January 11, 2001 | Read Time: 2 minutes
By ELIZABETH SCHWINN
Saying that an organization is not a charity just because it gives away its services, the U.S. Tax Court has ruled that an organization that pledged to provide free job training to the poor and free employment referrals to business was not exempt from tax because its activities also benefited the group’s founder.
Matthew Fondel, the owner of At Cost Services, a for-profit company in New York, sought tax-exempt status in 1995 for a nonprofit affiliate that he said would eliminate poverty among inner-city minorities by helping them to make a living.
Mr. Fondel told the Internal Revenue Service that the affiliate would train workers and then place them in jobs at area businesses, forgoing fees that temporary-help companies typically charge on top of hourly wages for such placements. Under Mr. Fondel’s plan, the businesses would pay the workers’ wages directly to At Cost, which would keep a portion of the money to cover expenses.
Mr. Fondel said that he would draw no salary and would perform all job training and placement activities, but that he would receive any net profits from the charity’s operations.
The I.R.S. denied Mr. Fondel’s application, saying that the operations would serve his own financial interests rather than exist solely for a charitable purpose. The I.R.S. Office of Appeals upheld the decision, which Mr. Fondel appealed to the U.S. Tax Court.
Tax Court Judge Mary Ann Cohen said that providing services to businesses without charging them extra fees does not by itself mean that an organization is charitable. She agreed with the I.R.S. that the operations would serve Mr. Fondel’s financial interests, noting that Mr. Fondel would derive income from the group’s activities and that the group would pay for his apartment, which would serve as its place of business.
(At Cost Services Inc. v. Commissioner Internal Revenue, T.C. Memo 2000-329.)
