                                       FREE FERTILITY FOUNDATION, PETITIONER v. COMMISSIONER
                                                 OF INTERNAL REVENUE, RESPONDENT

                                                        Docket No. 17122–07X.                          Filed July 7, 2010.

                                                  P, a nonprofit corporation founded by S, provides S’s sperm
                                               free of charge to women seeking to become pregnant through
                                               artificial insemination or in vitro fertilization. S and his
                                               father, F, are P’s board members and officers. S and F ulti-
                                               mately determine to whom P will distribute sperm. P, seeking
                                               tax exemption as a private operating foundation pursuant to
                                               sec. 501(c)(3), I.R.C., contends that it operates exclusively for
                                               the charitable purpose of promoting health.
                                                  1. Held: P’s activities do not promote health for the benefit
                                               of the community.
                                                  2. Held, further, pursuant to sec. 501(c)(3), I.R.C., P is not
                                               operated exclusively for exempt purposes and therefore does
                                               not qualify for tax exemption.

                                         Marcus S. Owens and Nancy Ortmeyer Kuhn, for peti-
                                      tioner.
                                         Philip T. Hackney and Michael B. Blumenfeld, for
                                      respondent.



                                                                                                                                        21




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                                      22                 135 UNITED STATES TAX COURT REPORTS                                       (21)


                                                                                  OPINION

                                         FOLEY, Judge: Pursuant to section 7428(a), 1 petitioner
                                      seeks a declaratory judgment that it meets the requirements
                                      of section 501(c)(3) and is exempt from Federal income tax-
                                      ation. This case was submitted for decision based on the
                                      stipulated administrative record as defined in Rule
                                      210(b)(12). Petitioner has exhausted its administrative rem-
                                      edies as required by section 7428(b)(2) and Rule 210(c)(4),
                                      received a final adverse determination letter dated June 15,
                                      2007, and invoked the jurisdiction of this Court by a petition
                                      filed July 31, 2007.

                                                                               Background
                                         William C. Naylor, Jr. (Naylor), is a software engineer who
                                      holds more than 10 patents on various inventions. On March
                                      1, 2001, Naylor entered into a contract (2001 contract) with
                                      a Spokane, Washington, sperm bank to store and distribute
                                      his sperm to recipients of his choice. Pursuant to the 2001
                                      contract, Naylor was required to pay annual storage fees and
                                      designate recipients.
                                         On October 15, 2003, Naylor founded and incorporated
                                      petitioner in California as a nonprofit public benefit corpora-
                                      tion. The purpose of the corporation is to provide sperm free
                                      of charge to women seeking to become pregnant through
                                      artificial insemination or in vitro fertilization. Petitioner
                                      advertises online through a search engine and a Web site.
                                         On February 6, 2004, petitioner submitted to respondent
                                      Form 1023, Application for Recognition of Exemption, in
                                      which petitioner seeks tax-exempt status as a private oper-
                                      ating foundation. On April 11, 2005, respondent requested a
                                      copy of petitioner’s agreement with the sperm bank that
                                      stored its donated sperm. In response to the request peti-
                                      tioner, on May 31, 2005, submitted Naylor’s 2001 contract.
                                         Petitioner’s Web site states that Naylor is its ‘‘single sperm
                                      donor’’ and chronicles Naylor’s life from infancy to adulthood.
                                      Naylor’s donor profile includes photographs, a physical
                                      description, health information, family history, and achieve-
                                      ments. In particular, the Web site provides great detail of
                                      Naylor’s academic and athletic accomplishments during
                                        1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986,

                                      as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.




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                                      (21)              FREE FERTILITY FOUND. v. COMMISSIONER                                          23


                                      elementary school (e.g., spelling bee competition), junior high
                                      school (e.g., science fair competition), high school (e.g., swim-
                                      ming competitions), and college (e.g., recognition as ‘‘top
                                      engineering student’’). On the Web site Naylor states:
                                      I derive meaning and happiness from believing that I am making the
                                      world a better place. Being a sperm donor is a way that I can help a few
                                      people to have children who otherwise could not. This makes more of a
                                      positive difference to the world than all of the inventions and scientific
                                      discoveries that I could ever create.

