## Facts

- William C. Naylor, Jr. formed a California nonprofit public benefit corporation to provide sperm free of charge to women seeking pregnancy through artificial insemination or in vitro fertilization.
- Before incorporation, Naylor contracted with a sperm bank to store and distribute his sperm to recipients he designated and paid related storage fees.
- The organization advertised online; the website identified Naylor as the sole sperm donor and prominently featured detailed biographical and achievement-related information about him.
- Applicants completed questionnaires about background and personal circumstances; Naylor scored and ranked applicants using self-developed criteria, preferring women who were well educated and met additional subjective requirements (including family/community characteristics and absence of divorce or domestic violence).
- In 2004 the organization received hundreds of applications and distributed sperm to 20 women; in 2005 it distributed sperm to four women.
- The organization applied for recognition of exemption under I.R.C. § 501(c)(3); the IRS requested additional materials, then issued a final adverse determination denying exemption.
- The organization filed a petition for declaratory judgment under I.R.C. § 7428; the case was submitted on the stipulated administrative record.

## Issues

1. Whether the organization was operated exclusively for an exempt purpose under I.R.C. § 501(c)(3), specifically as a charitable organization that promotes health for the benefit of the community.
2. Whether the organization’s operations conferred an impermissible substantial private benefit, defeating exemption.

## Decision

- The Tax Court entered declaratory judgment for the Commissioner and upheld the denial of recognition of exemption.
- The court held the organization did not promote health for the benefit of the community because it served an extremely limited, selectively chosen group tied to a single donor.
- The court found the organization’s activities did not resemble recognized community health promotion (e.g., providing medical care, research, or health education).
- The court concluded the organization’s operations primarily advanced Naylor’s personal interests by facilitating propagation of his genetic material, constituting a substantial private benefit inconsistent with § 501(c)(3).

## Legal Principles

- An organization qualifies under I.R.C. § 501(c)(3) only if it is organized and operated exclusively for exempt purposes; a substantial nonexempt purpose defeats exemption even if some charitable effects exist.
- “Charitable” purposes may include promoting health, but the activity must benefit a sufficiently large or indefinite charitable class or the community as a whole, not a narrowly defined, selectively chosen group.
- Exemption is unavailable where more than an insubstantial part of the organization’s activities serves private interests rather than public charitable ends.

## Conclusion

The Tax Court upheld the IRS’s adverse determination because the organization’s sperm-distribution program—centered on a single donor and a subjective, donor-controlled recipient selection process—served a narrow class and conferred substantial private benefit, failing the operational requirements for exemption under § 501(c)(3).


Free Fertility Found. v. Comm’r, 135 T.C. 21 (2010)