The United States Tax Court recently upheld an Internal Revenue Service (“IRS”) adverse determination ruling for the Abovo Foundation, Inc. (“Abovo”). The Tax Court ruled that Abovo, which applied for federal tax-exempt status under Internal Revenue Code (“IRC”) §501(c)(3), failed to meet the qualifications as required under IRS rules and regulations.
Background
According to the IRS, in order to have tax-exempt status under IRC §501(c)(3), an organization must be organized and operated exclusively for exempt purposes as set forth in this section, and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization and, consequently, may not attempt to influence legislation as a substantial part of its activities or participate in any campaign activity for or against political candidates. Additionally, organizations described in IRC §501(c)(3) are commonly referred to as charitable organizations and are eligible to receive tax-deductible contributions under IRC §170.
Most importantly, the organization must not be organized or operated for the benefit of private interests, and no part of an IRC §501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.
Facts
Emmanuel C. Okonkwo, M.D., a military veteran and board-certified expert in patient safety and risk management, created Abovo in May of 2011. During this time, Dr. Okonkwo incorporated Abovo under the nonprofit laws of the State of Texas.
According to T.C. Memo 2018-57, Abovo’s primary purpose was 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.”
Abovo also solicited donations and contributions and received fees for services provided. Abovo’s President/Chief Executive Officer and sole employee, Dr. Okonkwo, performed services at an hourly rate of $350. Dr. Okonkwo further received an annual salary of $217,000 and was eligible for annual performance-based bonuses not to exceed $100,000.
IRS Determination
On April 23, 2012, the IRS received Abovo’s Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, which was deemed by the IRS to be incomplete. The IRS requested additional information and, in return, Abovo sent an updated Form 1023 in December of 2013. Within this submission, Abovo amended its certificate of formation to provide that the organization was organized and operated exclusively for charitable, religious, educational, and scientific reasons in accordance with IRC §501(c)(3).
Abovo received a final adverse determination from the IRS with respect to its request for tax-exempt status in 2015. Unhappy with this adverse determination, Abovo petitioned the Tax Court for a declaratory judgment that it met the requirements of IRC §501(c)(3) and should be exempt from federal income tax.
Tax Court Decision
Abovo contended that its services advance government programs pursuant to federal patient safety laws and lessen the government’s burden. The Tax Court, however, concluded that Abovo failed to prove that the services provided would develop government programs and lessen any such governmental burden.
The Tax Court noted that Abovo’s services did not serve an exempt purpose, are commercial in nature, and serve Dr. Okonkwo’s individual interests, rather than the interests of the public. T.C. Memo 2018-57 indicates that the Tax Court believed that Abovo was merely a “facade for Dr. Okonkwo’s consulting activities”, and this organization would simply expand Dr. Okonkwo’s business relationships and further his consulting career as a board-certified expert in patient safety and risk management.
In the court’s view, the benefits relating to Abovo inured to Dr. Okonkwo as Abovo’s sole employee, service provider and primary source of funding. Abovo was operated for commercial purposes and for the benefit of Dr. Okonkwo personally. Therefore, the court concluded that Abovo did not qualify for tax-exempt status under IRC §501(c)(3).
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