Single Individual Control Contributes to 501(c)(3) Exemption Denial

In Ohio Disability Association v. Commissioner, the United States Tax Court denied recognition as a Code section 501(c)(3) tax-exempt organization to a nonprofit corporation formed to create a pooled trust that would hold the assets of disabled individuals that would then, under the applicable law, not be considered in determining Medicaid eligibility.  The IRS agreed and the court ultimately agreed that the denial was justified based not only on the corporation’s inability to adequately explain how it would operate exclusively for charitable purposes, but also on the fact that a single individual served as the corporation’s sole incorporator, director, officer, and employee.  While carefully noting that control by one individual is not by itself grounds for denial (citing Revenue Ruling 66-219), the court when on to state that the “obvious opportunity for abuse” created by such a situation “calls for an open and candid disclosure of the taxpayer’s organization and operations.”  The court then found that the lack of a clear description of intended charitable activities, combined with the apparent lack of any other parties who could provide oversight of the corporation’s activities, including, for example, overseeing compliance with the corporation’s conflict of interest policy (adopted apparently only after IRS inquiries).  The court also noted that while the individual involved had agreed to serve without compensation, the articles of incorporation permitted the payment of reasonable compensation.  The bottom line is that the court’s decision indicates any entity solely controlled by a single individual would have to make a strong showing that there were other measures in place to prevent any abuse of that control before the court would be willing to grant recognition of section 501(c)(3) tax-exempt status.

LHM