## Facts

- B.S.W. Group, Inc. (BSW) was incorporated in 1976 to provide consulting services in rural-related policy and program development.
- BSW applied to the IRS for recognition of exemption under I.R.C. § 501(c)(3).
- The IRS issued a final adverse determination that BSW was not a § 501(c)(3) organization; BSW sought declaratory judgment in the Tax Court under I.R.C. § 7428.
- The case was submitted on a stipulated administrative record; the facts and representations in that record were treated as true for purposes of decision.
- BSW proposed to enter consulting-retainer relationships with several “limited resource” groups in fields such as health, housing, vocational skills, and cooperative management.
- BSW planned to obtain consulting work through independent contractors, pay those contractors itself, and charge client organizations fees that covered contractor compensation plus an administrative increment.
- At the time of its application, BSW had no clients, and its exemption claim rested on its proposed operations.
- BSW’s planned services were tailored to the needs of particular paying client organizations, including both exempt and nonexempt entities.

## Issues

1. Whether BSW was “operated exclusively” for charitable, educational, or scientific purposes within I.R.C. § 501(c)(3) and related regulations when its principal activity was providing consulting services for fees to client organizations.

## Decision

- The Tax Court upheld the Commissioner’s adverse determination.
- BSW did not qualify for exemption under § 501(c)(3) because it failed the operational test.
- The court found BSW’s proposed activities had a substantial nonexempt commercial purpose as a consulting business, defeating exemption.

## Legal Principles

- Under the § 501(c)(3) operational test, an organization is not operated “exclusively” for exempt purposes if more than an insubstantial part of its activities furthers a nonexempt purpose.
- The presence of a substantial nonexempt purpose disqualifies an organization from § 501(c)(3) status even if the organization also asserts charitable or educational aims.
- Providing services for fees in a businesslike manner may indicate a substantial commercial purpose inconsistent with § 501(c)(3).
- The exempt character of an organization’s clients does not, by itself, convert the service provider’s fee-based activities into exempt operations.
- In a § 7428 declaratory judgment case, the court may evaluate qualification based on proposed operations reflected in the administrative record.

## Conclusion

BSW’s planned fee-for-service consulting arrangement, conducted through contractors and priced to cover costs plus an administrative charge, showed a substantial commercial purpose; because that nonexempt purpose was not insubstantial, the organization did not meet § 501(c)(3)’s operational test and was denied tax-exempt recognition.


B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978)