On January 6, 2026, the United States Tax Court (Court) upheld the IRS's revocation of an organization's tax-exempt status, finding the organization failed the operational test under IRC Section 501(c)(3) because it was no longer operated exclusively for a charitable purpose. In Milk Saving Starving Children Foundation v. Commissioner of Internal Revenue, (T.C. Memo. 2026-1) the Court found that Milk Saving Starving Children Foundation (the Foundation) was no longer engaged primarily in activities that furthered its tax-exempt purposes specified in IRC Section 501(c)(3).

Facts

The Foundation was incorporated in Pennsylvania in 2001, with the stated purpose of raising funds to purchase and distribute powdered milk to starving children worldwide. The IRS recognized the Foundation's tax-exempt status under IRC Section 501(c)(3) in 2002 and classified it as a public charity. However, over the years, the Foundation's activities diverged significantly from its original charitable mission.

In 2018, the IRS initiated an examination of the Foundation's activities, which revealed that it had ceased its milk distribution activities for several years. Instead, the Foundation operated a coffee shop, Café Beignet, and engaged in fundraising activities, including an annual golf tournament, though it wasn't clear how the Foundation used any funds it raised from the fundraisers.

The IRS issued a final adverse determination letter on February 25, 2022, stating that the Foundation was no longer fulfilling its exempt purpose and that its primary activity — operating a café to raise funds — was neither educational nor charitable. In response to the IRS's revocation of its tax-exempt status, the Foundation filed a petition for a declaratory judgment with the Court on May 26, 2022, challenging the IRS's revocation of its tax-exempt status.

Law and analysis

The Court focused much of its analysis on the Foundation's non-compliance with the operational test required for tax-exempt status under IRC Section 501(c)(3). The operational test requires an organization to be organized and operated exclusively (primarily) for tax-exempt purposes under IRC Section 501(c)(3), as demonstrated by the organization engaging primarily in activities that further one or more of the exempt purposes specified in IRC Section 501(c)(3), such as charitable, educational or religious activities. The Court noted that the presence of a single non-exempt purpose, if substantial, precludes exempt status regardless of the number or importance of truly exempt purposes.

The IRS's revocation of the Foundation's tax-exempt status was based on its conclusion that the Foundation had failed the operational test. The IRS found that the Foundation's primary activities had shifted away from its charitable mission. Instead of distributing powdered milk, the Foundation operated a coffee shop and engaged in fundraising activities that did not further its exempt purpose. Organizations that engage in some charitable activities may still lose their tax-exempt status, the Court noted, if a substantial portion of those activities is not in furtherance of its exempt purpose.

The Foundation's financial records for its tax year ending June 30, 2018, indicated that it generated income primarily from its coffee shop sales, rental income, and golf fundraiser proceeds, totaling $26,447. However, none of its reported expenses for that tax year related to its tax-exempt purposes or its charitable mission of distributing powdered milk to starving children. The IRS concluded that the Foundation's activities did not primarily further tax-exempt charitable purposes under IRC Section 501(c)(3), and the funds raised were not used for charitable purposes. The Court agreed and upheld the IRS's revocation of the Milk Saving Starving Children Foundation's tax-exempt status under IRC Section 501(c)(3).

Implications

The revocation demonstrates the need for tax-exempt charitable organizations to actively engage in charitable activity each year so they meet the IRC Section 501(c)(3) operational test. Charitable activity is a necessity throughout a charitable organization's existence, as qualification for IRC Section 501(c)(3) status in one year (or a future year) does not automatically qualify the organization for tax-exempt IRC Section 501(c)(3) status in the next year. When an IRC Section 501(c)(3) organization reduces or materially changes its activity, it may no longer qualify as tax-exempt. The IRS's revocation letter, and the Court's holding, highlight the importance of charitable organizations maintaining at least some level of tax-exempt activity every year to meet the operational test. They also underscore the need for an IRC Section 501(c)(3) organization that conducts unrelated trade or business activity to ensure that activity is insubstantial compared to activity that substantially relates to its tax-exempt purposes, to avoid jeopardizing exemption.

Fundraising activities, though they may be needed to fund charitable activities, generally do not qualify as charitable activities themselves, so it is essential for charitable organizations to use funds raised through those activities to further their IRC Section 501(c)(3) purposes. In fact, a regularly conducted fundraising activity that is not charitable in nature — like the coffee shop in this case — will jeopardize an IRC Section 501(c)(3) organization's tax exemption if it is more than insubstantial in relation to the organization's charitable activities.