## Facts

- Family Trust of Massachusetts, Inc. (FTM) was a nonprofit corporation that served as trustee and administrator of a pooled special-needs trust for disabled beneficiaries receiving Medicaid, SSI, and related public benefits.
- Beneficiaries’ assets were held in individual accounts but pooled for investment; FTM charged trustee and administrative fees.
- FTM’s founder, Peter Macy, acted as president, treasurer, and executive director and devoted roughly 260 hours per year to trust business.
- Macy’s compensation rose from $9,000 (2004) to $70,000 (2009) as FTM’s annual excess revenues rose from $5,197 to $362,524.
- FTM sought recognition of federal tax exemption under I.R.C. § 501(c)(3) and § 501(a).
- After extended IRS requests for information and a proposed adverse determination (without a final determination within 270 days), FTM filed a declaratory judgment action under 26 U.S.C. § 7428.
- The parties filed cross-motions for summary judgment.

## Issues

1. Whether FTM was operated exclusively for charitable purposes under I.R.C. § 501(c)(3) and applicable Treasury regulations, given its fee-based operations and accumulation of surplus.
2. Whether FTM’s net earnings inured to the benefit of, or otherwise conferred more-than-incidental private benefit on, an insider (Macy) through compensation and operational structure.
3. Whether the court had jurisdiction under 26 U.S.C. § 7428 based on the IRS’s failure to issue a determination within the statutory period.

## Decision

- The court exercised jurisdiction under § 7428 due to the IRS’s failure to issue a timely determination.
- The court granted the United States’ motion for summary judgment and denied FTM’s motion.
- The court declared that FTM was not entitled to recognition as a tax-exempt organization under § 501(c)(3).
- The court held that FTM failed the operational test because it was not operated exclusively for charitable purposes.
- The court also found impermissible private benefit (and at least potential inurement) connected to Macy’s role and compensation.

## Legal Principles

- To qualify under I.R.C. § 501(c)(3), an organization must be organized and operated exclusively for exempt purposes, and no part of its net earnings may inure to the benefit of a private shareholder or individual.
- Under the Treasury “operational test,” exemption fails if the organization has a single substantial non-exempt purpose, even if it also advances charitable ends.
- Operating a pooled special-needs trust under 42 U.S.C. § 1396p(d) does not, by itself, establish charitable operation for § 501(c)(3) purposes; courts examine whether the activity is materially commercial in character.
- Private benefit beyond what is qualitatively and quantitatively incidental to accomplishing exempt purposes defeats exemption, regardless of whether the benefit rises to classic private inurement.
- In assessing insider compensation and private benefit, courts consider governance and reasonableness support (e.g., comparability data), insider control, compensation trends, and whether fee structures and surpluses function to support private interests.

## Conclusion

The court concluded that FTM’s fee-supported trustee operations and revenue use reflected a substantial non-charitable commercial purpose and conferred more-than-incidental private benefit related to its founder’s role and compensation, disqualifying FTM from § 501(c)(3) recognition.


Family Trust of Massachusetts, Inc. v. United States, 892 F. Supp. 2d 149 (D.D.C. 2012)