Professional rodeo association does not qualify under section 501(c)(3)

Plain-English summary

A membership association conducted about fourteen rodeos each year, charged participants entry fees, charged spectators admission, and awarded cash prizes. Its bylaws emphasized promoting professional rodeo and advancing the mutual benefit of participants. The IRS found that it was not a qualified amateur sports organization under section 501(j)(2), did not limit its governing purposes to exempt purposes, and operated for the substantial nonexempt purpose of promoting a professional sports league. Its activities also lacked a formal educational program. The IRS denied recognition of exemption under section 501(c)(3).

Ruling snapshot

• Question: Did the professional rodeo association qualify for exemption under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC §§ 501(c)(3) and 501(j)(2); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 70-4; Better Business Bureau v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

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

Date: November 18, 2016

Release Number: 201706019 Employer ID number:

Release Date: 2/10/2017

UIL Code: 501.03-30 Contact person/ID number:
501.29-00

Contact telephone number:
Form you must file:

Tax years:

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.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


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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,

Jeffrey I. Cooper
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
P.O. Box 2508
Cincinnati, OH 45201
Date: September 20, 2016
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Category:
Legend: UIL:
501.03-30
Y = Date 501.29-00
Z = State
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

1. Do you meet the requirements under Section 501(j) of the Code as a qualified amateur sports
organization? No, for the reasons described below.

2. Do you meet the organizational test under Treasury Regulation § 1.501(c)(3)-1(b)? No, for the reasons
described below.

3. Do you meet the operational test under Treas. Reg. § 1.501(c)(3)-1(c)? No, for the reasons described
below.

Facts

You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code, on date Y

You attest that you were incorporated on date Y, in the state of Z. You attest that you have the necessary
organizing document, that your organizing document limits your purposes to one or more exempt purposes
within the meaning of Section 501(c)(3), that your organizing document does not expressly empower you to

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


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engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes,
and that your organizing document contains the dissolution provision required under Section 501(c)(3).

You further attest that you are organized and operated exclusively to foster national or international amateur
sports competitions. You attest that you have not conducted and will not conduct prohibited activities under
Section 501(c)(3). Specifically, you attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way

• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

• Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

• Not provide commercial-type insurance as a substantial part of your activities

During the review of your Form 1023-EZ, detailed information was requested to supplement the above
attestations. This information confirms you were incorporated in the State of Z on date Y. Article III of your
bylaws state:

(t)he purposes which the corporation is authorized to pursue are:

• To encourage, promote and advance information and knowledge concerning rodeos, including the
dates of rodeos, names of contestants, prize money and other particulars in which the members
are interested

• To promote the professional sport of rodeo through the organization of rodeo participants for
their mutual benefit [emphasis added. ]

  ○ To ensure a just amount of prize money

  ○ To require that all entrance fees be added to prize money

  ○ To secure competent, honest judges and officials in all rodeo events

  ○ To encourage cooperation between rodeo contestants and management of all rodeos at
which members participate

  ○ To protect against unfairness in the sport of professional rodeo [emphasis added. ]

  ○ To preserve the historical integrity of the sport of professional rodeo [emphasis added. ]

• To raise the standards of cowboy contests so they shall rank among the foremost of American
sports

• To bring about honest advertising by the rodeo committees, so that the public may rely upon the
truth of advertised events in which it is claimed that members of the Association participate

• To work for the betterment of conditions and of rules governing rodeo events in which members
of the Association participate
• To establish a central place of registration for the convenience of members
• To undertake any activity which, in the opinion of the Board of Directors of the corporation, will
facilitate the participation of its members in the professional sport of rodeo [emphasis added. ]

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


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Article XIV, section 4 of your bylaws indicate you are a membership organization and states your board of
directors will be elected by the popular vote of the membership body.

You provide a rodeo venue for participants to participate and the community to attend. You conduct
approximately fourteen rodeos per year from April through September. Entry fees are charged for each
participant that is competing in the various rodeo events. Spectators pay a fee to attend the rodeo events.

You did not provide proposed revenues or expenses for your organization. Based on the provided schedule of
events and general information in your brochure, your revenues appear to include event entry fees and gate
receipts. Rodeo participants pay entry fees to compete for championship buckles and cash prizes. Membership
in the organization is open to anyone who participates in an event, with no membership fee.

Cash prizes for first place finishers can range from a few hundred dollars to up to several thousand based on a
set percentage of the entry fee collected for that event.

Law

Section 501(c)(3) of the Internal Revenue Code (Code) exempts from federal income tax: 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

• to foster national or international amateur sports competition (but only if no part of its activities involve the
provision of athletic facilities or equipment), 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
(except as otherwise provided), 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.

Section 501(j)(2) of the Code defines the term "qualified amateur sports organization" to mean any organization
organized and operated exclusively to foster national or international amateur sports competition if such
organization is also organized and operated primarily to conduct national or international competition in sports
or to support and develop amateur athletes for national or international competition in sports.

Treas. Reg. § 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
purposes specified in such section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

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


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Treas. Reg. § 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more
exempt purposes only if its articles of organization limit its purposes to one or more exempt purposes and do
not expressly empower it to engage, otherwise than as an insubstantial part, in activities which in themselves are
not in furtherance of one or more exempt purposes.

Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii) provides that an organization is not organized exclusively for one or more
exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its
activities, activities that are not in furtherance of one or more exempt purposes.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes if it
engages primarily in activities that accomplish exempt purposes specified in section 501(c)(3) of the Code. An
organization must not engage in substantial activities that fail to further an exempt purpose.

Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) states that the term “educational” as used in section 501(c)(3) relates to: (a)
The instruction or training of the individual for the purpose of improving or developing his capabilities; or (b)
The instruction of the public on subjects useful to the individual and beneficial to the community.

Rev. Rul. 70-4, 1970-1 C.B. 126, provides that an organization whose activities consisted primarily of the
promotion and regulation of a sport for amateurs is not exempt as a section 501(c)(3) educational organization
because the promotion and regulation of a sport for amateurs as described neither improve nor develop the
capabilities of the individual nor instruct the public on subjects useful to the individual and beneficial to the
community.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that an organization is not
operated exclusively for exempt purposes, and thus will not qualify for exemption under section 501(c)(3), if it
has a single non-charitable purpose that is substantial in nature. This is true regardless of the number or
importance of the organization's exempt purposes.

B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), describes an organization whose sole activity was to
provide consulting services for a fee to nonprofit organizations. It provided qualified persons to perform
research projects for its clients. The fees charged by the organization were set at or close to cost but were not
less than the organization's full cost of providing its service. The organization was denied exemption because it
operated in a commercial, nonexempt manner. The provision of managerial and consulting services on a regular
basis for a fee is a trade or business ordinarily carried on for profit. The court held that the organization was not
operated exclusively for charitable, educational or scientific purposes within the meaning of section 501(c)(3)
of the Code.

In Hutchinson Baseball Enterprises v. Commissioner, 73 T.C. 144 (1979), nonacq. 1980-2 C.B. 2, affd. 696
F.2d 757 (10th Cir. 1982), the organization funded and operated an amateur baseball team, leased and
maintained baseball fields for the use of Little League, American Legion teams and a baseball camp, and
provided coaches for Little League teams. The court held, and the Tenth Circuit affirmed, that the promotion,
sponsorship and advancement of amateur sports is a charitable purpose within the meaning of section 501(c)(3).

In Wayne Baseball, Inc. v. Commissioner, T.C. Memo. 1999-304, it was determined that a highly competitive
amateur baseball league did not qualify for exemption under 501(c)(3). Team members were recruited from a
series of spring tryouts were comprised of players who each possessed a high degree of baseball skills. The

Letter 4036 (Rev. 7-2014)
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team did not have a formal instructional program. Players relied on informal interaction to seek advice, self-
teaching, and hands-on experience during games. No admission was charged to spectators who watched the
games. Although spectators were allowed to watch the baseball games for free, the organization's activities did
not promote the game of baseball in the surrounding community. Instead, the court found that organization's
purpose was to provide a team for the enjoyment, recreation and social interaction of its players.

Application of law

Based on the facts presented in your application, we have concluded that you are not a qualified amateur sports
organization. Neither are you organized and operated for exempt purposes as required in section 1.501(c)(3)-
1(a)(1) of the Tax Regulations. Accordingly, you do not qualify for exemption as an organization described in
section 501(c)(3) of the Code.

You do not meet section 501(j)(2) of the Code because you are a professional rodeo organization as opposed to
a qualified amateur sports organization. You are not organized and operated primarily to conduct or to support
and develop amateur athletes for national or international competition in sports. Rodeo competition is not a
national or international competition such as the Olympics or Pan-American Games, nor does it appear your
competitors are in the age group from which Olympic-quality athletes are normally chosen. Finally, it does not
appear that you are a member of a national or international committee such as the United States Olympic
Committee.

You do not meet the organizational test under Treas. Reg. § 1.501(c)(3)-1(b)(1)(i) because your governing
documents do not limit your purposes to one or more exempt purposes and do not expressly empower it to
engage, other than as an insubstantial part, in activities which in themselves are not in furtherance of one or
more exempt purposes.

You also do not meet the requirements of Treas. Reg. § 1.501(c)(3)-1(b)(1)(iii) because your governing
documents expressly permit activities to be carried on that are not in furtherance of one or more exempt
purposes.

You do not meet the operational test under Treas. Reg. § 1.501(c)(3)-1(c)(1) because your activities further a
substantial non-exempt purpose, namely the promotion of a professional sport. The operational test states that
an organization will not be regarded as ‘operated exclusively’ if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose.

You do not meet the definition of “educational” as defined in Treas. Reg. § 1.501(c)(3)-1(d)(3)(i) because your
activities do not provide instruction or training to the individual nor do you instruct the public on subjects useful
to the individual and beneficial to the community.

You are similar to the organization described in Rev. Rul. 70-4 in that your promotion of the sport of rodeo
neither improves nor develops the capabilities of the individual nor instruct the public on subjects useful to the
individual and beneficial to the community.

Similar to the organization in Better Business Bureau, you are operated for a non-exempt purpose that is
substantial in nature, i.e., the promotion of a professional sports league.

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


As in B.S.W. Group, Inc., your sole activity is operating a professional sports league in a manner similar to a
commercial enterprise. You charge entry fees for participants competing in your events and also charge patrons
to attend your events.

You are not similar to the organization in Hutchinson Baseball Enterprises because Hutchinson operated an
amateur baseball league. In contrast, as you stated in subsequent correspondence, you operate a professional
rodeo association.

You are similar to the organization described in Wayne Baseball, Inc. in that you do not have a formal
instructional program. Your activities also do not promote the sport of rodeo in the community.

Conclusion

Based on the facts and information submitted, you are not organized and operated exclusively for exempt
purposes. You are not a qualified amateur sports organization as described in section 501(j)(2). Further, 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). Additionally, you do not meet the operational test because your activities
do not further an exempt purpose, such as a charitable or educational purpose. 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.

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:

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


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Under penalties of perjury, I declare that I examined this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We’ll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest

Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: 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.

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


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,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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