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Updated 1/10/2013
2011 Form 990

Updated 6/22/2011
3ABN sued
over Tommy!

Added 3/14/2010
Can 3ABN Survive?

Added 11/16/2010
Judge Rejects
Plea Deal

Updated 4/2/2010
Tommy Shelton

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Mene, Mene,
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The Actual Lawsuit
IRS Criminal Investigation

3ABN's Property Tax Case Appeal

Opening Brief of Appellant 3ABN

Part Six

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Typographical errors may actually be copied from the original.

Statements of interest include:

  • "None of its revenue inured to the benefit of any private person."
  • "Factor 2 – No Personal Inurement"
  • "Three Angels Articles state that none of its net earnings shall 'inure to the benefit of . . . its members, trustees, directors, officers or other persons.' "
  • "Three Angels broadcasting has a close association with the Adventist Church."
  • "... the close relationship between Three Angels and the Seventh-day Adventist Church ...."
  • "... as testified to by both Three Angels treasurer Larry Ewing, as well as independent auditor Alan Lovejoy, that Three Angels did not make a 'profit' from the sale of ... other materials."
  • "It is quite unlikely that any net revenue, or actual profit, was received from any goods sold."
  • "The facts show that Three Angels receives no net revenue or profits from its sales."
  • "Its formational documents allow for no personal inurement, and there was no evidence of any such inurement."
  • "Rather, there was direct testimony on this point both by Three Angels internal treasurer, and independent, external auditor, who both agreed that no such inurement took place."
  • "... this Court should also correct the factual mistakes made by the hearing judge concerning ... the issue of personal inurement to Danny and Linda Shelton, which is supported by no evidence."

For comments on these type of statements, see the previous pages of this Appellant Brief.

Part Six of 3ABN's Appellant Brief

B.  The lower court erred in concluding that Three Angels did not use its property primarily for religious purpose, as revenues from its properties do not inure to any private person, it supports a wide range of missionary activities, and it provides its broadcast services at or below cost.

Three Angels used the properties at issue in this case, its administrative and operational center, its carpenter shop, and call center in a manner consistent with the religious purposes discussed in the statement of the case and Section A above. Under Illinois law, the requirement that property be used "exclusively" for religious purposes means "the primary purpose for which the property is used, not to any secondary or incidental purpose."32 Thus, an entity whose activities on a property are primarily in furtherance of religious purposes will not lose its tax-exempt status if there is some minor, incidental or secondary use of the property for non-exempt purposes.33

32 Methodist Old Peoples Home v. Korzen, 39 Ill. 2d 149, 158, 233 N.E.2d 537, 542 (1968).

33 Evangelical Hospitals Corp. v. Dept. of Rev., 223 Ill. App.3d 225, 231, 584 N.E.2d 1004, 1008 (Ill. App. 2d 1991).

[page 37]

Further, space used for administrative, maintenance, or storage purposes will be exempt if these uses are integral and necessary to the exempt purpose.34 At the trial, the interveners attempted to dissect the administrative facility into square-foot blocks broken down by specific purposes, such as administrative use, production studios, advertising, etc. TT 234. The hearing judge did a similar thing when she ruled that the pastoral offices were exempt, but the rest of the facilities were not. RD 3. But these distinctions are inappropriate, as long as all the uses relate to and support the primary religious purposes of Three Angels.

As one Illinois court put it, "Illinois courts have held that property used as hospital administrative and support services, property used as a hospital employee parking lot . . . and property used as a child-care center serving employees of a tax-charitable hospital all qualify for the property tax exemption."35 If the hearing judge below was correct in her division of Three Angels property, then hospitals would only have their emergency rooms, patient wards, and other patient care areas exempt, and would pay taxes on parking lots, maintenance rooms, and cafeterias. But this is not the approach Illinois courts have taken, and this Court should not take that approach with Three Angels' property.

In Illinois, one determines if a religious entity is operating according to its religious purposes, both generally and in relation to a particular property, by looking at two things:

34 Evangelical Hosp. Ass'n v. Novak 125 Ill. App. 3d 439, 465 N.E. 2d 986(Ill. App. 2d 1984) (administrative and storage space that was supportive of religious purposes was tax exempt).

