Soccer referee placement service denied section 501(c)(3) exemption

Plain-English summary

An organization recruited, trained, mentored, scheduled, and paid independent soccer referees for local leagues under negotiated contracts. Its revenue came from league and association fees, and most expenses were payments to referees and administrative costs. The organization argued that it improved officiating, safety, sportsmanship, and access to qualified referees, including for youth programs, and arranged donated referee time for charitable games. The IRS concluded that its primary activity was a commercial employment and placement service that mainly benefited its affiliated referees rather than the public. Because that substantial private and nonexempt purpose prevented it from satisfying the operational test, the IRS denied section 501(c)(3) exemption.

Ruling snapshot

• Question: Did the referee association operate primarily for charitable or educational purposes rather than commercial and private interests?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 61-170; Rev. Rul. 80-215.

Full text (IRS public release)

Internal Revenue Service
Appeals Office
300 N. Los Angeles Street
MS LA-8000 Room 3054
Los Angeles, CA 90012

Department of the Treasury
Taxpayer Identification Number: C
Date: SEP 26 2019
Person to Contact: *
Employee ID Number:
Tel:
Fax: *

Number: 201951015
Release Date: 12/20/2019
UIL Index:
501.03-00
501.33-00
501.35-00

A
B

Redaction legend:

A= taxpayer name

B= taxpayer address

C= taxpayer identification number

CERTIFIED
Dear :

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Section 501(c)(3).

We made the adverse determination for the following reason(s):

You have not demonstrated that you are organized and operated exclusively for charitable, educational,
or other purposes and that no part of your net earnings inure to the benefit of private shareholders or
individuals as required by section 501(c)(3) of the Internal Revenue Code. Treas. Reg. § 1.501(c)(3)-
1(a)(1). You appear to be organized and operated primarily for the purpose of providing a soccer league
job referral service for your affiliated referees in the local area. You have not established that your
operations serve public rather than private interests. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).

Contributions to your organization are not deductible under Code § 170.

You're required to file Federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return,
or 1041, U.S. Income Tax Return for Estates and Trusts. Mail your form to the appropriate Internal
Revenue Service Center per the form’s instructions. You can get forms and instructions by visiting our
website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Code section 6110 after deleting certain identifying information. We have provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents
attached that show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in either:

• United States Tax Court,
• The United States Court of Federal Claims,
• The United States District Court for the District of Columbia.

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed
this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate
forms for filing petitions for declaratory judgment. You can write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a
petition for declaratory judgment under section 7428 of the Code.

You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent
organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax
problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS.
Please contact the Taxpayer Advocate for the IRS office that issued this letter. If you qualify for TAS
assistance, which is always free, TAS will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process.
TAS cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to

file a petition in a United States Court.

If you have any questions, please contact the person whose name and telephone number are shown in
the heading of this letter.

Sincerely,

Appeals Team Manager

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: June 12, 2018

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.03-00
C = State 501.33-00
D = number 501.35-00

x dollars = amount
y dollars = amount

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 incorporated on B in the State of C.

The specific purpose stated in your Articles of Incorporation indicates that you are organized to support,
advance and sponsor amateur athletics and to carry on other charitable and educational activities associated by

this goal as allowed by law.

Your bylaws state that your purpose is to promote excellence in competition, sporting behavior, and safety in
the sport of soccer by recruiting, training, mentoring, and scheduling licensed referees and by providing advice
and guidance for youth and adult soccer leagues and organizations located within your geographic area. Your
goals are to ensure that the youth soccer games in the area are officiated fairly and that the players are taught the
values of discipline, work ethic, positive attitude, and teamwork through adherence to the rules of the game.

Your activities consist of scheduling certified soccer referees to youth and competitive soccer leagues in your
area to officiate soccer games including recreational leagues to the highest levels of competitive soccer
associations. You have no employees or members but you generally have a pool of approximately D certified
referee independent contractors available to referee games in your geographic area.

