Saturday, May 4, 2024
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GiftLaw Note:
Organization applied for tax exempt status under Section 501(c)(3). In its
articles of incorporation, Organization states that its purposes are
exclusively charitable. Organization's articles of incorporation states
that one of its purposes is to promote sports, recreation, health and
fitness through church leagues and tournaments, exercise programs and
recreational activities. Organization plans to organize and run sports
tournaments for adults and children. Organization will begin with an adult
male basketball tournament and a youth basketball tournament before
expanding to offer soccer and volleyball as well as youth clinics.
Financial support for organization will be from ticket sales, advertisement
income, auctions, annual fundraisers and donations.
To be exempt under Sec. 501(c)(3), an organization must be both organized
and operated exclusively for charitable purposes, no part of the earnings
of which inures to the benefit of a private individual. Under Reg.
1.501(c)(3)-1(b)(1)(iv), if an organization's articles express purposes
that are broader than the purposes specified in Sec. 501(c)(3), the
organization will not be considered organized exclusively for one or more
exempt purposes. Regulation 1.501(c)(3)-1(c)(1) states that an organization
will fail the operational test if more than an insubstantial part of its
activities is not in furtherance of its exempt purpose. In Rev. Rul. 65-2,
a foundation operated exclusively to hold youth sports clinics, providing
free instruction, equipment and facilities was exempt under Sec. 501(c)(3).
In Rev. Rul. 80-215, an organization organized to develop, promote and
regulate a sport for individuals under age 18 was deemed exempt under Sec.
501(c)(3). In St. Louis Science Fiction Limited v. Commissioner, the
Tax Court held that a science fiction club was not tax exempt because its
functions were recreational in nature, rather than educational. Here, the
Service determined that Organization differed from the organizations in
Rev. Rul. 65-2 and Rev. Rul. 80-215 because of its focus on adult
recreational sports, which are not considered charitable or educational
purposes. The Service determined that Organization failed both the
organizational and operational test because (1) Organization's purposes
were broader than the purposes described in Sec. 501(c)(3) and (2)
Organization's focus on adult sports was a substantial activity that was
recreational in nature rather than educational.
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PLR 201835012 Athletic Organization Denied Exemption
8/31/2018 (6/5/2018)
Dear * * *:
We considered your application for recognition of exemption from federal income tax under Section 501(a) of the Internal Revenue Code (the Code). Based on
the information provided, we determined that you don't qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our
conclusion. Please keep it for your records.
Issues
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.
Facts
You were formed as a corporation under the state law of M on date O. Your purpose as stated in your Articles of Incorporation is "exclusively for charitable
purposes, including: (i) promoting sports, recreation, health and fitness through church leagues and tournaments, exercise programs, and recreational
activities; and (ii) provide a safe and nurturing environment to help adults and children in N."
The activities as described in your Form 1023 application is "to promote health and fitness through physical activity. The organization's goal is to
organize adult and youth athletic competitions."
You later stated that you plan to organize and run sports tournaments for adult men and women, as well as children. You state you will focus your effort on
an adult male basketball tournament and a youth basketball tournament. It is estimated that each adult basketball tournament will have about p participants,
on q teams and will compete in regular season games and playoff rounds. In three to five years, expansion is projected to include basketball and soccer
programs and clinics for kids ages three and up, as well as women's volleyball tournaments and other sports. Each youth basketball tournament will have r
participants.
You state you do not have flyers or other printed promotional materials. Your website is used for marketing.
Your proposed sources of financial support will be from ticket sales, advertisement income, auctions, annual fundraisers, and donations. Your expenses will
go to programs, salaries and wages, and other expenses.
Law
Section 501(c)(3) of the Code describes corporations organized and operated exclusively for charitable purposes no part of the net earnings of which inures
to the benefit of any private shareholder or individual.
Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order for an organization to be exempt under Section 501(c)(3) of the Code, it must be
both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the
organizational or operational test, it is not exempt.
Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv) provides that in no case shall an organization be considered to be organized exclusively for one, or more exempt
purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section
501(c)(3).
Treas. Reg. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt
purposes only if it engages primarily in activities which accomplish one or more such exempt purposes specified in Section 501(c)(3). An organization will
not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Rev. Rul. 65-2 held that a foundation operated exclusively to teach children a sport by holding clinics conducted by qualified instructors in schools,
playgrounds, and parks and by providing free instruction, equipment, and facilities qualifies for exemption under Section 501(c)(3) of the Code.
Rev. Rul. 70-4 held that an organization was formed for the stated purposes of promoting the health of the general public by encouraging all persons to
improve their physical condition and of fostering by educational means public interest in a particular sport for amateurs. The organization engaged in
promoting and regulating a sport for amateurs is not exempt under section 501(c)(3) of the Code but is exempt under section 501(c)(4).
Rev. Rul. 80-215 held that an organization formed to develop, promote, and regulate a sport for individuals under 18 years of age by organizing local and
statewide competitions, promulgating rules, organizing officials, presenting seminars, distributing a newsletter and otherwise encouraging growth of the
sport qualified for exemption under IRC 501(c)(3).
In First Libertarian Church v. Commissioner of Internal Revenue, 74 T.C. 396 (1980), the court stated that the church failed to show that it successfully
segregated the clearly social and political aspects of its supper club meetings and its publication from its purpose to further the doctrine of ethical
egoism. As the church operated for social and political purposes to more than an insubstantial degree, it fails to qualify for exemption under section
501(c)(3) of the Code. The court stated that an organization will not qualify for exemption if a nonexempt activity is more than an insubstantial part of
its overall activities or if an activity has more than an insubstantial non-exempt purpose. The court explained that "clearly the regulations and cases
contemplate that a single activity may be carried on for more than one purpose. If a substantial secondary purpose is not an exempt one, qualification under
section 501(c)(3) will be denied."