35 Mount Calvary Baptist Church v. Zehnder, 302 Ill. App.3d 661, 672, 706 N.E.2d 1008, 1016 (Ill. App. 1d. 1998).

[page 38]

one, how the entity is organized, and two, "the actual facts relating to its method of operation."36

In examining religious charities, the courts have found a number of factors to be relevant to whether there is exclusive operation for charitable purposes. These factors were helpfully summarized for religious ministries in the case of Inter-Varsity Christian Fellowship, where the court noted certain "specific and vital" factors relevant to Inter-Varsity's exempt status.37 These included:

  1) It was organized as a not-for-profit corporation with a charter dedicated exclusively to religious and charitable purposes;

  2) None of its revenue inured to the benefit of any private person and, upon dissolution, any capital surplus, if any, must be distributed to another charitable organization;

  3) It supported missionaries and served the needs of an evangelical movement;

  4) It provided a substantial amount of materials free or below cost to groups which were targeted for its message.

A fifth factor that has emerged from the cases is that relating to revenue of charitable organizations. As more fully discussed below, this factor is basically whether:

  5) Any net revenue from sales by the organization are secondary and incidental to the exempt purpose, the sales are of items that further the organization's purpose, and the excess revenue is used in the furtherance of the entity's charitable purposes.

The evidence, even those facts considered undisputed, showed that Three Angels meets these five factors.

36 Evangelical Teacher, 118 Ill. App. at 25, 454 N.E. 2d at 838.

37 Inter-Varsity Christian Fellowship v. Hoffman, 62 Ill. App. 3d. 798, 802-03, 379 N.E.2d 813, 817 (Ill.

[page 39]

Factor One – Organized and dedicated to a charitable or religious purpose.

First, Three Angels' Articles of Incorporation state that its purposes will be those of a purely religious or charitable not-for-profit organization. RD 5; TT 53-55, Appl. Exh. 2. The Articles then state that Three Angels will "develop, plan, promote, produce and direct in cooperation with various religious organizations, all types of religious programming for electronic transmission for television and radio broadcasting throughout the world." Id. at Sec. 1.2(a).

Factor 2 – No Personal Inurement and a Dissolution Clause

Second, Three Angels Articles state that none of its net earnings shall "inure to the benefit of . . . its members, trustees, directors, officers or other persons." Id. at 1.2(I)(I). Further, the governing documents require that, upon dissolution of Three Angels, all assets shall be distributed to organizations that are "organized and operated exclusively for charitable, religious, educational scientific purposes" and are not-for-profit organizations under federal law. TT 60-61, Appl. Exh. 3. There was some confusion on the existence of a dissolution clause in the hearing judge's initial opinion, but in a later ruling, she recognized that one existed. OPR 2.

The hearing judge's concerns with the topic of inurement is twofold. First, she mistakenly held that Three Angels does not have an independent board, and the organization is basically a closely held business of the Sheltons. RD 7, 35. Pages 11 to 13 above detail the plain factual error of this conclusion, including testimony by Dr. Walter Thompson, the board chairman, Elder Ken Denslow, Adventist leader and board member, Larry Ewing, CPA and Three Angels treasurer, and Alan Lovejoy, independent accountant with Gray, Hunter and Stenn, LLP, Accountants.

App.2d 1978).

[page 40]

Second, she mistakenly concluded that Linda Shelton, Three Angels vice president, received royalties from Three Angels for music CDs. Once again, as described in pages 15 to 16 above, there is no evidentiary basis for this application of law to fact. Linda received no royalties from Three Angels, but received de minimis royalties of $20 or so from a third party with no connection with Three Angels from the licenses to her songs, which were her personal property. Once again, the hearing judge's application of fact to law on this point were in error.

Given these points, this Court should find that Three Angels meets the no inurement standard. It should reverse the lower court's legal conclusion on this point, and reject the hearing judge's legal conclusion that Three Angels profits goes to the personal inurement of private persons.

Factor 3 – Missionary Activity and Support of an Evangelical Movement

Three Angels broadcasting has a close association with the Adventist Church. Adventist leaders and pastors are on its board, including the current president of the Illinois Conference of Seventh-day Adventists. TT 93-94. All the board members are active members of the Adventist church. TT 92. Danny Shelton is an ordained elder and serves as a lay minister of the Adventist church. TT 38.

