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Tax-Exempt Status Denied for Entity Operating as a Conduit to Generate Sales Leads

(Parker Tax Publishing August 2019)

The Tax Court held that a nonprofit corporation that implemented a corporate sponsorship program designed to allow for-profit businesses to generate sales leads in exchange for charitable contributions was not operated exclusively for an exempt purpose and the IRS was therefore justified in revoking the corporation's tax exemption. The court found that the corporate sponsorship agreement, by design and effect, permitted for-profit businesses to invoke the organization's name as part of a telemarketing pitch intended to generate sales leads and revenues and also allowed for-profit businesses to get around the National Do-Not-Call Registry, which applies to for-profit businesses but not to charities. Giving Hearts, Inc. v. Comm'r, T.C. Memo. 2019-94.


Window Plus, Inc. is a for-profit company that sells replacement windows and other home improvement services. Ronald Carrier was a shareholder and the president of Window Plus. Window Plus promoted its business through telemarketing and other channels, relying heavily on its in-house telemarketing staff to generate sales leads. In 2008, Window Plus employed 16 full-time telemarketers. In the years that followed, however, the company reduced its telemarketing staff to eight employees as a result of the National Do Not Call Registry, a federal program that allows individuals to avoid unsolicited phone calls from commercial telemarketers.

Recognizing that charities were not subject to the restrictions of the do-not-call registry, Carrier came up with a plan to combine for-profit telemarketing sales efforts with charitable giving. In 2009, Carrier formed Giving Hearts, Inc., as a Michigan nonprofit corporation, and the IRS approved its application for federal tax exemption. Giving Hearts established a so-called corporate sponsorship program with the aim of providing telemarketing opportunities for businesses to help generate leads and give back to a charity.

In 2011, the telemarketing staff of Window Plus began to test the Giving Hearts corporate sponsorship program by making telemarketing calls to potential customers. Later that year, the Michigan attorney general notified the IRS that a number of individuals had filed complaints alleging that Giving Hearts was operating as a front for a window sales operation. The IRS notified Giving Hearts in April 2012 that it was opening an examination regarding its exempt status.

In 2012, Giving Hearts and Window Plus executed a corporate sponsorship program under which Window Plus would fundraise on behalf of Giving Hearts by making telemarketing calls to potential customers and soliciting donations for Giving Hearts. The telemarketing script said that for every homeowner who accepted a product demonstration and free estimate from Window Plus, Giving Hearts would receive a donation from Window Plus. In 2011, Window Plus reported that 50 percent of its sales leads and 33 percent of its sales originated from telemarketing calls. In 2012, Window Plus reported that 44 percent of its sales leads and 30 percent of its sales originated from telemarketing calls. In 2013, Natalie Simon, an experienced public relations professional was appointed as the president of Giving Hearts. Simon undertook efforts to expand participation in Giving Hearts' corporate sponsorship program. Several companies declined to participate and others expressed interest only if the IRS examination regarding Giving Hearts' tax-exempt status was favorably resolved.

Giving Hearts filed Forms 990-EZ, Short Form Return of Organization Exempt From Income Tax, for tax years 2010-2016 reporting that it received annual charitable contributions ranging from $1,102 to $8,334. Giving Hearts used a small portion of the contributions to pay annual filing and other fees and donated the rest to charitable organizations. After issuing multiple proposals to revoke Giving Hearts' exempt status, the IRS issued a final adverse determination letter in May of 2016 stating that Giving Hearts was not operated exclusively for exempt purposes under Code Sec. 501(c)(3) and was operated for a substantial private and commercial purpose, rather than exclusively for public purposes. Giving Hearts appealed to the Tax Court.


The Tax Court upheld the IRS's decision to revoke Giving Hearts' tax exemption because it found that Giving Hearts failed to operate exclusively for an exempt purpose as required under Code Sec. 501(c)(3). The Tax Court noted that, by collecting donations from Window Plus and transferring the funds to other charitable organizations, Giving Hearts operated at least in part to further charitable purposes.

While the court acknowledged that the Code does not preclude the use of for-profit enterprises, such as Window Plus, to solicit or collect charitable donations, it found that the presence of a single substantial purpose that is not described in Code Sec. 501(c)(3) precludes exemption from tax under Code Sec. 501(a) regardless of the number or the importance of the organization's exempt purposes. In the court's view, the purpose of Giving Hearts' corporate sponsorship program was, first and foremost, to generate sales leads and revenues. The court said that although telemarketing calls were ostensibly made on behalf of Giving Hearts, their real purpose was business promotion. The court noted that a participating business was obligated to make a charitable contribution to Giving Hearts only when a potential customer agreed to an in-home product demonstration.

The court concluded that Giving Hearts was primarily engaged in generating sales leads (and ultimately revenues) to advance a commercial enterprise, with charitable donations arising only as a function of the businesses' success in securing in-home product demonstrations and presenting project estimates to potential customers. Because generating sales leads in support of a for-profit enterprise is not an exempt purpose, nor is it related to such an exempt purpose, the court said it necessarily followed that more than an insubstantial part of Giving Hearts' activities was not in furtherance of an exempt purpose under Reg. Sec. 1.501(c)(3)-1(c)(1).

For a discussion of Code Sec. 501(c)(3) organizations, see Parker Tax ¶60,502.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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