Youth sports charity is reclassified under Section 509(a)(2)

Plain-English summary

A Section 501(c)(3) youth sports organization operated two gymnasiums and received most of its support from basketball and volleyball programs, camps, tournaments, concessions, and hotel commissions. Its contributions were too small for it to remain classified as a publicly supported charity under Section 170(b)(1)(A)(vi). The IRS found that the organization instead met Section 509(a)(2) because more than one-third of its support came from contributions and related program receipts, while less than one-third came from investment income and unrelated business income. The IRS changed the public-charity classification effective January 1 of the redacted year. The organization's tax-exempt status under Section 501(c)(3) remained in effect.

Ruling snapshot

• Question: Should the youth sports organization be classified under Section 170(b)(1)(A)(vi) or Section 509(a)(2)?
• Outcome: Reclassified as a Section 509(a)(2) public charity, with Section 501(c)(3) exemption unchanged.
• Key authorities: IRC §§ 170(b)(1)(A)(vi), 501(c)(3), 509(a)(2); Treas. Reg. § 1.170A-9(f)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce, MS 4920 DAL
Dallas, Texas 75242-1100

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: DEC 04 2017

Release Number: 201826014
Release Date: 6/29/2018

Employer Identification Number:
Person to Contact/ID Number:
Contact Numbers:
Voice:
Fax:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

UIL: 501.03-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear :

This is a final determination regarding your foundation classification. This modifies our
letter dated November 8, 20xx in which we determined that you were an organization
described in section 509(a)(1) as described in section 170(b)(1)(A)(vi) of the Internal
Revenue Code (IRC). We have modified your foundation status to that of a public charity
described in IRC section 509(a)(2), effective for tax years beginning January 1, 20xx.

Your tax exempt status under IRC section 501(c)(3) is not affected. Grantors and
contributors may rely on this determination, unless the Internal Revenue Service publishes
a notice to the contrary. Because this letter could help resolve any questions about your
private foundation status, please keep it with your permanent records.

We previously provided you a report of examination explaining the proposed modification
of your tax-exempt status. At that time, we informed you of your right to contact the
Taxpayer Advocate, as well as your appeal rights. On June 13, 20xx, you signed Form
6018, Consent to Proposed Action - Section 7428, in which you agreed to the modification
of your foundation classification to IRC section 509(a)(2). This is a final determination letter
with regards to your Federal tax-exempt status under IRC section 501(a).

You are required to file Form 990, Return of Organization Exempt from Income Tax. Form
990 must be filed by the 15th day of the fifth month after the end of your annual accounting
periods. A penalty of $20 a day is charged when a return is filed late, unless there is a
reasonable cause for the delay; however, the maximum penalty charged cannot exceed
$10,000 or 5 percent of your gross receipts for the year whichever is less. In addition,
organizations with gross receipts exceeding $1,000,000 for any year will be charged a
penalty of $100 a day when a return is filed late; however, the maximum penalty charged
cannot exceed $50,000. These penalties may also be charged if a return is not complete,
so be sure your return is complete before you file it.

If you are subject to the tax on unrelated business income under IRC section 511, you
must also file an income tax return on Form 990-T, Exempt Organization Business Income
Tax Return.

If you decide to contest this determination in court, you must initiate a suit for a declaratory
judgment in the United States Tax Court, the United States Claims Court, or the District
Court of the United States for the District of Columbia before the 91st day after the date this
final determination letter was mailed to you. Contact the clerk of the appropriate court for
rules for initiating suits for declaratory judgment. You may write to the Tax Court at the
following address:

United States Tax Court,
400 Second Street
Washington, D.C. 20217

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS
that can help protect your rights. We 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 our assistance, which is always free, we will do everything possible to
help you. Visit [email protected] or call 1-877-777-4778.

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter.

Thank you for your cooperation.

Sincerely,

Maria Hooke
Director, Exempt Organizations Examinations

Publication 892

Date: 6-9-2017

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Taxpayer Identification Number:
Form:
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 propose modifying
your foundation status under section 509(a) of the Internal Revenue Code (Code).

Your exempt status under section 501(c)(3) of the Code is still in effect.

If you accept our findings, take no further action. We will issue a final letter modifying your
foundation status.

If you do not agree with our proposed modification of your foundation status, you may provide
additional information that you would like to have considered, or you may submit a written
appeal. The enclosed Publication 3498, The Examination Process, and Publication 892,
Exempt Organization 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.

If you request a conference with Appeals, you must submit a written protest within 30 days from
the date of this letter. 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. 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.

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 letter.

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:

Internal Revenue Service
Office of the Taxpayer Advocate

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,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 3498
Publication 892
Report of Examination

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Year/Period ended
December 31,
20xx

Issue:

Whether [redacted] (formerly [redacted]) doing business as
[redacted], is a public charity described in IRC §170(b)(1)(A)(vi) or §509(a)(2).

Facts:

[Redacted] is organized for charitable purposes.

[Redacted] is currently classified as an organization exempt from income tax as a 501(c)(3) organization, further
classified as a public charity described in IRC 170(b)(1)(A)(vi). [Redacted] is completing Schedule A as a public
charity described in 170(b)(1)(A)(vi), meeting the 10% facts and circumstances test.

[Redacted] is organized for the promotion of youth sports programs by providing facilities and financial aid for
youth athletic programs.

[Redacted] owns two gymnasium facilities. The facilities are used to host tournaments, camps, and games.
[Redacted] also lets others use the gym free of charge including Special Olympics and [redacted] ([redacted]) and
[redacted] ([redacted]).