                                         Petitioner’s bylaws provide for a board consisting of 1 to 10
                                      directors, all of whom shall be appointed by Naylor. None of
                                      the directors may be compensated. Naylor and his father, a
                                      retired university professor, are petitioner’s board members
                                      and officers. Naylor’s father is petitioner’s president and
                                      chairman of the board. Naylor is petitioner’s secretary, treas-
                                      urer, and sole financial contributor. Petitioner’s board of
                                      directors selects all sperm recipients.
                                         Women seeking to receive sperm from petitioner are
                                      required to submit answers to a questionnaire created by
                                      Naylor and his father (collectively, the Naylors). The ques-
                                      tions relate to the woman’s family background, living
                                      environment, age, history of fertility treatment, educational
                                      attainment, personal achievements, and desire to have a
                                      child. Preference is given to women ‘‘with better education’’
                                      and no record of divorce, domestic violence, or ‘‘difficult fer-
                                      tility histories’’ and are from families ‘‘whose members have
                                      a track record of contributing to their communities’’; who are
                                      in ‘‘a traditional marriage situation’’; who are under age 37;
                                      who are ethnic minorities; and who are ‘‘from locations where
                                      * * * [petitioner has] not previously accepted recipients.’’
                                      Petitioner scores the questionnaires by hand, transfers the
                                      information to a computer-readable form, and enters the
                                      information into a computer program which assigns a score
                                      to each woman. The threshold score required for a woman to
                                      receive sperm is adjusted so that the number of recipients
                                      accepted matches the number of sperm vials available. The
                                      Naylors are authorized to override a score to accept or reject
                                      anyone if, in their judgment, the computer program fails to
                                      account for a critical factor. In 2004 petitioner received 433
                                      questionnaires and distributed sperm to 20 women. In 2005




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                                      petitioner received 386 questionnaires and distributed sperm
                                      to 4 women.
                                         On November 30, 2005, respondent sent petitioner a pro-
                                      posed exemption denial letter. Petitioner, on March 30, 2006,
                                      submitted a written protest. The parties held a conference on
                                      November 28, 2006, to discuss petitioner’s application for
                                      exemption. On June 15, 2007, respondent issued a final
                                      determination letter denying petitioner’s request for exemp-
                                      tion. On July 31, 2007, petitioner, a California corporation,
                                      filed its petition with this Court seeking review of the final
                                      determination.

                                                                                Discussion
                                         Pursuant to section 501(a), organizations described in sec-
                                      tion 501(c)(3) are exempt from Federal income taxation.
                                      Section 501(c)(3) organizations include:
                                      Corporations * * * organized and operated exclusively for religious, chari-
                                      table, * * * or educational 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 * * *, any political campaign * * *.

                                      The requirement that a corporation be operated exclusively
                                      for exempt purposes is referred to as the ‘‘operational’’ test.
                                      See sec. 1.501(c)(3)–1(c), Income Tax Regs. To meet the
                                      requirements of the operational test, an organization must
                                      engage primarily in activities that accomplish exempt pur-
                                      poses, and no more than an insubstantial part of the
                                      organization’s activities may be in furtherance of a non-
                                      exempt purpose. Sec. 1.501(c)(3)–1(c)(1), Income Tax Regs.
                                      An organization is not operated exclusively for exempt pur-
                                      poses unless it serves a public rather than a private
                                      interest. 2 Sec. 1.501(c)(3)–1(d)(1)(ii), Income Tax Regs.
                                        Respondent contends that petitioner does not, pursuant to
                                      section 501(c)(3), operate exclusively for exempt purposes and
                                      therefore is not entitled to tax exemption. More specifically,
                                      respondent contends that petitioner’s operations do not pro-
                                      mote health or otherwise serve a charitable purpose. Peti-
                                        2 We need not and do not decide whether sec. 7491(a)(1) applies to a declaratory judgment

                                      action. The applicability of sec. 7491(a)(1) does not impact the outcome of this case.




