In PLR 201645017 the IRS denied tax-exempt status to a religious organization that established a coffee shop that it planned to use to spread a religious message to members of the community. The exemption was denied because the IRS determined, under the facts of the case, that a substantial portion of the organization’s operations would be devoted to operating the coffee shop in a commercial manner.
The organization’s planned operation and charitable purposes were described as follows in the ruling:
The Minister of F, who is one of your founding board members, came up with the vision to form 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. You were formed as a separate entity from F in order to encourage other Christian churches and organizations to participate in your vision. F granted the funding for your start up and your board members are all members of F. Article 3, Section 2, of your Bylaws indicates that at least one of your directors must be an Elder of F. Additionally, a majority of your directors should be members of F.
The ruling goes on to provide more specific details with regard to the operation of this organization:
You are open Monday through Friday from 6 a.m. to 8 p.m. and Saturday from 7 a.m. to 8 p.m. You have free Wi-Fi and power outlets throughout for customer use. You use coffee that is sourced directly from coffee farmers. Therefore, the coffee you buy benefits the coffee farmers 50-100% over the price paid for "Fair Trade" coffee. Your drink selection includes coffee, tea, smoothies, frappes, soft drinks, and juices. Your food items include baked goods, soups, sandwiches, salads, and desserts. Copies of your menu can be found on your website. The menu shows the various food and beverages you serve and the prices you charge for each. You also plan to sell your roasted coffee beans online in the future but you do not have the capability at this time. Your customers can currently purchase roasted beans at the coffee shop.
You state that at the coffee shop you provide a location for both formal and informal Bible study, church group meetings, and meetings for other organizations. So far, your location has been used for a Women's Bible Study, a Men's Bible Ministry, meetings of the Elders of F, book signings, birthday parties, baby and bridal showers, community business meetings, game nights, live music, and similar events. You do not typically charge a fee for the use of space by groups or organizations but your General Manager advises users that a "suggested" donation in the amount of x dollars per hour is welcome. You have never denied access or use of your room due to an inability to pay or a decision not to donate.
All of the profits earned from the operation of the coffee shop will be donated to various charitable organizations.
The organization likely believed this operation was similar to that described in Revenue Ruling 68-72. The ruling summarizes that ruling as follows:
Rev. Rul. 68-72, 1968-1 C.B. 250, states that a nonprofit organization that operates a supervised facility to bring together young people of college age with church leaders, educators, and leading businessmen of the community may be exempt from federal income tax under Section 501(c)(3) of the Code. The organization was formed by local churches for the purpose of furthering the religious, intellectual, and moral development of persons of college age through the operation of the "coffee house", a supervised facility where church leaders, educators, and leading businessmen of the community meet and mingle with young people in an informal atmosphere. They hold discussions on such subjects as religion, current events, and social problems. Personal counseling and vocational guidance are provided. A nominal charge is paid upon admission, but there are no additional charges for the refreshments and entertainment. The organization meets it expenses from contributions and the admission charges.
The IRS found that the operation of the coffee shop differed in important ways from the coffee house of Rev. Rul. 68-72. The ruling notes:
You are distinguishable from the organization in Rev. Rul. 68-72 in that the majority of your activities are to operate your coffee shop in a commercial manner. The organization in Rev. Rul. 68-72 ran a supervised facility where church leaders, educators, and leading businessmen of the community met and mingled with young people in an informal atmosphere. They held discussions on such subjects as religion, current events, and social problems. Personal counseling and vocational guidance were provided. You do not conduct any regular religious or educational activities at your facility. While activities such as Bible studies may be conducted at your coffee shop, they are not conducted by you. They are conducted by groups that are coming to use your space. You allow your space to be used by the public for all activities, not just those that are religious, charitable, or educational. For instance, business meetings, birthday parties, and baby and bridal showers have all taken place at your coffee shop. Additionally, unlike the organization in Rev. Rul. 68-72 that charged a nominal admission fee but did not charge for refreshments or entertainment, you charge for the food and beverages at your shop. The majority of your expenses which are devoted to the operation of the coffee shop are met by the funds from these sales.
The IRS finds the operation is a commercial operation that just happens to eventually give its earnings to charities, with most of the activities looking suspiciously like the activities of your average for profit coffee shop:
Your operation of a coffee shop consists of providing food and beverage to the public for a fee. You are similar to the organization in Better Business Bureau of Washington, D. C, Inc. v. United States, in that you have a substantial commercial purpose to operate a coffee shop which is not in furtherance of any exempt purpose within the meaning of Section 501(c)(3). You are also similar to the organization in B.S.W. Group, Inc. v. Commissioner because your primary purpose is commercial. Your coffee shop resembles a trade or business that is ordinarily carried on by commercial ventures organized for profit. You chose your location because there is no other similar business downtown. You charge fees for your food and beverages and plan to eventually sell your coffee beans online.
The fact that those earnings will devoted to charity will not save the organization’s charitable status (see Zagfly, Inc. v. Commissioner, T.C. Memo 2013-29 for an attempt to make a web-brokerage business a tax-exempt entity through the same position that all earnings would be contributed to charity—the Tax Court found that argument insufficient to overcome what was otherwise a regular commercial operation in competition with other commercial entities).