IRS Denies 501(c)(4) Tax Exemption to Discounted Rate Pharmacy Offering Fertility Medications

In Private Letter Ruling 201215019, released on April 13, 2012, the U.S. Internal Revenue Service denied the application for tax-exempt status under Section 501(c)(4) of the Internal Revenue Code of a nonprofit corporation formed to provide fertility medications at cost to uninsured patients, and without payment of a co-pay by insured patients.

An organization may obtain exemption as a social welfare organization under Section 501(c)(4) if it is “primarily engaged in promoting in some way the common good and general welfare of the community.” The relevant IRS regulation provides that an organization is not operated primarily for the promotion of social welfare if its primary activity is carrying on a business with the general public in a manner similar to organizations which are operated for profit.

In the instant ruling, after reviewing multiple factors–including the applicant’s advertising expenses and a consistent excess of revenues over expenses during a period of three years–the IRS held that the pharmacy in question was “operating for a substantial, non-exempt, commercial purpose.” Even though the organization provided some products at no charge to needy individuals, the Service found the pharmacy’s operations to be too similar to those of a commercial pharmacy to justify its claim of an exemption.

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