The Tax Court yesterday held that a nonprofit formed to provide the donor's sperm free of charge to applicants approved by the donor did not qualify for tax exempt status.  Free Fertility Foundation v. Commissioner, 135 T.C. No. 2 (July 7. 2010):

William C. Naylor, Jr. (Naylor), is a software engineer who holds more than 10 patents on various inventions. On March 1, 2001, Naylor entered into a contract (2001 contract) with a Spokane, Washington, sperm bank to store and distribute his sperm to recipients of his choice. Pursuant to the 2001 contract, Naylor was required to pay annual storage fees and designate recipients.

On October 15, 2003, Naylor founded and incorporated petitioner in California as a nonprofit public benefit corporation. The purpose of the corporation is to provide sperm free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization. Petitioner advertises online through a search engine and a Web site.

Petitioner’s Web site states that Naylor is its “single sperm donor” and chronicles Naylor’s life from infancy to adulthood. Naylor’s donor profile includes photographs, a physical description, health information, family history, and achievements. In particular, the Web site provides great detail of Naylor’s academic and athletic accomplishments during elementary school (e.g., spelling bee competition), junior high school (e.g., science fair competition), high school (e.g.,swimming competitions), and college (e.g., recognition as “top engineering student”). On the Web site Naylor states:

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.

Women seeking to receive sperm from petitioner are required to submit answers to a questionnaire created by Naylor and his father (collectively, the Naylors). The questions relate to the woman’s family background, living environment, age, history of fertility treatment, educational attainment, personal achievements, and desire to have a child. Preference is given to women “with better education” …

The free provision of sperm may, under appropriate circumstances, be a charitable activity. Petitioner, however, does not qualify for tax exemption because the class of petitioner’s beneficiaries is not sufficiently large to benefit the community as a whole. … the class of potential beneficiaries includes only the limited number of women who are interested in having one man-–Naylor–-be the biological father of their children and who survive the very subjective, and possibly arbitrary, selection process controlled by the Naylors. Over a 2-year period, petitioner received 819 inquiries and provided sperm to 24 women. In deciding who receives the sperm, petitioner has certain preferences that narrow the class of eligible recipients. It is not apparent what, if any, relationship some of these preferences have to the promotion of health. …

While Naylor may believe that petitioner’s 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 man’s (i.e., Naylor’s) sperm to a small number of women, selected in the manner presented, promotes health or confers a public benefit.