Determination 200850039: the booster club's own parent handbook proved the inurement, and the 60/40 split proved the rest

Plain-English summary

Mandatory Review in Dallas signed this final letter on September 4 2008 and the Service released it on December 12 2008. The letterhead reads "4920DAL Mandatory Review" at "1100 Commerce Street, Mandatory Review" in "Dallas, TX 75242", and Lois G. Lerner signed it as "Director, Exempt Organizations". It opens "This is a final adverse determination as to your exempt status under section 501©(3) of the" Code and ends the exemption of a gymnastics booster club retroactively, "Federal income tax under IRC section 501(c)(3), effective September 1, 20XX.for the following" reasons. The deadline box gives a "Last Day to File a Petition with the" United States Tax Court of "December 3, 20XX", which is exactly ninety days after the letter's own unredacted date of "Date: September 4, 2008". That is the same arithmetic the corpus shows in 0850044, 0850043, 0850042 and 0850041: the year is blanked, the month and day are not, and the two together give the letter's real date away.

Most revocations in this block are proved out of bank records the reader never sees. This one is proved out of the organization's own parent handbook, and the handbook is quoted at length. The Parent Reference Guide tells each family "For each fundraiser that your family participates in, you will be credited your portion raised from the net (minus % tax and 10% for the Team Fund)." It promises that "ORG will track the amount of money raised by each family and it will be used to offset their child’s expenses when billing." It offers an exit: "you are allowed to ‘pick and choose’ the fundraiser that is right for your family or you may opt to not fundraise and pay the competing expenses in full." The bylaws carry the same bargain, requiring that "Members must participate in all fund raising activities as determined by the Voting Membership or may elect to pay a “non-participating” fee." A family that declines still owes its share: "If ateam family elects to not participate in ORG, the motto will still be responsible for paying an equal portion of the coaches’ expenses plus a 10% service charge."

Once that is on the page, the examiner barely needs the money. Each competitor pays in either way, since "Each competing motto will be required to pay an equal portion of the coaches’ expenses and their own travel expenses for each meet." Failure to pay ends the season: "If the motto is not able to make the first payment to cover air fare and coaches’ expenses, the motto will not be allowed to participate", and the same follows if "the motto is not able to make the second payment to cover the hotel, ground transportation, parking, and coaches’ hotel". Only "10% after expenses and taxes of all fundraising will go into a Team Fund." The report's conclusion follows directly: "the parents of the team members control the booster club, and are the primary members", the club "proportionally credits motto / child accounts based upon participation. Asa" result the earnings reach named children, "The parent-members of the booster club are considered the insiders of the organization", and "There is no scholarship program for those players who are unable to raise the money to participate."

The finding runs in a second direction at the same time, and this is what makes the case unusual. The club existed alongside a privately owned for-profit gym. The report states that "ORG has purchased equipment installed at the CO-1 gym that is used by the owners in their commercial business.", that the team's use of the private facility "resulted in an increased advertisement and patronage to the for-profit gym", and that "both DIR-1 and DIR-2 (owner of the for-profit gym) have considerable control in the booster club" even without sitting on its board. The price is stated plainly in the club's own older printed material, where the "division of net income were 60% going to CO-1 and 40% going to ORG." The letter's summary of grounds captures both directions in two sentences: "your fundraising practices conferred impermissible private benefits to the member families of and such funds inured to the member families" and "In addition, you operated for the impermissible private benefit of the owners of facilities connected with your organization."

The founding purposes are quoted alongside, and they read as charitable on their face. The club "was incorporated on September 10, 19XX, as a non-profit" corporation to "find ways to help defray expenses incurred by the competing motto and coaches of CO-3 when traveling." A state filing described the purpose as "to raise money to pay for travel expenses for motto and their coaches to mottoi meets." Members were told they received "mailing of meetings, minutes, and activities." for their dues. Recognition came on July 21 of a redacted year: "On July 21, 19XX, ORG was issued a determination letter advising the organization of recognition of exempt status under Section 501(c)(3) of the Internal Revenue Code (IRC), and an advance ruling on the foundation status under IRC section 509(a)(2)._"

A smaller thread runs through the facts and is never resolved. "ORG did not rent space at the CO-1 gym." by the time of the examination, having moved to a second gym under a sublease and an equipment lease. At the initial interview it was determined that "WK-1 is the current President of ORG and that she owns or is an officer of CO-13", the company leasing the equipment. In later correspondence "Ms. WK-1 stated that she was not the current President of the ORG nor was she ever the President of the ORG." The Service asked twice for a current list of officers and "The ORG have not responded to that request." The report records the contradiction and moves on without deciding it.

