Denies social welfare exemption to tennis umpire association

Plain-English summary

A tennis umpire association sought reinstatement of tax-exempt status as a social welfare organization under section 501(c)(4). Its main activity was referring member umpires to sanctioned tennis events, collecting payment for their services, and passing the money to them. The IRS concluded that the association primarily secured employment and provided economic benefits for its members, while any community benefit was incidental. The IRS denied exemption, and the denial became final after the association did not protest within 30 days.

Ruling snapshot

• Question: Did an association that referred member umpires to tennis events and handled their payments qualify under section 501(c)(4)?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1(a)(2)(i); Rev. Rul. 73-306; Rev. Rul. 75-199; Rev. Rul. 78-132.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201820020
Release Date: 5/18/2018

Date:
February 20, 2018

Employer ID number: [redacted]
Contact person/ID number: [redacted]
Contact telephone number: [redacted]
Form you must file: [redacted]
Tax years: [redacted]

UIL: 501.04-00

Dear [redacted]:

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(4) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date:
December 7, 2017

Employer ID number: [redacted]
Contact person/ID number: [redacted]
Contact telephone number: [redacted]
Contact fax number: [redacted]

Legend:
X = Date of formation
Y = State

UIL:
501.04-00

Dear [redacted]:

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)(4) 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)(4) of the Code? No, for the reasons stated below.

Facts

You are an unincorporated association and were formed on X in the state of Y. You were previously recognized
as exempt under Section 501(c)(4) of the Code. However, your exemption was automatically revoked for failure
to timely file Form 990 series annual returns for three consecutive years. You are now seeking reinstatement
under Section 501(c)(4).

You are formed to promote the sport of tennis in your geographical area and to ensure that the sport is played
fairly within the rules. You accomplish this through acting as an association of umpires in your geographic
region.

You recruit and mentor new umpires. You evaluate all member officials to verify their officiating skills.

You also provide annual clinics and seminars, which focus on rule changes. However, your main activity is
referring trained member umpires to officiate at sanctioned tennis events within your geographic region. You
act as a pass-through entity by collecting payment for the officiating services and passing it on to your
members.

You receive and handle money owed to your members for the umpiring services they provide. You invoice
what is owed to the member umpires and pay them for their work. These pass-through payments are reported
annually to each member via Form 1099.

In your application for exemption, you indicated that you receive income from tennis events, tournaments and
competitions. Approximately 99 percent of your revenue you classified as gross amounts derived from the
activities related to your exempt purpose. When we requested a breakdown of these revenues, you said that
these amounts aren’t really income; rather, they are simply remitted to you as payment for the member umpires
services and then paid out to the members respectively. You said that membership dues are your main source of
revenue, although they are minimal compared to the revenue you receive on behalf of your members for their
officiating duties. Expenses consist of paying members for their officiating services and administrative costs
(banking, accounting services, etc.).

Law

Section 501(c)(4) of the Code provides for the exemption from federal income tax of civil leagues or
organizations not organized for profit but operated exclusively for the promotion of social welfare.

Treasury Regulation Section 1.501(c)(4)-1(a)(2)(i) provides that, in general, an organization is operated
exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common
good and general welfare of the people of the community.

Revenue Ruling 69-384, 1969-2 C.B. 122, provided that a nonprofit organization created for the primary
purpose of maintaining an amateur baseball association and conducting amateur baseball games among its
members’ teams is exempt under Section 501(c)(4) of the Code. The Service ruled that, by helping to develop
good sportsmanship, high character, and the physical well-being of young adults through the operation of an
amateur baseball league, the organization was promoting the common good and general welfare of the people of
the community.

Rev. Rul. 70-4, 1970-1 C.B. 126, describes an organization engaged in promoting and regulating a sport for
amateurs which was found to be exempt under Section 501(c)(4) of the Code to an organization. The
organization's primary activities are directed toward reviving and promoting a sport by circulating printed
material about the sport, by conducting exhibitions to introduce the sport to the public, by conducting
tournaments, and by giving occasional instructive clinics. The organization also sets the standards for the
equipment to be used, establishes the official rules of the games, and prescribes the official size of the playing
area. By promoting and regulating a sport for amateurs, the Service ruled that the organization is providing
wholesome activity and entertainment for the social improvement and welfare of the community, which
promotes the common good and general welfare of the people of the community.

Rev. Rul. 73-306, 1973-2 C.B. 179, provides that an organization formed for the purpose of promoting the
common interest of tenants who reside in a particular apartment complex does not qualify for exemption under
Section 501(c)(4) of the Code. The organization represented its member-tenants in negotiations with the
management of the complex to secure better maintenance and services, as well as reasonable rents. The ruling
holds that the organization was not described in Section 501(c)(4) because it operated essentially to benefit its
members and, thus, was not primarily engaged in activities that promote the common good and general welfare
of the community.

Rev. Rul. 75-199, 1975-1 C.B. 160, held that where the benefit from an organization is limited to that
organization's members (except for some minor and incidental benefit to the community as a whole), the
organization is not operated exclusively for the promotion of social welfare within the meaning of Section
501(c)(4) of the Code.

