Adult recreational sports club denied 501(c)(3) exemption

Plain-English summary

The IRS denied section 501(c)(3) status to a recreational sports group made up of former players of a particular sport who gather about once a week to play. The denial became final because the group did not file a protest within 30 days of the proposed adverse letter. The organization had applied using the streamlined Form 1023-EZ and attested to charitable and educational purposes, but on supplemental review the IRS found it was neither organized nor operated exclusively for exempt purposes. Its articles of incorporation described a broad recreational-sports purpose that was not limited to what section 501(c)(3) allows, so it failed the organizational test; and its actual activity, providing recreational sports for adults, served the substantial nonexempt purpose of promoting its members' social and recreational interests, so it failed the operational test. The IRS distinguished a ruling that exempts organizations teaching a sport to children and relied on authorities denying exemption to adult recreational sports leagues. Because the group does not qualify, contributions to it are not deductible under section 170.

Ruling snapshot

• Question: Does a club that provides recreational sports for adults qualify for exemption under section 501(c)(3)?
• Outcome: denied (proposed adverse determination became final when no protest was filed)
• Key authorities: IRC §§ 501(c)(3) and 170; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 65-2 and 70-4; La Verdad v. Commissioner, 82 T.C. 215 (1984); Media Sports League, Inc. v. Commissioner, T.C. Memo 1986-568 (1986)

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 02/28/2022

Tax Exempt and Government Entities Employer ID number:
P.O. Box 2508

Cincinnati, OH 45201

Person to contact:

[X] Check if 501(c)(3) denial
[ ] Check if valid POA

Release Number: 202221011
Release Date: 5/27/2022
UIL Code: 501.03-30, 501.35-00

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.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632B

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Sincerely,

Stephen A. Martin

Director, Exempt Organizations

Rulings and Agreements

Letter 4038 (Rev. 11-2021)
Catalog Number 47632B

Department of the Treasury
Internal Revenue Service
PO Box 2508
IRS Cincinnati, OH 45201
Date: 1/6/2022

Employer ID number:

Person to contact

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
X = Date 501.03-30
Y = State 501.35-00
Z = Sport
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 Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code.

You attested on Form 1023-EZ that you are organized and operated exclusively to further charitable and
educational purposes. You also attested that you have not conducted and will not conduct prohibited activities
under IRC Section 501(c)(3)-

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.

You were formed as a corporation on X in the State of Y. Your organizing document, Articles of Incorporation
(“Articles”), indicates you are a recreational sports organization to help Y residents  years and older to
continue living a healthy lifestyle through sports. You describe yourself as a social group that gathers former Z
players. Anyone in the local area who enjoys Z as a form of exercise can participate. Your program operates
once a week for approximately 1 to 2 hours. Basically, you provide a Z program for adults.

Currently, you charge no fees for your program but if there are any costs for the use of a Z field, you would
simply divide the fee amongst the members. You would like to fundraise so that you could provide scholarships
and help the local schools with their after-school programs. No fundraising has taken place to date.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in IRC Section 501(c)(3), an organization 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 test or the
operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv) states that in no case shall an organization be considered to be
organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which
such organization is created are broader than the purposes specified in section 501(c)(3).

Treas. Reg. Section 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 which 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.

Rev. Rul. 65-2, 1965-1 C.B. 227, found that exemption may be granted to an organization which is organized
and operated for the purpose of teaching a particular sport to children by holding clinics conducted by qualified
instructors in schools, playgrounds, and parks, and by providing free instruction, equipment, and facilities.

Rev. Rul. 70-4, 1970-1 C.B. 126, describes an organization engaged in promoting and regulating a sport for
amateurs. The organization's stated purposes were to promote the health of the general public by encouraging
all persons to improve their physical condition and fostering public interest in a particular sport. Its activities
were directed toward promoting sport tournaments, exhibitions and holding instructive clinics. The organization
did not qualify for exemption under IRC Section 501(c)(3).

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization’s
request for tax-exempt status was reasonable.

In Media Sports League, Inc., v. Commissioner, T.C. Memo 1986-568 (1986), the 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.

Application of law

You are organized and operated to provide recreational sports to adults, which does not further any specific
exempt purpose. Further, your organizational document does not limit your purposes to those recognized under
IRC Section 501(c)(3). Thus, you do not meet the standards of the organizational or operational test under IRC
Section 501(c)(3). (See Treas. Regs. Secs. 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(b)(1)(iv), and 1.501(c)(3)-1(c)(1).)

You are not like the organization granted exemption in Rev. Rul. 65-2 because you do not limit your programs
to youth. Rather, you aim your program at adults.

You are like the organization denied exemption in Rev. Rul. 70-4 because your activities are directed towards
promoting sport tournaments and exhibitions. Similarly, you are like the organization denied exemption in
Media Sports League because you have a substantial nonexempt purpose of promoting the social and
recreational interests of its members.

As noted in La Verdad, you have not demonstrated that you operate exclusively in furtherance of any exempt
purpose, thus denial is warranted.

Conclusion
As indicated above, you are not organized or operated exclusively in furtherance of any exempt purpose that

would merit recognition under IRC Section 501(c)(3). Therefore, you do not qualify for exemption and
donations to you are not deductible.

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 an 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