The authorities are conventional and the report applies them briskly. It quotes the regulations at 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1) and 1.501(c)(3)-1(d)(2), then "Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states" the public-rather-than-private-interest rule. Three revenue rulings are set out: "Revenue Ruling 69-175, 1969-1 C.B. 149" on parents who band together to buy themselves a service, "Revenue Ruling 65-2, 1965-1 CB 227, (Jan. 01, 1965)" on free instruction open to any child, and a third whose number the scan mangles, printed as "Revenue Ruling 9-215, 1980-2 C.B. 174". The ruling number in that last citation is not reconstructed here. The single case is "Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279, 283" (1945), cited twice for the proposition that one substantial non-exempt purpose defeats exemption. The taxpayer never answered: "A draft report of examination was provided to the organization. The organization have not provided any information as to their position at this time." The conclusion is that "ORG exemption should be revoked effective September 1, 20XX." and "Form 1120 returns should be filed for the tax periods after August 31, 20XX."

Like several others in this release, the final letter carries a proposal letter from a different office bound in behind it. That earlier letter is dated "Date: February 25, 2008", comes from "915 Second Avenue, M/S 540" in "Seattle, Washington 98174", is signed by "Reatsamay Ly" as "Internal Revenue Agent", and is a "Letter 3618 (Rev. 11-2003)". Roughly six months separate the Seattle proposal from the Dallas final letter.

Three OCR corrections were applied, four replacements in total. The opening sentence printed the statute as "501©(3)", with a copyright symbol standing in for the parenthesized c, and was closed to 501(c)(3). One printing of the revenue ruling read 1969-a C.B. 149 and was corrected to "1969-1 C.B. 149", the form the same report prints twice elsewhere. And "Intemal Revenue Service" was corrected to Internal Revenue Service in the two masthead bands where it appears. Nothing else was changed.

The defects left as released are numerous, and the masthead is the clearest case. The Form 886-A band at the top of each page is misread a different way on nearly every page, printing among others as "iefesei 886A", "baysan 886A", "Tayean 886A" and "Fleyeen 886 A", with the form-number line varying as well. The column header reads "Name of Taxpayet" on one page. The redaction legend collapses its ordinals, printing "WK-1 = 15* WK" and "DIR-1 & DIR-2 = 1%t & 2™ dir". The legend token for the competitors is mangled into the surrounding words, giving "mottoi meets" and "the mottois’ travel expenses". A date lost its ordinals in held January 7" and 8th ,20XX. A word lost its first letter in "develop heir capabilities". A stray underscore closes the sentence at 509(a)(2). And the sentence about the effective date runs two words together after the period.

Four citation defects were flagged rather than repaired, on the corpus rule that a citation is reproduced as released. The letter cites the regulations twice as "Tres. Reg. § 1.501(c) (3)-1(c) (2)" and "Tres. Reg. § 1.501(c) (3) — 1(d) (1) (ii)", misspelling Treas. and spacing the subsection letters apart in both, which reads as a template habit rather than a scanner slip because it happens identically twice. Neither spaced form is listed in code_sections; the report prints the same regulations correctly later and those forms are what is listed. "Section 1.501(c)-1(d)(3) of the regulations defines the term “educational”" drops the (3) from the regulation number, so it is omitted from code_sections entirely and no correct form of it appears in this document. "Section 1.501(c)(3)-1(d)(ii) of the regulations provides" the public-interest rule under a shortened number that omits the (1); the correct 1.501(c)(3)-1(d)(1)(ii) appears later for the same rule and is what is listed. That shortened form also appears twice in 0850038, released the same day, which is why it reads as a template habit rather than an error in this scan.

Because the case-law tool available to this corpus is currently unavailable, no citation in this document was independently confirmed. Every authority above is reproduced exactly as the release prints it, and no case name, reporter, year or ruling number was supplied from memory.

Ruling snapshot

• Question: Does a booster club operate exclusively for exempt purposes when its own handbook credits each family the proceeds of its own fundraising against that family's child's competing bills, and when the club buys equipment for and splits meet profits with the for-profit gym its teams train in?
• Outcome: No. Exemption revoked effective September 1 of a redacted year, contributions no longer deductible, Forms 1120 required, with a Tax Court petition deadline of December 3 falling ninety days after the September 4 2008 letter.
• Key authorities: IRC 501(c)(3) with Treas. Reg. 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii) and (d)(2); Rev. Rul. 69-175, Rev. Rul. 65-2 and a third ruling whose number the scan garbles; Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945); IRC 170, 7428 and 6104(c).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
4920DAL Mandatory Review

