                          T.C. Memo. 2004-12



                        UNITED STATES TAX COURT



                  PEOPLES PRIZE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18658-02X.              Filed January 15, 2004.


     Daniel L. Pfaff (President), for petitioner.

     Elizabeth Edwards and Michael Blumenfeld, for respondent.


                          MEMORANDUM OPINION


     HAINES, Judge:     Respondent determined that Peoples Prize

does not qualify as an organization described in section

501(c)(3) and consequently is not exempt from Federal income tax

under section 501(a).    Petitioner challenged respondent’s

determination by timely filing a petition for a declaratory

judgment pursuant to section 7428(a) after exhausting its

administrative remedies and satisfying jurisdictional
                                - 2 -

requirements.   See sec. 7428(b)(3); Rule 210(c).   The case was

submitted for decision under Rule 122 upon the stipulated

administrative record.   For purposes of this proceeding, the

facts and representations contained in the administrative record

are accepted as true, see Rule 217(b), and are incorporated

herein by this reference.    The issue for decision is whether

petitioner is operated exclusively for charitable purposes within

the meaning of section 501(c)(3).

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

                             Background

     Petitioner, a nonprofit corporation, with its principal

place of business at Warren, Michigan, was incorporated under the

laws of Michigan on February 1, 2000, with its purpose being “To

create and administer prizes for humanitarian goals.    The prizes

will be broad based, consisting of donations of no more and no

less than $1.00 (one dollar US currency) per person.”

     Petitioner’s Form 1023, Application for Recognition of

Exemption Under Section 501(c)(3) of the Internal Revenue Code,

was filed on May 14, 2001.    Petitioner supplemented the

information contained in Form 1023 through correspondence with

respondent during the remainder of 2001 and into early 2002.
                              - 3 -

     The original articles of incorporation were restated on

September 13, 2001, and January 9, 2002, to provide:

     PEOPLES PRIZE is organized exclusively for charitable,
     religious, educational, and scientific purposes, including,
     for such purposes the making of distributions to
     organizations that qualify as exempt organizations under
     section 501(c)(3) of the Internal Revenue Code, or the
     corresponding section of any future federal tax code.

     PEOPLES PRIZE will fulfill these purposes by creating and
     administering prizes for humanitarian goals. The prizes
     will be broad based, consisting of donations of at least
     $1.00 (one dollar US currency) per person.

     Petitioner does not intend to commence operations until it

receives recognition as a section 501(c)(3) organization.    In

response to respondent’s requests to provide greater detail about

its proposed activities, petitioner provided the following

description:

     Peoples Prize plans to become an Internet-based appeal for
     support of bold humanitarian goals. * * * All monetary
     contributions that we receive from individuals and from any
     source will be applied to prizes. We will be posting the
     amount of contributions, the amount of prizes (these will be
     identical), and the number of contributions on the website
     daily or as frequently as possible. * * * It is our hope and
     expectation that the prizes will continue to grow
     continuously, both in the dollar amount and in the number of
     contributors. When a challenge is eventually achieved by
     one of the competitors, Peoples Prize will award the
     monetary amount of the prize to the victor. * * * The entire
     process is much like circulating a petition, combined with a
     real and growing prize to create interest and eventually
     real competition. * * * Our first prize is for the mass
     production of a reliable car.

               *    *     *     *     *     *     *

     For example, our first prize states: “We the people hereby
     join together to each contribute one dollar (U.S.) to this
     prize to be awarded to the first company to manufacture,
                              - 4 -

     sell and deliver within 365 days more than 100,000 cars
     and/or light trucks with the proven ability to go ONE
     MILLION KILOMETERS without replacement parts (excluding
     tires, brake pads, and filters).” This prize will be
     awarded to an automobile manufacturing company when it can
     demonstrate to it’s [sic] competitors, to the media, and to
     Peoples Prize that it has reached the goal. The economic
     and other benefits to humanity will be enormous, but
     proportionally, the most beneficial impact will be felt by
     the working poor and low income persons in all lands by
     increasing the supply of reliable used vehicles and reducing
     the cost per year to purchase and maintain a motor vehicle.