Further, the evidence overwhelmingly shows that Three Angels supports and directly carries out missionary activity. It purchased property and buildings in Russia to serve as church building and offices as well as a religious broadcast center. TT 133-134. It pays the salaries of the 30 to 40 employees who operate the religious broadcast ministry in Russia. T 134, 188. It also similarly owns and operates a religious broadcast ministry in

[page 41]

the Philippines. The facility there employees about ten full-time employees and broadcasts religious programs to a potential audience of 20 million people. TT 135.

But not only does Three Angels support missionary activity, it directly carries it out. As more fully described above in pages 20 to 22, Three Angels leadership is actively involved in preaching, praying, and praising in churches throughout America and overseas. The Three Angels team has conducted a number of direct evangelism preaching campaigns resulting in many baptisms, including 15,000 in India and a similar number in Russia in 2000 and 2001. TT 136.

These facts, along with the close relationship between Three Angels and the Seventh-day Adventist Church, a growing worldwide evangelical movement, as described above at pages 4 to 7, support the finding that Three Angels meets the criteria of factor three. This Court should reject any legal conclusions made by the hearing judge to the contrary.

Factor 4 – Reduced or No-Cost Benefits to the Public

The evidence at trial demonstrated that Three Angels gives away, at no charge, a significant amount of religious literature, videos, audio tapes and other materials. TT 171, 172, 182, 186; Appl. Exh. 18-21. Everyday, free material is promoted and made available to the public on a variety of spiritual and religious topics, including healthful living and finding spiritual peace. TT 171. Every Thursday, there is a special, two-hour program called 3-ABN Presents, where there is always a free give-away. TT 172. During 2000, Three Angels sold its satellite dishes at their materials cost, which represented a loss to Three Angels because of the overhead and administrative expense associated with the sales. TT 325. During 2001, the dishes were actually sold at $50 less than their materials cost to Three Angels. TT 325-326. Indeed, a number of satellite

[page 42]

dishes were given away in both 2000 and 2001 to callers who showed significant financial hardship. TT 300.

Even for books and materials that are listed for a modest sale price, Three Angels will further discount the price or give the items away if callers are unable to afford them. TT 169-170. Further, its charges for air-time programming are set to cover costs, not to make a profit, and even these prices are frequently adjusted downward based on a participating ministry's ability to pay. TT 160-162. Indeed, some participating groups or ministries are given airtime at no charge. TT 106-108.

The items that Three Angels gives away and/or sells at or below cost are further detailed above at pages 6-7, 9, 17-19. The clear factual record, further set out at pages 8 to 10 above, is that Three Angels gives away a significant amount of material and airtime. Those items and airtime that Three Angels sells, it does so at or below cost. There is no evidence in the record to the contrary on either of these points. Thus, this Court should conclude that Three Angels provides at-or-below-cost materials and benefits to the public.

Factor 5 – Any net revenue is incidental to, and used to further, Three Angels religious purposes and mission.

Fifth, the evidence will show that net revenue, if any, from sales is an incidental and secondary form of revenue that accounts for only a few percent of Three Angel's total revenue. TT 139; Appl. Exh. 14 & 15. The Illinois Supreme Court has rejected the notion that a revenue stream from sales that is greater than the associated expenses, a net profit, will disqualify an organization from being a tax exempt, "not-for-profit" entity.

[page 43]

Rather, the Court has noted that the "determining feature of a 'profit with respect to a charitable institution is whether there is inurement of benefit to a private individual."38

In Du Page County, the Court noted that the state erroneously believed that if a not-for-profit organization accumulates funds beyond their obligations, that a "fund balance ceases to be a fund balance and becomes a 'profit.'"39 The Court rejected this notion. It pointed out the foolishness of insisting that "not-for-profit" organizations must literally have "no profit" on their sale of items, thus maintaining minimal or non-existent fund balances. "Conditioning tax exemption on high-risk money management," the court asserted, fails to serve the interests of charitable organizations and their beneficiaries."40

But this is precisely what the hearing judge requires of Three Angels in the present case. She claims that "financials statements prove that applicant netted a profit during the years at issue." RD 38. She states that the size of the surplus, about 1.2 million in 2000, and 1.9 million in 2001, disqualifies Three Angels as being a "not-for-profit" entity. RD 38. What the hearing judge overlooked was that compared to Three Angels operating expenses, this revenue margin was actually quite slim. With operating costs at about 1.2 million per month, these yearly surpluses represent merely one to two months in operating costs.

