## Facts

- Westward Ho, a Vermont nonprofit corporation formed in 1988 by three Burlington restaurant owners, sought recognition as tax-exempt under I.R.C. § 501(c)(3).
- Its stated purpose was to provide travel grants or loans to “indigent and antisocial persons” who wanted to leave the Burlington area but lacked funds.
- The organization had no formal process to identify eligible beneficiaries, discouraged applications, and had no program to evaluate whether relocation would benefit recipients or to assess conditions at their destinations.
- The founders’ restaurants in Burlington’s Church Street Marketplace experienced disruptions from certain homeless individuals; the founders publicly expressed frustration with that problem.
- Westward Ho’s only documented relocation assistance was providing a one-way ticket to Oregon for a single individual who had caused disturbances affecting the founders’ businesses.
- The IRS issued a final adverse determination denying exemption; Westward Ho sought declaratory judgment under I.R.C. § 7428 on a stipulated administrative record.

## Issues

1. Whether Westward Ho was organized and operated exclusively for charitable purposes within I.R.C. § 501(c)(3).
2. Whether Westward Ho’s operations conferred a substantial private benefit on its founders, disqualifying it from exemption even without prohibited inurement.

## Decision

- The Tax Court sustained the IRS’s adverse determination and held Westward Ho did not qualify for exemption under I.R.C. § 501(c)(3).
- The court concluded Westward Ho failed the operational test because a substantial part of its activities served private interests of its founders.
- Decision entered for the Commissioner.

## Legal Principles

- To qualify under I.R.C. § 501(c)(3), an organization must satisfy both the organizational and operational tests and be operated primarily for exempt purposes.
- An organization is not operated exclusively for exempt purposes if a substantial part of its activities serves private interests; substantial private benefit is disqualifying even absent net-earnings inurement.
- In applying the operational test, courts examine actual operations, including beneficiary selection methods, whether the organization serves an objectively defined charitable class, and who principally benefits from the activities.

## Conclusion

Westward Ho’s limited and targeted relocation activity, lack of neutral procedures to identify and evaluate beneficiaries, and the direct effect of reducing disruptions to the founders’ restaurants showed that its operations provided substantial private benefit, preventing qualification for § 501(c)(3) exemption.


Westward Ho v. Commissioner, T.C. Memo. 1992-192 (1992)