1100 Commerce Street, Mandatory Review Employer Identification No.:
Dallas, TX 75242 Person to Contact:

Employee ID Number:
Release Number: 200850039 Tel:
Release Date: 12/12/08 F ‘
LEGEND UIL:501.03-01 ax: ; ;
ORG = Organization name XX = Date Form Required to be Filed:
Address = address Tax Years:

August 31, 20XX and subsequent

Date: September 4, 2008 years

Last Day to File a Petition with the
United States Tax Court:
December 3, 20XX
ORG
ADDRESS

Certified Mail

Dear
This is a final adverse determination as to your exempt status under section 501(c)(3) of the

Internal Revenue Code (IRC). It is determined that you are no longer recognized as exempt from
Federal income tax under IRC section 501(c)(3), effective September 1, 20XX.for the following

reason(s):

Organizations exempt from Federal income tax under section 501(c) (3) of the Code are required
to operate exclusively for charitable, educational, or other exempt purposes. Organizations are
not operated exclusively for exempt purposes if the net earnings of the organization inure in
whole or in part to the benefit of private shareholders or individuals of the organization. See
Tres. Reg. § 1.501(c) (3)-1(c) (2). In addition, organizations may not impermissibly serve private
interests as set forth in Tres. Reg. § 1.501(c) (3) — 1(d) (1) (ii). During the period examined, you
operated in a manner in which your fundraising practices conferred impermissible private
benefits to the member families of and such funds inured to the member families. In this
regard, you operated a cooperative service for the member families of your organization to pay
private costs, as is prohibited by the cited Code. Regulations, and principles described in Rev.
Rul. 69-175, 1969-1 C.B. 149. In addition, you operated for the impermissible private benefit of
the owners of facilities connected with your organization.

Contributions to your organization are not deductible under IRC section 170.

You are required to file Federal income tax returns on the form indicated above. You should file
these returns within 30 days from the date of this letter, unless a request for an extension of time
is granted. Please send the returns to the following address:

Processing of income tax returns and assessment of any taxes due will not be delayed because
you have filed a petition for declaratory judgment under IRC section 7428.

If you decide to contest this determination under the declaratory judgment provisions of IRC
section 7428, a petition to the United States Tax Court, the United States Court of Claims, or the
district court of the United States for the District of Columbia must be filed within 90 days from
the date this determination letter was mailed to you. Contact the clerk of the appropriate court

for rules for filing petitions for declaratory judgment. To secure a petition form from the United
States Tax Court, write to the United States Tax Court.

You also have the right to contact the Office of the Taxpayer Advocate. However, you should
first contact the person whose name and telephone number are shown above since this person
can access your tax information and can help you get answers. You can call and ask for
Taxpayer Advocate assistance or you can contact your nearest Advocate’s office, in this case by
calling or writing to:

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determinations, nor extend the time fixed by law that you have to file a petition in
Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been
resolved through normal channels gets prompt and proper handling.

We will notify the appropriate State officials of this action, as required by IRC section 6104(c).
You should contact your state officials if you have any questions about how this determination
may affect your state responsibilities and requirements.

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

Sincerely,

Lois G. Lerner
Director, Exempt Organizations

Attachments:
Publication 892

i]

, Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX08
ORG

LEGEND

ORG = Organization name XX = Date XYZ = State City = city

Address = address WK-1 = 15* WK motto = motto County = county

Fundraiser = fundraiser DIR-1 & DIR-2 = 1%t & 2™ dir CO-1 thru CO-13 =

1st, 2nd) 3rd) 4th, 5th, eth, 7th, gth, goth joth, 41%, 12* g 13° COMPANIES
ISSUE

Whether ORG is operated exclusively for exempt purposes within the scope of Internal
Revenue Code §501(c)(3).

FACTS

ORG (referred to as “ORG”) was incorporated on September 10, 19XX, as a non-profit
corporation in the XYZ. During the year of examination, ORG was a booster club for
CO-1 (referred to as “CO-1”), a for-profit entity. Currently, ORG is a booster club for the
CO-2 (CO-2), another for-profit entity.

On July 21, 19XX, ORG was issued a determination letter advising the organization of
recognition of exempt status under Section 501(c)(3) of the Internal Revenue Code
(IRC), and an advance ruling on the foundation status under IRC section 509(a)(2)._ In
ORG's response to the IRS Determination Specialist inquiry concerning whether ORG
paid any money to the CO-3, the ORG answered, no. ORG’s response to the question
of what members of the organization received in exchange for the payment of
membership dues, the ORG replied: “mailing of meetings, minutes, and activities.
Flyers to encourage participation of activities. Access to video library.”

