## Facts

- United Cancer Council, Inc. (UCC) was a § 501(c)(3) cancer-prevention charity that, by the early 1980s, faced severe financial distress.
- UCC entered an exclusive long-term fundraising agreement with Watson & Hughey Company (W&H), a professional fundraising firm.
- Under the agreement, W&H designed and ran direct-mail campaigns, advanced campaign costs, and was paid from gross receipts; the contract also gave W&H co-ownership rights in donor lists and other favorable terms.
- Over roughly five years, W&H sent about 80 million mailings, raised approximately $28.8 million, incurred about $26.5 million in costs, and left UCC with net receipts of about $2.3 million used for UCC’s charitable programs.
- Roughly 90% of UCC’s gross revenues during the period went to W&H as fundraising costs and fees.
- W&H was not part of UCC’s governance (no board seat or equity interest) and acted as an independent contractor.

## Issues

1. Whether UCC’s fundraising contract caused “net earnings” to inure to the benefit of a private shareholder or individual (W&H) in violation of § 501(c)(3), justifying revocation of exemption.
2. Whether, even absent inurement, UCC was operated for the private benefit of W&H such that it was not operated exclusively for charitable purposes (issue remanded).

## Decision

- The Seventh Circuit reversed the Tax Court’s revocation of UCC’s exemption on the ground of private inurement.
- The court held that the inurement prohibition was misapplied to an arm’s-length contract with an independent contractor, even if the contract was financially unfavorable to the charity.
- The court remanded for the Tax Court to consider the separate question whether UCC’s operations conferred an impermissible private benefit on W&H.

## Legal Principles

- “Private inurement” under § 501(c)(3) targets insider self-dealing—diversion of a charity’s earnings to persons with control or insider-like influence—rather than payments to independent contractors under bona fide commercial contracts.
- The IRS and courts may not treat a high-cost or poor business bargain, standing alone, as inurement; the inurement clause is not a general mechanism for second-guessing nonprofit contracting decisions.
- Compensation paid for services rendered under an arm’s-length agreement, including compensation reflecting the contractor’s risk (such as advancing costs), is not automatically a diversion of the charity’s “net earnings.”
- “Private benefit” is analytically distinct from inurement and addresses whether an organization’s operations substantially serve noncharitable private interests, even without insider diversion.

## Conclusion

The Seventh Circuit held that UCC’s agreement with a professional fundraiser did not establish private inurement because the fundraiser was not an insider and was paid under an arm’s-length services contract, and it sent the case back for a separate determination of whether the arrangement nevertheless resulted in impermissible private benefit.


United Cancer Council, Inc. v. Commissioner, 165 F.3d 1173 (7th Cir. 1999)