The opinion
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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24 135 UNITED STATES TAX COURT REPORTS (21)
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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