Monday, July 15, 2013

Commerciality Doctrine Strikes Again: D.C. Circuit Upholds Denial of Exemption

Family Trust of MassachusettsAffirming a trial court's grant of summary judgment, the U.S. Court of Appeals for the District of Columbia Circuit recently concluded that an organization seeking tax exemption under Internal Revenue Code § 501(c)(3) did not operate exclusively for charitable purposes because it operated for a substantial commercial purpose.  In Family Trust of Massachusetts v. United States, decided June 28th, the named organization sought a declaratory judgement that it fell with section 501(c)(3).  Family Trust of Massachusetts manages pooled account trusts that benefit individuals with disabilities without the assets in those trusts being counted for purposes of determining eligibility for certain government benefit programs.

After reviewing Family Trust's operations, the court concluded it operated in a commercial manner for several reasons.  Those reasons included the fact that the organization consistently produced profits, apparently charged market rate fees, did not solicit charitable contributions to defray its costs, and did not use its accumulated funds to offset or waive trust management fees.  The court also found that the Family Trust had a close relationship with its President's private law firm and marketed its services to affluent (and disabled) elder law clients who could afford both the minimum $25,000 deposit and $750 annual fee.  The court therefore concluded that the Family Trust had a "pervasive commercial hue" that prevented it from qualifying for exemption under section 501(c)(3). 


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