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                                      (21)              FREE FERTILITY FOUND. v. COMMISSIONER                                          25


                                      tioner contends that it operates exclusively to promote health
                                      by providing free health products and services.
                                         Section 501(c)(3) identifies a number of exempt purposes,
                                      including ‘‘charitable’’ purposes. The term ‘‘charitable’’ is
                                      used in its generally accepted legal sense. Sec. 1.501(c)(3)–
                                      1(d)(2), Income Tax Regs. In particular, this Court has found
                                      that the promotion of health for the benefit of the community
                                      is a charitable purpose. Redlands Surgical Servs. v. Commis-
                                      sioner, 113 T.C. 47, 73 (1999), affd. 242 F.3d 904 (9th Cir.
                                      2001). The promotion of health may be deemed beneficial to
                                      the community if the class of beneficiaries is sufficiently
                                      large to benefit the community as a whole. Id.; Sound Health
                                      Association v. Commissioner, 71 T.C. 158, 181–182 (1978)
                                      (citing 4 Scott, Trusts, sec. 372.2 (3d ed. 1967)); 2 Restate-
                                      ment, Trusts 2d, sec. 372, cmt. c (1959).
                                         The free provision of sperm may, under appropriate cir-
                                      cumstances, be a charitable activity. Petitioner, however,
                                      does not qualify for tax exemption because the class of peti-
                                      tioner’s beneficiaries is not sufficiently large to benefit the
                                      community as a whole. Petitioner contends that ‘‘the class of
                                      individuals that could be direct beneficiaries of Petitioner is
                                      extremely large: all women of child-bearing age.’’ To the con-
                                      trary, the class of potential beneficiaries includes only the
                                      limited number of women who are interested in having one
                                      man—Naylor 3—be the biological father of their children and
                                      who survive the very subjective, and possibly arbitrary, selec-
                                      tion process controlled by the Naylors. 4 Over a 2-year period,
                                      petitioner received 819 inquiries and provided sperm to 24
                                      women. In deciding who receives the sperm, petitioner has
                                      certain preferences that narrow the class of eligible recipi-
                                      ents. It is not apparent what, if any, relationship some of
                                      these preferences have to the promotion of health. For
                                      example, petitioner prefers women ‘‘from families whose
                                      members have a track record of contributing to their commu-
                                      nities’’ and women ‘‘with better education’’. Petitioner does
                                        3 The 2001 contract and both petitioner’s Form 1023 and Web site indicate that Naylor is the

                                      only donor. On Mar. 31, 2005, however, there were 56 sperm vials available from two other do-
                                      nors. Petitioner’s Web site states that 4 vials are required for a cycle of artificial insemination
                                      and that women typically require 20 cycles of artificial insemination (i.e., 80 sperm vials) to
                                      achieve pregnancy. Thus, the sperm provided by donors other than Naylor was not sufficient
                                      to complete a typical cycle of artificial insemination. Moreover, there is no evidence of these do-
                                      nors’ involvement with petitioner before or after Mar. 31, 2005, nor is there evidence that these
                                      donors’ vials were made available to the public.
                                        4 The Naylors have unfettered veto power in the selection process.




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                                      26                 135 UNITED STATES TAX COURT REPORTS                                       (21)


                                      not provide medical care, research, education, or other serv-
                                      ices that advance or further health. Cf. 4 Scott, Trusts, sec.
                                      372 (3d ed. 1967) (noting the types of organizations that pro-
                                      mote health). In addition, petitioner’s questionnaire fails to
                                      inquire about any health-related issues, and petitioner’s
                                      board members and officers (i.e., the Naylors) do not have
                                      health-related education or expertise. Simply put, petitioner’s
                                      activities may promote the propagation of Naylor’s seed and
                                      population growth, but they do not promote health for the
                                      benefit of the community.
                                         As the Supreme Court has recognized: ‘‘Charitable exemp-
                                      tions are justified on the basis that the exempt entity confers
                                      a public benefit’’. Bob Jones Univ. v. United States, 461 U.S.
                                      574, 591 (1983). While Naylor may believe that petitioner’s
                                      activities ‘‘make more of a positive difference to the world
                                      than all of the inventions and scientific discoveries that
                                      * * * [he] could ever create’’, we are not convinced that the
                                      distribution of one man’s (i.e., Naylor’s) sperm to a small
                                      number of women, selected in the manner presented, pro-
                                      motes health or confers a public benefit. 5 Accordingly, we
                                      find that petitioner is not operated exclusively for exempt
                                      purposes and therefore does not qualify for tax exemption
                                      pursuant to section 501(c)(3).
                                         Contentions we have not addressed are irrelevant, moot, or
                                      meritless.
                                         To reflect the foregoing,
                                                                           Decision will be entered for respondent.

                                                                               f




                                        5 Petitioner does not contend, nor is there evidence, that it relieves the poor, distressed, or

                                      otherwise underprivileged.




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