The ORG’s Articles of Incorporation was filed in the XYZ on June 4, 19XX. As
enumerated in the articles of incorporation, ORG’s function is to “find ways to help
defray expenses incurred by the competing motto and coaches of CO-3 when traveling.
The foundation may sponsor activities for the benefit of all the motto.” The purpose of
ORG was subsequently amended to state the following: “provide assistance to
qualifying motto residing in the County. The foundation may sponsor activities for the
benefit of all the motto.”

In its description to the Department , XYZ, ORG
described its purpose as “to raise money to pay for travel expenses for motto and their

coaches to mottoi meets.”

As enumerated in ORG’s original bylaws, “the purpose of this group shall be to aid the
students under the jurisdiction of the CO-4 within the framework of the By-Laws of this
group and consistent with the rules of the Centre.”

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

. iefesei 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayet Year/Period Ended
20XX08
ORG

Additionally, Article II of the bylaw, state the following regarding the principal office of
ORG's: “the principal office for the transaction of the business of the group is as may
be hereafter fixed and located by the Board of Directors of the CO-4 in the County.”

In March of 20XX, the ORG’s bylaws were amended to reflect its current purpose and
membership requirements. The purpose of ORG as stated in the revised bylaws, is to
“provide assistance to qualifying motto for competitions. ORG may sponsor activities

for the benefit of qualified motto for their competitions.”

ORG’s revised 20XX bylaws, Article Il, state the following with respect to membership
requirements:

e members are any person who is interested in promoting and furthering the
purpose of the corporation shall be eligible for membership. The membership
shall be divided into Voting Members and Associate Members.

e Voting members is defined as those persons who are parents or legal guardians
of qualified motto. Only the Voting members will participate in making decisions
of the corporation.

e Associate members are members who are not voting members. Associate
members can attend meetings of the general membership and serve on

committees.
e Qualified motto are current member and must comply with all application
and eligibility rules of the A qualified motto must be a member of the

competitive program at CO-1

e ORG members must pay an annual fee, the amount to be established by the
Board of Directors. Members must participate in all fund raising activities as
determined by the Voting Membership or may elect to pay a “non-participating”
fee. Failure of members to participate in fund raising activities or to pay the
“non-participation” fee may, by vote of the Board of Directors, result in
termination of support for the participating motto.

The ORG’s bylaws were amended again on August 11, 20XX to reflect its new purpose
and membership requirements. The purpose of ORG as stated in the revised 20XX
bylaws, is to “provide a facility to assist qualified motto and members through
education, training and competition. ORG may sponsor activities for the benefit of
qualified motto and members for the facility and competition.”

The below reflect the amended 20XX bylaw revision, Article Il, membership
requirements:

Form 886-A cRev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

‘ baysan 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
20XX08

ORG

e Any person who is interested in promoting and furthering the purpose of the
corporation shall be eligible for membership. The membership shall be divided
into Voting members and Associate members.

e Voting members is defined as persons who are parents or legal guardians of
qualified motto and members. Only the Voting members will participate in
making decisions of the corporations.

e Associate members is defined as not being a Voting member and can attend
meetings of the general membership and serve on committees.

e Qualified motto is defined as being a current member and must comply
with all application and eligibility rules of the . A qualified motto must be a
member of the CO-2 program.

e Qualified member is defined as a member of the CO-2 program. The member
must comply with all applications and eligibility rules of their activity.

ORG filed Form 990-EZ return for the tax year ending August 31, 20XX. Within Part Ill,
of Form 990-EZ, ORG stated that their primary exempt purpose is to “provide training
equipment and travel costs for school age motto’.

ORG'’s primary income source is derived from fundraising events, public contributions,
grants, and membership fees and assessments. The organization's expenditures are
primarily motto meet expenses.

ORG engages in a variety of fund raising activities. The major fundraisers have been
the competitive meets (City Invitational) for which admission fees are charged, the sale
of ads, and the operation of concessions. Parent members are required to participate
in the fund raising activities at levels predetermined by the Board of Directors or to
contribute a corresponding amount in cash to enable their child to compete at meets
sponsored by ORG and to be eligible for benefits paid on behalf of team motto. The
other fundraisers include Fundraiser, a car wash, , silent auctions, and others.

