On July 20, 2021, the Tax Court issued a Memorandum Opinion in the case of New World Infrastructure Organization v. Commissioner (T.C. Memo. 2021-91). The primary issue presented in New World Infrastructure was whether the petitioner qualified for tax exempt status for purposes of IRC § 501(c)(3).
Background to New World Infrastructure Organization v. Commissioner
The petitioner is “a successor to a for-profit business that never made any profit.” This, according to the petitioner, made it eligible to seek nonprofit status. The Tax Court had its doubts.
The petitioner was incorporated as a nonprofit corporation in Nevada in 2015. Petitioner’s articles of incorporation provide: “It’s [sic] purposes shall, at all times, conform to one or more of the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.”
Shortly after its incorporation, the petitioner submitted a Form 1023 (Application for Recognition of Exemption Under IRC § 501(c)(3)). The petitioner included a narrative description of its activities with the form. According to that description, petitioner’s “ultimate purpose and core focus will be charitable, with its main beneficiary being Federal, State and Local Government Agencies.”
The petitioner built pipes—very big pipes. In fact, the pipes could be used to make highway overpasses. According to the petitioner’s application, the cost of these pipes represent a fraction of the cost of traditional methods. Standardized design and installation methods will greatly reduce engineering requirements. This should result in more projects getting the green light, thus employing more workers.
Work on these projects will be far less disruptive to the environment and local economies. Projects will be scheduled to take full advantage of the time savings. The results of this research and machinery developed were to be dedicated to public purposes, however, the petitioner would retain ownership and control over any patents, copyrights, processes, etc.
The IRS determined that the petitioner did not qualify for exemption from Federal income tax under IRC § 501(a) as an organization described in IRC § 501(c)(3). The adverse determination was made, in part, based on the fact that the petitioner was a successor organization to a for-profit business, and it failed to demonstrate that it would be operated exclusively for charitable, scientific, or other exempt purposes. Specifically, it failed to show how its proposed activities will lessen the burdens of government or otherwise further charitable purposes.
The taxpayer bears the burden of proving that the IRS’s determination to deny a charitable exemption is erroneous. See Christian Manner Int’l, Inc. v. Commissioner, 71 T.C. 661, 664-665 (1979). IRC § 501(a) generally exempts from taxation an organization described in IRC § 501(c). Specifically, IRC § 501(c)(3) describes a qualifying organization in relevant part to include corporations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.
An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC § 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. See Treas. Reg. § 1.501(c)(3)-1(c)(1).
The presence of a single substantial purpose that is not described in IRC § 501(c)(3) precludes exemption from tax under IRC § 501(a) regardless of the number or the importance of the purposes that are present and described in IRC § 501(c)(3). See Better Bus. Bureau of Wash., D.C., Inc. v. United States, 326 U.S. 279, 283 (1945). Under the operational test, the purpose towards which an organization’s activities are directed, and not the nature of the activities themselves, is ultimately dispositive of the organization’s right to be classified as an IRC § 501(c)(3) organization exempt from tax under IRC § 501(a). See B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352, 356-357 (1978).
As the Tax Court has previously observed, even in a commercial, profit motivated context, such activities may be wholesome and commendable; but they will not support tax-exempt status unless they are undertaken to further an exempt purpose. Partners in Charity, Inc. v. Commissioner, 141 T.C. 151, 164 (2013).
Treas. Reg. § 1.501(c)(3)-1(d)(5)(ii) provides that scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc.
Thus, the petitioner’s intended activities to design and to construct prototype machinery are, as the IRS was quick to point out, the type of activities specifically excluded from the definition of scientific research by the above-quoted subdivision. Accordingly, the Tax Court held that such activities did not further scientific purposes for purposes of IRC § 501.
Although charitable purposes include “erection or maintenance of public buildings, monuments, or works; and lessening of the burdens of Government,” the petitioner proposed to manufacture and then sell large, corrugated metal pipe to contractors for use in infrastructure projects such as roads and bridges. Furthermore, the administrative record does not establish that petitioner would lessen the Government’s burden. See Quality Auditing Co. v. Commissioner, 114 T.C. 498, 507-508 (2000).
Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not operated exclusively for exempt purposes unless it is operated for the benefit of the public rather than for the benefit of a private interest. The petitioner must therefore have established that it is not organized or operated for the benefit of private interests such as those of its founder. See Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), aff’d per curiam sub nom. Kile v. Commissioner, 739 F.2d 265 (7th Cir. 1984).
Unfortunately, the petitioner appeared (to the Tax Court) to be a mere façade for the failed pipe making for-profit company…and the benefits of the nonprofit would have inured to the owners of said for-profit company…
In a word, the Tax Court held that the petitioner was an abject, well, you know…
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