Surrounded by 100 year old trees and within view of a crystal clear lake stands a health and fitness center large enough to accommodate more than 6000 paying members. These members are eager to swim, exercise on the latest equipment, shoot hoops, lift weights, box under the watchful eye of a boxing instructor, or just socialize with other members at the juice bar. Designed for the entire family, this health and fitness center features state-of-the-art equipment and an ambiance not unlike an upscale private country club. The best part is that this health and fitness center is a nonprofit, tax-exempt organization generating substantial income from membership fees, instructional classes and special activities, but as a nonprofit, tax-exempt organization none of its income is taxable to the corporation.¹

¹ An exempt organization may, however, be liable for taxes on net income generated from a business activity regularly carried on if the net income is generated from business activity unrelated to the organization's exempt purpose. Such income is commonly known by the acronym UBIT (Unrelated Business Income Tax).

Now, not every health and fitness center will qualify as a tax-exempt organization. After all, the purpose of a fitness center is commercial in nature - that is, it offers members an opportunity to engage in vigorous exercise through the use of equipment and facilities designed for that purpose, in exchange for a membership fee. This is a commercial transaction. But, if an organization's activities support or benefit a specific charitable organization, then the net income from such activities is not subject to state or federal taxation [Reg §1.509(a)-4(c)(1), §1.509(a)-4(e)(2)].

In the above example, the health and fitness center's activities support and benefit a charitable §501(c)(3) youth camp. And, because it meets this support and benefit test, the health and fitness center qualifies as a §501(c)(3) and §509(a)(3) charitable support organization.

The law recognizes three types of relationships between a supporting organization (in this case, the health and fitness center) and a supported organization (in this case, the youth camp), namely, a relationship characterized as (a) operated, supervised or controlled by, (b) supervised or controlled in connection with, or (c) operated in connection with [Reg §1.509(a)-4(a)(3), §1.509(a)-4(f)(2)].

The first and second relationships [(a) and (b) above] may be characterized by a parent-subsidiary relationship. In the above example, the youth camp is the parent corporation which controls the subsidiary health and fitness center. The "control" test is satisfied due to the parent's ability (by means of provisions in the articles of incorporation and bylaws) to elect, and remove, the entire board of directors of its subsidiary.

The third relationship, namely (c), may be satisfied by demonstrating a significant level of involvement by the supporting organization in the programs and operation of the supported organization.

In conclusion, §501(c)(3) tax-exempt status may be obtained by an organization engaging in otherwise commercial activities provided that the organization can demonstrate that its relationship with another charitable organization may be characterized as a support and benefit relationship within one or more of the relationships described in (a), (b), and (c) above.

If you would like to obtain tax-exempt status or you want us to review your current tax situation, assemble a package of: 1) your Articles of Incorporation; 2) the names and addresses of your officers and board members; 3) a copy of your bylaws or constitution; 4) your federal EIN (employer identification number);` and 5) a recent set of financial statements. We will need additional information later, but this will get us started. We will deal with the IRS and prepare all of the documents necessary to obtain tax-exempt status.