Organization Operated for Commercial, Not Exempt, Purpose

In the case of Abovo Foundation, Inc. v. Commissioner, TC Memo 2018-57, the taxpayer was asking the Tax Court to rule that the organization qualified as a §501(c)(3) tax-exempt organization.  The Tax Court, siding with the government, found that the entity failed to qualify.

The organization’s stated purpose was summarized as follows in the opinion:

Abovo's primary purpose would be to deliver quality management consulting services to medical providers and advance Government programs through patient safety initiatives. Its quality management services would include “defining, identifying, analyzing, measuring and controlling systems and processes to ensure desirable outcomes”. In addition, Abovo would provide “uplifting services for the elderly and veterans”, housing for low-income individuals, and internal auditing services.

Dr. Okonkwo, who had formed the corporation, would be its sole employee, as well as president and CEO. The doctor:

…would perform services provided to clients (i.e., at an hourly rate of $350), receive a $217,000 salary, and be eligible for an annual performance-based bonus (i.e., not to exceed $100,000). While Abovo has not entered into any service contracts, its fee structure would be market based and dependent on the nature of the project and the expertise required to complete it.

The key issue in the case revolved around the clause in IRC §501(c)(3) that required the organization be organized and operated exclusively for exempt purposes and no portion of its net earnings inure to the benefit of any private shareholder or individual.  The IRS had denied the organization’s application, finding that operated for the benefit of Dr. Okonkwo, violating the operational test for private inurement.

The Tax Court agreed with the IRS’s holding.  The Court found that the entity would not advance Government programs pursuant to Federal patient safety laws or lessen the Government’s burden.  Rather, the Court found:

…Abovo is a facade for Dr. Okonkwo’s consulting activities. See B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352, 358 (1978) (stating that the relevant consulting activities were “of the sort which * * * [were] ordinarily carried on by commercial ventures organized for profit”). Abovo would develop Dr. Okonkwo's business relationships, further his consulting career as a board certified expert in patient safety and risk management, and potentially pay him annual compensation in excess of $300,000. See sec. 501(c)(3); B.S.W. Grp., Inc. v. Commissioner, 70 T.C. at 359; sec. 1.501(c)(3)-1(c)(2), Income Tax Regs. The benefits relating to Abovo would inure to Dr. Okonkwo, Abovo’s sole employee, service provider, and primary source of funding. Because Abovo would be operated for commercial purposes and for the benefit of Dr. Okonkwo, it does not qualify for tax exemption.