IRS denies exemption for a medication-development trust

Plain-English summary

A trust and its wholly owned disregarded entity planned to develop, manufacture, import, distribute, and sell medication for medical aid in dying. The trust expected loans from its trustee at first and projected that product sales would eventually provide its revenue. It argued that state-authorized medical aid in dying was lawful under Gonzales v. Oregon, that its activities relieved terminally ill patients' distress, and that commercial activity could further an exempt purpose. The IRS concluded that the activity conflicted with federal law and established public policy, did not qualify as public-interest scientific research, and constituted a substantial commercial nonexempt purpose. It also found no plan to publish research or make resulting intellectual property available to the public on a nondiscriminatory basis. Appeals sustained the denial of exemption under IRC § 501(c)(3).

Ruling snapshot

• Question: Is the trust organized and operated exclusively for charitable or scientific purposes under § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; 42 U.S.C. § 14401; Rev. Rul. 71-447; Rev. Rul. 75-384; Better Business Bureau v. United States; Bob Jones University v. United States; Gonzales v. Oregon

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service

Appeals Office Person to contact:

IRS Name:

Employee ID number:
Telephone:
Fax:

Hours:
Number: 202101007 Employer ID number:

Release Date: 1/8/2021

Uniform issue list (UIL):

501.04-02

Certified Mail
Dear

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(3)
of the Code.

We made the adverse determination for the following reasons:

You have not demonstrated that you will be operated exclusively for charitable, educational or other exempt
purposes as required by section 501(c)(3) of the Internal Revenue Code. Your are organized and operated for a
substantial non-exempt purpose of producing, selling, and distribution of medications.

Contributions to your organization are not deductible under Section 170 of the Code.

You're required to file federal income tax returns on Forms 1041, U.S. Income Tax Return for Estates and
Trusts. Mail your form to the appropriate Internal Revenue Service Center per the form's instructions. You can
get forms and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM
(800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice
437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court US Court of Federal Claims US District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Avenue, NW
Washington, DC 20217 Washington, DC 20005 Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status, for
more information about the Appeals process.

You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent organization
within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing
a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.
gov or call 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a
petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager
Enclosures:
Publication 892
cc:

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date:
October 17, 2018

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.00-00
C = State 501.03-00
D = LLC 501.03-03
E = Date 501.03-30
F = Individual 501.36-01
Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issue

Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons described below.

Facts
You formed as a trust on B in the State of C. F is your sole and initial Trustee. Your Trust Agreement states that
you are organized and operated so that you may qualify for exemption from federal income tax under Section
501(c)(3) of the Code. Your Trust states that the purpose for which you are organized is charitable. Specifically,
you will offer [redacted].

According to your Trust Agreement you are authorized and empowered to form and organize one or more
nonprofit subsidiary entities that are treated as “disregarded entities” under applicable federal tax law.
Accordingly, you formed D on E in the State of C and you are the sole member of D. F is the manager of D.
The Operating Agreement of D states that D’s principal purpose is to function as your wholly owned entity and
to pursue your purpose.

2

You, through D, seek to develop and manufacture [redacted].

From time to time, you may make grants to other charitable organizations that support [redacted].

Initially, expect to be primarily funded with loans from F. The interest rate on any future loan(s) from F may not
exceed the current published applicable federal rate. According to your proposed budgets for the next
[redacted] years, you expect to be primarily funded from the sale of [redacted]. By your [redacted] year of
operations, you project that the sale of [redacted].

Law
Section 501(c)(3) of the Code provides for the exemption from federal income tax of corporations organized
and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to
the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization
described in Section 501(c)(3), an organization must be both organized and operated exclusively for one or
more exempt purposes. If an organization fails to meet either the organizational test or the operational test, it is
not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes
only if it engages primarily in activities that accomplish exempt purposes specified in Section 501(c)(3) of the
Code. An organization will not be operated exclusively for exempt purposes if more than an insubstantial part
of its activities are not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines charitable as it is used in its generally accepted legal sense. It
continues to describe the generally accepted legal sense as the relief of the poor and distressed, advancement of
religion, advancement of education or science, erection or maintenance of public buildings, lessening the
burdens of government, or promoting social welfare if its an organization designed to accomplish one of the
above causes or to lessen neighborhood tensions, defend human and civil rights, or combat community
deterioration and juvenile delinquency.