During the year of audit and prior years, ORG was closely associated with a privately
owned for-profit facility, CO-1 (CO-1). Currently, the ORG is associated with a for-profit
gym called CO-2. The competitive teams that ORG sponsors compete at various skill
levels, Level 4-10. All teams use CO-1/ CO-2 gym for both training and competing.
The age group of the competitive team is 6-18 years. ORG hosts various levels of
competition on the , including hosting and organizing the CO-5 held each January
in which over 200 motto attended. Teams from

, and other countries participated in the meet, including the NCAA
collegiate competitive team. The season starts September to August. ORG helps
cover the costs incurred by the sponsored motto teams by paying individual meet fees
and travel expenses for the motto and coaches to approved competitions. ORG has
also purchased equipment necessary for competitive training. This equipment has

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

: Rec 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
20XX08

ORG

been installed at CO-1 gym and is available for use by regular classes during non-
training hours.

ORG does not provide training for members of the motto teams it sponsors. The staff
of CO-1 gym, which includes the coaches of the sponsored teams, provides the almost
daily training of the team members.

Membership in ORG is available upon payment of a $ membership fee. To join ORG
an annual registration fee of $ is charged to team members per family. This fee is used
to pay for the operating expenses of the ORG. All team parents are asked to
participate in the proposed ORG fundraisers and to attend required meetings. Team
members are expected to travel together as a team going to and from each meet.

The Parent Reference Guide of the ORG sets guidelines for fundraisings, membership
fees, member meetings, and others for parent team members to follow.

According to the ORG Parent Reference Guide, dated final 07/13/20XX, the purpose of
ORG is to “raise monies for competing expenses. ORG is a non-profit organization run
by the parents of the CO-6. The costs for classes and annual fees paid to CO-6 are
separate from ORG.”

Additionally, the Parent Reference Guide states that team parents are given
opportunities to participate in all fundraising activities to offset their daughter's
competing expenses, including coaches’ expenses for air, ground transportation, hotel,
per diem, and consulting fees; and motto’s traveling expenses---air and ground
transportation and hotel. Moreover, it states that the families are required to participate
at 100%--each family will have a minimum number of tickets or goods to sell and they
must work the event. In order to be eligible for participating in fundraisers, the parents
of the team member must be ORG member and have paid the annual fee, and attend
meetings. Each fundraiser will have its own minimum requirements. The more the
parent/motto participates the more benefit they will receive to offset his/her individual
costs. In this way, “you are allowed to ‘pick and choose’ the fundraiser that is right for
your family or you may opt to not fundraise and pay the competing expenses in full.”

The Parent Reference Guide sets the following policy regarding fundraising:

e For each fundraiser that your family participates in, you will be credited your
portion raised from the net (minus % tax and 10% for the Team
Fund).

e ORG will track the amount of money raised by each family and it will be used
to offset their child’s expenses when billing. The ORG Board will keep each
family informed on how much money is raised after each fundraiser.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

: Tayean 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX08
ORG

e 10% after expenses and taxes of all fundraising will go into a Team Fund.
This fund is designed to assist any member of the CO-6 who qualifies for the
Regional and National Meets. ORG may ask the team to voluntarily
participate in fundraising designated solely for the Team Fund. In this case,
100% of the net profit generated will be used to help pay for the coaches’
expenses and the mottois’ travel expenses.

e Major fundraisers that ORG holds annually are:

o Fundraiser

Fundraiser

Fundraiser

Fundraiser

Fundraiser

Fundraiser

Fundraiser

o Other

e Billing procedures:

o Each competing motto will be required to pay an equal portion of the
coaches’ expenses and their own travel expenses for each meet.
Families who participate in fundraising will be entitled to use the
money earned to offset these expenses. If the motto is not able to
make the first payment to cover air fare and coaches’ expenses, the
motto will not be allowed to participate. If the motto is not able to
make the second payment to cover the hotel, ground transportation,
parking, and coaches’ hotel, the motto will not be allowed to participate
in the next meet.

o If ateam family elects to not participate in ORG, the motto will still be
responsible for paying an equal portion of the coaches’ expenses plus
a 10% service charge.

000000

When a family exceeds their sales quota, the monies will either be credited toward next
year or a check will be dispersed out to those families at the end of the season when all
expenses are paid. The attached Exhibit A, taken from the Board Meeting minutes
dated 01/30/20XX, shows a break down of how ORG billed the individual families with
the Fundraiser and Tabloid fundraisers. Exhibit B shows the Summer

Concession income, expenses, and net income divided up and dispersed to the

participating families.

The City Invitational is one of the biggest activities of the ORG. The following
information references some of the ORG’s promotional material, the advertising flyers

to potential sponsors.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

. Fleyeen 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
20XX08

ORG

e The City Invitational meet flyers were distributed to potential sponsors. The
following shows the background information on the event:

The CO-6 Invitational is held each year by the CO-1 and the ORG. The event
includes a College Meet, which is the season-opener for most of the teams, and
two days of club competition. The club meet includes the compulsory events for
Levels 4, 5, and 6, whose season ends with the state championships in
December, and the optional events of the more advanced motto in Levels 7, 8, 9,
10, and Elite. The optional group's season begins in January and ends with
state, regional and national competitions in the spring.