[Redacted] is the name used by [redacted] for the youth sports program. [Redacted] hosts
tournaments, camps, and games in the two gymnasiums. Both volleyball and basketball activities are
conducted. [Redacted] receives income from basketball and volleyball program fees, camp fees, tournament
income, concessions, and hotel commissions.

Forms 990 for 20xx through 20xx show income was received from these same sources.

See chart for summary of income received—

Tax year ending 12/31/20xx 12/31/20xx 12/31/20xx 12/31/20xx 12/31/20xx
Gifts, grants, and contributions $x,xxx.xx $xx,xxx.xx $x,xxx.xx $x,xxx.xx $xx,xxx.xx
Basketball Tournament $xxx,xxx.xx $xxx,xxx.xx $xxx,xxx.xx $xxx,xxx.xx
Concession stand $xx,xxx.xx
Basketball Program $xxx,xxx.xx $xxx,xxx.xx $xxx,xxx.xx $xxx,xxx.xx
Basketball Camp $xx,xxx.xx $xx,xxx.xx $xx,xxx.xx $xx,xxx.xx
Volleyball Program $xx,xxx.xx $xxx,xxx.xx
Volleyball Camp $xx,xxx.xx $xx,xxx.xx
Volleyball Tournament $xxx.xx $x,xxx.xx
Hotel Commissions $xxx.xx $x,xxx.xx $x,xxx.xx $x,xxx.xx
Charity Golf Outing $xx,xxx.xx
Interest Income $x.xx $xx.xx $xx.xx $xxx.xx $xxx.xx

The Schedule A on the 20xx Form 990 reported Public Support as $xx,xxx, Total Support as $xxx,xxx, and
gross receipts from related activities as $x,xxx,xxx. The public support percentage when completing the
support schedule for the 170(b)(1)(A)(vi) calculation is xx.xxx% for 20xx.

Law:

Section 170(b)(1)(A)(vi) of the Code describes an organization “which normally receives a substantial part
of its support from a governmental unit...or from direct or indirect contributions from the general public.”

Section 509(a)(2) of the Code describes an organization that receives not more than one-third of its support
from gross investment income and more than one-third of its support from contributions, membership fees,
and gross receipts from activities related to its exempt functions.

Treasury Regulation section 1.170A-9(f)(2) states that an organization is publicly supported if at least 33
1/3 percent of its support is received from grants from governmental units, and direct or indirect support
from the general public.

Treasury Regulation section 1.170A-9(f)(7)(3) states that even if an organization fails to meet the 33 1/3
percent support test, it is publically supported if it normally received a substantial part of its support from
governmental units, from contributions made directly or indirectly from the general public, or from a
combination of these sources, and meets the other requirements of this paragraph.

Treasury Regulation section 1.170A-9(f)(3)(i) states that the percentage of support normally received by an
organization from governmental units, from contributions made directly or indirectly by the general public,
or from a combination of these sources must be substantial. An organization will not be treated as normally
receiving substantial amount of governmental or public support unless the total amount of governmental
and public support normally received equals at least 10 percent of the total support normally received by
such organization.

Treasury Regulation section 1.170A-9(f)(7)(iii) states that an organization will not be treated as satisfying
the 33 1/3 percent test or the 10 percent support limitation if it receives (1) almost all of its support from
gross receipts from related activities; and (2) and insignificant amount of its support from governmental
units and contributions made directly or indirectly from the general public.

Taxpayer's Position:

The organization has not provided a written or oral statement at this time.

Government's Position:

As provided in Treasury Regulation 1.170A-9(f)(7)(iii), an organization will not be treated as satisfying the
33 1/3 percent test or the 10 percent support limitation if it receives almost all of its support from gross
receipts from related activities and and insignificant amount of its support from governmental units and
contributions made directly or indirectly from the general public.

[Redacted] main sources of revenue are from the sports activities they host, which is an activity related to its
exempt purpose.

Contributions for the five-year period total $xx,xxx.

Program service revenue (tournaments, program, and camp fees) for the five-year period totals
$x,xxx,xxx.

Total support (program service revenue, contributions, hotel commissions, fundraisers, and interest) for the
five-year period totals $x,xxx,xxx.

Using the five-year totals, contributions divided by total support results in x.x percent being from public
support.

[Redacted] does not meet the 33 1/3 percent test, or the 10 percent facts and circumstances test. A majority of
its income is from program service revenue and an insignificant amount is from contributions.

[Redacted] does meet the public support test for an organization classified as a public charity under IRC
509(a)(2).

An organization described in IRC 509(a)(2) is an organization that normally receives more than 33 1/3
percent of its support from contributions, membership fees, and gross receipts from activities related to its
exempt functions and no more than 33 1/3 percent of its support from gross investment income and
unrelated business taxable income.

[Redacted] receives xx percent of its income from contributions and gross receipts from program activities
(contributions, program service revenue, hotel commissions / total support).

[Redacted] receives less than x percent from investment income.

[Redacted] meets the requirements of an organization described in IRC 509(a)(2) since more than 33 1/3 percent
of its support is from contributions, membership fees, and income from related activities, and less than 33
1/3 from investment income and unrelated business taxable income.

Conclusion:

Whether [redacted] (formerly [redacted]) doing business as
[redacted], is a public charity described in IRC §170(b)(1)(A)(vi) or §509(a)(2).

[Redacted] is exempt from federal income tax as a 501(c)(3) organization, further
described as a public charity described in IRC §509(a)(2).

The effective date of the foundation status reclassification is 1/1/20xx.