T.C. Memo. 2004-12
UNITED STATES TAX COURT
PEOPLES PRIZE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18658-02X. Filed January 15, 2004.
Daniel L. Pfaff (President), for petitioner.
Elizabeth Edwards and Michael Blumenfeld, for respondent.
MEMORANDUM OPINION
HAINES, Judge: Respondent determined that Peoples Prize
does not qualify as an organization described in section
501(c)(3) and consequently is not exempt from Federal income tax
under section 501(a). Petitioner challenged respondent’s
determination by timely filing a petition for a declaratory
judgment pursuant to section 7428(a) after exhausting its
administrative remedies and satisfying jurisdictional
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requirements. See sec. 7428(b)(3); Rule 210(c). The case was
submitted for decision under Rule 122 upon the stipulated
administrative record. For purposes of this proceeding, the
facts and representations contained in the administrative record
are accepted as true, see Rule 217(b), and are incorporated
herein by this reference. The issue for decision is whether
petitioner is operated exclusively for charitable purposes within
the meaning of section 501(c)(3).
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
Background
Petitioner, a nonprofit corporation, with its principal
place of business at Warren, Michigan, was incorporated under the
laws of Michigan on February 1, 2000, with its purpose being “To
create and administer prizes for humanitarian goals. The prizes
will be broad based, consisting of donations of no more and no
less than $1.00 (one dollar US currency) per person.”
Petitioner’s Form 1023, Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code,
was filed on May 14, 2001. Petitioner supplemented the
information contained in Form 1023 through correspondence with
respondent during the remainder of 2001 and into early 2002.
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The original articles of incorporation were restated on
September 13, 2001, and January 9, 2002, to provide:
PEOPLES PRIZE is organized exclusively for charitable,
religious, educational, and scientific purposes, including,
for such purposes the making of distributions to
organizations that qualify as exempt organizations under
section 501(c)(3) of the Internal Revenue Code, or the
corresponding section of any future federal tax code.
PEOPLES PRIZE will fulfill these purposes by creating and
administering prizes for humanitarian goals. The prizes
will be broad based, consisting of donations of at least
$1.00 (one dollar US currency) per person.
Petitioner does not intend to commence operations until it
receives recognition as a section 501(c)(3) organization. In
response to respondent’s requests to provide greater detail about
its proposed activities, petitioner provided the following
description:
Peoples Prize plans to become an Internet-based appeal for
support of bold humanitarian goals. * * * All monetary
contributions that we receive from individuals and from any
source will be applied to prizes. We will be posting the
amount of contributions, the amount of prizes (these will be
identical), and the number of contributions on the website
daily or as frequently as possible. * * * It is our hope and
expectation that the prizes will continue to grow
continuously, both in the dollar amount and in the number of
contributors. When a challenge is eventually achieved by
one of the competitors, Peoples Prize will award the
monetary amount of the prize to the victor. * * * The entire
process is much like circulating a petition, combined with a
real and growing prize to create interest and eventually
real competition. * * * Our first prize is for the mass
production of a reliable car.
* * * * * * *
For example, our first prize states: “We the people hereby
join together to each contribute one dollar (U.S.) to this
prize to be awarded to the first company to manufacture,
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sell and deliver within 365 days more than 100,000 cars
and/or light trucks with the proven ability to go ONE
MILLION KILOMETERS without replacement parts (excluding
tires, brake pads, and filters).” This prize will be
awarded to an automobile manufacturing company when it can
demonstrate to it’s [sic] competitors, to the media, and to
Peoples Prize that it has reached the goal. The economic
and other benefits to humanity will be enormous, but
proportionally, the most beneficial impact will be felt by
the working poor and low income persons in all lands by
increasing the supply of reliable used vehicles and reducing
the cost per year to purchase and maintain a motor vehicle.
The prizes will all be for long-term, bold, large objectives
that would seem to be impossible, such as a million-
kilometer car, a universal alphabet, etc. We will actively
solicit ideas for further prizes. They must be of direct
general benefit to the well being of humanity, particularly
to large numbers and future generations, and not to a
limited few (such as a cure for an extremely rare disease).
There will be no prizes for space exploration. We
anticipate maintaining only a small number of prizes at a
time.
On March 11, 2002, respondent issued a proposed adverse
ruling as to petitioner’s exempt status. Petitioner filed a
protest to the proposed adverse ruling on April 17, 2002. On
August 15, 2002, respondent issued a notice of determination
denying petitioner’s exempt status and stated as reasons for the
denial:
You have not established that you are operated exclusively
for exempt purposes within the meaning of section 501(c)(3)
of the Code. Your primary activity is the promotion of the
private interests of for-profit companies rather than the
promotion of a public charitable purpose. Furthermore, you
have failed to establish that your activities serve to
lessen the burdens of government within the meaning of
section 501(c)(3) of the Code.
On November 18, 2002, petitioner filed a timely petition for
declaratory judgment seeking a determination that it is a
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qualified section 501(c)(3) organization exempt from Federal
income tax under section 501(a).
Discussion
A tax exemption is a matter of legislative grace, and an
organization seeking an exemption must prove that it “comes
squarely within the terms of the law conferring the benefit
sought”. Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958); see
also Fla. Hosp. Trust v. Commissioner, 103 T.C. 140, 153 (1994),
affd. 71 F.3d 808 (11th Cir. 1996).
An organization may seek tax-exempt status before it begins
operations, but the administrative record must set forth
sufficient detail about its prospective operations to provide the
basis for the granting of the exemption. Nationalist Movement v.
Commissioner, 102 T.C. 558, 572 (1994), affd. 37 F.3d 216 (5th
Cir. 1994); La Verdad v. Commissioner, 82 T.C. 215, 219 (1984);
World Family Corp. v. Commissioner, 81 T.C. 958 (1983); Church of
Boston v. Commissioner, 71 T.C. 102, 105 (1978); Hancock Acad. v.