Rev. Rul. 78-132, 1978-1 C.B. 157, found a community cooperative organization formed to facilitate the
exchange of personal services among members was operating primarily for the private benefit of its members
and was not exempt from tax as a social welfare organization under Section 501(c)(4) of the Code. The fact that
payments for services were made in kind and did not involve a monetary exchange did not derogate from the
economic benefits accruing to members. Any benefits to the community were not sufficient to meet the
requirement of the regulations that the organization be operated primarily for the common good and general
welfare of the people of the community. Accordingly, this organization is not exempt from federal income tax
as a social welfare organization under Section 501(c)(4).

In Commissioner v. Lake Forest, Inc., 305 F.2d 814 (4th Cir. 1962), a corporation was organized by World War
II veterans for the purpose of purchasing a government housing project and converting it to cooperative,
nonprofit housing for its members. Individuals became members in the corporation by purchasing an apartment
unit and, as such, the number of members was limited to the number of units available. The court held that the
organization was not described in Section 501(c)(4) of the Code because it was “a public-spirited but privately-
devoted endeavor” that provided only incidental benefit to the community. The organization did not promote
social welfare because it furnished housing only to a certain group of individuals, rather than on a community
basis, and did not offer a service or program for the direct betterment or improvement of the community as a
whole.

In New York State Association of Real Estate Boards Group Insurance Fund v. Commissioner, 54 T.C. 1325
(1970), an association organized by a small group interested in obtaining group insurance did not qualify for
exemption because it offered its benefits to only a limited class of its members and their employees. Where the
primary benefit from an organization is limited to that organization's members, and not provided to the
community as a whole, the organization is not operated primarily for the social welfare.

In Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d 684 (2d Cir. 1973), cert.
denied, 419 U.S. 827 (1974), plumbers working in New York City were responsible for the cuts they made in
the city streets. Prior to the organization's existence, the city had repaired the cuts and billed the plumbers
individually in what proved to be a highly inefficient system. The organization was formed to restore the city
streets. It only repaired cuts made by its members. The joint effort of the plumbers reduced their liability and
their expenses, and more efficiently repaired the city streets. While the court found that the program provided
substantial benefits to the public, it concluded that the organization primarily served the private economic
interests of its members and, thus, could not be considered exempt under Section 501(c)(4) of the Code.

Application of law

An organization recognized under Section 501(c)(4) of the Code is one that is operated primarily to bring about
civic betterments and social improvements to the community. You were formed to promote the sport of tennis
by acting as an association of umpires whereby you refer your trained members to officiate at sanctioned tennis
events. You are not operated for the promotion of social welfare within the meaning of Section 501(c)(4)
because your activities primarily serve the private interests of your members by securing employment
opportunities for them.

According to Treas. Reg. Section 1.501(c)(4)-1(a)(2)(i), an organization is operated for the promotion of social
welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people
of the community. Your primary activity involves acting as a pass-through entity by collecting payment for the
officiating services performed by your embers and passing it on to them. This provides a private benefit to your
members and the benefits to community are incidental.

You are dissimilar to the organizations found to be exempt under Section 501(c)(4) of the Code in Rev. Rul. 69-
384 and Rev. Rul. 70-4 because you are not promoting and regulating a sport for amateurs. Rather, your
primary function is securing employment opportunities at tennis events, tournaments and competitions for your
members.

The concept of social welfare implies a service or program directed at benefiting the community as a whole,
rather than a private group of individuals. See Rev. Rul. 73-306 and Commissioner v. Lake Forest, Inc. You are
similar to the organization discussed in Rev. Rul. 75-199 because, other than some incidental benefit to the
community, the benefits you offer are limited to your members. Therefore, you are not operated for the
promotion of social welfare within the meaning of Section 501(c)(4) of the Code.

You are similar to the organization described in Rev. Rul. 78-132 which found that an organization formed to
facilitate the exchange of services among members was operating primarily for the benefit of the members and
not for the general welfare of the community. You facilitate the employment of your members and then act as a
pass-through for the payment of their services. In the ruling, the fact that the payments for services were made
in-kind and did not involve the exchange of money did not detract from the economic benefits accruing to
members. In your case, there is a monetary exchange for services which emphasizes the fact that you operate
primarily to provide economic benefit to your members. As noted in Commissioner v. Forest Lake, Inc.,
operating an enterprise which only incidentally benefits the whole community, precludes exemption under
Section 501(c)(4) of the Code.

You are like the organizations described in New York State Association of Real Estate Boards Group Insurance
Fund and Contracting Plumbers Cooperative Restoration Corp. because, while you do provide some benefits to
the public, you primarily serve the private economic interests of your members. Therefore, you are not operated
primarily for social welfare purposes within the meaning of Section 501(c)(4) of the Code.

Conclusion

Your activities primarily provide for the private benefit of your members and not for the common good and
general welfare of the community within the meaning of Section 501(c)(4) of the Code. Therefore, you are
precluded from exemption under Section 501(c)(4).

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