Treas. Reg. Section 1.501(c)(3)-1(d)(5)(i) states that a scientific organization may meet the requirements of
Section 501(c)(3) only if it serves a public rather than a private interest.

Treas. Reg. Section 1.501(c)(3)-1(d)(5)(ii) states that scientific research does not include activities of a type
ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing
or inspection of materials or products or the designing or construction of equipment, buildings, etc.

Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iii) provides that scientific research will be regarded as carried on in the
public interest if the results of such research (including any patents, copyrights, processes, or formulae resulting
therefrom) are made available to the public on a nondiscriminatory basis.

Letter 4036 (Rev. 7-2014)
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Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iv) provides that an organization will not be regarded as organized and
operated for the purpose of carrying on scientific research in the public interest and, consequently, will not
qualify under Section 501(c)(3) as a scientific organization if such organization retains (directly or indirectly)
the ownership or control of more than an insubstantial portion of the patents, copyrights, processes, or formulae
resulting from its research and does not make such patents, copyrights, processes, or formulae available to the
public on a nondiscriminatory basis.

Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization which is organized and operated for the
primary purpose of carrying on an unrelated trade or business is not exempt under Section 501(c)(3) of the
Code.

42 United States Code (“U.S.C.”) 14401(a)(2) states that assisted suicide, euthanasia, and mercy killing have
been criminal offenses throughout the United States and, under current law, it would be unlawful to provide
services in support of such illegal activities.

42 U.S.C. 14401(b) states that federal funds may not be used to pay for items and services (including
assistance) the purpose of which is to cause (or assist in causing) the suicide, euthanasia, or mercy killing of any
individual.

Revenue Ruling 71-447, 1971-2 C.B. 230, states that under common law, the term “charity” encompasses all
three major categories of religious, educational, and charitable purposes. All charitable trusts, educational or
otherwise, including religious trusts, are subject to the requirement that the purpose of the trust may not be
illegal or contrary to public policy. Citing Restatement (Second) Trusts, (1959) Sec. 377, Comment c: “A Trust
for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is
invalid.”

Rev. Rul. 75-384, 1975-2 C.B. 204, holds that a nonprofit organization, whose purpose was to promote world
peace, disarmament, and nonviolent direct action, did not qualify for exemption under Sections 501(c)(3) or
501(c)(4) of the Code. The organization’s primary activity was to sponsor antiwar protest demonstrations in
which demonstrators were urged to violate local ordinances and commit acts of civil disobedience. Citing the
law of trusts, the ruling stated that all charitable organizations are subject to the requirement that their purposes
cannot be illegal or contrary to public policy. The law of trusts states that an intended trust or trust provision is
invalid if its purpose is unlawful, its performance calls for the commission of a criminal or tortious act, or it is
contrary to public policy.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that an organization is not
operated exclusively for charitable purposes, and thus will not qualify for exemption under Section 501(c)(3), if
it has a single non-charitable purpose that is substantial in nature. This is true regardless of the number or
importance of the organization's charitable purposes.

In Green v. Connally, 330 F. Supp. 1150 (1971), the court discussed multiple cases that limited tax benefits
such as the dependency deduction, the business expense deduction, and the charitable deduction due to
violation of federal or state laws. “Before considering the more particular subject of charities, we refer to the
general and well-established principle that the Congressional intent in providing tax deductions and
exemptions is not construed to be applicable to activities that are ... illegal.” It went on to say that all charitable
trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal

Letter 4036 (Rev. 7-2014)
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or contrary to public policy. This elementary principle, was restated as follows in the Restatement (Second) of
Trusts Section 377, Comment c (1959): "A trust for a purpose the accomplishment of which is contrary to
public policy, although not forbidden by law, is invalid." This public policy doctrine operates as a necessary
exception to or qualifier of the precept that in general trusts for education are considered to be for the benefit
of the community. Otherwise, for example, Fagin's school for pickpockets would qualify for a charitable trust.

