Adult baseball league loses charitable exemption

Plain-English summary

A nonprofit operated an adult men's baseball league and charged team membership fees. Its activities centered on league play, game administration, statistics, prizes, playoffs, and an all-star game, without an instructional or training program. The IRS concluded that the league primarily served the recreational and social interests of its members rather than charitable, educational, or national or international amateur-sports purposes. It also found that the organization's governing purpose was too broad for section 501(c)(3), that the league served private interests, and that income inured to private individuals. The IRS revoked the organization's exemption effective as of the redacted date and stated that later contributions would no longer be deductible.

Ruling snapshot

• Question: Did an adult men's baseball league continue to qualify as a section 501(c)(3) charitable organization?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 501(j), 509(a)(2), 7428; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION December 27, 2016

Number: 201717044 Taxpayer Identification Number:

Release Date: 4/28/2017
Person to Contact:

Identification Number:

Contact Telephone Number:
UIL: 501.03-00

CERTIFIED MAIL

Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated June 30, 20XX is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

You are not engaged primarily in activities which accomplish charitable, educational, or
any other exempt purposes as required by Treas. Reg. section 1.501(c)(3)-1(c)(1).
Your activities more than insubstantially furthered non-exempt purposes and your
income inured to the benefit of private shareholders and individuals. In addition, you
operated for the benefit of private, rather than public interests, as required for continued
recognition of exemption pursuant to Treas. Reg. section 1.501(c)(3)-1(d)(1)(ii).

Contributions to your organization are no longer deductible under IRC §170 after
January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the tax year ended December 31, 20XX.
and for all tax years thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts at the following addresses:

United States Tax Court United States Court of Federal Claims
400 Second Street, NW 717 Madison Place, NW
Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, D.C. 20001

The Taxpayer Advocate Service (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. If you qualify for TAS assistance, which is always
free, TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov
or call 1-877-777-4778.

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

Sincerely,
Mary Epps
Acting Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury Date:

Internal Revenue Service September 7, 2016
Tax Exempt and Government Entities Division Taxpayer Identification Number:
Form:

Tax year(s) ended:

Person to contact / ID number:

Contact numbers:

Manager's name / ID number:

Manager's contact number:

Response due date:

Certified Mail - Return Receipt Requested

Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action - Section
7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in
section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status

If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)
shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone conference with the

supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as ataxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt
Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't 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:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination and Form 4621-A
Form 6018

Publication 892

Publication 3498

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886-A                         EXPLANATION OF ITEMS                         SCHEDULE NO. OR EXHIBIT

(REV JANUARY 1994)

NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX

Issue:

Whether tax exempt status under Internal Revenue Code (IRC) section
501(c)(3) should be revoked for not operating exclusively for charitable purposes?

Facts:

was incorporated as a not-for-profit corporation in the State of on August 20, 20XX.
The organization’s purposes, as stated in the articles of incorporation, are exclusively charitable. The
specific purpose, as stated in the articles, is to operate an adult men’s baseball league.

filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3), with the
Internal Revenue Service (Service) on February 18, 20XX. Organization activities have the following
objectives:

a) Provide strong league play

b) Operate a quality run organization that gives back to players and provides the best experience
possible (to including tracking stats, providing prizes for season leaders, playoff series,
championship series and All-star game)

c) Promote a healthy lifestyle

d) Provide revenue support to area public high schools in the form of field rental fees

The information submitted with the exemption application, Form 1023, states the organization would
operate an supporting X to XX teams (X-X teams each in age
divisions XX & over and XX & over) with a maximum of XX players on each team. A website at

will provide organization and league information. The league plays under the sanctions of the

_ The source of financial support will be from team membership fees. Anticipated annual revenues for
your first three years of operation are $X, $XX,XXX and $XX,XXX respectively.

The Service issued Letter 947 on June 30, 20XX with an effective date of exemption under IRC section
501(c)(3) of August 20, 20XX. This ruling also determined foundation status as a public charity under IRC
section 509(a)(2).

filed Form 1120, U.S. Corporation Income Tax Return, for the tax year ended December 31, 20XX.
There is no record of any returns filed for subsequent years.

was selected for an audit for the tax year ended December 31, 20XX. The information requested
for review during this audit was:

a. A detailed description of the activities conducted during the year under audit

b. A statement of revenue, expenses, assets and liabilities for the year under audit

Form 886-A (Rev. 01-94) Page 1 Cat No.20810W Department of the Treasury -Internal Revenue Service

Form 886-A                         EXPLANATION OF ITEMS                         SCHEDULE NO. OR EXHIBIT

(REV JANUARY 1994)

NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX

c. Copies of board of director meeting minutes

d. Corporate bylaws

e. Confirmation of return filing for the year under audit
f. Staffing information

Information was provided via fax on December 4, 20XX, January 5, 20XX and August 10, 20XX. Activity
during 20XX consisted of:

O weekly baseball games ( through ) by X teams
O games and game ( )

o Annual board of director meeting in

o Management and supervision of league and games

Administrative duties and league operations are largely handled by sole Board member and corporate
President/CEO, . Games are run by the team managers and umpires assigned to the
games with oversight by the President/CEO.

advertised prior to the 20XX season to solicit players and teams. Subsequently, word of mouth
has been used.

During the tax year ended December 31, 20XX, received gross revenues of $XX,XXX from team
membership fees . Expenses of $XX,XXX were incurred consisting of: field rental ($X,XXX), game
announcement ($X,XXX), printing, reproduction and advertising ($X,XXX), game balls ($X,XXX), game
umpires ($X,XXX) and miscellaneous ($X,XXX).

Law:

IRC section 501(c)(3) provides an exemption from federal income tax for organizations organized and
operated exclusively for charitable, educational, and other purposes, including to foster national or
international amateur sports competition (but only if no part of the organization's activities involves
providing athletic facilities or equipment), if no part of the organization's net earnings inures to the benefit
of any private shareholder or individual.

IRC section 501(j) removes the prohibition on providing athletic facilities or equipment for a “qualified
amateur sports organization.” Section 501(j)(2) defines this organization as one “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 such sports.”

Treasury Regulation section 1.501(c)(3)-1(a) provides that to qualify for exemption under IRC section
501(c)(3), an organization must be both organized and operated exclusively for one or more purposes

Form 886-A (Rev. 01-94) Page 2 Cat No.20810W Department of the Treasury -Internal Revenue Service

Form 886-A                         EXPLANATION OF ITEMS                         SCHEDULE NO. OR EXHIBIT

(REV JANUARY 1994)

NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX

specified in that section. If an organization fails either the organizational or the operational test, it is not
exempt.

Treasury Regulation section 1.501(c)(3)-1(b)(1)(i) provides an organization is organized exclusively for
exempt purposes under IRC section 501(c)(3) only if its articles of organization (a) limit its purposes to
exempt purposes; and (b) do not expressly empower the organization to engage, otherwise than as an
insubstantial part of its activities, in activities that do not further one or more exempt purposes.

Treasury Regulation section 1.501(c)(3)-1(b)(iv) provides that an organization is not organized exclusively
for one or more exempt purposes, if by the terms of its articles, its purposes are broader than the
purposes specified in IRC section 501(c)(3).

Treasury Regulation section 1.501(c)(3)-1(d)(1)(ii) provides an organization is not organized or operated
exclusively for exempt purposes under IRC section 501(c)(3) unless it serves a public rather than a
private interest.

Treasury Regulation section 1.501(c)(3)-1(d)(3)(i) states the term “educational” in IRC section 501(c)(3)
refers to (a) the instruction or training of the individual to improve or develop his capabilities; or (b) the
instruction of the public on subjects useful to the individual and beneficial to the community.

In Rev. Rul. 69-175, the Service ruled that a mutual benefit organization did not qualify for exemption
under IRC section 501(c)(3) where it served the private interests of its members. The organization
provided bus transportation to and from school for members' children. The ruling reasoned that when a
group of individuals associate to provide a cooperative service, the organization serves the private
interest of its members.

In Rev. Rul. 77-365, 1977-1 C.B. 192, an organization instructed persons of all ages and skill levels in a
particular sport, conducting clinics, workshops, lessons, and seminars. Its program was open to anyone in
the community. The Service held the organization was organized and operated for charitable purposes
under IRC section 501(c)(3).

Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court discussed the
meaning of the word “exclusively,” as used in an exemption statute similar to IRC section 501(c)(3). The
Court held that an organization is not organized and operated exclusively for exempt purposes if it has a
single substantial nonexempt purpose.

In Hutchinson Baseball Enterprises, 73 T.C. 144 (1979), aff'd, 696 F.2d 757 (10th Cir. 1982), non-acq,
1980-2 C.B. 2, the Tax Court held that an organization that promoted recreational and amateur sports
was exempt as a “charitable” organization under IRC section 501(c)(3). The organization undertook

Form 886-A (Rev. 01-94) Page 3 Cat No.20810W Department of the Treasury -Internal Revenue Service

Form 886-A                         EXPLANATION OF ITEMS                         SCHEDULE NO. OR EXHIBIT

(REV JANUARY 1994)

NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX

numerous activities to promote the sport of baseball: and the court found that the purpose of promoting
sports predominated over subsidiary purposes, such as members' recreational or social benefit.