     The prizes will all be for long-term, bold, large objectives
     that would seem to be impossible, such as a million-
     kilometer car, a universal alphabet, etc. We will actively
     solicit ideas for further prizes. They must be of direct
     general benefit to the well being of humanity, particularly
     to large numbers and future generations, and not to a
     limited few (such as a cure for an extremely rare disease).
     There will be no prizes for space exploration. We
     anticipate maintaining only a small number of prizes at a
     time.

     On March 11, 2002, respondent issued a proposed adverse

ruling as to petitioner’s exempt status.   Petitioner filed a

protest to the proposed adverse ruling on April 17, 2002.   On

August 15, 2002, respondent issued a notice of determination

denying petitioner’s exempt status and stated as reasons for the

denial:

     You have not established that you are operated exclusively
     for exempt purposes within the meaning of section 501(c)(3)
     of the Code. Your primary activity is the promotion of the
     private interests of for-profit companies rather than the
     promotion of a public charitable purpose. Furthermore, you
     have failed to establish that your activities serve to
     lessen the burdens of government within the meaning of
     section 501(c)(3) of the Code.

     On November 18, 2002, petitioner filed a timely petition for

declaratory judgment seeking a determination that it is a
                               - 5 -

qualified section 501(c)(3) organization exempt from Federal

income tax under section 501(a).

                            Discussion

     A tax exemption is a matter of legislative grace, and an

organization seeking an exemption must prove that it “comes

squarely within the terms of the law conferring the benefit

sought”.   Nelson v. Commissioner, 30 T.C. 1151, 1154 (1958); see

also Fla. Hosp. Trust v. Commissioner, 103 T.C. 140, 153 (1994),

affd. 71 F.3d 808 (11th Cir. 1996).

     An organization may seek tax-exempt status before it begins

operations, but the administrative record must set forth

sufficient detail about its prospective operations to provide the

basis for the granting of the exemption.     Nationalist Movement v.

Commissioner, 102 T.C. 558, 572 (1994), affd. 37 F.3d 216 (5th

Cir. 1994); La Verdad v. Commissioner, 82 T.C. 215, 219 (1984);

World Family Corp. v. Commissioner, 81 T.C. 958 (1983); Church of

Boston v. Commissioner, 71 T.C. 102, 105 (1978); Hancock Acad. v.

Commissioner, 69 T.C. 488, 492 (1977).

     Petitioner has, for the most part, provided only

generalizations in response to repeated requests by respondent

for more detail on prospective activities.    As petitioner states

in its reply brief:

     once momentum for our first prize is substantial, we will
     launch additional prizes to benefit of humankind. The
     prizes will be chosen only after months and years of
     extended deliberation and collaboration. We will
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     continually solicit ideas, and select those promising the
     greatest benefit to humankind. Interest income from the
     growing prizes will be used to fund and promote new prizes
     so the corporation can continue creating and awarding prizes
     into the indefinite future.

Such generalizations do not satisfy us that petitioner qualifies

for the exemption.   See La Verdad v. Commissioner, supra at 221;

World Family Corp. v. Commissioner, supra at 966.

     The single activity for which petitioner did provide detail,

raising money to award a prize to a manufacturing company that

develops and builds a reliable car, was determined by respondent

to promote the private interests of for-profit companies as

opposed to public charitable purposes.   In addition, respondent

found that the activity would not lessen the burdens of the

Government.   Petitioner concedes that its activity will not

lessen the burdens of the Government but contends it will relieve

the poor and distressed by providing transportation less costly

to purchase and maintain.
                                - 7 -

     Section 501(a)1 exempts organizations described in section

501(c)(3) from Federal income tax.      In order to qualify for an

exemption under section 501(c)(3), the organization must be not

only organized exclusively for exempt purposes but also operated

exclusively for exempt purposes.       Quality Auditing Co. v.

Commissioner, 114 T.C. 498, 504 (2000).       Respondent conceded that

petitioner is organized for exempt purposes but denies that

petitioner will be operated exclusively for exempt purposes.