2

For the certified referees affiliated with you, you negotiate and then maintain two-year contracts with several
local soccer leagues ranging from recreational leagues to the highest level of competition in your area to
provide certified referees for all scheduled games. During these negotiations, compensation paid to referees and
mentors on a per-game and per-hour basis is set by using compensation data obtained from other objective
sources to ensure that the compensation paid is reasonable and fair. Also incorporated in the rates are
administrative expenses such as the cost of the scheduling software, the hourly cost of providing referees, and
the costs incidental to conducting training for referees, coaches, and league officials. Currently, you pay these
referees a flat rate for each game worked, and the pay increases with the level of competition, such that a referee
is paid slightly more per game for an upper level competitive game than a lower level recreation league game.
For example, the pay scale ranges from x dollars per hour for those leagues under eight years of age and up to y
dollars per hour for those leagues under nineteen years old.

Another activity you engage in is periodically providing paid certified referee mentors on an hourly basis for
their on-field services in mentoring the referees who work certain soccer games. The primary purpose of
mentoring is to improve the referees’ skills in officiating games. Each such mentor is paid x dollars per hour for
any mentoring duties performed.

When the soccer leagues provide the game schedules to you, one of your board members who is licensed
through the national association assigns officials to each game, based on the availability of the referee and his or
her qualification level. You subscribe to a software program through the national association that matches the
availability of individual referees with the needs of clubs, leagues, and tournaments in your vicinity with whom
you have contracted with to provide referees. The software also keeps track of all games worked by referees and
hours worked by mentors. Payments to such individuals are processed every two weeks and are sent via
electronic deposit to the recipient.

You have a board of directors who do not receive pay for their services as board members but may be
reimbursed for out of pocket expenses related to educational programs conducted locally or regionally for
referees, league officials, or team coaches. They may also be paid as independent contractors for refereeing and
mentoring. Furthermore, your directors serve as referee liaisons to soccer leagues and schedule
referees/mentors when needed.

To be eligible to serve as a director, all directors except one must be a referee, assessor or instructor licensed by
and in good standing with the national association and in good standing as well as have been licensed for a
continuous combined total of three years as a referee, assessor and/or instructor. In addition, to be eligible, a
director must have served as a referee, mentor, assessor or instructor for your a for a minimum of one year and
must continue to be licensed as a referee, assessor or instructor while serving on your board.

You receive no revenue from gifts, grants, and contributions. Your primary source of revenue is contract fees
from the various soccer leagues and associations while your primary expenses are fees to referees for services
rendered and administrative expenses.

Other activities you conduct include:
a. Advocating on behalf of the referees to obtain safe working conditions.

b. Training coaches and board members on the rules of the sport.

Letter 4036 (Rev. 7-2014)
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c. Arranging for referees to donate their time for various charitable soccer games and other charitable

causes.
Finally, you wrote that without a reliable source of qualified referees, these youth soccer leagues simply could

not function.

Law

Section 501(c)(3) of the Code exempts from federal income tax corporations organized and operated
exclusively for charitable and educational purposes, among others, no part of the net earnings of which inures to
the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying
on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene
in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition
to) any candidate for public office.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for
one or more of the purposes specified in Section 501(c)(3). If an organization fails to meet either the
organizational test or the operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides an organization will not be regarded as a Section 501(c)(3)
exempt organization if more than an insubstantial part of its activities is not in furtherance of an exempt
purpose.

Treas. Reg. Section 1.501(c)(3)-1 (d)(1)(ii) provides an organization is not organized or operated exclusively
for exempt purposes unless it serves a public rather than a private interest.

Revenue Ruling 61-170, 1961-1 C.B. 112., holds that an association composed of professional private duty
nurses and practical nurses which supported and operated a nurses’ registry primarily to afford greater
employment opportunities for its members was not entitled to exemption under Section 501(c)(3) of the Code.
Although the public received some benefit from the organization’s activities, the primary benefit of these
activities was to the organization’s members.

