We do a lot of nonprofit and tax-exempt work at my firm. People come into my office with all kinds of ideas for charitable organizations. I thought I’d heard it all – apparently, I hadn’t. The “Case of the Charitable Sperm Bank” has put an interesting twist on the types of charitable activities that taxpayers are willing to promote.

Here are the facts of the case: William C. Naylor, Jr. is a Washington state software engineer who holds a number of patents. My guess is, he’s a pretty smart cookie. In 2001, he contracted with a sperm bank to store and distribute his sperm to recipients of his choice. As part of the arrangement, he was required to pay the storage fees for the sperm. He was also able to choose the recipients of his apparently genius sperm.

At some point, Naylor decided to spread the wealth a bit. He incorporated Free Fertility Foundation, Inc., in California in order to provide sperm free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization. While the web site purports to offer a variety of sperm, there is currently one donor listed in the catalog:

fwcn02453 – scientific researcher; mathematics and computer expert; vice-president of company; straight A student in university; chess champion in high school; awards for academic excellence and athletics while child; 6 ft 1 inch tall; Caucasian 3/4 English 1/4 Scottish. Sperm vials available immediately with no wait.

That’s right. It’s Naylor. He’s sharing his own sperm with those less fortunate than himself because:

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.

That may be a noble enough intention, depending on who you are. But it doesn’t rise to the level of providing a truly public benefit, as Naylor found out. In 2004, Naylor’s company made application to the IRS for tax-exempt status. The application was denied. While Free Fertility Foundation, Inc., claims that it promotes health by providing free health products and services, the IRS found that the operations do not promote health or otherwise serve a charitable purpose. In fact, the application process has very little to do with health. Naylor has a list of questions for potential beneficiaries; he scores and screens all of the questionnaires by hand to determine whether a potential recipient is qualified. As part of the selection process, Naylor gives special consideration to women “from families whose members have a track record of contributing to their communities” and women “with better education.”

Naylor’s qualifications for his sperm recipients means that the pool is a little smaller than it might otherwise be. In 2004, of 433 questionnaires received by the company, only 20 were granted sperm. In 2005, 386 questionnaires were received but only 4 women received sperm donations. In other words, over a two year period, only 24 women were found to have benefited from, er, the company.

While the Court found that “free provision of sperm may, under appropriate circumstances, be a charitable activity” (boys, the key word here is “appropriate circumstances”), it also agreed with the IRS that “the class of petitioner’s beneficiaries is not sufficiently large to benefit the community as a whole.” The Tax Court found that the organization is “not operated exclusively for exempt purposes and therefore does not qualify for tax exemption pursuant to section 501(c)(3).” You can read the Tax Court’s opinion as a pdf here.

The Tax Court was clearly trying not to judge whether the donation of Naylor’s own sperm was charitable on its own. I have a feeling if they had, a whole bunch of new charitable entrepreneurs would be, um, setting up shop. The real point of the case is that the potential pool of charitable beneficiaries must be large enough to justify tax exemption and adding restrictions and other criteria necessarily limits the pool of beneficiaries. Whether those restrictions are fair or just isn’t the point – the Tax Court didn’t even get there in its analysis. The focus was, instead, on whether the final benefit to the public was enough. Despite Naylor’s claims about the good that his sperm can do in the world, the answer is no. The Tax Court did leave open the possibility that under the right circumstances, the answer could be different.