The IRS denies exemption to a social enterprise

Excerpted from IRS Denial Letter 200802036.  (HT:  Paul Streckfus EO Tax Journal for 1/15/08)

You hire as part-time or temporary workers persons who have low-incomes, who are chronically unemployed or who are handicapped, elderly or developmentally disabled. However, employing these types of individuals, in and of itself, does not constitute an activity that furthers the charitable purpose of providing relief of the poor and distressed or of the underprivileged within the meaning of section 1.501(c)(3)-1(d)(2) of the regulations.

Furthermore, the training and education activities that you conduct for the benefit of these persons are negligible, consisting of only stuffing and assembling envelopes for mailings. Thus, it is apparent that your primary activity is the operation of these businesses for commercial purposes, rather than primarily for the purpose of providing meaningful training or educational services to a class of persons who are in need of these services. Your three principal activities are similar to the types of business activities carried on by commercial ventures organized for profit. See B.S.W. Group, Inc. v. Commissioner, supra. Your activities have the same type of "commercial hue" that the courts in Easter House v. U.S., supra, and in Airlie Foundation v. I.R.S., supra, held were activities that furthered commercial, rather than charitable, purposes.

Furthermore, your operations are similar to the retail grocery store operations carried on by the organization in Rev. Rul. 73-127, supra. By contrast, your operations are unlike those of the organization in Rev. Rul. 73-128, supra, whose activities were primarily educational. In addition, your operations are different from the grocery store operated by the organization in Rev. Rul. 76-94, supra, which operated primarily to provide job skill training to needy adolescents. Your operations are also unlike those carried on by the organization in Aid to Artisans. Inc. v. Commissioner, supra, whose primary activities, alleviating economic deficiencies in communities of disadvantaged artisans, relieved the poor and distressed or underprivileged.

Therefore, you are not operated exclusively for one or more exempt purposes as required in section 1.501(c)(3)-1(a) of the regulations.