Milk Saving Starving Children Foundation loses tax-exempt status
Milk Saving Starving Children Foundation v. Commissioner, T.C. Memo. 2026-1, No. 13274-22X.
The Tax Court upheld the IRS’s revocation of a charity’s §501(c)(3) status after it stopped its stated charitable activity and primarily ran a café, rented property, and held fundraisers without using proceeds for charitable purposes.
Holding
The court granted summary judgment to the IRS and upheld revocation of the foundation’s §501(c)(3) tax-exempt status effective July 1, 2017, because the organization failed the operational test.
Why It Matters
§501(c)(3) status depends on what an organization actually does, not what it claims.
Running commercial activities is not fatal by itself, but funds must further exempt purposes.
Restarting minimal charitable activity after an audit begins does not cure years of noncompliance.
Failure to respond to an IRS summary judgment motion is often decisive.
Timeline
2001–2002: Foundation incorporated. IRS recognizes §501(c)(3) status.
2003 onward: The Foundation operates Café Beignet.
2011: Powdered milk donations cease.
2018: IRS audits the foundation’s fiscal year.
2022: IRS issues final adverse determination revoking exemption.
2026: Tax Court grants summary judgment for the IRS.
Key Facts
The foundation was formed to distribute powdered milk to starving children.
It operated a cash-only café and rented out real property to commercial tenants.
By 2018, its income came mainly from rent, a golf fundraiser, café sales, and donations.
No expenses in 2018 were incurred for milk distribution or similar charitable activities.
Funds were used for salaries, loans to an insider, property expenses, and operating costs.
Small milk purchases occurred only after the IRS proposed revocation.
Statutory or Regulatory Framework
§501(c)(3) requires organizations to be organized and operated exclusively for charitable purposes.
Operational test under Treas. Reg. §1.501(c)(3)-1(c)(1) requires primary activities to further exempt purposes.
A single substantial nonexempt purpose defeats the exemption, even if some charitable activity exists.
§7428 allows declaratory judgment review of IRS revocations based on the administrative record.
Arguments
Taxpayer argued:
It received substantial contributions.
It remained a publicly supported charity.
It engaged in other charitable activities, such as fundraisers and donations.
Government argued:
The foundation stopped its core charitable activity years earlier.
Its primary activities were commercial and fundraising.
Funds raised were not used for charitable purposes.
The foundation failed the operational test.
Court’s Reasoning
The court reviewed only the administrative record.
The foundation bore the burden of proving the IRS was wrong.
Evidence showed charitable milk distribution had ceased years before the audit.
Café operations, rentals, and fundraisers dominated activities.
No showing that commercial activities furthered an exempt purpose.
Minimal charitable acts after the audit began did not outweigh years of nonexempt operations.
The foundation failed to oppose summary judgment with facts or evidence.
Forward-Looking Implications
Charities must continuously operate in line with their stated exempt purpose.
Commercial revenue must be tied to charitable outcomes.
Poor Form 990 reporting can undermine exempt status.
Silence in litigation can be as damaging as bad facts.
Result
The Tax Court entered judgment for the IRS and upheld revocation of tax-exempt status.
The Takeaway
A charity that morphs into a café, a landlord, and a fundraiser without directing money to its mission no longer qualifies as a charity for tax purposes.
List of Citations
§501(c)(3): Defines organizational and operational requirements for charitable exemption.
Treas. Reg. §1.501(c)(3)-1(c): Explains the operational test standard.
Better Business Bureau v. United States, 326 U.S. 279 (1945): Establishes that a substantial nonexempt purpose defeats exemption.