Who Let the Dogs Out?

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Would-be Section 501(c)(3) charities can easily bark up the wrong tax-exemption tree, as demonstrated by two recent IRS denials.  Taking a closer look at what they did wrong provides important (and entertaining) lessons about the pitfalls of commercial activity.


Two pet care centers filed applications for recognition as tax-exempt public charities.  As noted by the IRS, their applications showed plenty of animal care but scant charitable activities: 

Organization 1:

  • “Boarding and Daycare:  Your facility includes background music, television, central heat and air conditioning, video surveillance, and proper staff to guest ratio.  You also have penthouse suites (large suites with plenty of sunlight, heated floors, and a TV and DVD player) for dogs and suites for cats.”
  • “Fitness and Spa treatments for pets that include a heated spa, treadmill, and other fitness equipment for aerobic conditioning as well as strength and balance/coordination training.  Pet massage is also offered for relaxation.”
  • “Party Hall:  Individuals can host their pet’s special occasion at your party hall.  You will arrange for a cake and decorate the hall.”

Organization 2:

  • “Healing services may involve Body Talk, CCMBA, Reiki, clairvoyant readings, past-life regression therapy, Fuji-san, Etheric Plane Communication, Multi-Generational Healing, channeling and numerology.”
  • “You will host workshops and seminars to empower others to do the kind of healing work that you do.  Topics may include animal communication workshops and Egyptian Numerology workshops.”

Organized but not Operated for Tax-Exempt Purposes

As a basic qualification for public charity status, an organization’s primary purpose must be recognizable as tax exempt, such as religious, charitable, or educational.  Commercial business purposes do not qualify an organization for tax exemption.  While minor or incidental non-exempt activities may not jeopardize tax exemption, any substantial non-exempt purpose will prevent exemption.

The pet care centers’ activities clearly did not serve primarily tax-exempt purposes.  For example, one of the centers indicated certain purposes that might have qualified it for exemption, such as providing public awareness of the need for spaying and neutering animals, free or reduced boarding and veterinary care for stray and rescued animals, and financial support for other like-minded charitable organizations.   Significantly, however, the center admitted that it was not actually performing any of the exempt activities, purportedly because it was waiting to raise charitable funds for such activities.  In the meantime, the center was performing standard pet care business activities.  While its stated purpose thus may have been appropriate, its actual activities showed that it was operating primarily for commercial purposes, not exempt ones.

Primarily Commercial Activities Will Invalidate Tax-Exempt Status

The most common non-exempt purpose that keeps organizations from obtaining exemption is the “commercial” purpose, which – by definition – cannot be charitable.  For example, if an organization’s main purpose is to sell merchandise or services for a profit, then it is commercial. Generally, if the organization is in substantial competition with for-profit businesses, it is probably a for-profit business and not a public charity.  Whether an organization’s activities are too “commercial” may be difficult to discern.  For example, child care provision, fine art exhibits, and music performances are all activities that may all be carried out for profit or on a nonprofit, charitable basis.  Additional significant factors likely include the extent to which the organization relies on charitable support, rather than fee-based revenues, and volunteers.[1]

Notably in the pet center cases, both organizations took over the activities of for-profit businesses and continued providing the same services.  One of the centers even had a “suggested donation” but wouldn’t provide services without the “donation” and required 24-hour cancellation notice to not be charged for the services.  The center had previously been a sole proprietor business that was operating at a loss.  Upon establishing a nonprofit organization, the center performed all the same activities as the previous business, and the sole proprietor remained in complete control as the Executive Director, President, and only paid employee.  The pet center’s website event included a link to her for-profit jewelry business and sales of a book she co-authored.  In looking at all of these facts, the IRS determined that the pet center still was operating primarily as a business for business purposes, not tax-exempt purposes.

These cases represent extreme examples in which a business tried to “change its spots” without really changing its commercial nature. How much business activity is too much?  It’s hard to tell, and the IRS’s amorphous “facts and circumstances” can be challenging to apply.  So watch out for financially lucrative business opportunities, which can look attractive but jeopardize an organization’s public charity status if too extensive.  And keep the main thing front and center:  maintain both a clearly tax-exempt purpose and clearly tax-exempt activities.


[1] An organization may also carry on “unrelated business activities” for which it may owe “unrelated business income tax” (known as UBIT).  Such activities are beyond the scope of this article.  Generally, UBIT-related activity should be minimal in relation to a charity’s overall scope, to avoid the commercial problems involved in these pet care center cases.