Commissioner, 69 T.C. 488, 492 (1977).
Petitioner has, for the most part, provided only
generalizations in response to repeated requests by respondent
for more detail on prospective activities. As petitioner states
in its reply brief:
once momentum for our first prize is substantial, we will
launch additional prizes to benefit of humankind. The
prizes will be chosen only after months and years of
extended deliberation and collaboration. We will
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continually solicit ideas, and select those promising the
greatest benefit to humankind. Interest income from the
growing prizes will be used to fund and promote new prizes
so the corporation can continue creating and awarding prizes
into the indefinite future.
Such generalizations do not satisfy us that petitioner qualifies
for the exemption. See La Verdad v. Commissioner, supra at 221;
World Family Corp. v. Commissioner, supra at 966.
The single activity for which petitioner did provide detail,
raising money to award a prize to a manufacturing company that
develops and builds a reliable car, was determined by respondent
to promote the private interests of for-profit companies as
opposed to public charitable purposes. In addition, respondent
found that the activity would not lessen the burdens of the
Government. Petitioner concedes that its activity will not
lessen the burdens of the Government but contends it will relieve
the poor and distressed by providing transportation less costly
to purchase and maintain.
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Section 501(a)1 exempts organizations described in section
501(c)(3) from Federal income tax. In order to qualify for an
exemption under section 501(c)(3), the organization must be not
only organized exclusively for exempt purposes but also operated
exclusively for exempt purposes. Quality Auditing Co. v.
Commissioner, 114 T.C. 498, 504 (2000). Respondent conceded that
petitioner is organized for exempt purposes but denies that
petitioner will be operated exclusively for exempt purposes.
Exempt purposes are broadly stated in section 501(c)(3) to
include religious, charitable, scientific, and educational
1
Sec. 501, in relevant part, provides:
SEC. 501. (a) Exemption From Taxation.— An organization
described in subsection (c) * * * shall be exempt from
taxation under this subtitle unless such exemption is denied
under section 502 or 503.
* * * * * * *
(c) List of Exempt Organizations.— The following
organizations are referred to in subsection (a):
* * * * * * *
(3) Corporations * * * organized and operated
exclusively for * * * charitable * * * purposes, * * *
no part of the net earnings of which inures to the
benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying
on propaganda, or otherwise attempting, to influence
legislation, * * * and which does not participate in, or
intervene in (including the publishing or distributing
of statements), any political campaign on behalf of (or
in opposition to) any candidate for public office.
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purposes. “Charitable” is further defined in section
1.501(c)(3)-1(d)(2), Income Tax Regs., as follows:
The term “charitable” is used in section 501(c)(3) in its
generally accepted legal sense and is, therefore, not to be
construed as limited by the separate enumeration in section
501(c)(3) of other tax-exempt purposes which may fall within
the broad outlines of “charity” as developed by judicial
decisions. Such term includes: Relief of the poor and
distressed * * * lessening of the burdens of Government;
To operate “exclusively” for exempt purposes does not mean
that there must be an absence of nonexempt purposes. Quality
Auditing Co. v. Commissioner, supra at 504; Nationalist Movement
v. Commissioner, supra at 576. A single activity might be
directed to both an exempt and a nonexempt purpose. Our inquiry
must determine whether the nonexempt purpose is incidental and
not substantial. If the nonexempt purpose is substantial, the
organization will not satisfy the operational test regardless of
the number or importance of truly exempt purposes. See Better
Bus. Bureau v. United States, 326 U.S. 279, 283 (1945); Am.
Campaign Acad. v. Commissioner, 92 T.C. 1053, 1065 (1989); Church
of Scientology v. Commissioner, 83 T.C. 381 (1984), affd. 823
F.2d 1310, 1315 (9th Cir. 1987); see also sec. 1.501(c)(3)-
1(c)(1), Income Tax Regs.
A nonexempt purpose can arise if an organization benefits
private interests. See Am. Campaign Acad. v. Commissioner, supra
at 1066. Section 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs.,
states:
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An organization is not organized or operated exclusively for
one or more of the purposes specified in * * *[section
501(c)(3)] unless it serves a public rather than a private
interest. Thus, * * * it is necessary for an organization
to establish that it is not organized or operated for the
benefit of private interests * * *
Private interests within the meaning of this rule may include not
only related persons and insiders but also unrelated and
disinterested private parties. See Am. Campaign Acad. v.
Commissioner, supra at 1068-1069. If the unrelated and
disinterested third party is a charitable class, bestowing of
benefits on that class will not be grounds for denying the
exemption. See Aid to Artisans, Inc. v. Commissioner, 71 T.C.
202, 208, 212-213 (1978). However, if the disinterested third
party is not a charitable class, benefits bestowed on the third
party, if substantial and not incidental, will be sufficient to
cause the exemption to be denied. See Am. Campaign Acad. v.
Commissioner, supra at 1068; Christian Stewardship Assistance,
Inc. v. Commissioner, 70 T.C. 1037 (1978).
Car and truck manufacturers, who will receive the prize, are
not members of a charitable class. Cf. Aid to Artisans, Inc. v.
Commissioner, supra at 215. After examining the administrative
record, we have no reasonable basis, other than speculation by
petitioner, to conclude that the poor and distressed or any other
charitable class would receive any benefit from the activity
proposed. We conclude that the administrative record fully
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supports respondent’s determination that petitioner is not
entitled to exemption under section 501(c)(3).
We have considered all of petitioner’s contentions,
arguments, and requests that are not discussed herein, and we
conclude that they are without merit or irrelevant.
To reflect the foregoing,
Decision will be
entered for respondent.