The hearing judge included in the revenue totals a combination of sales revenue and charitable donations. When the sales revenue is looked at separately, it becomes clear, as testified to by both Three Angels treasurer Larry Ewing, as well as independent auditor

38 Du Page County Board of Review v. Joint Comm'n on Accreditation of Healthcare Organizations, 274 Ill. App.3d 461, 470, 654 N.E.2d 240, 246 (Ill. App.2d. 1995).

39 Id. at 470, 948.

40 Id. at 470-71, 948.

[page 44]

Alan Lovejoy, that Three Angels did not make a "profit" from the sale of airtime or other materials. TT 444, 476-477.

Three Angels fits well within existing Illinois caselaw on the issue of revenue production. Inter-Varsity, the court rejected the state's contention that "inasmuch as profits are made from the sale of the literature, this is a non-exempt operation of a charitable or religious organization."41 The court ruled that "it was not the use to be made of the profits, but the nature of the business done that should be considered in deciding questions of liability of a charitable institution's property to taxation."42

In Evangelical Teacher, the court noted that the applicant did not produce materials "to be distributed free of charge." Rather, it at times would donate course and text materials to mission schools and then offset these losses by "income from 'high volume textbook' sales."43 Clearly, these "high volume textbook sales" were made at more than cost and generated a positive income stream, yet this was not a disqualifying "profit."

A similar case to the instant one is Congregational Sunday School, where applicant sold books at a "sufficient charge to cover the expenses of this work."44 The court noted that it was difficult to determine if a profit was made in any given year. "Some years the business is operated at a profit and some years it is operated at a loss," although it is impossible to tell "what the expenses will be each year."45 But the important point was that "such profits as do come from the business of selling books and periodicals are devoted to the maintenance of the missionary department. . . . The purposes of the

41 Inter-Varsity, 379 NE.2d at 816.

42 Id.

43 Evangelical Teacher, 118 Ill. App.3d at 23, 454 N.E.2d at 838.

44 Congregational Sunday School, 290 Ill. at 110-111, 125 NE. at 9.

45 Id.

[page 45]

[applicant] are directly carried out by the distribution of its books and supplies, and the receipt of the money from the sales is incidental and secondary."46

Very similarly, it may be difficult to pinpoint precisely what "profit" or "loss" Three Angels takes on sale of airtime, satellites, books, or materials. The testimony was that these items were sold either at cost, or at a loss. TT 161, 166-167, 169-170. But even if some small "profit" was realized on these items at times, that revenue was "incidental and secondary" to the intent of the sales, which was to spread the religious message of Three Angels through printed materials, audio and video broadcasts, and videos and CDs.

The evidence at trial showed clearly that profit, when it existed at all, was very incidental. Gross revenue from satellite dish sales was $2.6 million in 2000, but the costs of satellite dishes to Three Angels that year was nearly $3 million. Appl. Exh. 14, p. 200019 and 200026. Thus, Three Angels took a $400,000 loss that year on satellite sales. In 2001, as sales caught up with inventory, there were $600,000 in sales, and about $400,000 in dish costs, representing a net "profit" of $200,000. Appl. Exh. 14, p. 4 and 12. But that still did not make up for the $400,000 in losses from the previous year. Indeed, other costs associated with satellite sales in 2001, including salaries and shipping meant that even for that year there was no net revenue. TT 446-450.

The situation in regards to sales of tapes, videos, CDs and books was very similar. Gross revenue from these items was about $150,000 in 2000 and about $250,000 in 2001. Appl. Exh. 14 p.4 and Exh. 15 p. 4. Evidence at trial showed that the cost of goods sold were likely at least as much, factoring in overhead and administrative expenses associated with making, selling, and distributing goods. TT 453. It is quite unlikely that

46 Id.

[page 46]

any net revenue, or actual profit, was received from any goods sold. Certainly this is true in the aggregate. Appl. Exh. 14-15.