     Exempt purposes are broadly stated in section 501(c)(3) to

include religious, charitable, scientific, and educational




     1
         Sec. 501, in relevant part, provides:

         SEC. 501. (a) Exemption From Taxation.— An organization
     described in subsection (c) * * * shall be exempt from
     taxation under this subtitle unless such exemption is denied
     under section 502 or 503.

                *    *     *     *        *     *     *

         (c) List of Exempt Organizations.— The following
     organizations are referred to in subsection (a):

                *     *     *      *      *      *    *

                 (3) Corporations * * * organized and operated
           exclusively for * * * charitable * * * 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 (including the publishing or distributing
           of statements), any political campaign on behalf of (or
           in opposition to) any candidate for public office.
                                 - 8 -

purposes.    “Charitable” is further defined in section

1.501(c)(3)-1(d)(2), Income Tax Regs., as follows:

     The term “charitable” is used in section 501(c)(3) in its
     generally accepted legal sense and is, therefore, not to be
     construed as limited by the separate enumeration in section
     501(c)(3) of other tax-exempt purposes which may fall within
     the broad outlines of “charity” as developed by judicial
     decisions. Such term includes: Relief of the poor and
     distressed * * * lessening of the burdens of Government;

     To operate “exclusively” for exempt purposes does not mean

that there must be an absence of nonexempt purposes.      Quality

Auditing Co. v. Commissioner, supra at 504; Nationalist Movement

v. Commissioner, supra at 576.    A single activity might be

directed to both an exempt and a nonexempt purpose.    Our inquiry

must determine whether the nonexempt purpose is incidental and

not substantial.    If the nonexempt purpose is substantial, the

organization will not satisfy the operational test regardless of

the number or importance of truly exempt purposes.    See Better

Bus. Bureau v. United States, 326 U.S. 279, 283 (1945); Am.

Campaign Acad. v. Commissioner, 92 T.C. 1053, 1065 (1989); Church

of Scientology v. Commissioner, 83 T.C. 381 (1984), affd. 823

F.2d 1310, 1315 (9th Cir. 1987); see also sec. 1.501(c)(3)-

1(c)(1), Income Tax Regs.

     A nonexempt purpose can arise if an organization benefits

private interests.    See Am. Campaign Acad. v. Commissioner, supra

at 1066.    Section 1.501(c)(3)-1(d)(1)(ii), Income Tax Regs.,

states:
                                 - 9 -

     An organization is not organized or operated exclusively for
     one or more of the purposes specified in * * *[section
     501(c)(3)] unless it serves a public rather than a private
     interest. Thus, * * * it is necessary for an organization
     to establish that it is not organized or operated for the
     benefit of private interests * * *

Private interests within the meaning of this rule may include not

only related persons and insiders but also unrelated and

disinterested private parties.    See Am. Campaign Acad. v.

Commissioner, supra at 1068-1069.    If the unrelated and

disinterested third party is a charitable class, bestowing of

benefits on that class will not be grounds for denying the

exemption.    See Aid to Artisans, Inc. v. Commissioner, 71 T.C.

202, 208, 212-213 (1978).    However, if the disinterested third

party is not a charitable class, benefits bestowed on the third

party, if substantial and not incidental, will be sufficient to

cause the exemption to be denied.    See Am. Campaign Acad. v.

Commissioner, supra at 1068; Christian Stewardship Assistance,

Inc. v. Commissioner, 70 T.C. 1037 (1978).

     Car and truck manufacturers, who will receive the prize, are

not members of a charitable class.       Cf. Aid to Artisans, Inc. v.

Commissioner, supra at 215.    After examining the administrative

record, we have no reasonable basis, other than speculation by

petitioner, to conclude that the poor and distressed or any other

charitable class would receive any benefit from the activity

proposed.    We conclude that the administrative record fully
                             - 10 -

supports respondent’s determination that petitioner is not

entitled to exemption under section 501(c)(3).

     We have considered all of petitioner’s contentions,

arguments, and requests that are not discussed herein, and we

conclude that they are without merit or irrelevant.

     To reflect the foregoing,

                                             Decision will be

                                        entered for respondent.