Rev. Rul. 80-215, 1980-2 CB 174 describes an organization that was 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 Section 501(c)(3) of the Code.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court stated that the presence of
a single nonexempt purpose, if substantial in nature, will preclude exemption under Section 501(c)(3) of the
Code, regardless of the number or importance of statutorily exempt purposes.

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974), the court held that an organization
seeking a ruling as to recognition of its tax-exempt status has the burden of proving that it satisfies the
requirements of the particular exemption statute.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation formed to

provide consulting services did not satisfy the operational test under Section 501(c)(3) of the Code because its
activities constituted the conduct of a trade or business that is ordinarily carried on by commercial ventures

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4

organized for profit. Its primary purpose was not charitable, educational, or scientific, but rather commercial.
In addition, the court found that the organization's financing did not resemble that of the typical Section
501(c)(3) organizations. It had not solicited, nor had it received, voluntary contributions from the public. Its
only source of income was from fees from services, and those fees were set high enough to recoup all projected
costs and to produce a profit. Moreover, it did not appear that the corporation ever planned to charge a fee less
than “cost.” Finally, the corporation did not limit its clientele to organizations that were Section 501(c)(3)
exempt organizations.

In Easter House v. U.S., 12 CI. Ct. 476, 486 (1987), affid, 846 F. 2d 78 (Fed. Cir.) cert. denied, 488 U.S. 907,
109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the court found an organization that operated an adoption agency was
not exempt under Section 501(c)(3) of the Code because a substantial purpose of the agency was a nonexempt
commercial purpose. The court concluded that the organization did not qualify for exemption under Section
501(c)(3) because its primary activity was placing children for adoption in a manner indistinguishable from that
of a commercial adoption agency. The court rejected the organization's argument that the adoption services
merely complemented the health-related services to unwed mothers and their children. Rather, the court found
that the health-related services were merely incidental to the organization's operation of an adoption service,
which, in and of itself, did not serve an exempt purpose. The organization's sole source of support was the fees
it charged adoptive parents, rather than contributions from the public. The court also found that the organization
competed with for-profit adoption agencies, engaged in substantial advertising, and accumulated substantial
profits. Accordingly, the court found that the "business purpose, and not the advancement of educational and
charitable activities purpose, of plaintiff's adoption service is its primary goal" and held that the organization
was not operated exclusively for purposes described in Section 501(c)(3).

Application of law

You are not as described in Section 501(c)(3) of the Code because you do not meet the operational test as per
Treas. Reg. Section 1.501(c)(3)-1(a)(1). You are not operated exclusively for educational purposes, nor are you
devoted to fostering national amateur athletic competition. You were formed to provide soccer leagues with
certified referees to perform referee services for fees.

You do not meet the provisions in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are operating for the
non-exempt private purpose of providing employment services to a pool of about D affiliated certified referees

consisting of:

• Negotiating two-year contracts with several local soccer leagues in your area specifying agreed upon
hourly wages for the type of games being played,

• Scheduling appropriate games for the pools of referees depending on their level of certification,

• Collecting payment for them,

• Turning the payment over to them and then issuing them Form 1099’s.

Your finance structure further demonstrates that you operate for a substantial nonexempt commercial purpose
because you rely on negotiated fees and then turn the money over to pay the referees. This non-exempt purpose
is substantial and precludes you from exemption.

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5

You are not described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii), because you are operating for the private
interest of your pool of qualified referees. Negotiating contracts for their benefit, scheduling of games for them
and the distribution of your income as payments indicate that your activities primarily benefit them.

You are like the organization described in Revenue Ruling 61-170. Your activities are primarily directed to
arrange employment for certified referees who meet particular requirements and must maintain specific
certifications. Furthermore, you are primarily governed by certified referees and certified mentors without
public participation. You also maintain a pool of qualified referees. Finally, like the organization in the revenue
ruling, public support is negligible because fees that you negotiate with various leagues fund your activities.

You are not similar to the organization in Rev. Rul. 80-215 because you were not formed to develop, promote,
and regulate youth hockey. You were formed to provide youth hockey leagues with certified hockey referees to
perform referee services for fees.

