Does a combination of for-profit telemarketing sales efforts and charitable giving qualify for tax-exempt status?
That’s the question in T.C. Memo. 2019-94 (Giving Hearts, Inc.).
The taxpayer organized itself as a nonprofit organization and filed an application requesting non-profit status in 2009. The IRS granted the application for exemption from federal income tax effective December 21, 2009.
The taxpayer established a “corporate sponsorship program” with the aim of providing telemarketing opportunities for businesses “to help generate leads” and “give back to a charity.”
In 2011, the telemarketing staff began to test the corporate sponsorship program by making telemarketing calls to potential customers. Under the program, the taxpayer made telemarketing calls on behalf of commercial businesses. The calls were scripted to schedule appointments for in-house product demonstrations by the business’s representatives with potential customers. The customers were under no obligation to purchase what the businesses were selling, and the taxpayer would receive a $5 donation from the business for each appointment made.
The attorney general for the state in which the taxpayer was operating received complaints from individuals who received the calls. The attorney general sent a memorandum to the IRS. In April 2012, the IRS notified the taxpayer of an examination regarding its tax-exempt status.
Eventually the IRS determined that the taxpayer was “not operated exclusively for exempt purposes within the meaning of internal revenue code section 501(c)(3) and treasury regulation section 1.501(c)(3)-1 * * * and operated for substantial private and commercial purposes, rather than exclusively for public purposes.”
The IRS revoked the taxpayer’s exempt status and issued the final adverse determination letter.
The IRS did not not dispute that the taxpayer was organized for exempt purposes (the so-called organizational test). Instead the IRS determined that the taxpayer did not operate exclusively for exempt purposes (the so-called operational test). Specifically, the IRS said the taxpayer operated as a conduit to generate sales leads (and revenues) for commercial businesses.
The taxpayer said (and the court agreed), that the taxpayer operated (at least in part) to further a charitable purpose. In short, the taxpayer collected donations from commercial businesses and transferred those funds to other charitable organizations. The taxpayer also correctly said that the internal revenue code does not preclude the use of for-profit enterprises to solicit or collect charitable donations.
The question came down to the operational test. The standard for tax-exempt status prescribed in internal revenue code section 501(c)(3) requires that an organization be “operated exclusively” for an exempt purpose.
Section 1.501(c)(3)-1(c)(1) of the federal income tax regulations describes the so-called operational test as follows:
(c) Operational test–(1) Primary activities.–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 section 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.
BASED ON THAT DEFINITION, WHAT WOULD YOU DECIDE?
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The taxpayer's corporate sponsorship agreement, by design and in effect, permits for-profit businesses to invoke its name as part of a telemarketing pitch intended, first and foremost, to generate sales leads and revenues. In other words, although telemarketing calls are ostensibly made on the taxpayer's behalf, the real purpose of the calls is business promotion. A participating business would be obliged to make a charitable contribution to the taxpayer only when a potential customer agreed to an in-home product demonstration.
Considering all of the facts and circumstances, the court concludes that the taxpayer was primarily engaged in generating sales leads (and ultimately revenues) to advance a commercial enterprise, with charitable donations arising only as a function of the businesses’ success in securing in-home product demonstrations and presenting project estimates to potential customers.
Generating sales leads in support of a for-profit enterprise is not an exempt purpose within the meaning of internal revenue code section 501(c)(3), nor is it substantially related to such an exempt purpose. It necessarily follows that more than an insubstantial part of the taxpayer's activities was not in furtherance of an exempt purpose.
Thus, the taxpayer does not qualify as an organization exempt from tax under section 501(a).
Consistent with the foregoing, we hold that the taxpayer was not operated exclusively for one or more exempt purposes within the meaning of internal revenue code section 501(c)(3) and that the IRS did not err in determining that the taxpayer is not eligible for an exemption from taxation under section 501(a).