Alleged Non-profit Was Really a Facade for a Doctor's Consulting Activity

(Parker Tax Publishing May 2018)

The Tax Court held that a corporation organized to deliver quality management consulting services to medical providers, and to advance government programs through patient safety initiatives, did not qualify for tax exemption under Code Sec. 501(c)(3) because it would be operated for commercial purposes and it benefits would inure to its owner, a military vet and medical doctor who was also the sole employee and service provider. The court was not persuaded that the organization would act on the government's behalf and found that the company was a facade for its owner's consulting activities, which were of the sort that ordinarily are carried on by commercial ventures organized for profit. Abovo Foundation, Inc. v. Comm'r, T.C. Memo. 2018-57.

Dr. Emmanuel Okonkwo is a military veteran, medical doctor, and board certified expert in patient safety and risk management. In 2011, Dr. Okonkwo incorporated Abovo Foundation, Inc. as a Texas nonprofit corporation. Abovo's primary purpose would be to deliver quality management consulting services to medical providers and advance government programs through patient safety initiatives. Its quality management services would include analyzing and controlling systems and processes to ensure desirable outcomes. In addition, Abovo would provide services for the elderly and veterans, housing for low income individuals, and internal auditing services.

Abovo would solicit donations and receive fees relating to its services. Dr. Okonkwo, Abovo's president, CEO and sole employee, would perform services at an hourly rate of $350. Dr. Okonkwo would receive an annual salary of $217,000 and be eligible for a performance based bonus not to exceed $100,000. Abovo's fee structure would be market based and dependent on the nature of the project and the expertise required to complete it.

In April 2012, Abovo submitted to the IRS an incomplete Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. At the IRS's request, Abovo sent an updated Form 1023, and later amended its certificate of formation to provide that Abovo was organized exclusively for charitable, religious, education, and scientific purposes as required by Code Sec. 501(c)(3).

Abovo received a final adverse determination with respect to its tax exempt status in 2015. It then petitioned the Tax Court for a declaratory judgment that it met the requirements of Code Sec. 501(c)(3) and was exempt from federal income tax. Abovo contended that its services would advance government programs pursuant to federal patient safety laws and lessen the government's burden.

The Tax Court held that Abovo did not qualify for tax exemption because its services would not serve an exempt purpose, would be commercial in nature, and would serve Dr. Okonkwo's interest rather than that of the public. The Tax Court was not persuaded that Abovo would act on the government's behalf or that Abovo's consulting services would lessen the government's burden.

The Tax Court found that Abovo was a facade for Dr. Okonkwo's consulting activities, which it found were of the sort which ordinarily are carried on by commercial ventures for profit. The court reasoned that Abovo would develop Dr. Okonkwo's business relationships, further his consulting career as an expert in patient safety and risk management, and potentially pay him annual compensation in excess of $300,000. In the court's view, the benefits relating to Abovo would inure to Dr. Okonkwo as Abovo's sole employee, service provider and primary source of funding.

The court concluded that because Abovo would be operated for commercial purposes and for the benefit of Dr. Okonkwo, it did not qualify for a tax exemption under Code Sec. 501(c)(3).

For a discussion of the requirements that must be met to be a Code Sec. 501(c)(3) organization, see Parker Tax ¶60,502.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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