## Facts

- The Tony and Susan Alamo Foundation (the Foundation) was incorporated in California in 1969; its articles stated religious and charitable purposes, including operating an evangelistic church and caring for the needy.
- Tony and Susan Alamo served as the Foundation’s incorporating directors and principal religious leaders, and the IRS recognized the Foundation as exempt under I.R.C. § 501(c)(3) effective for years beginning May 1, 1974.
- The Alamos encouraged followers to live as members in a quasi-communal setting; members lived and worked on Foundation-owned property and attended daily prayer meetings and religious services.
- Over time, the Foundation acquired substantial real estate and operated multiple revenue-producing ventures; in California it owned a large property that included a church and facilities such as motels and trailer courts, and in 1974 it moved its principal operations to Arkansas where it owned more than 300 acres.
- In Arkansas, Foundation members built four homes for the Alamos using Foundation resources; the Foundation also maintained other housing and facilities for members.
- The Foundation’s recordkeeping was inadequate. Its federal returns reported that the Alamos’ expense accounts and other allowances were not ascertainable from the Foundation’s books.
- The Alamos exercised pervasive control over the Foundation’s finances, including being the sole signatories on the Foundation’s credit cards and controlling major expenditures.
- Using Foundation funds and assets, the Alamos obtained significant personal benefits, including multiple residences and personal luxury items such as jewelry, furs, clothing, automobiles, and antiques.
- After examining the Foundation’s activities and records for 1977–1980, the Commissioner revoked the Foundation’s exempt status retroactively for years beginning after December 31, 1976, and later issued a final adverse determination letter stating, among other things, that the Foundation had substantial nonexempt activities, served private purposes, operated primarily to conduct unrelated businesses, and allowed net earnings to inure to private individuals.
- The Foundation filed a petition in the Tax Court for declaratory judgment under I.R.C. § 7428, challenging the revocation after completing the administrative process.

## Issues

1. Whether the Foundation was operated “exclusively” for exempt purposes within the meaning of I.R.C. § 501(c)(3), applying the operational test.
2. Whether any part of the Foundation’s net earnings inured to the benefit of private individuals, including Tony and Susan Alamo, barring exemption under § 501(c)(3).
3. Whether the Commissioner properly revoked the Foundation’s exempt status retroactively for years beginning after December 31, 1976.

## Decision

- The Tax Court sustained the Commissioner’s adverse determination and upheld the retroactive revocation of the Foundation’s § 501(c)(3) status for years beginning after December 31, 1976.
- The court concluded that the Foundation failed the operational test because more than an insubstantial part of its activities consisted of commercial business operations not shown to be carried on in a manner consistent with operation exclusively for exempt purposes.
- The court found prohibited private inurement because Foundation resources provided substantial personal benefits to Tony and Susan Alamo, and the Foundation failed to substantiate that those benefits were reasonable compensation or otherwise incidental to exempt functions.
- The court rejected the Foundation’s challenge to retroactivity, holding that the Foundation did not carry its burden to show the revocation was improper or an abuse of the Commissioner’s discretion.

## Legal Principles

- To qualify under I.R.C. § 501(c)(3), an organization must be organized and operated exclusively for one or more exempt purposes; under the operational test, “exclusively” permits only an insubstantial amount of nonexempt activity.
- Operating commercial businesses does not automatically defeat exemption, but extensive commercial activity may show the organization is not operated exclusively for exempt purposes when it becomes a substantial part of overall operations.
- Section 501(c)(3) imposes an absolute prohibition on private inurement; if any part of net earnings inures to insiders (such as controlling founders or officers), exemption is barred.
- Inurement may be shown by the use of organizational funds or assets to provide substantial personal benefits to insiders, particularly where governance and financial controls are weak and expenses are not adequately documented.
- In a declaratory judgment action under I.R.C. § 7428 challenging revocation of exempt status, the organization bears the burden of proving it satisfies § 501(c)(3) requirements for the period at issue.
- The Commissioner may revoke recognition of exemption retroactively when the organization’s actual operations do not match the requirements for exemption and the organization does not show that retroactive revocation is an abuse of discretion.

## Conclusion

In *Tony and Susan Alamo Foundation v. Commissioner*, the Tax Court upheld the IRS’s retroactive revocation of the Foundation’s § 501(c)(3) status for years beginning after December 31, 1976, because the Foundation’s commercial business activity was more than insubstantial and because Foundation earnings and assets were used to provide substantial, poorly documented personal benefits to Tony and Susan Alamo, constituting prohibited private inurement.


Tony and Susan Alamo Foundation v. Commissioner, 63 T.C.M. 2422 (1992)