IRS denies 501(c)(3) status to a sports-and-arts club operated for substantial recreational and social purposes

Plain-English summary

An organization applied for 501(c)(3) charitable status using the streamlined Form 1023-EZ,
describing its mission as promoting sports and arts, running training and coaching programs,
and organizing competitions, along with some charitable activities like food drives. When the
IRS asked for more detail, the organization explained that it devotes most of its time and
resources to social and recreational sports open to adults, youth, and children in its
community, funded by membership fees and donations.

The IRS denied exemption. To qualify under § 501(c)(3), an organization must be operated
exclusively for exempt purposes, and it fails that operational test if more than an
insubstantial part of its activities serves a non-exempt purpose. Here the recreational and
social sports activities were a substantial non-exempt purpose, which (under Better Business
Bureau v. United States) defeats exemption no matter how many charitable purposes also
exist. The IRS also found the group is not a "qualified amateur sports organization" under
§ 501(j), because it does not foster or develop athletes for national or international
competition; it simply gives people of all ages a chance to play sports recreationally. Because
the organization did not protest the proposed denial within 30 days, the denial became final.
The result: donors generally cannot deduct contributions under § 170, and the organization
must file income tax returns. The lesson: a community sports-and-recreation club usually is
not charitable for federal tax purposes.

Ruling snapshot

• Question: Does a club that mainly runs recreational and social sports activities qualify for exemption under § 501(c)(3)?
• Outcome: Denied (fails the operational test; substantial non-exempt recreational/social purpose; not a qualified amateur sports organization under § 501(j))
• Key authorities: IRC §§ 501(c)(3), 501(j), 170, 6104(c), 7428(b)(2); Treas. Reg. § 1.501(c)(3)-1(a), (c); Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Transcriber's note: The text below is a proofread OCR transcription of the scanned
release, which comprises the final adverse determination letter (Letter 4038) and the
proposed adverse determination letter (Letter 4034), which contains the facts, law, and
analysis. The repeating "Letter / Catalog Number" footer lines have been removed, and
obvious OCR misreads have been corrected where the intended word is unambiguous; wording is
otherwise verbatim, so some minor scanning artifacts remain. The IRS redacted names, dates,
and other identifying details (shown by the Legend placeholders) before release.

Department of the Treasury Date:
Internal Revenue Service February 1, 2022
IRS Tax Exempt and Government Entities Employer ID number:

Box 2508 Form you must file:
Cincinnati, OH 45201 a
Tax years:
Release Number: 202217008 Person to contact:
Release Date: 4/29/2022 Pali ber:
UIL: 501.00-00, 501.03-00, 501.03-30 toleohone
elephone:
Check if 501(c)(3) denial
[_] Check if valid POA

Dear

‘This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501 (a) as an organization described in IRC Section 501(c)(3). 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 IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Sincerely,

Director, Exempt Organizations _
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: December 8, 2021

Employer iD number:

Person to contact:

Name:

ID number:

Telephone:

Fax:
Legend: VIL:
X = Date 501.00-00
Y = Date 501.03-00
Z = State 501.03-30

B = Names
C = Geographical area

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

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

You attest that you were incorporated on 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 IRC Section 501(c)(3), that your organizing document does not expressly empower you to 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 IRC Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you

have not conducted and wil! not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

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

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

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

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

e 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)

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

You indicated on the Form 1023 EZ that your mission is to promote all types of sports and art activities;
develop training and coaching programs in common sports, arts and other traditional recreational activities; and
organize competitions in the field of sports and arts.

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations. We also provided you a copy of your Articles of Incorporation obtained from the Z’s Secretary of
State’s website that were filed on Y.

In response to our additional information letter, you described your activities as promoting sports in B;
providing sports training and conducting coaching camps to children, youth and adults; conducting and
participating in sports tournaments; and promoting fundraising activities and conducting fundraising events.
You are also involved in ancillary charitable activities such as organizing food drives for the homeless and
supporting charitable organizations affiliated with B and other legal charitable actions that your Executive
Committee determines are in your interests and that of your members. You further indicated that your goal is to
devote % of your lime and resources to promote social and recreational sports activities in C while you
devote % of your time to charitable activities within the United States.

Your activities are currently conducted in C free of charge. You explained that your membership is open to
members of the community who pay the annual membership fee which is determined by the Executive
Committee. Members and nonmembers, consisting of adults, youth and children from C, are eligible to
participate in your activities.

Your income is derived from membership fees and donations. Your expenses have been for sporting events
such as volleyball club tournaments, registration fees, tee shirt printing charges and other administrative
expenses, outlays for charitable and educational activities, and refreshments.

Furthermore, you anticipate that your members will devote % of their time towards your activities. In
addition, your expectation is that members will contribute their vehicles for your events and make their homes
available for meetings and gatherings.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax of organizations organized
and operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

IRC Section 501(j)(2) defines a "qualified amateur sports organization” as an organization organized and
operated exclusively to foster national or international amateur sports competition if it is also organized and
operated primarily to conduct or to support and develop amateur athletes for national or international
competition in sports.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, for an organization to be exempt under IRC
Section 501(c)(3), it must be both organized and operated exclusively for one or more of the purposes specified
in such section. If an organization fails to meet either the organizational or operational test, it is not exempt.

Treas. Reg. Sec.1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for
one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such
exempt purposes specified in IRC 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.

In Better Business Bureau of Washington, D.C... lic.. v. U.S. 326 U.S. 279 (1945), the court held that the
presence of a single non-exempt purpose, if substantial in nature, will preclude exemption, regardless of the
number or importance of statutorily exempt purposes.

Application of law

You are not described in IRC Section 501(c)(3) because you fail the operational test as described in Treas. Reg.
Section 1.501(c)(3)-1(a)(1).

You do not meet the provisions in Treas. Reg. Section 1.501(c)(3)-1(c)(1). Specifically, you devote % of
your time and resources to social and recreational sports. Adults and children are eligible to take part in your
sports activities. These facts show you are operated for substantial nonexempt recreational and social purposes
which precludes you from exemption under IRC Section 501 (c)(@3).

You are not a qualified amateur sports organization, as defined in IRC Section 501(j)(2) because you do not
foster national or international amateur sports competition or support and develop amateur athletes for national
or international competition in sports. Rather, you are operated to provide to persons of all ages the opportunity
to participate in sports for recreational and social purposes.

You are like the organization described in Better Business Bureau. Although you may have some educational
and charitable purposes, you are operated for substantial nonexempt recreational and social purposes. The
presence of these substantial non-exempt purposes prevents exemption under IRC Section 501(c)(3).

Conclusion

Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an
organization described in IRC Section 501(c)(3). You are not operated exclusively for exempt purposes as set
forth in Section 501(c)(3) and have more than an insubstantial amount of social and recreational activities.

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.

If you don't agree

You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

* Your name, address, employer identification number (EIN), and a daytime phone number
* A statement of the facts, law, and arguments supporting your position
* A statement indicating whether you are requesting ai Appeals Office conference

* The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

¢ The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request. 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 they haven’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 gave us a basis to reconsider our determination. If so,
we'll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

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

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

PO Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-

pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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 if 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 www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements