been a letterpress printer since 1970.     He

later began to use handmade paper.   Since 1971, he has been

principally involved in the publishing and papermaking business;

in 1988, he established a facility for making handmade paper on

his 66-acre property located in the mountains of Mendocino County

near Leggett, California (the Mendocino County property), making

500 sheets of handmade paper a week.   He also has published

articles from time to time, and in 1971 he founded the Evanescent

Press in Montreal, Canada, which he operated as an unincorporated

sole proprietorship.

     After petitioner's organization, the Evanescent Press was

deeded to petitioner by its owner, John Stahl.   Nevertheless,

since the transfer to petitioner by John Stahl in 1993, the
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Evanescent Press has retained its letterhead and title, and its

income and expense was reported in John Stahl's personal income

tax return for the year 1993.

     In September 1993, John Stahl deeded to petitioner the

Mendocino County property mentioned above, the Evanescent Press,

an automobile, and other miscellaneous property.   Although

petitioner now owns the property, Mr. Stahl, his wife, and two

daughters (inter alia) continue to live there rent free; they

receive no salary from petitioner.   All utilities, taxes, and

insurance on the Mendocino County property and the Evanescent

Press are now apparently paid by petitioner.   As part of the

conveyance of the Mendocino County property to petitioner by Mr.

Stahl, petitioner assumed liabilities in the form of two

mortgages on the property, as well as assuming the burden of a

small amount of commercial credit advanced to the Evanescent

Press and some personal credit card debt of John Stahl himself.

     Petitioner filed a Form 1023, Application for Recognition of

Exemption Under Section 501(c)(3), on October 12, 1992.    The

application requested a ruling that petitioner was exempt from

tax under section 501(c)(3) and was other than a private

foundation under section 509(a)(1) because it qualified as a

church under section 170(b)(1)(A)(i).   In the application, as a

statement of the "detailed narrative description of all the

activities of the organization--past, present, and planned",

petitioner stated as follows:
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          Our primary activity is the cultivation and
     planting of trees. This is ongoing. Through the
     organization of the Church, we hope to accelerate our
     planting of trees.

          Our main secondary activity is to work towards
     establishing an industry of papermaking from
     appropriate fiber sources (e.g., kenaf, hemp, rice,
     straw, etc.) to relieve trees from the assaults of the
     pulp and paper industry for wood chips.

          As a hand paper maker, I experiment with
     alternative fibers and am ready to proceed to
     papermaking on a larger scale as a pilot project for
     the future.

     Thereafter, a period of correspondence ensued between

respondent and petitioner concerning petitioner's support and

activities in which petitioner engaged or proposed to engage.   In

1994, in response to inquiries from respondent, petitioner

indicated that it was willing to amend its charter of

organization in certain respects and enclosed a proposed draft of

language for such amendment.   Nevertheless, the record does not

show that such amendment to petitioner's articles of organization

was ever adopted.   In April 1994, respondent notified petitioner

that she proposed to rule adversely to petitioner's request for

exemption on the grounds, inter alia, that it was not a church.

In May 1994, petitioner protested this proposed ruling.

     Nevertheless, on January 10, 1995, respondent issued her

final adverse ruling letter, denying petitioner's request for

exemption under section 501(c)(3).   In denying petitioner's

request for exemption, respondent stated:
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          You are not operated exclusively for exempt
     purposes within the meaning of section 501(c)(3) of the
     Code. You serve private rather than public interests.
     Your net income ensures to the benefit of private
     individuals. Your activities further substantial
     nonexempt purposes. Furthermore, you have not
     established that you will engage in scientific research
     within the meaning of section 501(c)(3) of the Code.
     Finally, you do not qualify as a church within the
     meaning of the Code.

     This petition followed, asking that the Court rule that

petitioner qualifies for exemption under section 501(c)(3), and

that it further qualifies as a church under sections 509(a)(1)

and 170(b)(1)(A)(i).

     The focus of a section 7428 action in this Court is the

review of respondent's administrative determination that

petitioner is not exempt.   The Court's review of the Service's

determination in an initial application case is limited to the

materials contained in the administrative record before the

Court.    Rule 217(a); Houston Lawyer Referral Serv., Inc. v.

Commissioner, 69 T.C. 570, 575 (1978).    Petitioner bears the

burden of proving that respondent's determination was erroneous.

Rule 217(b)(2); Hancock Academy of Savannah, Inc. v.

Commissioner, 69 T.C. 488, 492 (1977); The Church in Boston v.

Commissioner, 71 T.C. 102, 106 (1978).    Petitioner does not

qualify for exemption, regardless of whether it furthers exempt

purposes, if it also furthers a substantial nonexempt purpose.

See Better Business Bureau v. Commissioner, 326 U.S. 279, 283-284

(1945).    The question of whether a substantial nonexempt purpose
                                7

is being furthered is one of fact.   Christian Stewardship

Assistance v. Commissioner, 70 T.C. 1037, 1042 (1978); Christian

Manner International v. Commissioner, 71 T.C. 661, 668 (1979).

The question of whether net earnings inure to the benefit of a

private shareholder or individual is also one of fact.     Unitary

Mission Church v. Commissioner, 74 T.C. 507, 514 (1980), affd.

without published opinion 647 F.2d 163 (2d Cir. 1981).

     As we consider the administrative record in this case that

has been presented by the parties, we come to the conclusion that

petitioner has failed to carry its necessary burden of proof to

show that it has been and is being operated exclusively for

exempt purposes within the meaning of section 501(c)(3).     As is

made clear by the statement in petitioner's application for

exemption, which we have quoted, the primary purpose of the

organization is to plant trees, with a secondary purpose to

promote and establish the industry of papermaking, perhaps using

alternative materials other than paper from wood pulp.

Petitioner has not shown that its objective to encourage the

papermaking industry is a public and charitable purpose.

     Further, there is no showing in this record that

petitioner's net income does not serve private purposes and does

not accrue to the benefit of individuals.   What information is

provided--and we concede that this present petitioner seems to be

only in the initial or "shell" stages--is that John Stahl, his

wife, and children are afforded rent-free housing on petitioner's
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property that was deeded to it by John Stahl; furthermore, it

appears that petitioner took over the burden of debts owed on the

property as well as personal debts of John Stahl and his

proprietorship printing venture.       Petitioner has simply failed to

show in this record that it is operated exclusively for exempt

purposes.   The implication from the scanty record presented is

rather to the contrary.   The rather vague references to the

development of alternative papermaking resources from materials

other than wood pulp, and the projects to secure Government

assistance in furthering such projects, all tend to be in aid of

the papermaking and printing industries, as opposed to a

nonprofit public purpose.

     In cases like this one, the courts have considered the

question of exemption under section 501(c)(3) before deciding

whether the organization constitutes a church within the meaning

of the Code.   Only in the event the Court finds that petitioner

qualifies for exemption under section 501(c)(3) must the Court

further decide whether petitioner is a church.       The Basic Unit

Ministry of Alma Karl Schurig v. United States, 511 F. Supp. 166

(D.D.C. 1981), affd. per curiam 670 F.2d 1210, 1212 (D.C. Cir.

1982); American Guidance Found. v. United States, 490 F. Supp.

304, 306 (D.D.C. 1980), affd. without opinion __ F.2d __ (D.C.

Cir. 1981).    Since we have held that petitioner does not qualify

as an exempt institution under the provisions of section
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501(c)(3), we need not go further and examine whether or not

petitioner would qualify as a church under section 170.

                                    Decision will be entered

                              for respondent.