In the Federation Pharmacy Services Inc. v. Commissioner, 625 F.2d 804 (8th Cir. 1980), the Tax Court stated
we fail to see how the fact that [an organization] happens to deal in drugs can convert it to a Section 501(c)(3)
organization. If it could be so converted, then so could a store which sells orthopedic shoes, crutches, health
foods, or any other product beneficial to health. We do not believe that the law requires that any organization
whose purpose is to benefit health, however remotely, is automatically entitled, without more, to the desired
exemption. We have been cited no evidence that Congress intended to exercise its grace in such an expansive
manner.

In Bob Jones University v. United States, 461 U.S. 574 (1983), the Supreme Court held that racially
discriminatory education is contrary to public policy, and therefore, the University could not be viewed as
providing public benefit within the charitable concept.

In Regan v. Taxation with Representation, 461 U.S. 540 (1983), the Supreme Court held that both tax
exemptions and tax deductibility are a form of subsidy that is administered through the tax system.

In IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003), the selling of health services or
goods, at a discount, is not, of itself, a charitable purpose. Many profitmaking organizations sell at a discount.
Nor does the fact that the petitioner seeks to sell its drugs at cost alter the result; so does an old-fashioned
cooperative, yet it is not entitled to classification as charitable.

Application of law

Treas. Reg. Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt an organization described in
Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more
exempt purposes. As explained in Treas. Reg. Section 1.501(c)(3)-1(c)(1), an organization operates exclusively
for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in
Section 501(c)(3) of the Code. You fail the operational test because your activities are not exclusively
charitable, as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(2) because the development, manufacture, and
distribution of medical aid in dying medication, is illegal at the federal level.

Your activities are a type ordinarily carried on as a commercial operation through your wholly owned entity,
which seeks to develop, manufacture, import, and distribute [redacted].
Accordingly, you are not engaged in scientific research within the meaning of Treas. Reg. Section
1.501(c)(3)-1(d)(5)(ii).

You have failed to establish that you have any plans or intent to publish research or otherwise make your
research or findings available to the public on a non-discriminatory basis. Therefore, your research cannot be
regarded as carried on in the public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iii). Because
your research does not serve a public interest as described in Treas. Reg. Section 1.501(c)(3)-1(5), you are not
exempt under Section 501(c)(3) of the Code.

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[redacted]. This is not considered carried on a manner that is
for the public interest and does not qualify as scientific research as described in Treas. Reg. Section 1.501(c)(3)-
1(d)(5)(iv) under Section 501(c)(3) of the Code.

Federal law does not recognize any health benefits of what is described as “assisted suicide” in 42 U.S.C.
Section 14401(a)(2). Federal law, under 42 U.S.C. Section 14401(b), prohibits federal funds to be used to pay
for items and services (including assistance) the purpose of which is to cause (or assist in causing) the suicide,
euthanasia, or mercy killing of any individual. As stated in Regan, both tax exemption and tax deductibility are
a form of federal subsidy. Also, stated in Green, tax deductions and exemptions are not designed to be
applicable to activities that are illegal. Because you engage in activities that contravene federal law, you are not
exempt.

In the tax code, charity is interpreted in its generally accepted legal sense as described in Section 1.501(c)(3)-
1(d)(2). This includes the requirement for all charitable trusts that their purposes may not be illegal or contrary
to public policy as explained in Rev. Rul. 71-447. This ruling is further clarified by Rev. Rul. 75-384, which
provides that an organization that induces or encourages the commission of criminal acts cannot be exempt
under Section 501(c)(3) of the Code since it violates the common understanding of a charitable trust. These
principles were later upheld in the Supreme Court case Bob Jones University, where in reaching its decision, the
Court indicated that entitlement to tax exemption depends on meeting certain common law standards of charity;
namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to
established public policy. Since you are operated to support those engaging in the federally illegal act of
providing medical aid in dying medicine, you cannot be exempt under Section 501(c)(3).

You are not operated exclusively for exempt purposes because you are formed to advance the development of a
[redacted]. Treas. Reg. Section
1.501(c)(3)-1(e)(1). As held in Better Business Bureau, the presence of a single non-exempt purpose if
substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt
purposes. Your provision of medical aid in dying medicine is a substantial non-exempt purpose, which
precludes you from exemption.

