The United States Tax Court in Giving Hearts, Inc. v. Commissioner of Internal Revenue,TC. Memo 2019-949, decided the issue of whether a commercial entity can make combined telemarketing and charity calls to avoid the restrictions of the Do-Not-Call registry list.
This case centered around the Do-Not-Call Implementation Act, passed in 2003, and allowed individuals to join a national registry opting out of receiving telemarketing calls. The act permitted the Federal Trade Commission to collect fees in order to both implement and enforce this registry. Window Plus, a window company, relied considerably on telemarketing calls, and as the registry grew, the number of potential customers to call dwindled. Window Plus decided to combine its telemarketing with charitable calls as a way to avoid violating the do-not-call registry law.
Giving Hearts, Inc. was thus founded as a nonprofit corporation in 2009 “exclusively for charitable, religious, educational, and scientific purposes,” which made it exempt from the do-not-call registry law. It adopted Window Plus for a “corporate sponsorship program,” and telemarketers resumed calls to those who were registered on the do-not-call list. Those receiving calls from the company would be offered a deal: if they agreed to have a salesperson visit their home, Window Plus would donate to Giving Hearts, a charity.
Individuals were not moved by this deal, however, and instead interpreted the calls as evidence that Giving Hearts was only operating as “a front for a window sales operation.” After receiving multiple complaints about the calls, the Attorney General of Michigan, the state in which Window Plus primarily operates, reported the company to the IRS. Giving Hearts received notice that its status as a tax-exempt nonprofit was revoked from the Commissioner of Internal Revenue in 2016, and the revocation was effective retroactively to the beginning of 2010.
The court applied an operational test set out in the Income Tax Regulations to determine whether Giving Hearts was truly “operated exclusively” for a tax-exempt purpose. This test calls for determining if an organization “engages primarily in activities which accomplish one or more of such exempt purposes specified…. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.”
In applying this test, the U.S. tax court determined that the corporate sponsorship agreement between Window Plus and Giving Hearts “by design and in effect, permits for-profit businesses” to invoke the charitable organization’s name “as part of a telemarketing pitch intended, first and foremost, to generate sales leads and revenues.” Thus, because the telemarketing calls are primarily centered on generating revenue for Window Plus, the court held that Giving Hearts was engaged primarily in advancing a commercial enterprise.
The court clarified that, whether or not Giving Hearts had been involved with additional businesses for its corporate sponsorship program, it would still end up classified as primarily acting on behalf of for-profit enterprises. Regardless, Giving Hearts was not operating exclusively for purposes that are exempt under federal regulations. The tax court thus entered the decision in favor of the Commissioner of Internal Revenue. The decision by this court ultimately illustrates that the use of charitable giving does not allow companies to forego the prohibitions on telemarketing encompassed within the do-not-call registry.
With contribution from Angela Mauroni, first year J.D. candidate at the University of Pittsburgh School of Law.