Not infrequently, the U.S. Tax Court gets to hear some strange cases, and the case of the Free Fertility Foundation v. Commissioner of Internal Revenue surely ranks as one of the weirdest.
The case, recently highlighted on Professor Paul Carons always fascinating TaxProf blog, involved a software engineer and inventor named William C. Naylor Jr., who entered into a contract in 2001 with a sperm bank in Spokane, Wash., to store and distribute his sperm to the recipients of his choice.
In 2003, Naylor founded the Free Fertility Foundation, with the stated purpose of providing sperm free of charge to women who were seeking to become pregnant through artificial insemination or in vitro fertilization. According to the Web site, the foundation isnt open to just anybody, though. Only Naylor is the single sperm donor.
Women too are carefully screened. They must fill out a detailed questionnaire devised by Naylor and his father, a retired university professor (presumably William C. Naylor Sr.), asking about the womens family background, living environment, age, education, personal achievements, and previous fertility treatments. Women with a better education and no record of divorce got dibs on Naylors sperm.
Despite the rigorous requirements, over a two-year period, the foundation received 819 inquiries and provided sperm to 24 women. Naylor advertised the foundations service via search engine ads and through a Web site, where he chronicled his life from infancy to adulthood, including photos, a physical description and the Naylor family history and achievements.
Those achievements included Naylors academic and athletic accomplishments, including spelling bee competitions in elementary school, science fair competitions in junior high school and recognition as a top engineering student in college
On the Web site, Naylor had the following message for potential recipients: I derive meaning and happiness from believing that I am making the world a better place. Being a sperm donor is a way that I can help a few people to have children who otherwise could not. This makes more of a positive difference to the world than all of the inventions and scientific discoveries that I could ever create.
Naylor would score the questionnaires by hand, transfer the information to a computer-readable form, and enter the information into a computer program that would assign a score to each woman. The threshold score required for a woman to receive sperm would be adjusted so that the number of recipients accepted matched the number of sperm vials available.
Not surprisingly, though, the IRS took issue with granting a tax exemption to Naylors foundation. And in November 2005, the IRS sent the foundation a denial letter. Naylor protested the following March and the two sides met in November 2006 to discuss the application for a tax exemption. However, in June 2007, the IRS issued a final determination letter denying the request for a tax exemption. The foundation then filed a petition with the Tax Court seeking review of the final determination.
However, on July 7 of this year, the Tax Court issued its ruling in the case. Naylors foundation appears to be out of luck, at least as far as his tax exemption goes.
The free provision of sperm may, under appropriate circumstances, be a charitable activity, the court noted. Petitioner, however, does not qualify for tax exemption because the class of petitioners beneficiaries is not sufficiently large to benefit the community as a whole.
While Naylor may believe that petitioners activities make more of a positive difference to the world than all of the inventions and scientific discoveries that * * * [he] could ever create, we are not convinced that the distribution of one mans (i.e., Naylors) sperm to a small number of women, selected in the manner presented, promotes health or confers a public benefit, the court concluded. Accordingly, we find that petitioner is not operated exclusively for exempt purposes and therefore does not qualify for tax exemption pursuant to section 501(c)(3).
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