One commonly held misconception regarding charities is that an organization can qualify under section 501(c)(3) on the grounds that it provides needed services to other 501(c)(3) organizations. In a seminal case in Rev. Rul. 72-369, an organization sought 501(c)(3) status on the grounds that it provided consulting services to 501(c)(3)s for a fee set at cost. The IRS ruled that paid consulting services is a commercial activity carried on for profit and the fact that the fee was set at cost was not sufficient to remove the commercial aspects. In GCM 37257, the general counsel declared that such service-providing organizations will only qualify themselves under section 501(c)(3) if the services they provide to the other 501(c)(3)s are “substantially below cost.”
Recently, in PLR 201131025, the IRS examined an organization the provided classroom supplies to school teachers. The organization operated an on-line registry where teachers could register and list needed supplies for their classrooms; then donors could go to the website and purchase items for the teacher (the donors would pay the organization retail price and the organization would purchase the supplies from vendors at wholesale price). The IRS denied 501(c)(3) status to the organization because it was performing commercial fundraising services, which are not educational or otherwise charitable.
Helping teachers obtain classroom supplies may be more sympathetic than providing consulting or (to take an extremely unsympathetic example) legal services, but as this ruling shows, the same principles apply.