In St. Louis Science Fiction Limited v. Commissioner, 49 TCM 1126, 1985-162, the Tax Court held that a science fiction society failed to qualify for
tax-exempt status under section 501(c)(3) of the Code. Although many of the organization's functions at its annual conventions (the organization's principal
activity) were educational, its overall agenda was not exclusively educational. A substantial portion of convention affairs were social and recreational in
nature.
Application of law
You are not described under Section 501(c)(3) of the Code or Treas. Reg. Section 1.501(c)(3)-1(a)(1) because you do not meet the organizational or
operational tests.
To satisfy the organizational test, an organization must have a valid purpose clause (Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv)). Your Articles of
Incorporation state your purpose is "exclusively for charitable purposes, including: (i) promoting sports, recreation, health and fitness through church
leagues and tournaments, exercise programs, and recreational activities; and (ii) provide a safe and nurturing environment to help adults and children in
N." These purposes, specifically encouraging sports, recreational, and social interaction between adults, are not exclusive exempt purposes described under
Section 501(c)(3) of the Code or corresponding regulations. Therefore, you do not meet the organizational test.
You also do not meet the operational test. You indicated you plan to hold sports tournaments for adult men and women with the focus on an adult male and
youth basketball tournament. While you intend to expand in three to five years to include programs and clinics for kids three and up, as well as women's
volleyball tournaments, this still includes adult sports and is not exclusive in nature to either youth or education. Sports and social and recreational
events are not considered exempt activities under Treas. Reg. Section 1.501(c)(3)-1(c)(1).
You differ from the organizations in Revenue Rulings 80-215 and 65-2, where sports were offered to children under the age of 18. You will focus your
activities more than insubstantially on basketball tournaments for adult men. Recreational sports for adults are not considered charitable or educational
purposes under Section 501(c)(3) of the Code.
You are similar to the organization described in Revenue Ruling 70-4 that received exemption under Section 501(c)(4). Like the organization in this ruling,
offering sports, tournaments or other recreational activities for adults encouraged all persons to improve their physical condition and fosters public
interest in a particular sport for amateurs. However, an organization engaged in promoting and regulating a sport for amateurs is not exempt under Section
501(c)(3) of the Code.
You are like the organizations described in First Libertarian Church and St. Louis Science Fiction Limited v. Commissioner. While portions of your
activities are directed at youth, and will in part be educational in teaching a sport, more than an insubstantial amount of your activities are directed at
sports for adults, and therefore more than a substantial portion of your activities are social and recreational in nature. Similar to where a substantial
portion of convention affairs were social and recreational in nature in St Louis, if a substantial secondary purpose is not an exempt one, such as your
adult recreational activities, qualification under section 501(c)(3) will be denied.
Your position
You claim that your mission is to promote sports, recreation, health and fitness in a nurturing environment incorporating Christian principles and teaching
fundamentals to foster growth and development. You claim that through sports and exercise programs and recreational activities for people in many different
age groups from children to adults on various levels, you help people to become physically active and health conscious to improve and maintain their
well-being.
Our response to your position
As described above, you differ from Revenue Rulings 80-215 and 65-2 where those organizations hold sports tournaments for children under the age of 18.
Based on your stated purpose and the activity you conduct or plan to conduct, you have a substantial purpose of providing social and recreational activities
for adult men and women. Hence, the overall facts and circumstances involved show you have a substantial non-exempt purpose of conducting social and
recreational activities.
Conclusion
Based on the facts and information submitted, you are not organized and operated exclusively for exempt purposes. You do not meet the organizational test
because your organizing document does not properly limit your purposes to those described in Section 501(c)(3) of the Code. Likewise, you do not meet the
operational test because you conduct substantial social and recreational activities. Accordingly, you do not qualify for exemption under section 501(c)(3)
of the Code and you must file federal income tax returns. Contributions to you are not deductible under section 170 of the Code.
We have not considered whether you qualify for exemption under any other section Internal Revenue Code.
We explained your option to apply for exemption under a different section but you declined to do so.
If you don't agree
You have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you must send a statement to us within 30 days of
the date of this letter. The statement must include:
Your name, address, employer identification number (EIN), and a daytime phone number
A copy of this letter highlighting the findings you disagree with
An explanation of why you disagree, including any supporting documents
The law or authority, if any, you are relying on
The signature of an officer, director, trustee, or other official who is authorized to sign for the organization, or your authorized representative
One of the following declarations:
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including accompanying documents, and to the best of my knowledge and belief,
the statement contains all relevant facts and such facts are true, correct, and complete.
For authorized representatives:
Under penalties of perjury, I declare that I prepared this protest statement, including accompanying documents, and to the best of my knowledge and belief,
the statement contains all relevant facts and such facts are true, correct, and complete.
Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of
Attorney and Declaration of Representative, with us if he or she hasn't already done so. You can find more information about representation in Publication
947, Practice Before the IRS and Power of Attorney.
We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If so, we'll continue to process your case
considering the information you provided. If you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and notify
you. You can find more information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.
If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because the law requires that you use the IRS
administrative process first (Section 7428(b)(2) of the Code).
Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable address:
U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Room 7-008
P.O. Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202
You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the
person listed at the top of this letter to confirm that he or she received it.
If you agree
If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse
determination letter. That letter will provide information on your income tax filing requirements.
You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If you have questions, you can contact the person
listed at the top of this letter.
Sincerely,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements
Enclosure:
Publication 892
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