You are like the organization in Better Business Bureau v. United States because you operate for a substantial
non-exempt commercial purpose. This is indicated by the fact your source of income is from contract fees for
referee services and your major expenses are compensation and fees to referees for services rendered.

You are similar to the organization in B.S.W. Group, Inc. v. Commissioner, because your activities are serving
a commercial rather than a Section 501(c)(3) purpose. For example, you schedule and assign referees to various
games and collect the fees from the games from the various soccer leagues to pay your referees. Your only
income is from negotiated fees. Like the court case, you are operating similar to a trade or business ordinarily
carried on by commercial ventures.

Similar to the organization in Easter House v. U.S., you are operating for a business purpose rather than the
advancement of charitable or educational activities because you are primarily providing certified soccer referees
paid employment. Your only source of income is the fees you charge the various organizations for each game.
By negotiating contracts for affiliated certified referees and then matching certified referees to jobs where they
are qualified and paid, you are engaging in a business. Your charitable and educational activities are merely
incidental to your employment service operations which, in and of itself, does not serve an exempt purpose.

Your position
You wrote that you believe you qualify under Section 501(c)(3) of the Code. You wrote there are several other

local referee associations in your area with a structure and activities like your own.

You further stated that all your affiliated referees are independent contractors who determine their own
availability to work games and are free to choose the leagues and/or teams for which they officiate. Referee fees
are paid by the schools, leagues, and teams who use your services. Leagues, clubs, and tournaments also pay a
per game fee to you to cover the cost of subscribing to and maintaining the assigning and direct deposit
software, the hourly cost of providing experienced referees as on field mentors on game days, and costs
incidental to conducting classroom and on field training for referees, coaches, and league officials. You also
indicated that youth and adult amateur sports programs require the participation of persons to act as officials to
teach the rules, enforce the rules and ensure the safety of the participants. High schools, youth soccer leagues
and amateur soccer programs in your metropolitan area face the constant problem of recruiting and retaining
referees to allow their programs to continue and expand. You also indicated that you recruit referees who are
age twelve and older. Many referees are high school age and have neither the confidence or experience

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6

necessary to advocate for proper working conditions and fees individually with clubs and leagues run by adults.
For many teenage referees this is their first experience with managing their time, being responsible for a field
full of young and energetic soccer players, and asserting themselves in the presence of sometimes intimidating
adult coaches and soccer parents.

In addition, you stated that the local soccer community greatly benefits from having referees which you insure
are of the highest quality to teach not only the rules of soccer, but also the values of good sportsmanship, fair
play, teamwork and self-discipline. Without the services you provide, the local soccer clubs and leagues simply
would not have enough highly-trained referees to work the games and tournaments they are currently
accustomed to playing.

You also indicated that you contribute to the community by arranging for referees to donate their time for
charity soccer games, fundraising tournaments for local soccer leagues, and games for those with developmental
disabilities.

Our response to your position

You failed to provide any additional information from which it can be concluded that your activities exclusively
further or advance a purpose described in Section 501(c)(3). You were formed to provide youth soccer leagues
with certified referees to perform referee services for fees as discussed previously. Although you provided the
names of organizations exempt under Section 501(c)(3) whose operations you believe are like yours, you have
the burden of proving that you satisfy the requirements for tax exemption. Similar to the organization in
Harding Hospital, Inc. v. United States, you have failed to provide enough information to prove to us that you
are operating exclusively for purposes described in Section 501(c)(3). Further, determinations are based on the
very facts and circumstances contained within each individual application that may vary between organizations.

Conclusion

Based on the facts and information submitted, you do not meet the operational test for exemption under Section
501(c)(3). You provide certified referees officiating assignments and receive contract fees for these placements.
You then pay these fees to the referees thereby operating for their private interests. You also operate in a
commercial manner because you provide an employment services for negotiated fees which also precluded you

from exemption under Section 501(c)(3) of the Code.

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

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7

• 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 later 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

Letter 4036 (Rev. 7-2014)
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8

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W