Brief Fact Summary. The Internal Revenue Service (Defendant) found that Redlands Surgical Services (Plaintiff) was not a tax-exempt nonprofit organization and Plaintiff appealed.
Synopsis of Rule of Law. An organization must be operated in an exclusively charitable manner to qualify for tax-exempt status.
Others include the particular manner in which the organization's activities are conducted, the commercial hue of those activities, and the existence and amount of annual or accumulated profits.View Full Point of Law
Issue. Must an organization be operated in an exclusively charitable manner to qualify for tax-exempt status?
Held. (Thornton, J.)Â Yes.Â An organization must be operated in an exclusively charitable manner to qualify for tax-exempt status.Â To the extent that Plaintiff cedes control over its sole activity to for-profit parties having an independent economic interest in the same activity, and having no obligation to put charitable purposes ahead of profit-making objectives, Defendant cannot be certain that the partnership will in fact be operated to further its charitable purposes.Â Based on all factors considered, Plaintiff has in fact ceded effective control of the partnerships’ and the surgery center’s activities to for-profit parties, conferring on them significant private benefits, and therefore was not operated for charitable purposes alone.Â Affirmed.
Discussion. In determining the for-profit control over the partnerships’ activities, the court considered three indications in this case.Â First, there was no charitable obligation.Â Second, Plaintiff had no formal control.Â Third, Plaintiff also had no significant informal control.