Tax Court Revokes Exempt Status for Failure to Satisfy the Section 501(c)(3) Operational Test

The United States Tax Court recently issued a Memorandum Opinion in Milk Saving Starving Children Foundation v. Commissioner, T.C. Memo. 2026-1, highlighting the operational test under Internal Revenue Code (I.R.C.) section 501(c)(3). Granting the Commissioner’s motion for summary judgment, the Court sustained the revocation of the organization’s tax-exempt status after concluding that it failed to operate "exclusively" for exempt purposes. The decision highlights the significant risks faced by charitable organizations whose actual operations diverge from their stated charitable missions.

The Milk Saving Starving Children Foundation, incorporated in Pennsylvania in 2001, applied for tax-exempt status as a public charity that would raise funds to purchase rice, soy, and powdered milk for worldwide distribution to starving children. Based on these representations, the IRS granted recognition of exemption under section 501(c)(3).

The administrative record, however, revealed that the Milk Saving Starving Children Foundation failed to operate in furtherance of their exempt purpose. Shortly after applying for exemption, the organization acquired real property and began operating a cash-only coffee shop known as “Café Beignet,” an activity not disclosed in its exemption application. In addition to operating the café, the organization leased portions of the property to unrelated commercial tenants, including restaurants and pizza shops.

The record further showed that charitable activity was minimal and eventually ceased. While the organization donated a small amount of powdered milk in 2001, milk distributions stopped entirely by 2011. Charitable distributions resumed only in 2020, after the IRS began examining the organization’s 2018 tax year. In the audited tax year, the organization reported income from rental activity, fundraising events, and café sales, but none of its expenses were devoted to its stated charitable mission. Instead, expenditures consisted primarily of mortgage payments, insurance, property-related costs, and loans to the organization’s incorporator. No funds were spent on rice, soy, or powdered milk during the year under examination.

Following the issuance of a Final Adverse Determination Letter revoking tax-exempt status effective July 1, 2017, the organization sought declaratory relief in the Tax Court. The petitioner asserted that it received substantial public support and remained compliant with section 501(c)(3). When the Commissioner moved for summary judgment, the Court afforded the petitioner additional time to respond. Despite this extension, the petitioner failed to file any response or submit evidence disputing the Commissioner’s factual assertions.

The Court’s analysis focused on the operational test set forth in Treasury Regulation § 1.501(c)(3)-1(a)(1). To qualify for and maintain exemption, an organization must be both organized and operated exclusively for one or more exempt purposes. Although “exclusively” does not mean “solely,” the presence of a single substantial nonexempt purpose is sufficient to defeat exemption, regardless of the number or importance of any exempt activities.

Under the regulations, an organization fails the operational test if more than an insubstantial part of its activities does not further an exempt purpose. The Court reiterated that the critical inquiry is the purpose toward which an organization’s activities are directed, not merely the nature of the activities themselves. Even “commercially benign” or “socially commendable” activities will not support exemption unless they are conducted in furtherance of an exempt purpose.

Because the petitioner failed to respond to the Commissioner’s motion, the Court treated the Commissioner’s factual assertions as undisputed. The Court concluded that the organization did not operate exclusively for exempt purposes during the years at issue. The opinion emphasized that the petitioner had ceased meaningful charitable activity for several years and only resumed limited milk distributions after facing the prospect of revocation.

The record demonstrated that the organization engaged almost entirely in commercial activity, including operating a café, leasing property to unrelated businesses, and managing real estate investments. Despite generating income, the organization made no charitable expenditures in 2018 and used its funds for property-related costs and insider loans. The petitioner failed to establish any nexus between its commercial activities and the furtherance of its stated charitable mission.

The Tax Court held that the administrative record clearly demonstrated that the Milk Saving Starving Children Foundation failed the operational test under section 501(c)(3). Because the organization was not operated exclusively for exempt purposes, the Court sustained the IRS’s revocation of tax-exempt status and found it unnecessary to address the organizational test.

This decision serves as a reminder for nonprofit organizations and their advisors that statements of charitable intent in exemption applications are insufficient on their own. To maintain exempt status, organizations must substantially operate in furtherance of their exempt purposes, and commercial activities must be demonstrably connected to those purposes. If you have questions about this update or require assistance with your tax-exempt organization, please contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page.