201835012: Denies 501(c)(3) status because adult recreational sports were a substantial purpose

Plain-English summary

A corporation sought section 501(c)(3) status to promote health and fitness through church leagues, tournaments, exercise programs, and recreation for both adults and children. Its immediate focus was an adult men's basketball tournament alongside a youth tournament, with later plans for more youth programs and women's sports. The IRS found that the articles were too broad because they expressly included adult sports, recreation, and social interaction, which are not exclusively charitable or educational purposes. It also found that the planned adult tournaments were more than an insubstantial nonexempt activity, unlike rulings approving sports instruction or competition limited to children. Because the organization failed both the organizational and operational tests and did not protest, exemption was denied and contributions are not deductible under section 170.

Ruling snapshot

• Question: Does an organization substantially operating adult and youth recreational sports qualify under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(iv), and (c)(1); Rev. Ruls. 65-2, 70-4, and 80-215; First Libertarian Church v. Commissioner; St. Louis Science Fiction Limited v. Commissioner; IRC § 170

Full text (IRS public release)

[Redaction note: the IRS release blanks the applicant's identity, identification number, contact information, required return, and tax years.]

Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date:
June 5, 2018

Employer ID number:

Number: 201835012
Release Date: 8/31/2018 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-00, 501.03-05, 501.31-00, 501.35-00

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) 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.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. 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.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

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 4036, Proposed Adverse Determination Under IRC Section 501 (c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date:

February 21, 2018
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

M = state 501.03-00
N = city 501.03-05
O = date 501.31-00
p = number 501.35-00
q = number

r = number

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 non-
exempt 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 al]
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: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

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