Exemption revoked for private benefits from individualized fundraising

Plain-English summary

A sports booster organization raised money for athletes who trained at a related for-profit gymnastics and cheerleading business. Members could reduce their own required assessments through fundraising, and the amounts they raised were credited to their individual accounts rather than used for scholarships or shared support. The IRS also found that the organization benefited its president and the related business through required memberships, unpaid advertising, branded uniforms, volunteer labor, trainer certifications, and activities that promoted the business. The organization supplied only minimal and incomplete records despite repeated requests during a multi-year examination. The IRS concluded that the organization served private interests and allowed earnings to inure to members and disqualified persons, so it revoked section 501(c)(3) status effective August 1 of the redacted year.

Ruling snapshot

• Question: Did individualized fundraising credits and benefits provided to a related for-profit training business violate the private-benefit and inurement limits of section 501(c)(3)?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. § 1.501(c)(3)-1; Capital Gymnastics Booster Club, Inc. v. Commissioner, T.C. Memo. 2013-193

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

Number: 201749014 Taxpayer Identification Number:
Release Date: 12/8/2017
Person to Contact:
Identification Number:

Telephone Number:

CERTIFIED MAIL — Return Receipt Requested UIL: 501.03-00

Dear

This is a final adverse determination regarding your exempt status under section

501(c)(3) of the Internal Revenue Code. Our favorable determination letter to you dated -

October 20, 19xx is hereby revoked and you are no longer exempt under section 501(a)
of the Code effective August 1, 20xx.

The revocation of your exempt status was made for the following reasons:

You are not operating exclusively for any charitable purpose, educational purposes, or
any other exempt purpose. Our examination reveals that you are not engaged primarily
in activities which accomplish charitable, educational or other exempt purpose as
required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities, including your financial
transactions, more than insubstantially furthered non-exempt purposes. Moreover, you
failed to establish that you were not operated for the benefit of private interest of your
members, president and as required for continued
recognition of exemption pursuant to Treas. Reg. 1.501(c)(3)-1(d)(1)(ii). Your income
inured to the benefit of private shareholders and individuals.

You failed to keep adequate books and records and failed to respond to repeated
reasonable requests to allow the Internal Revenue Service to examine your records
regarding your receipts, expenditures, or activities as required by I.R.C. sections 6001
and 6033(a)(1), Treas. Reg. 1.6033-2(i)(2) and Rev. Rul. 59-95, 1959-1 C.B. 627.

Contributions to your organization are no longer deductible under section 170 after
August 1, 20xx.


You are required to file Form 1120 U.S. Corporation Income Tax Return. These returns
should be filed with the appropriate Service Center for tax years ended July 31, 20xx,
July 31, 20xx July 31, 20xx, July 31, 20xx and July 31, 20xx and for all 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, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following three
venues: United States Tax Court, the United States Court of Federal Claims, or the
United States District Court for the District of Columbia. A petition or complaint in one of
these three courts must be filed before the 91st day after the date this determination
was mailed to you if you wish to seek review of our determination. Please contact the
clerk of the respective court for rules and the appropriate forms regarding filing petitions
for declaratory judgment by referring to the enclosed Publication 892. You may write to
the courts at the following addresses:

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

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

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS
that can help protect you 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 yours,

Maria D. Hooke
Director, EO Examinations

Enclosure:
Publication 892


Department of the Treasury Date:

Internal Revenue Service 11/09/2015
IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
Form:

Tax year(s) ended:

Person to contact / ID number:

Contact numbers:
Phone Number:

Fax Number:
Manager's name / ID number:

Manager's contact number:
Phone 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 a taxpayer 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
Form 6018
Publication 892
Publication 3498

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Year/Period Ended

20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07

Name of Taxpayer

Issue:

Whether the exempt status of under Internal Revenue Code
(“IRC”) Section (“Sec.”) 501(c)(3) should be revoked on the grounds that it served the private

benefit of its members, and disqualified persons including its President, and

Facts:

(“Organization”) was incorporated in the State of in
April 19xx. On December 3, 20xx, the Internal Revenue Service (“Service”) issued a favorable
determination letter to Organization recognizing it as tax-exempt under IRC. Sec. 501(c)(3). The
Service determined that Organization was not a private foundation because it was classified as a
publicly supported organization as described in IRC Sec. 170(b)(1)(A)(vi). For the years under
examination, Organization reported it was not a private foundation because it was an
organization described in IRC Sec. 170(b)(1)(A)(vi). The Organization’s Articles of
Incorporation provide its purpose is “

.” Similarly, Organization summarizes its mission on its Forms 990, stating

its purpose is “ ”
Organization was founded by who served as

Organization’s first President. During her tenure as President, was a co-owner of

, which is a for-profit entity that

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Year/Period Ended

20xx07, 20xx07,
20xx07, 20xx07,

Name of Taxpayer

and 20xx07
operates gymnastics and cheerleading facilities in and . Since
Organization’s inception, , her business partner, (
) (who was also one of the Organization’s directors), and worked closely with
Organization. trained amateur athletes from ages x through xx in gymnastics and placed

them on teams (according to age, ability, et cetera). Organization then helped the athletes trained
by to raise funds to pay the expenses related to sanctioned amateur gymnastics
competitions. Organization also assisted participants in cheerleading competitions to raise funds;

however, Organization never disclosed to the Service that it intended to support cheerleading

activities.

Around 20xx, left her position as President of Organization and sold her
interest in to . When asked, explained that left
her position and sold her share in because she was no longer interested in being involved
with gymnastics. After left, Organization selected its second President, who
served until approximately 20xx. In 20xx, replaced this individual and became the

Organization’s third President. To hold a position as an officer of the Board of Directors,
Organization mandated that an individual be a parent/guardian of an athlete training within ,
however, this requirement was waived for . Since becoming Organization’s
President, has been responsible for recording receipts in Organization’s
QuickBooks records, depositing funds, reconciling accounts, approving expenditures, writing

and signing checks, making book entries, making day-to-day decisions for the Organization, and

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit -0002
Name of Taxpayer Year/Period Ended
20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07
making decisions for the Organization’s long-term direction. is currently
Organization’s President and owns with her husband.

The Organization was asked to provide extensive records for all tax years under
examination, multiple times. Initially, the examination was focused on the year ending July 31,
20xx (‘primary year”). Thus, records obtained were for the primary year. However, after
expanding the examination to prior and subsequent tax years, the Service made repeated requests
for records and provided Organization several extensions for additional information for the
primary, as well as, new information for all other years. Throughout the request and extensions,
the Organization provided minimal and incomplete responses.

According to the records provided, Organization generated its income from membership
fees, fundraisers, and sponsorships.

Organization’s policy (identified in Exhibit A, item number 7) stated that members were
required to pay directly and/or to participate in fundraisers. In addition to Organization’s annual
membership fee, members were required to pay a “team assessment” (“assessment”), which
consisted of each member’s share of cumulative estimated expenses for the year; including,
training, coaching fees, athletic membership fee, meets, banners, equipment, competitive gear
and other competition related expenses. According to Organization’s competitive budget for
20xx-20xx (Exhibit B), the assessment ranged from $xxx.xx to $x,xxx.xx, depending on the
athlete’s level and whether travel was involved. Organization tracked each member’s assessment
balance separately to verify that each member met his or her share of the expenses. Organization

communicated about member’s account balance when inquired by that individual. Members

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Year/Period Ended

20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07

Name of Taxpayer

were required to sign a commitment form that acknowledged their commitment to and
acknowledged that members would be removed from the team should their attendance fall below
xx% (Exhibit C). On the commitment form, members also signed to acknowledge that they
understood that the money provided to the Organization would, under no circumstances, be
“refunded, transferred or directed”. Members who were not current with their assessment were
not allowed to participate in Organization’s activities.