At the end of the above printed material it indicates that DIR-1 and DIR-2 are the
CO-6 coaches and directors.

e In ORG’s Seventh annual CO-6 Invitational: January 4,5,6, 20XX flyer, the
following excerpt describes ORG’s cause:

Background info: The CO-6 Invitational is a fund-raiser for the CO-6 ,
the nonprofit booster club for the CO-3. Each year, the Invitational includes club
teams competing in the compulsory events of Levels 4, 5, 6, which concluded
their season in December, and the optional events of the more skilled motto in
levels 7, 8, 9, 10, and Elite, who start their season in January. This year's
invitational will feature a college night with the season opening NCAA
competition with teams from CO-7, CO-8, CO-9, and CO-10.

Again, at the end of the printed material it indicates that DIR-1 and DIR-2 are
coaches and directors of CO-3.

It was also noted that going back to 19XX, the viewed printed material described the
CO-1 (coaches/owner responsibilities) and ORG responsibilities, showing how
monies were to be divided between the owner of CO-6 and ORG in which the
division of net income were 60% going to CO-1 and 40% going to ORG.

In ORG’s printed materials, the following shows the team requirement to participate in a
meet.

Team requirement for 20XX-20XX competitive season:

e Charge a team membership fee of $ each year
e Intro level 4 fee is $
e Registration fee of $ per year

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

: Phys 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX08
ORG

The fees charged above is for a program and not for specific lessons, tuition is
due regardless of attendance. With additional costs for and

for level 7 and up.

Entry fees for meets range from $ to $ per meet. $ entry fee deposit for
compulsory meet fees, except for state and beyond is due in August and non-
refundable.

CO-6 requires that all team families, competing level 4 and up join the non profit
booster organization, whose job is to raising money for CO-6 travel and coaches
expenses. Competing level 4’s must join ORG. Motto membership
requires the following for team members: $ annual fee due in August,
participation in any/all fundraisers, fundraising minimum amounts set b ORG.
All meet expenses must be paid prior to season start or pre-approved payment
schedule must be in place with ORG. No exceptions.

ORG did not rent space at the CO-1 gym. Currently, ORG rents a gym space including
a small office in the facility of CO-2 for its administrative activities as well as motto
training and meets. The sublease agreement of gym facility and equipment with CO-2
is notated as follows:

The agreement, dated January 1, 20XX, was between WK-1 and ORG, with ORG
as the sublessee. The facility, located at Address, City, XYZ, belonged to CO-11
and is leased to WK-1. WK-1 as the sublessor is transferring use of the facility units
14 & 15 of the CO-12, known as the CO-2, to ORG for a fee of $ per month.

The lease agreement dated January 1, 20XX, is an arrangement between CO-13
and the ORG. The equipment is located at Address, City, XYZ. CO-13 leased the
equipment to ORG at the above location. The rental fee charged by CO-13 to ORG
is $ per month.

During the initial interview with the Treasurer of ORG, it was determined that WK-1 is
the current President of ORG and that she owns or is an officer of CO-13. In the
correspondence dated November 8, 20XX, Ms. WK-1 stated that she was not the
current President of the ORG nor was she ever the President of the ORG.

In the correspondence dated November 19, 20XX and January 14, 20XX, the IRS
requested that the ORG send a listing of the names, addresses, and telephone
numbers of current ORG officers. The ORG have not responded to that request.

LAW

Internal Revenue Code

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -7-

, lean 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
20XX08

ORG

Section 501(c)(3) of the Code describes certain organizations exempt from taxation
under section 501(a) of the Code and reads as follows:

Corporations, and any community chest, fund, or foundation, organized and
operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or for the prevention of cruelty to children or
animals, no part of the net earnings of which inures to the benefit of any private
shareholder or individual, 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 any candidate for public office.

Treasury Regulations

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

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be
regarded as operated exclusively for exempt purposes if more than an insubstantial part
of its activities is not in furtherance of exempt purposes. Thus, to qualify for
exemption, the organization must show that it engaged “primarily” in activities which
accomplished that exempt purpose. The organization will not qualify for exemption if a
nonexempt activity is more than an insubstantial part of its activities, or if an activity of
the organization has more than an insubstantial nonexempt purpose.

