I have a small manufacturing company that produces medical products sold through distributors to be used by physicians. Much of our focus is education of health care professionals in the knowledge and value of using these products in their practices. Can we form a 501(c)(3) charitable nonprofit subsidiary to perform the education service that is unrelated to manufacturing?
The IRS is rightly skeptical about “educational” organizations that are formed to educate about specific proprietary products. Just as an association dealing with an “industry” of a single product line is not recognized as a trade association exempt under 501(c)(6) (See Nonprofit Issues®, 8/16/10), an educational organization dealing with a single product line would likely be deemed a form of private benefit for the manufacturer and would not be granted charitable exemption to use deductible contributions to purchase the manufacturer’s products.
We have dealt with charitable organizations that raise funds to purchase healthcare services for low-income people who can’t afford the services, but they are usually run by independent boards and purchase services from a variety of service providers. It is a very delicate situation, and usually not successful in obtaining exempt status, when the vendor controls the nonprofit and applies the funds mostly to purchase the vendor’s products.