As an alternative to paying the assessment, Organization offered members the option to
reduce their assessment obligation by participating in a number of fundraisers. Organization’s
fundraisers included, “Scrip”, (gift wrapping) and other fundraisers. Scrip, as used by
Organization, involved interested merchants offering support by allowing the purchase of
discounted gift certificates (“gift cards”). Members would buy gift cards from Organization at
full face value. Members purchased Scrip using a “ Gift Card Order
Form” (“order form”). Organization generated a Scrip profit equal to the discount offered by the
merchant. The value of the Scrip was also attributed to the members who purchased the gift
cards, which was also identified on the order form. Organization’s  fundraiser was a
program offered by  for exempt organizations only. Members participating in this
fundraiser would travel to the facility, located in the area to wrap
gifts. Each gift wrapped earned $.xx for the Organization. would then provide
Organization statements showing the members who participated in the gift wrapping program
and the total amount generated by each individual member. Organization would then use

records to determine the amount to credit each individual member towards their

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit -0002
Name of Taxpayer Year/Period Ended
20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07
assessment. According to , members could also raise funds by volunteering to work
for . When asked, explained that she would pay minimum wage to members
who volunteered to work for . then explained that instead of paying the wages

directly, members would earn their wages in the form of a donation, which was paid to the
Organization under the individual member’s name and applied to their assessment.

During the interview, explained that Organization’s members have
consistently carried out Organization’s fundraisers in the same manner during Organization’s
existence. The limited historical records provided by Organization have shown the same.
Although Organization failed to provide extensive records relating to its fundraising activities for
the other years under examination, explanation indicates that the policies and
procedures for Organization’s fundraising activities were consistent during all tax years under
examination.

Organization’s phone list identified that Organization had approximately xx members
during “20xx”. Organization failed to provide more extensive records concerning the number of
members it had for each year. However, when asked, confirmed that, while
membership may have increased around 20xx, Organization’s membership for all years under
examination was equal, on average to the numbers shown on the 20xx phone list..

Records, such as handwritten notes, typed notes, order forms, Scrip deposits and
statements from , identified a number of members who participated in Organization’s
fundraisers. Based on these records, about xx% of members were identified as having elected to

satisfy at least part of their assessment through fundraising. The records identifying members

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit -0002
Year/Period Ended
20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07

Name of Taxpayer

who participated in Organization’s fundraisers also showed a portion of the amounts attributed to
each individual member. Members who participated in fundraising earned the value of the
fundraising profits, which was then applied to their assessment. Overall, a member’s
participation in a fundraiser (whether Scrip, or any other program), reduced their
assessment based on the amount of funds raised. Members who did not participate in a fundraiser
did not receive a reduction of their assessment.

The Organization’s “sponsorship” income was primarily generated from businesses

advertising in Organization’s yearbook. Organization’s yearbook also contained a significant

amount of content related to . content within yearbook included:
• An image of facility on the cover
• On page one, the top right corner contained a three by two inch image of logo
• The entire third page was dedicated to , which included a narrative
identifying as the owner of __, and discussing background,
including the history of

• In the coaches section, approximately x of x coaches were not coaches of the

Organization but instead were employees of

Despite the substantial amount of related content in Organization’s yearbook,
Organization did not receive any payments from as a sponsor or advertiser. According to

, the content was included in yearbook because Organization and had a

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Name of Taxpayer Year/Period Ended
20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07
very close relationship. In explaining the close relationship, stated the following
concerning both entities:
• All athletes of the Organization were referred to as members of “ ”, which

was title for its athletes.

• The Organization’s policies required all members of the Organization to also be members

of and receive training from

• All of Organization’s trainers were also employees of ; therefore, Organization
depended on for training. In addition to using trainers, Organization paid for
each trainer’s certifications. No records were presented showing that reimbursed

Organization for these expenses.

• Members of Organization attended competitions, which were created and hosted
by to generate business income.
• Whenever Organization’s athletes won competitions, received promotion and

validation for its training programs.

The expenses incurred by the Organization throughout the years under examination,
among other things, included: coaching fees, gymnastics and cheerleading entry fees,
gymnastics and cheerleading uniforms and travel. Although Organization provided limited to

no training, Organization purchased uniforms for coaches and athletes which were used

during training sessions performed by . Organization also purchased uniforms for
athletes which specifically included company logo.
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -7-


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit -0002

Name of Taxpayer Year/Period Ended
20xx07, 20xx07,

20xx07, 20xx07,
and 20xx07

Law:

IRC Sec. 501(c)(3) 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 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 (Treas. Reg.) Sec. 1.503(c)(3)-1(c) Operational Test—

(1) Primary activities. —An organization will be regarded as “operated exclusively” for
one or more exempt purposes only if it engages primarily in activities which accomplish one or
more of such exempt purposes specified in section 501(c)(3). An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt
purpose.