Section 1.501(c)(3)-1(d)(ii) of the regulations provides that an organization is not
organized or operated exclusively for one or more exempt purposes unless it serves a
public rather than a private interest. Thus, it is necessary for an organization to
establish that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or his family, shareholders of the organization, or
persons controlled, directly or indirectly, by such private interests.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations provides that the term
“charitable” is used in section 501(c)(3) of the Code in its generally accepted legal
sense and includes the advancement of education and the promotion of social welfare
by organizations designed to combat juvenile delinquency.

Section 1.501(c)-1(d)(3) of the regulations defines the term “educational” as including
the instruction or training of the individual for the purpose of improving or developing his

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

. ayaa 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
20XX08

ORG

capabilities, or the instruction of the public on subjects useful to the individual and
beneficial to the community.

Revenue Rulings

Revenue Ruling 69-175, 1969-1 C.B. 149 states that when a group of individuals
associate to provide a cooperative service for themselves, they are serving a private
interest. By providing bus transportation for school children the organization is enabling
the participating parents to fulfill their individual responsibility of transporting their
children to school. Thus, the organization serves a private rather than a public interest.
Accordingly, it is not exempt from Federal income tax under section 501(c)(3) of the
Code.

Revenue Ruling 65-2, 1965-1 CB 227, (Jan. 01, 1965) describes an organization which
is organized and operated exclusively for the purpose of teaching a particular sport to
the children of a community by providing free instruction, free equipment, and facilities.
The foundation was formed to provide educational and character building programs for
the children of the community. Its activities consist of conducting clinics for student
players at playgrounds and at parks, coaching clinics for instructors of the student
players, provide free instruction in schools, playgrounds, and parks and furnish free
equipment to those children who are unable to afford such equipment, stimulates
interest in its program through the use of film and other instructional devices. Its
program and facilities are available to any child in the community who desires to
participate, is physically able, and has reached the qualifying age level.

The ruling concludes that the organization's activities of instructing individuals to
develop heir capabilities are educational. Further, its furnishing of free instruction,
equipment, and facilities to children of the community is accomplishing the charitable
purpose of combating juvenile delinquency. Accordingly, the organization qualifies for
exemption under IRC 501(c)(3).

Revenue Ruling 9-215, 1980-2 C.B. 174, describes an organization which is organized
and operated to develop, promote, and regulate a sport for junior players, and to
promote sportsmanlike competition for junior players in a particular state. The
organization is comprised of affiliated individual associations, clubs, leagues, and
teams. Each club may be comprised of any number of teams. The organization
organizes local and state-wide competition for individuals under 18 years of age;
promulgates rules; organizes officials; and presents seminars for players, coaches, and
referees. The organization provides a framework for protests, appeals, and
procedures. It also distributes a newsletter, and otherwise encourages the growth of
the sport throughout the state. This ruling holds that the organization's activities
combat juvenile delinquency and promote the education of children. Therefore, the
organization qualifies for exemption under IRC 501(c)(3).

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

: Ror 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
20XX08

ORG

Court Cases

Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279, 283
(1945), the presence of a single non-exempt purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly exempt
purposes.

TAXPAYER’S POSITION

A draft report of examination was provided to the organization. The organization have
not provided any information as to their position at this time.

GOVERNMENT’S POSITION

Based on the facts of the examination, it is our position that your organization is not
operated exclusively for purposes within the scope of §501(c)(3) and as a result, your
organization does not qualify for exemption under §501(c)(3) of the Internal Revenue
Code.

Section 501(c)(3) of the Code provides exemption from federal income tax for
organization’s organized and operated exclusively for educational, charitable or
religious purposes, or to foster national or international amateur sports competition (but
only if no part of its activities involve the provision of athletic facilities or equipment), no
part of the net earnings of which inures to the benefit of any private shareholder or
individual.

In addition, Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization
is not operated exclusively for one or more exempt purposes unless it serves a public
rather than a private interest. It must not be operated for the benefit of designated
individuals or the persons who created it.

It is the government's position that the parents of the team members control the booster
club, and are the primary members. ORG bylaws and Parent Reference Guide does
not urge parent-members to participate in the various fundraising activities for the
benefit of all motto on the competitive teams. ORG does not support all team motto to
the full extent of its resources regardless of whether their parents are members or
contributors.

ORG is not supporting the promotion of youth motto competition but is primarily
supporting the children of members based upon their participation in the organizations
fundraising events. ORG requires its parent-members to participate in the fundraising
events and proportionally credits motto / child accounts based upon participation. Asa

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX08
ORG

result, the motto is not permitted to compete for ORG unless the parent either raises a
certain amount of funds through the fundraising events, or pays upfront, the anticipated
cost of participation in the programs. If the parent does not pay, the motto does not

participate.

