IRS revokes exemption from organization whose only activity was gaming

Plain-English summary

The IRS revoked an organization's exemption under IRC § 501(c)(4), effective January 1 of the redacted year. The organization had originally been formed to support a youth football league, but it held no athletic or sporting activities during the examined year. Its only revenue came from poker, rummy, and other gaming events, where it retained a percentage of each pot. The IRS concluded that gaming did not promote social welfare and that the organization did not qualify as a social and recreational club under IRC § 501(c)(7) because it was not a membership organization supported by member dues or assessments.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(4), or alternatively qualify under IRC § 501(c)(7)?
• Outcome: Revocation, effective January 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(4) and 501(c)(7); Treas. Reg. § 1.501(c)(4)-1(a).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
3730 Elizabeth Avenue
Independence, MO 64057

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION
Date: May 21, 2007
Release Number: 201321033 UIL: 501.04-01
Release Date: 5/24/2013
Legend Form Number: 990
=N of Or
ORG=Name 8 Tax Year Ended: December 31, 20xx
Date=xx
Person To Contact:
Identification Number:
Contact Telephone Number:
Dear

In a determination letter issued in September 19xx, you were held to be exempt from Federal
income tax under IRC §501(c)(4).

We have determined you are not operating in accordance with the provisions of IRC §
501(c)(4).

On March 12, 20xx you signed Form 6018-A, Consent to Proposed Action, agreeing to the
revocation of your exempt status under section 501(c)(4) of the Code. Therefore, your
exemption from Federal income tax is revoked effective January 1, 20xx.

¢
You are required to file Form(s) 1120, U.S. Corporation Tax Return, for the years ended
December 31, 20xx through 20xx with the Ogden Service Center, currently. In the future,
you are required to file a Form 1120 by the due date of the return with the appropriate service
center indicated in the instructions for the return.

This is a final adverse determination letter with regard to your status under IRC § 501(c)(4).

You 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 1-877-777-4778
and ask for Taxpayer Advocate assistance. Or you can contact the Taxpayer Advocate from
the site where the tax deficiency was determined by writing to:

Internal Revenue Service

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 the United States Tax 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.

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

Sincerely yours,

Lois Lerner
Director, Exempt Organizations

DEPARTMENT OF THE TREASURY
internal Revenue Service

GOVERNMENT ENTITIES May 1, 2007
OLVISION
Legend: Taxpayer Identification Number:
ORG= Name of Organization
Date= xx Form:
Address = Address 990-EZ

Tax Year(s) Ended:
December 31, 20xx

ORG .
Person to Contact/ID Number:
ADDRESS Contact Numbers:
Telephone:
Fax

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear ,

We have enclosed a copy of our report of examination explaining why we believe an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains 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.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

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

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the Ogden Service Center within 60 days from the date of this letter, unless a request
for an extension of time is granted. File returns for later tax years with the appropriate
service center indicated in the instructions for those returns.

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.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Marsha A. Ramirez
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801 V

Form 886- A [Apartment of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Year/Period Ended
Neme e Taxpayer 20xx12
Legend:

ORG = Name of Organization State = Name of State
Address- Address of Org

Issues:

1. Whether the organization continues to qualify for federal income tax exemption under
   section 501(c)(4) of the Internal Revenue Code.

2. Whether the organization qualifies for exemption under Internal Revenue Code section
   501(c)(7).

Facts:

The organization filed the Articles of Incorporation with the State on October 26, 19xx. The
Articles state that the purpose of the organization is to "provide for the mutual assistance,
enjoyment, entertainment and improvement of its members socially and physically by
encouraging them in participation in some form of athletics or physical recreation." The
organization received tax exempt status under section 501(c)(4) of the Internal Revenue Code
in September of 19xx.

The organization has a facility located at Address. The facility is not owned by the organization
but they pay rent, utilities and the taxes assessed on the property. There is no rental
agreement with the owner of the property.

The initial purpose of the organization was to operate a youth football league in the Address area.
In recent years the organization has not been able to gather enough coaches and players to
operate a football league as they did in the past. During the 20xx tax year the organization did
not engage in any sporting or athletic activities. All revenues received by the organization in 20xx
were from gaming operations carried on by the organization. The gaming revenue was classified
incorrectly on the Form 990-EZ on Line 1 as contributions.

The gaming events are normally conducted four nights a week and occasionally the
organization holds tournaments. Poker, rummy and other card games are played at these
events. The organization receives a percentage of each pot. The percentage differs based
on what game is being played and how many individuals are playing. The organization does
not advertise their gaming events to the general public. A group of elderly individuals from the
area attend these gaming events. Food and beverages are served to these individuals at the
organization's expense.

The organization did not maintain a cash receipts journal or other records to determine the total
revenue received by the organization. In addition, there were no documents to show how the
organization's percentage of the pot was calculated. A majority of the expenses incurred went
to operate the gaming events. The organization did contribute $3,600 to another youth athletic
organization which is exempt under IRC section 501(c)(3).

Department of the Treasury - Internal Revenue Service Schedule No. or
_¢ Explanation of Items Exhibit
Name of Taxpayer year/Period Ended
ORG
‘Law:

Internal Revenue Code section 501(c)(4) exempts from federal income tax civic leagues or
organizations not organized for profit but operated exclusively for the promotion of social
welfare and the net earnings of which are devoted exClusively to charitable, educational, or
recreational purposes. No part of the net earnings of such entity inures to the benefit of any
private shareholder or individual.

Treasury Regulation section 1.501 (c)(4)-1(a) states that an organization is operated exclusively
for the promotion of social welfare if it is primarily engaged in promoting in some way the
commen good and general welfare of the people in the community. An organization is not
operated primarily for the promotion of social welfare if its primary activity is operating a social
club for the benefit, pleasure and recreation of its members.

Internal Revenue Code section 501(c)(7) exempts social and recreational clubs from Federal
income tax. Generally, social clubs are membership organizations supported by dues, fees,
charges or other funds paid by their members.

Taxpayers Position:

The president has signed a Form 6018-A, agreeing to the proposed revocation. A copy of
the signed Form 6018-A is attached to this Form.

Governments Position:

The organization's primary activity during the examination year was gaming. The organization's
only source of revenue was derived from gaming events. No athletic or sporting events were
held during this period. The Internal Revenue Code and Treasury Regulations state that an
organization cannot qualify for exemption under section 501(c)(4) if they are not operating
exclusively as a social welfare organization. Gaming does not qualify as an activity promoting
social welfare.

The organization is not organized and operated exclusively for social and recreational
purposes. ORG is not a membership organization and it is not supported by member dues or
assessments. The organization does not meet the criteria for exemption under section
501(c)(7) of the Internal Revenue Code.

Conclusion:

The organization is not operating exclusively for social welfare purposes. Accordingly,
revocation of the organization's tax exempt status is proposed effective January 1, 20xx.
Based on the facts above, the organization does not qualify for exemption under any other
subsection of | RC 501(c). -

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