In North American Sequential Sweepstakes, 77 T.C. 1087 (1981), an organization was formed to promote
a particular form of sky diving. The court examined all the facts and circumstances of the case in finding
that the purpose of promoting the sport was subsidiary to promoting the recreational and private interests
of its members. Accordingly, the organization did not qualify for exemption under IRC section 501(c)(3).

In The Media Sports League, Inc., T.C. Memo 1986-568, the Tax Court ruled that an organization that
sponsored sports competitions for adults in the community was not exempt under IRC section 501(c)(3).
The court found that the organization had the substantial nonexempt purpose of promoting the social and
recreational interests of its members.

In Syrang Aero Club, 73 T.C. 717 (1980), the Tax Court ruled that an organization that rented an airplane
to members, providing no instruction, was not exempt under IRC section 501(c)(3). The court found that
any educational purpose was incidental to substantial recreational purposes the organization served; and
that it furthered the private interests of the members.

Government’s Position:
tax exempt status under IRC section 501(c)(3) should be revoked as of January 1, 20XX.
is neither organized nor operated for exempt purposes within the meaning of IRC section 501(c)(3).

has not engaged in activities that are exclusively educational, charitable or fostering national or
international amateur sports competition within the meaning of IRC section 501(c)(3).

The organization’s only activity is the operation of a men’s adult baseball league. Such activity is not
educational because no program of instruction or training is provided, as was provided by the
organizations in Rev. Rul. 77-365 and the Hutchinson Baseball Enterprises case. Nor is information
provided to the public under section 1.501(c)(3)-1(d)(3) (i)(b) of the regulations.

Instead, like the organizations in the, North American Sequential Sweepstakes, Media Sports League,
and Syrang Aero Club cases considered above, the organization furthers the nonexempt purpose of

promoting the recreational and social interests of your members. This nonexempt purpose is, by itself,
sufficient to disqualify you from exemption under the rationale of the Better Business Bureau decision.

The organization’s recreational activity also does not foster national or international amateur sports
competition because you provide facilities or equipment to participant/members. Section 501(j) of the
Code does not excuse you from meeting this limitation; is not a “qualified amateur sports

Form 886-A (Rev. 01-94) Page 4 Cat No.20810W Department of the Treasury -Internal Revenue Service

Form 886-A                         EXPLANATION OF ITEMS                         SCHEDULE NO. OR EXHIBIT

(REV JANUARY 1994)

NAME OF TAXPAYER TAX IDENTIFICATION NUMBER YEAR/PERIOD ENDED

December 31, 20XX

organization” under section 501(j)(2) since the organization’s purposes and activities are not “exclusively”
or “primarily” to promote international or national sports competition.

recreational activities also further the substantial nonexempt purpose of furthering the private
interests its members, under section 1.501(c)(3)-1(d)(1)(ii) of the regulations. Like the organizations in
Rev. Rul. 69-175, the Syrang Aero Club, North American Sequential Sweepstakes, and Media Sports
League cases, provides cooperative services for your members, which benefits the organization’s
members and promotes private interest not public interests.

fails the organizational test. The Articles of Incorporation state the specific purpose is to operate a
men’s adult baseball league which is not a purpose listed under section 501(c)(3) of the Code and does
not constitute exempt activity under IRC section 501(c)(3). Therefore, the articles do not satisfy
requirements that (1) purposes be limited to one or more exempt purposes, Treasury Regulations section
1.501(c)(3)-1(b)(1)(i)(a); (2) articles not expressly empower the organization to engage in non-exempt
activities, Treasury Regulations section 1.501(c)(3)-1(b)(1)(ii)(b); and (3) purposes not be broader than
section 501(c)(3) purposes, Treasury Regulations section 1.501(c)(3)-1(b) (iv).

Taxpayer Position:
President/CEO has indicated agreement with the proposed revocation.
Conclusion:

does not meet the requirements to be exempt under IRC section 501(c)(3) because the
organization is not organized and operated exclusively for charitable or educational purposes. Moreover,
organization funds inure to the benefit of private individuals and do not further public purposes.
Consequently, tax exempt status under IRC section 501(c)(3) should be revoked effective January 1,
20XX.

Form 886-A (Rev. 01-94) Page 5 Cat No.20810W Department of the Treasury -Internal Revenue Service