The families are billed for their expenses up-front, with most checks will not be made
out to ORG. If all expenses are not covered by the fund raising events, parents are
required to contribute any shortages. A motto, through his/her parent, must help raise
funds in some way to receive an allocation of funds raised. Nonparticipating parents
are fully responsible for their children’s expenses and are expected to pay the full

amount in cash.

There is no scholarship program for those players who are unable to raise the money to
participate.

The parent-members of the booster club are considered the insiders of the organization
because they are in a position to have control or influence over the activities of the
ORG. The requirement that each parent-member participate in the fundraising
activities in direct proportion to the benefits they expect to receive causes a direct
benefit to flow to these parents. Consequently, the earnings of the organization are
being used directly and specifically to pay for benefits to specific individuals rather than
to a class of competitive motto as a whole. The organization is allowing the earnings of
the organization to inure to the benefit of specific insiders (the parent and their

children).

Inurement of income is prohibited under IRC 501(c)(3) without regard to the amount
involved. Like the organization in Better Business Bureau of Washington D.C., Inc. v.
United States, 326 U.S. 279, 283 (1945), the presence of a single non-exempt purpose,
if substantial in nature, will destroy the exemption regardless of the number or
importance of truly exempt purposes.

The ORG activity is similar to the organization described in Rev. Rul. 69-175, 1969-1
C.B. 149, in which a group of parents got together and provided bus transportation for
their own school children to and from the school their children attended. The
organization was found to serve a private rather than a public interest and was not

exempt under section 501(c)(3).

The examination revealed that ORG has purchased equipment installed at the CO-1
gym that is used by the owners in their commercial business. It is noted that the
transaction with CO-2 is the same as with CO-1. Even though the owners of CO-1 do
not sit on the Board of Directors of ORG, both DIR-1 and DIR-2 (owner of the for-profit
gym) have considerable control in the booster club. DIR-1 and DIR-2 are also
considered the insiders of the organization. Additionally, the examination revealed that

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

, Tatemn 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/ Period Ended
20XX08

ORG

ORG has purchased equipment installed at the CO-1 gym that is used by the owners in
their commercial business. Purchasing such equipment for use by a non-exempt entity
is not an exempt purpose. ORG’s competitive team use of CO-1 facility to train and hold
competitive meets resulted in an increased advertisement and patronage to the for-
profit gym.

ORG'’s use of the private facility resulted in a substantial private benefit to its owners
and accordingly benefiting a commercial enterprise. ORG’s operations are not
exclusively charitable within the meaning of section 501(c)(3).

According to the organization’s financial records, ORG hosted and organized the
annual City Invitational Meet, held January 7" and 8th ,20XX, with attendees from
,andthe — 60% of the profits from that meet were
given to CO-1 with the remainder stayed in ORG account. The 20XX City Invitational
brought in total income of $ and expenses of $. A net income of $. 60% of the net
income went to CO-6 (CO-1) $ and 40% went to ORG (ORG) $. In 20XX year, the net
profit for City Invitational was $. 40% of the net profit went to ORG of $ and 60% of the
net profit went to CO-1 of $.

CONCLUSION

Based on the facts presented above, the method in which ORG operates results in the
inurement of its income to its parent-members and to the owners of CO-1 gym.

ORG exemption should be revoked effective September 1, 20XX.

Form 1120 returns should be filed for the tax periods after August 31, 20XX.

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service
Page: -12-

Internal Revenue Service Department of the Treasury
TE/GE Exempt Organizations Examinations Division

915 Second Avenue, M/S 540
Seattle, Washington 98174

Taxpayer Identification Number:

Date: February 25, 2008

Form:

ORG
ADDRESS

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt
status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office
consideration within 30 days from the date of this letter to protest our decision. Your protest should include a
statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations.
The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The
Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues,
explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information
on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue
a determination letter to you based on technical advice, no further administrative appeal is available to you
within the IRS regarding the issue that was the subject of the technical advice.

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

If we do not hear from you within 30 days from the date of this letter, we will process your case based on the
recommendations shown in the report of examination. If you do not protest this proposed determination within
30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available
administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District
Court of the United States for the District of Columbia determines that the organization involved has exhausted
its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter.
We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the

Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate 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. The Taxpayer Advocate can, however, see that a tax matter that may not have been
resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and
ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to

contact you.
Thank you for your cooperation.

Sincerely,

Reatsamay Ly
Internal Revenue Agent

Enclosures:
Publication 892
Publication 3498
Report of Examination
Form 6018

Form 4621-A

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F