(2) Distribution of earnings. —An organization is not operated exclusively for one or
more exempt purposes of its net earnings inure in whole or in part to the benefit of private
shareholders or individuals. For the definition of the words “private shareholder or individual”,
see paragraph (c) of Sec. 1.501(a)-1.

Tax Court Case—

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

Page: -8-


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Year/Period Ended

20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07

Name of Taxpayer

Capital Gymnastics Booster Club, Inc. v. Commissioner, T.C. Memo. 2013-193

Government’s Position:
The Organization’s exempt status under IRC Sec. 501(c)(3) should be revoked on the
grounds that it served the private benefit of its members, and disqualified persons including its

President and

Members

Organization’s assessment policy (“assessment policy”), provided during the field
examination, showed that Organization mandated funds be paid by the members through “direct
payment and/or through fundraising activities sponsored by the Booster Club.” Refer to Exhibit
A, item number 7 for additional information. Organization’s assessment policy shares
similarities with the policies at issue in Capital Gymnastics Booster Club, Inc. v. Commissioner.
As with the organization in Capital Gymnastics Booster Club, Organization gave its members
the option to pay their assessment in cash or members could raise funds to offset their
assessment. According to handwritten and typed notes, and other records, showing a reduction in
only certain member’s accounts, the members who did not participate in fundraising did not
receive any benefit from the fundraising activities of the other members. Instead, those members
paid for their full assessment amounts. Moreover, there was no evidence among the records

provided that showed funds, raised through Scrip or other fundraising activities, were used to

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Year/Period Ended

20xx07, 20xx07,
20xx07, 20xx07,
and 20xx07

Name of Taxpayer

support scholarships for other members; or, to defray the expenses of participation of members
who may have been unable to afford the costs.

Rather than operating exclusively for the public, Organization served the private interest
of its members by allowing members to raise funds for their own accounts. Thus, Organization
failed to meet requirements under IRC Sec. 501(c)(3), “no part of the net earnings of [the
Organization may] inure ... to the benefit of any private shareholder or individual.” As a result,

Organization should be revoked of its exempt status.

President and
Given relationship with Organization, ownership of , and her
position as Organization’s President, both and are disqualified persons with
respect to Organization. The policies that required Organization’s members to also be members
of clearly provided financial benefits to and for the years under
examination. Whether identified as Organization’s President or owner, and
also clearly benefitted from the following:

• The use of the Organization’s members to work as volunteers for donations

• advertising on Organization’s publications without compensating Organization
• advertising on uniforms and other items paid for by Organization
• use of training uniforms and other related items for both gymnastics and

cheerleading, which were purchased by Organization

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

Page: -10-


Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit -0002
Year/Period Ended

20xx07, 20xx07,
20xx07, 20xx07,

Name of Taxpayer

and 20xx07
• Use of trainers and training curriculum, which increased Organization’s
dependency on
Operating Organization for the benefit of and served the private
interest of and . As a result, Organization failed to meet requirements under

IRC Sec. 501(c)(3), that “no part of the net earnings of [the Organization may] inure ... to the
benefit of any private shareholder or individual.” Consequently, Organization’s exempt status

should be revoked at this time.

Taxpayer’s Position:

The Service is awaiting Organization’s response.

Conclusion:

Organization’s net earnings, in a substantial part, have inured to the benefit of its
members, its President, and . This violates both IRC Sec. 501(c)(3) and
Treas. Reg. Sec. 1.501(c)(3)-1(c), and warrants revocation of Organization’s 501(c)(3) status
effective August 1, 20xx.

The Service has requested completed Forms 1120 for the years ending July 31, 20xx
through July 31, 20xx. Organization is required to file Form 1120, U.S. Corporation Income Tax

Return, for the year ending July 31, 20xx, any tax year thereafter.

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