Your development, manufacture, import, and sale of [redacted] charitable purpose. Like Federation Pharmacy Services Inc., the distribution of medication does not
automatically cause you to qualify as a Section 501(c)(3) organization. As explained in IHC Health Plans,
selling health services or goods at a discount, is not, of itself, a charitable purpose.

You anticipate that by your [redacted] year of operations all of your revenue will come from the sale of [redacted]. Even if you were to make the medication more easily obtainable or cheaper, this does not
automatically convert your activity to one that is charitable. If it could so be converted, then so could a store
which sells orthopedic shoes, health foods, or any other product beneficial to health as explained in Federation
Pharmacy Services Inc. Without more, the law does not require that any organization whose purpose is to
benefit health is automatically entitled to exemption. Therefore, even if we were to assume that

Letter 4036 (Rev. 7-2014)
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[redacted] were providing a health benefit to the community, without more, selling medication to
qualified individuals is not an exclusively charitable activity and you do not qualify for exemption under
Section 501(c)(3) of the Code.

Your position
Your charitable purpose is to offer [redacted].

You assert that medical aid in dying is legal under federal law by citing Gonzales v. Oregon, 546 U.S. 243
(2006), which held that doctors are permitted to prescribe regulated drugs for medical aid in dying under state
law that permits the procedures. This holding is based on principles of federalism, delegation of the states of the
regulation of the medical profession under the states’ police powers, and consideration of “public interest.”

[redacted] You assert that Gonzales v. Oregon is relevant because the Supreme Court rejected the tactic
to interpret federal law and that the court found that states are free to resolve the question for themselves.

The United States Constitution contains no explicit delegation of authority for the federal government to
regulate medical aid in dying. There are currently no federal laws or regulations that make the practice of
medical aid in dying illegal.

You cited Aid to Artisans, and stated that the presence of profitmaking activities is not, per se, a bar to
qualification of an organization as exempt if the activities further or accomplish an exempt purpose. You said
that Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization may meet the requirements of Section
501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such
trade of business is in further of the organization’s purpose. You said that you satisfy both the statutory and case
law standards because you function as an “ecosystem” whereby the proceeds from the sale [redacted].

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Additionally, you cited Rev. Rul. 79-17, which provides that alleviating the physical and mental distress of the
terminally ill is a qualifying charitable purpose under Section 501(c)(3) of the Code.

Our response to your position

You cited Gonzales v. Oregon and said that medical aid in dying is legal under federal law if state law permits
it. In this case, the court determined that the U.S. Attorney General can’t enforce the federal Controlled
Substances Act against the physicians who prescribed the drugs in compliance with Oregon state law. This case
was regarding the legality of the physicians prescribing medicine, not whether or not their activities were tax
exempt. As indicated previously, 42 U.S.C. Section 14401(a)(2) states that assisted suicide, euthanasia, and
mercy killing have been criminal offenses throughout the U.S. and, under current law, it would be unlawful to
provide services in support of such illegal activities. Conducting a federally illegal activity does not further any
exempt purpose.

Although you said that you do not operate a trade or business, Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides
that an organization may meet the requirements of Section 501(c)(3), if the operation of such trade of business
is in further of an exempt purpose. The first hurdle is that you must be exclusively furthering an exempt
purpose. Manufacturing, distributing and selling [redacted] is not an exempt purpose, so
with that alone you do not qualify for exemption. Even if it were an exempt purpose, it is illegal at the federal
level, which is another bar to exemption.

Conclusion
Your activity of enabling [redacted] through the development, facilitation, and distribution of
certain medication, is illegal under federal law. Because you support and engage in activities that
contravene federal law, you are not exempt under Section 501(c)(3) of the Code. In addition, your
development and distribution of medication, without more, furthers a substantial non-exempt purpose. For
these reasons, you do not qualify for exemption under Section 501(c)(3).

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number:

• A copy of this letter highlighting the findings you disagree with

• An explanation of why you disagree, including any supporting documents

• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

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• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

Letter 4036 (Rev. 7-2014)
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You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W