The United States Tax Court recently issued a Memorandum Opinion in Milk Saving Starving Children Foundation v. Commissioner, T.C. Memo. 2026-1, which serves as a stark reminder regarding the operational test under Internal Revenue Code (I.R.C.) section 501(c)(3). The Court granted the Commissioner’s Motion for Summary Judgment, sustaining the revocation of the petitioner’s tax-exempt status due to its failure to operate exclusively for exempt purposes. This article details the factual background, the legal framework applied by Special Trial Judge Leyden, and the specific operational failures that led to the adverse determination.

Factual Background and Examination Findings

The petitioner, the Milk Saving Starving Children Foundation, was incorporated in Pennsylvania in 2001. In its Form 1023, Application for Recognition of Exemption, the organization stated its purpose was to "raise money to purchase rice, soy, and/or powdered milk" to be "distributed world-wide to starving children". Based on these representations, the IRS granted the organization tax-exempt status as a public charity.

However, the administrative record revealed that the petitioner’s actual activities diverged significantly from its application. Shortly after applying for exemption, the petitioner purchased real property to operate a coffee shop known as "Café Beignet". Since November 2003, the petitioner operated this cash-only business, selling beignets and beverages, an activity not disclosed in its original application. Additionally, the petitioner leased an addition to the property to commercial tenants, including pizza shops and restaurants.

Regarding its charitable mandate, the record showed that while the petitioner donated $159.60 worth of powdered milk in 2001, milk donations ceased entirely by 2011. It was not until 2020, after the IRS commenced an examination for the 2018 tax year, that the petitioner resumed limited shipments of powdered milk.

During the examination of the 2018 tax year, the IRS revenue agent discovered that the petitioner’s primary income sources were rental income ($6,000) and proceeds from a golf fundraiser ($13,100), while "Café Sales" totaled $1,697. The expenses for that year included mortgage payments, insurance, and significant "Loans to Mr. Lucas" (the original incorporator), but notably, "[n]one of petitioner’s expenses in tax year 2018 were for rice, soy, or powdered milk".

The Taxpayer’s Request for Relief

Following the issuance of a Final Adverse Determination Letter revoking exempt status effective July 1, 2017, the petitioner filed a petition for declaratory judgment under section 7428(a)(1)(A),.

The petitioner argued in its pleadings that it "received substantial contributions to show it is in compliance with the requirements of being 501(c)(3) charitable foundation" and asserted it was a publicly supported organization. When the Commissioner moved for summary judgment, the Court directed the petitioner to respond. However, despite being granted an extension of time, "petitioner did not file any further response or objection to the Motion".

The Court’s Analysis of the Law

The Court’s analysis focused squarely on the operational test pursuant to Treas. Reg. § 1.501(c)(3)-1(a)(1). To maintain exemption, an organization must be both organized and operated exclusively for exempt purposes.

The Court emphasized the long-standing judicial precedent that "exclusively" does not mean "solely," but the existence of a single nonexempt purpose, if substantial, will destroy the exemption. Quoting the Supreme Court in Better Bus. Bureau of Wash., D.C., Inc. v. United States, 326 U.S. 279, 283 (1945), the Tax Court reiterated that the presence of a single nonexempt purpose precludes exempt status "regardless of the number or importance of truly exempt purposes".

Under the operational test regulations, an organization is not regarded as operated exclusively for exempt purposes "if more than an insubstantial part of its activities is not in furtherance of an exempt purpose" (Treas. Reg. § 1.501(c)(3)-1(c)(1)). Furthermore, the Court cited B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352, 356–57 (1978), to clarify that "the purpose towards which an organization’s activities are directed, and not the nature of the activities themselves, is ultimately dispositive". Even commercial activities that are "wholesome and commendable" will not support exemption unless they are "undertaken to further an exempt purpose".

Application of Law to Facts

In applying these legal standards, the Court found no genuine issue of material fact preventing summary judgment. The Court noted that the petitioner failed to properly address the assertions of fact in the Commissioner’s motion, allowing the Court to "consider the fact undisputed for purposes of the motion" under Rule 121(f).

The Court concluded that the petitioner was not operating exclusively for exempt purposes. The opinion highlighted that the petitioner "ceased milk distribution activities over the last several years" and only "recently began distributing milk in response to the potential revocation". This reactionary distribution did not cure the operational failure during the years at issue.

Instead of charitable activities, the petitioner "engaged extensively, and seemingly primarily, in commercial activities," specifically the purchasing and renovating of real property, renting out that property to unrelated commercial businesses, and operating Café Beignet. The financial data for the 2018 tax year was damning; despite receiving income of $26,447, the petitioner "did not make any payments or donations in support of its exempt purpose". Instead, funds were used for mortgage payments, repairs, and loans to an officer.

The Court explicitly noted that the petitioner failed to demonstrate that "its operation of its commercial activities furthered its exempt purposes". Consequently, the commercial nature of the real estate and café operations, combined with the absence of charitable disbursements, resulted in a failure of the operational test.

Conclusions

Special Trial Judge Leyden held that the administrative record clearly demonstrated the petitioner "did not operate exclusively for one or more exempt purposes within the meaning of section 501(c)(3)". Because the operational test was not met, the Court found it unnecessary to address the organizational test.

The Court sustained the IRS’s revocation of the petitioner’s tax-exempt status effective July 1, 2017, granting the respondent’s Motion for Summary Judgment,. This case serves as a critical precedent for tax professionals advising non-profits: mere intentions stated in an application do not suffice. Continuous, substantial operational activity in furtherance of the exempt purpose—distinct from unrelated commercial activity—is required to maintain section 501(c)(3) status.

Prepared with assistance from NotebookLM.