But even if one assumes there was no overhead or costs of goods sold, which was obviously not the case, the revenue generated from these sales was only one to two percent of total revenue for both years, which was $14.5 million for 2000 and $14.5 million for 2001. TT 139. This revenue from sales is patently "secondary and incidental" to that associated with direct charitable contributions to Three Angels, which makes up about 80% of total revenue. TT 140.

Likewise, revenue associated with fees from airtime and production fees, about $600,000 in 2000 and $850,000 in 2001, represent about 4% and 6% respectively of total revenue. Appl. Exh. 14 p. 4 and Exh. 15 p. 4. Once again, this is dwarfed by the income generated from directly charitable donations and gifts, which was between $11 million and $13 million during those years. Id.

All the items sold by Three Angels, including religious books, CDs, videos and tapes relate directly to Three Angel's religious mission and purposes, as they all have a religious content and message. TT 517, 597-599. Even the satellite receivers that Three Angels sells have a direct religious connection, as the dishes only receive religious broadcasting. TT 164. Three Angels sells two types of receivers, one that only receives Three Angels' broadcasts, and a second that receives Three Angels' programming along with that of a few other religious, family oriented stations. TT 164-165.

The facts show that Three Angels receives no net revenue or profits from its sales. But even if it were to receive some small profit, and even if this Court were to decide that satellite sales did not further Three Angels' religious purpose, the satellite sales should be

[page 47]

viewed as secondary and incidental to Three Angels' total activities and revenue that do not detract from the exempt status of the property. "When the property as a whole, or in unidentifiable portions, is used both for an exempt purpose and a nonexempt purpose, the property will be wholly exempt only if the exempt use is primary and the nonexempt use is incidental.'47

Three Angels' use of revenue from sales, insofar as they exceed the costs of sales, goes only to further the ministry and religious message of Three Angels.


The evidence is overwhelming and, as importantly, uncontradicted, in support of the not-for-profit, religious nature of Three Angels and its use of the subject properties for religious purposes. Three Angels was organized and is operated for religious, charitable exempt purposes. Its formational documents allow for no personal inurement, and there was no evidence of any such inurement. Rather, there was direct testimony on this point both by Three Angels internal treasurer, and independent, external auditor, who both agreed that no such inurement took place. The governing documents also require that upon dissolution, Three Angels' remaining assets will be distributed to a similar, not-for-profit organization. Three Angels is a missionary organization that runs and supports direct missionary efforts, as well as supporting the message and mission of the Seventh-day Adventist church, a world-wide, evangelical movement. Three Angels gives away significant amounts of free material, including books, CDs, and tapes, as well as more substantive items, such as satellite dishes and even broadcast airtime. Net revenue, if

47 Evangelical Hospitals Corp. v. The Department of Revenue, 223 Ill. App. 3d 225, 231, 584 N.E.2d 1004, 1008.

[page 48]

any, received by Three Angels is entirely secondary and incidental to the mission of Three Angels in getting its religious message out.

Requested Relief

For these reasons, the decision of the hearing judge should be reversed, and this Court should grant Three Angels a tax exemption for the properties at issue in this case for the years 2000 and 2001.

Alternatively, this Court should correct the lower court's legal rulings regarding the legal standard of religious purposes, and should remand the case for the hearing judge to consider the testimony of Dr. Denis Fortin and Elder Ted Wilson in arriving at a conclusion regarding the religious nature and activities of Three Angels. If this approach is taken, this Court should also correct the factual mistakes made by the hearing judge concerning the make-up of the Three Angels board and the issue of personal inurement to Danny and Linda Shelton, which is supported by no evidence. Further, Three Angels should be given the opportunity to take the discovery it was seeking on the constitutional issues, including subpoenas and depositions of WTCT-TV, and to present that evidence before the hearing officer.


BY:   [signed] D. Michael Riva               DATE:   3-8-05  
D. Michael Riva, Ltd.
Attorney at Law
226 E. Main Street
West Frankfort IL 62896
And Nichols P. Miller
Attorney at Law
2352 Bond Street
Niles MI 49120

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