## Facts

- Plumstead Theatre Society, Inc. was a California nonprofit corporation formed to promote the performing arts, particularly theater, and to support playwrights through productions and related programs.
- Its governing documents stated it would not operate for financial gain and that no earnings would benefit private individuals.
- In 1977, Plumstead agreed with the John F. Kennedy Center for the Performing Arts to co-produce an original play, “First Monday in October,” with each party responsible for half the capitalization costs.
- Plumstead lacked sufficient funds to meet its capitalization obligation and formed a limited partnership to raise capital by selling a portion of its rights in the production to outside investors.
- The limited partners (two individuals and a for-profit corporation) contributed capital in exchange for an interest in profits (or losses) from the single production venture.
- The partnership arrangement limited investors to passive, limited-partner status in the specific production and gave them no equity or governance rights in Plumstead as an organization.
- The partnership agreement reserved full management control of the production to Plumstead.
- The play was produced and marketed in a conventional manner (professional casting, advertising, ticket sales), with performances running from December 1977 through February 1978.
- Plumstead’s president, actor Henry Fonda, accepted reduced compensation and waived a royalty interest in gross receipts.
- At the time of the IRS determination, this production was Plumstead’s only completed play, though its charter contemplated broader exempt activities.

## Issues

1. Whether Plumstead was “organized and operated exclusively” for charitable and educational purposes under I.R.C. § 501(c)(3) despite using a limited partnership with profit-seeking investors to finance a theatrical production.
2. Whether the limited partnership conferred impermissible private benefit under Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) by operating for the benefit of private interests more than incidentally.
3. Whether the arrangement caused prohibited private inurement of net earnings to private individuals.

## Decision

- The Tax Court held that Plumstead qualified as a tax-exempt organization under I.R.C. § 501(c)(3) and was entitled to declaratory judgment recognizing exemption.
- The court found Plumstead’s purposes and governing documents satisfied the organizational and operational requirements for exempt status.
- The court concluded that the limited partnership financing structure did not cause Plumstead to operate for private interests in violation of the private benefit limitation.
- The Commissioner’s private inurement contention was not sustained (and was abandoned at trial).
- On appeal, the Ninth Circuit affirmed, holding the Tax Court’s finding that Plumstead was not operated for the benefit of private individuals was not clearly erroneous.

## Legal Principles

- A § 501(c)(3) organization is not “operated exclusively” for exempt purposes if it serves private interests more than incidentally. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).
- Participation with private investors in a discrete, profit-contingent financing arrangement does not by itself defeat § 501(c)(3) status when the exempt organization retains programmatic and managerial control and investor return is limited to the specific venture.
- Private benefit analysis turns on the structure and operation of the arrangement, including whether control is retained by the exempt organization and whether any private benefit is incidental to accomplishing exempt purposes.
- Absence of private inurement is supported where net earnings are not diverted to insiders and compensation/financial terms do not function as disguised distributions.

## Conclusion

The Tax Court determined that Plumstead’s limited partnership used to finance a single theatrical production did not disqualify it from § 501(c)(3) status because Plumstead retained full control over the charitable activity and any investor benefit was incidental, with no net-earnings inurement to private persons.


Plumstead Theatre Soc'y, Inc. v. Comm'r, 74 T.C. 1324 (1980)